Report

A New Federal Contribution To The District of Columbia? The Need, Likely Impact, and Some Options

by Ed Lazere and David Garrison

PDF of this analysis

Acknowledgements

 The Brookings Institution and the DC Fiscal Policy Institute express their appreciation to the Trellis Fund for its support of this report on the issues surrounding a possible new federal contribution to the District of Columbia.

The authors thank Congressman Eleanor Holmes Norton, and her Legislative Assistant, Rosalyn Parker, for meeting to discuss Mrs. Norton’s proposed new federal contribution to the District.  The authors thank the various Congressional staff members who met with them from the House Government Reform Committee, the House DC Appropriations Subcommittee, the Senate Government Affairs Committee, and the Senate DC Appropriations Subcommittee.  The authors are grateful for the assistance they received from city staff including Gregory McCarthy, Assistant to the Mayor for Policy and Legislative Affairs, and Kevin Clinton, as well as a number of staff from the Chief Financial Officer’s Office. The authors also received invaluable comments and suggestions from Walter Smith, Executive Director of the DC Appleseed Center and Alice Rivlin, Brookings Senior Fellow and Director of the Brookings Greater Washington Research Program.  The authors accept full responsibility for the final contents of this analysis.

 

Executive Summary

A 2003 report from the Government Accountability Office (GAO) found that the District of Columbia faces a large structural budget imbalance ‘ that is, a persistent gap between its ability to raise revenues and the cost of providing basic services.  DC’s imbalance stems largely from its being a “city without a state” and from revenue limitations caused by the federal presence.  The most logical solution to this problem would be an annual contribution from the federal government to help address the challenges that arise from DC’s unique status as the nation’s capital.

A bill introduced by DC Congresswoman Eleanor Holmes Norton and endorsed by the entire Congressional delegation from the Washington region would provide the District with $800 million annually (adjusted each year for rising costs) to address a variety of infrastructure needs.

This paper assesses the proposal’s likely impact.  It finds that the bill would give DC leaders flexibility to make a serious dent in several of the city’s major fiscal challenges.  This paper also considers other options for designing and computing the size of a federal contribution.

Like other large cities, the District faces a number of factors that put upward pressure on its budget ‘ such as a high cost of living and significant public safety and social service needs.  GAO found that the cost of providing basic services is far higher in DC than in any state.  Yet the District is not embedded in a larger state that can help share this load.  For example, 60 percent of the metro area’s homeless residents live in DC.

While its public service demands are high, DC’s revenues are restricted by the federal prohibition against taxing the income earned by non-residents, who make up roughly two-thirds of those who work in the District.  DC is also handicapped by the fact that 40 percent of its property is tax-exempt because it is owned by the federal government, other governments, or non-profits.

GAO found that DC’s structural imbalance is in the range of $470 million to $1.1 billion per year, depending on which assumptions are used.  A review of these assumptions suggests that the most reasonable estimate is between $900 million and $1.1 billion.  While GAO noted that many states also face structural deficits, the gap in DC is the largest per capita.

One result of this fiscal imbalance is a long-term under-investment in the District’s physical infrastructure.  DC public schools, for example, are on average 65 years old.  The most recent estimate of deferred capital needs is in the range of $5.2 billion over the next six years, and this was not a thorough assessment.  Yet the District’s debt is now far higher than any state’s on a per capita basis, making it virtually impossible to address its infrastructure backlog.

Despite these challenges, the District has balanced its budget for eight years in a row, emerged from oversight by a federal control board, and enjoyed upgrades in its bond rating.  This progress, however, has been built largely on an anomalous ‘ and perhaps cyclical ‘ upsurge in its real estate market, and it does not change the fundamental fact that the District faces substantial public service costs and a restricted tax base.  Notably, the improvement in DC’s financial position has not helped its ability to address deferred infrastructure needs.

Under the 1997 Revitalization Act, the federal government addressed some of the city’s greatest fiscal challenges by assuming responsibility for several court and corrections expenses, increasing the federal share of DC’s Medicaid expenses, and assuming responsibility for DC’s unfunded pension liability.  This came with a cost, however ‘ the elimination of an annual federal payment that had reached $666 million.   Although the Revitalization Act appears to have provided a net fiscal gain to the District, it did not erase DC’s structural imbalance; GAO’s study on DC’s budget gap was conducted after the Revitalization Act was fully in effect.

Further federal efforts to address the DC’s structural imbalance are warranted.  To be effective, a federal contribution must be stable and predictable, and it must allow the District to address its most pressing needs.  As noted, an annual contribution of up to $1.1 billion is justified.

The bill introduced by Congresswoman Norton would devote the federal contribution to a dedicated fund that could be used for repayment of bonds, school construction, information technology, and transportation costs, including DC’s share of Metro system expenses.  The bill’s contribution amount ‘ $800 million ‘ is roughly the mid-point of the range of DC’s imbalance as determined by GAO.  This bill would help the District address deferred infrastructure needs without raising its debt.  It also would allow the District to use these federal funds for certain operating expenses, such as debt payments, which could free up funds that the District could use to address high service costs in other areas, such as health care.

For example, an annual federal contribution of $800 million would enable the District, over the next decade, to address one-third of its major deferred capital maintenance needs, cut its high debt level in half, and address one-fourth of the burdens of state-level services it now provides.

Another way to set the size of a federal contribution would be to measure the services provided by the District that are funded at the state level elsewhere.  Each year the District spends at least $1.2 billion on services that typically are funded entirely at the state level.  This includes costly program areas, such as mental health and foster care.

Whichever method is used to compute the size of an annual federal contribution, it would make sense to permit the District to use this contribution to address high service delivery costs, as well as to make infrastructure investments. This would be an appropriate response to the problems resulting from DC’s structural imbalance as identified by GAO.

Federal compensation for DC’s structural imbalance would allow the city to make substantial progress on some its greatest challenges and become an even more welcoming place as the nation’s capital.

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