Principles to Guide Efforts to Address DC’s New Revenue Shortfall

by Ed Lazere | July 7th, 2009 | PDF of this report

A June 2009 revenue forecast shows that the District of Columbia’s budget is once again out of balance, as a weak economy continues to depress our resources.  Less than a month after adoption of the budget for fiscal year 2010, the new forecast revealed a $190 million shortfall for the remainder of fiscal year 2009 – which ends in just three months – and a $150 million shortfall in FY 2010.  The new shortfall will require Mayor Fenty and the DC Council to make difficult budget choices, despite adoption of $800 million in budget-balancing measures in the 2010 budget.

The following steps can help balance the District’s budget while limiting the impact on DC residents.  In particular, the Mayor and Council should pursue approaches to replace a portion of the revenues that have been lost due to the weak economy, which total $950 million in fiscal year 2010.  This would be consistent with the actions taken in other states, most of which have tapped rainy day funds, adopted revenue increases this year, or have done both.

  • Use the Rainy Day Fund and Fix Its Restrictive Rules: The District has $330 million in reserves intended to address budget crises. Some 27 states have tapped their reserves recently, but the District has not. Using half of the rainy day reserves would cover roughly half of the $340 million shortfall for FY 2009 and FY 2010, while leaving some reserves for future years. The Mayor and Council also should start working now with Congress to eliminate numerous federal rules that make DC’s reserve far more restrictive than the rainy day funds in nearly every state, including a requirement to repay withdrawals in a very short time frame – two years.
  • Tap Other Resources: The District has a number of special-purpose funds that are financed by fees and other revenues collected by the government. Some of these accounts have surpluses that can be used to close the budget shortfall. The District should scour aggressively for extra funds, including the Ballpark Revenue fund that supports the baseball stadium and the Convention Center fund.
  • Raise Revenue: The District’s budget shortfall stems almost entirely from falling revenue collections. Some 25 states have enacted revenue increases this year, with 12 more considering increases. The District has raised revenues only modestly, covering $100 million of an $800 million budget gap for FY 2010, and most of the additional revenues come from enhanced traffic and parking enforcement. Options to raise additional revenues include measures such as eliminating the CAPCO tax credit program (a job creation program which has proven to be an expensive failure), expanding the sales tax base, and raising the minimum corporate franchise tax. Revenue-raising options also should be progressive – by targeting those most able to pay additional taxes. This could include a new top income tax rate or by eliminating the tax exemption for interest on out-of-state bonds.
  • Spread Budget Cuts Broadly: DC agencies already have been asked to cut their budgets considerably to address previous revenue shortfalls. The new budget shortfall will require increasingly difficult decisions over service reductions. Future budget cuts should be spread across agencies to minimize the impact in any one area. Possible programmatic cuts include postponing lower-priority transportation projects and delaying an expansion of the police force.
  • Preserve Safety Net Programs: Local funding for DC’s health and human service programs has grown more slowly than any other part of the budget over the past five years. With DC’s unemployment rate at the highest level in 25 years and demand for public assistance benefits rising dramatically, the District should avoid cutting services that help with basic needs like housing, healthcare, and food assistance.