Using Future Revenues to Build a Pay-Go Account May Force the District to Cut the Budget for Current Services, and Will Likely Not Reduce Borrowing as Intended

A proposal in the FY 2011 Budget Support Act would establish a new mechanism to build up a “pay-go capital” account using a significant portion of future revenues.  Pay-go capital refers to supporting infrastructure improvements with operating revenues rather than by borrowing.  Yet because DC’s finances are still weak, and revenue growth is expected to be less than even the rate of inflation, devoting a portion of future revenue increases to pay-go capital would likely lead to cuts in basic services.

Moreover, while the intent of this proposal may be to reduce the amount of borrowing the District is required to do, the proposal would not in fact guarantee any reduction in general obligation borrowing.

The current proposal would dedicate 35 percent of all future revenue growth into a fund to be used for pay-go funding for capital projects, (using the current revenue projection for FY 2011 as a base).  Revenues would be deposited into the account every year unless the District’s debt service expenditures fall to five percent of total expenditures.  Currently, the District spends nearly 12 percent of expenditures on debt service and is expected to continue spending at that level through at least FY 2014.

DCFPI recommends that the Council remove the pay-go proposal from the FY 2011 Budget Support Act.  It is not clear at this time why a substantial pay-go account is a priority, and it could limit the flexibility of policymakers to respond to ongoing budget needs.  Instead, funding allocated to pay-go should be decided on an annual basis and based on the District’s financial climate and the projects that need to be completed.

To read the complete report, click here.