Mayor Bowser, the DC Council, and other District leaders are taking quick and decisive action to protect all DC residents from the spread of the coronavirus (COVID-19) pandemic, including declaring a State of Emergency in the District, closing schools, and proposing emergency legislation to ensure economic stability and provide for the basic needs of our most vulnerable residents. Fortunately, the District is a financially healthy city that has full reserves totaling $1.43 billion, and additional fiscal year 2019 surplus funds at our disposal, leaving us better prepared than most jurisdictions to deliver a coordinated, extensive response.
Now is the time to both dip into those reserves and waive the restrictive repayment rules that govern their use, given the harmful and extensive impact COVID-19 will wreak on residents and the economy. The Mayor already allocated $1 million of DC’s local contingency cash reserve fund to purchase personal protective equipment and other necessary supplies and resources for first responders and front-line staff.
While the Chief Financial Officer has not updated the city’s revenue forecast, COVID-19 could have a similar effect on DC as a recession if cases rapidly rise over an extended period: a sudden loss of income for workers and businesses, increased demand on public services and local charities, and decreased tax revenue for DC government. The best remedy to such a shock is for the DC (and federal) government to provide stability by using DC’s substantial and growing reserves to boost the DC economy.
City officials are already implementing some of the policy tools that DCFPI and other advocates outlined in a letter that would protect residents from physical and economic harm—including extending eligibility for food and cash assistance, and health care coverage, and pausing eviction proceedings. The emergency legislation will respond to other critical needs, particularly expanding unemployment insurance and providing supports to small businesses as they face a drastic drop in demand and thus profits, among other interventions.
Such swift and decisive actions will require a massive amount of public spending to be successful. After spending a decade building them up after the 2007 recession, now is time for our reserve funds to shine.
Overview of the District’s Four Fund Balance Reserves
The District’s $1.43 billion in savings are spread across four reserve funds, which are available to help manage fiscal crises and help maintain public services during shocks to the economy. However, the payment rules associated with these reserves essentially mean they’re not at lawmakers’ full disposal amidst a crisis, as described below.
In 2000, the District established two reserve funds: an emergency cash reserve and a contingency cash reserve, as required by Congress. These reserves are similar to the rainy day funds that most states use as a cushion against major crises that might impact the budget, such as a natural disaster or a rapid drop in revenues due to an economic downturn. In addition, the District established a new reserve in 2010, called the fiscal stabilization reserve, to augment the congressionally mandated reserves. The District also has a cash flow reserve, which is used to cover cash flow needs during the fiscal year and is intended to reduce the need for short-term borrowing.
Leaders Should Waive Repayment Rules Limiting Our Ability to Use Reserves
Unfortunately, compared to most states, the District has far less flexibility in determining when and how much to draw upon its reserves—meaning lawmakers essentially don’t have full access to these vital tools. The locally-mandated reserves have restrictions and specific timelines on when lawmakers have to replenish the funds, as do the federally-mandated reserves—even if the crisis is ongoing. District leaders should (1) temporarily reverse the local mandates that restrict the use of local reserves in the emergency legislation and (2) seek a federal waiver from these restrictions given that the COVID-19 pandemic could wreak havoc on our community.
DC requires any withdrawals from both of its local reserves to be repaid within the same fiscal year—a period of time that DC will likely be hard pressed to meet if the COVID-19 pandemic rapidly worsens. Lawmakers can only tap the locally created fiscal stabilization reserve if the city’s tax collections drop sharply in the middle of a fiscal year. The District also has a cash flow reserve, which is used to cover cash flow needs during the fiscal year and is intended to reduce the need for short-term borrowing. The emergency legislation should temporarily waive these requirements so the city can act quickly to address community needs. Lawmakers shouldn’t be afraid to use what they need to get us through this crisis. With $1.43 billion, they can spend a lot and still have some left in reserves.
Think about it on a personal level: when an unexpected event comes up, like a job loss, you might take money out of your savings account to help with expenses until you start working steadily again. But do you pay the money back right away? Usually not. Likewise, the city shouldn’t fret about how to replenish these funds until the crisis is averted.
Federal law requires the District to repay the money tapped from the fedrally-mandated funds within two years, with at least half repaid in the first year. The federal rules also set aside a third of the funds for use only in a natural disaster—it is unclear to DCFPI at this time whether the COVID-19 pandemic meets this qualification. Yet, the health crisis is an economic one and may lead to a recession. It would make more sense to make all of the city’s rainy day reserves available for either a natural disaster or an economic downturn. The federal waiver should eliminate this rule so the funds can be used to limit the spread and harm of the COVID-19 pandemic. In fact, now is the time to eliminate the federal repayment rules entirely—it’s our money and District leaders should decide how to spend it.
District policymakers rightly discuss how great it is that the city has been able to build up its reserves for a rainy day. They should be just as proud to use reserves when a rainy day comes. That time is now.
COVID-19 provides a sobering reminder of how much we need effective and well-resourced governance at the District and federal levels, as residents grapple with large scale and rapid changes to their daily routines and income. In the coming months, we must all do our part to come together to blunt the impacts of this global pandemic and contain the harm to the health, well-being, and economic security of people in and beyond DC.