Report

Does The District Have $190 Million Additional Revenue To Spend This Year?

by Ed Lazere
PDF of this Report

Recent reports suggest that the District’s finances have started to recover from the downturn that started in 2001.  A December 2003 Washington Post article, for example, noted that new forecasts show that revenues will be $190 million higher this year than had been expected when the budget was enacted.  The article also stated that policy makers are beginning to make decisions over how to use those funds.[1]

A review of the underlying revenue and budget information, however, finds that the District’s financial conditions have not improved as much as this figure suggests.  While revenues are rising, the District does not have an additional $190 million fully at its disposal this year.  A significant portion of this amount is not new revenue, and much of it is not available to support ongoing service enhancements or tax relief.   Moreover, some ‘ and perhaps all ‘ of the available revenues will be needed to address unbudgeted additional costs of existing services and a number of new commitments that have been or are expected to be enacted soon.

The $190 million figure includes the following sources of funds: 

  • $50 million cash reserve:  This reserve was established in the 2004 budget to address unforeseen budget problems that may occur in fiscal year 2004.  It is unlikely that District officials would choose to use those funds now, just three months into the 2004 fiscal year.

  • $52 million in one-time federal fiscal relief:  Last May, federal legislation was enacted to give DC and states temporary relief from their severe budget problems.  The $52 million the District will receive in 2004 from this package is one-time assistance and is not expected to be renewed.  As a result, these funds can be used for one-time purposes but not to support initiatives that have ongoing costs.  (The District also has roughly $22 million in one-time funds from reserves that were not fully utilized in 2001.  These one-time revenues are not included in the $190 million figure.)

The remaining $90 million of the $190 million reported figure represents an increase in projected tax collections in 2004.  The new revenue projection also shows a $100 million increase in revenues in fiscal year 2005.  (Although some reports suggest that rising property tax revenues are the source of the increase, the higher collections stem almost entirely from deed recordation and transfer taxes.)  Unlike the cash reserves and federal fiscal relief, the higher tax collections represent new revenues to the District.

While rising revenues is good news for the District, there are likely to be a number of claims that will use most or all of these additional revenues.

  • Spending pressures:  The District’s Chief Financial Officer has identified $127 million of “spending pressures” for fiscal year 2004 ‘ spending needs that were not anticipated when the budget was enacted.  The spending pressures include a $16 million increase in the contract for the DC Health Care Alliance (the program that provides health benefits to uninsured residents), $11 million in transportation costs for DC’s special education program, and $36 million in higher utilization of Medicaid and mental health services, among others.  District officials are likely to address some of the spending pressures by cutting spending in other areas, but at least some spending pressures will have to be addressed by using the District’s additional revenues.

  • New Claims on Available Revenues:  It is likely that legislation soon will be enacted to address rising property tax assessments for DC homeowners.  That relief is expected to reduce revenues from projected levels by $20 million to $25 million per year.[2]

The potential claims on additional revenues in 2004 thus could be as high as $152 million ($127 million plus $25 million), far more than the additional revenues that have been identified.

Will the District Enjoy a Budget Surplus in 2005?

As noted, the new revenue projection shows that revenues in fiscal year 2005 will be $100 million more than had been projected earlier.  Nevertheless, it is too early to determine whether this means that the District has additional funds to devote to program enhancements, tax relief, or other purposes.

  • This week, the Council enacted legislation to use up to $10 million in existing revenues to support physical investments in distressed neighborhoods.  That program and the expected property tax relief of $25 million will reduce additional revenues from $100 million to $65 million.

  • Budget projections developed last summer assume that spending in 2005 will be only 2.2 percent higher than the enacted 2004 budget.[3]  It is likely that this figure understates the spending increases that will be needed to maintain existing services.  At the federal, state, and city level, government spending tends to rise faster than this each year as a result of inflation, rising health care costs, and other factors.[4]  If the enacted budget for fiscal year 2005 is more than 2.2 percent higher than the 2004 budget, some or all of the additional $65 million in revenues will be needed to address those spending needs.

In February 2004, the Chief Financial Officer will publish a “baseline” budget for fiscal year 2005 ‘ which will reflect the costs of maintaining programs and services at 2004 levels and of other mandated expenditures.  At that point, baseline spending needs can be compared with the most recent revenue projections to determine whether the District will have a budget surplus in 2005.  Until then, the answer to this question will remain unknown.

Implications

This review leads to the following conclusions:

  • The District has $73 million available for one-time expenditures.  This includes $52 million in federal fiscal relief and $21 million in unspent reserves from prior years.  Typically, one-time revenues are used to support capital construction projects or other projects that are not expected to have ongoing costs.  The District’s one-time revenues could be set aside, for example, for school construction or to cover subsidies that have been pledged to support construction of a new public hospital.

  • The additional $90 million in fiscal year 2004 revenues should not be allocated until spending pressures have been resolved.  Given the spending pressures, it is not clear that the District has any additional funds to support new ongoing initiatives.  The actual amount that is available will depend how the mayor and Council respond to identified spending pressures.

  • Spending and tax decisions that would affect the fiscal year 2005 budget should not be made until a baseline budget is available.  Because it is not yet known whether the District will have a surplus for fiscal year 2005, it is not fiscally sound to make decisions that would increase spending or reduce taxes next year.

End Notes:

[1] "D.C. Coffers Get Extra $190 Million," Washington Post, December 18, 2003.

[2] It is not clear whether the enacted tax relief will go into effect in 2004 or 2005.  Some supporters have urged implementation in 2004.

[3] This figure comes from the financial plan included in the fiscal year 2004 budget.  It reflects budgeted expenditures in 2004 and projected expenditures for 2005 in the District’s seven agency clusters ‘ known as “appropriations titles.”

[4] For example, despite budget problems, spending has increased three percent per year in the District and more than six percent per year in Fairfax and Montgomery Counties.)