Which of the following statements is true, according to the bond-rating agency Standard & Poor’s?
A. The District of Columbia’s financial management practices are considered “strong.”
B. The District’s general obligation bond rating is now “at risk.”
C. DC’s Financial Position to Weaken
“A” is the correct answer. In fact, in its December report, S&P gave DC an A+ rating, noting that that the outlook for the city’s finances is “stable.”
This may come as a surprise if you read recent news reports. A Washington Business Journal story on the S& P report was headlined with Answer C (“DC’s Financial Position to Weaken”) and quoted a letter from Chief Financial Officer Natwar Gandhi that said Answer B (our GO bond rating is “at risk”) even though S & P itself said Answer A.
Why such confusion? The assessment of DC’s financial health has focused largely on the “fund balance”’ essentially the District’s savings account. States typically increase fund balances in strong economic times, and spend down their reserves in times of limited economic growth; this is precisely what the District has done. Now Gandhi and S&P are concerned that our fund balance should not get smaller, and that we cannot continue to use reserves to balance our budget.
While DC’s fund balance has been reduced, from $1.6 billion in 2005 to about $800 million now, this is not a sign that our finances are in chaos or even a sign of poor fiscal management. Moreover, the DC Council and Mayor Gray already are taking steps needed to preserve our fund balance. Consider this:
- When DC’s fund balance reached $1.6 billion, it was at a historically high level, equal to more than one-quarter of the city’s budget.
- The Mayor and Council used the growing fund balance to meet legitimate needs. The fund balance was used to pay for city construction projects — avoiding the need to borrow funds — as well as to set aside money for health benefits of DC government retirees and to help maintain services in face of the recession. Every state has been doing that, and in fact, DC’s reserves remain larger than in most states.
- S&P noted that DC’s A+ rating partly reflects the buildup of reserves in first half of 2000s, “which allowed the district to weather the downturn…”
So the real issue is not whether it is ever acceptable to use reserves, but when to use them and how much is acceptable. In their recent statements, Dr. Gandhi and S&P both basically said that we are at a point now where we cannot continue the recent trend of using reserves to pay some of our bills. But if that stops, DC will keep its A+ rating (unless other problems worsen).
The good news is that DC’s leaders already are heeding this message. Mayor Gray has pledged to balance next year’s budget without using reserves, and the Council approved legislation last summer to start re-building reserves. Given that, it does not appear that a decline in our rating is around the corner.
The need to balance next year’s budget without reserves ‘ and without federal stimulus funds, either ‘ is one reason Mayor Gray has said the city is facing very tough choices. And it is why new revenues also need to be part of the budget discussion this year. While Councilmember Jack Evans suggests that raising taxes would be looked upon poorly by the rating agencies, this is not what Standard & Poor’s or Dr. Gandhi said. Instead, they both note that our budget for next year should be based on the revenues we will collect next year, so that we won’t have to dip into savings. In other words, a tax increase can be part of a fiscal stability plan.
The District can bring its spending in line with resources by cutting spending, raising revenues, or by taking a balanced approach and doing both. A cuts-only approach could put at risk the progress DC has made in recent years and our ability to grow out of the recession. A mixture of budget cuts and revenue increases would maintain fiscal stability and our bond rating while also helping preserve services that DC residents rely on.
