Yesterday, DC’s Chief Financial Officer issued a revenue forecast that showed no change to DC’s estimated revenue collections from the February 2010 estimate. That is good news and means, for now, that DC doesn’t have to close another budget shortfall. Yet, the forecast also stated that that economic recovery “is likely to be long and slow” and that “the economy still appears to be fragile.”
While a fragile and uncertain economic recovery are probably the biggest threat to DC’s finances, policymakers spent much of the budget season focused on another issue ‘ the falling amount in DC’s savings account, otherwise known as DC’s fund balance. This concern led to a provision in the FY 2011 budget to place all of DC’s future end-year surpluses into savings, rather than keeping them available for unforeseen budget problems.
Yet a recent DCFPI report finds most states have drawn down their fund balance to avoid severe budget cuts in the midst of one of the worst recessions in history. DC’s fund balance actually is healthier than in 43 states.
This suggests that while building back up our savings account is an important goal, it does not need to be our top goal right now. That’s why we think the recent proposal passed by the DC Council goes too far, too fast, and will tie up a significant amount of new future resources. Specifically, it will put all end-year surpluses into two savings accounts until they reach at least $650 million. That could be many, many years away and ties up a substantial amount of resources as DC’s finances are still fragile from the recession.
A portion of end-year surpluses (about $120 million) will go to an operating budget reserve so that can be used to respond to budget emergencies ‘ like revenue shortfalls or spending pressures. A much larger amount ‘ $530 million ‘ will be built up over time in a “cash flow reserve” ‘ money that will just sit in the fund balance to help meet the city’s cash flow needs that can never be touched.
Every dollar we put into a reserve is a dollar that can’t be used to invest in our city. That balance needs to be weighed carefully going forward. DC’s most pressing fiscal problem is the large drop in tax collections that has led to a $500 million drop in revenues and cuts to many programs and services. DC’s finances are likely to be fragile as it comes out of the recession, which means preserving resources for the budget should be the top priority right now.
