Last Tuesday, we elected the people who will lead the District of Columbia starting in January. My colleague, Vince Gray, will take office as our new Mayor and Kwame Brown as Chair of the Council. The challenges before elected leaders are tremendous, and the next several weeks will be crucial in determining the fiscal future of the District.
Although the city is in good financial shape overall, we learned from Chief Financial Officer Natwar M. Gandhi in September that we are facing a $175 million shortfall for the fiscal year that began October 1. This shortfall comprises approximately $50 million less in sales tax revenue, $50 million less in income tax revenue, $35 million in federal stimulus money the city anticipated but did not receive, $25 million in spending pressures in our public schools, and other costs. We face another $135 million shortfall in fiscal 2012, when one-time stimulus money is no longer available.
When the mayor and council faced similar shortfalls over the past three years, we relied largely on spending our reserves to close the gap. This was possible because by September 2005 the District had built up reserves totaling $1.6 billion. But year after year, as revenue slowed and spending increased, we drew down our savings. Over the past three years, the District has spent almost $1 billion in reserves, leaving us only $611 million today. No more of this amount can be used because it supports our revenue bonds and other debt commitments. The District also continued to borrow for capital investments and has increased its outstanding debt to the legal limit of 12 percent of annual debt payments to revenue.
Without reserves available to close our spending gap, and no more room to borrow, we must either raise revenue, cut spending, or both. Because our rates in commercial property tax, personal and corporate income tax, and sales tax are already the highest in the region, and in some cases the nation, it is difficult to ask our residents and businesses to pay more, particularly in these tough economic times. Raising taxes might help to close the shortfall now, but it will also put us at a greater competitive disadvantage with Maryland and Virginia in the future. It’s no secret that new residents and businesses that relocate to the region go elsewhere to save money. This hurts our long-term ability to expand our revenue base and pay for government — including the social safety net — that we want and need.
On the expenditure side, more than 85 percent of our budget is dedicated to social services, education, public safety, and debt service. Reductions in these areas are very difficult, again because of the times. But these areas must be reduced if the city is to balance its budget. Keep in mind that we spend more money on education per student, and on social services and public safety per resident, than most cities and states, and we are consistently ranked as having one of the highest rates of government employees per capita.
We cannot afford to jeopardize all the progress we have made with our bond ratings and investment climate. Now is the time to right-size spending, no matter how painful the decisions might be. Postponing this downsizing by using tax increases and one-time fixes will only lead to larger deficits. I continue to assert — as I have for the past 3 years — that this revenue downturn is not a one year phenomenon. I believe the economy will continue to grow anemically, and we certainly cannot count on a big turnaround in revenues to save the day.
The experience of the District in the 1990’s continues to serve as a cautionary tale. Back then, we used one-time fixes and ended up with a control board. The board then made the hard decisions that the elected government would not make. I will not allow something like that to happen to the city on my watch.