The Great Recession has had a great impact on the finances of our city, including how much money we can borrow now to pay for things later. Earlier this month, DC Chief Financial Officer Natwar Gandhi warned Mayor Fenty and the DC Council that the city is near its debt limit, and at risk of violating its cap on borrowing.
The District, just like a person or household, often borrows money to pay for big expenditures. In the city’s case, the purchases might be to build or modernize public school buildings, construct or refurbish roads, or pay for infrastructure around a new Target or Costco.
Yet as the nationwide mortgage crisis has illustrated, you don’t want to borrow more than you can afford to eventually and realistically repay.
The District has a mechanism in place to make sure the city doesn’t take on more debt than it can handle. It is known as the debt cap, and it mandates that the city’s debt payments cannot exceed more than 12 percent of its expenditures.
As the city’s budget shrinks during these tough times, the city’s ability to borrow declines as well. Job losses and falling house prices have translated into lower income, sales, and property tax collections, which in turn means our expenditures must drop as well. This has the effect of raising the city’s debt-to-expenditures ratio. In other words, now that we have less money to spend, our debt payments, which are largely repaying money borrowed from prior years, are growing as a share of the city’s budget and creating the risk that our debt cap will be exceeded.
In his letter, Gandhi explained that the city has taken measures to lower the debt ratio, largely by restructuring some of the city’s existing debt. This will allow the city to maintain current infrastructure development plans, but with little to no wiggle room. Gandhi noted that city leaders will need to pay close attention to this part of the budget. “I urge Mayor and Council to carefully evaluate the need for any and all proposed borrowing, including both for the core government functions funded”¦as well as for economic development projects, and to set priorities for what is the most critical to the needs of District residents,” Gandhi wrote in a March 16 letter.
We agree with Gandhi; the District needs to prioritize its borrowing for what is most urgently needed. There is no reason to panic, but city leaders need to be judicious about current and future plans. Can that school project be completed for less? Does that economic development project really need as much as it’s asking for?
As DC’s infrastructure budget becomes yet another victim of the Great Recession, these are really important questions to address.
