The September Revenue Forecast: A One Time Gain, But Likely Pain Down the Road
DC Chief Financial Officer Natwar Gandhi released his September revenue forecast Friday. Here’s what he said:
•For Fiscal Year 2011, our current fiscal year which will end September 30, there is $89 million in new revenue. The money can be spent—though it is unclear whether it needs to be a supplemental budget from the Mayor or can be allocated by Council. If it is not spent, it likely will contribute to a surplus when the books for Fiscal Year 2011 are closed. Under rules adopted last year, all undesignated end of year surplus funds must go into the fund balance, into two accounts: half to the fiscal stabilization fund and half to the cash flow reserve fund.
•For Fiscal Year 2012, the next fiscal year which begins October 1, the revenue forecast shows virtually no change over the last estimate.
•For Fiscal Years 2013, 2014, 2015, the years that are part of our financial plan, Dr. Gandhi forecast declines in revenue from his June prediction. Specifically, Gandhi said FY 2013 is $52.6 million lower than previously expected; FY 2014 is $57.7 million lower than previously expected; and FY 2015 is $38.9 million lower than previously expected.
Gandhi’s revised numbers will likely be part of the discussion Tuesday, when the DC Council meets for a legislative session and considers changes to the FY 2012 budget.
Right now, it seems there are two big questions the Council will face:
a. Should the additional $89 million for FY 11 be spent?
b. Should the Council address the out-of-state municipal bond tax, which remains in place for FY 2012 given Mayor Gray’s veto?
First Question A: Given the lower than projected revenues forecast in future years, DCFPI supports putting the one-time $89 million revenue gain for FY 11 into the fund balance. Even though we have a one-time revenue gain this year, the city is looking at less money — $149.2 million—between FY2013 and FY2015. This means that the new revenue forecast does not give the District the capacity to fund new services or new tax breaks that have an ongoing cost. This is why the best option may be to use these revenues to build up DC’s fund balance.
Now Question B: The budget must balance, so the removal of the bond tax must be replaced with another revenue source. One possibility for restoring this tax break for current bondholders would be to offset the revenue loss by creating a new income tax bracket for individuals with incomes above $350,000. This idea was floated in July but not voted upon. Another possible proposal would be to pay for the tax break with the $89 million in FY 2011 unanticipated revenues that Chief Financial Officer Natwar Gandhi announced. It is important to keep in mind this is one-time money, so the new revenue could not be used to grandfather current bondholders in perpetuity.
DCFPI has supported eliminating the bond tax break as a progressive way to raise revenue. That said, we agree that the bond tax did not get a full public vetting, and we understand concerns of bondholders in this regard. Therefore, we believe it is reasonable to grandfather current bondholders as long as the revenue loss is replaced with another progressive form of revenue, such the high income earners tax. DCFPI would oppose a proposal to tap into the unanticipated revenues.
Council member Mary Cheh (D-Ward 3) considered such an amendment in July, but opted not to introduce it at that time. This will bring in less revenue than the Mayor’s initial proposal that DCFPI supported, which would have raised the income tax rate to 8.9% for income above $200,000. We were also supportive of eliminating the bond tax break, but we were concerned that this would impact some lower-income residents who may rely on this income source. Our preferred solution would be to preserve the out of state bond tax exemption for lower-income residents, but we will support the replacement of one progressive source of revenue for another.
This is consistent with results of a DCFPI poll this spring which found that DC voters think it is very important to protect education, social service, and public safety programs, and nearly all support moderate increases in taxes to help preserve services.
In summary: Do not use the additional FY 11 revenue for the bond tax. And stay tuned to the District Dime later today on this important issue!