What should the District do if the city’s next revenue forecast, slated to be released in June after the budget is passed, reveals tens of millions of dollars of additional revenue for the coming year? That issue received a good deal of attention at Monday’s DC Council meeting on the FY 2012 budget. Chairman Brown offered a somewhat surprising plan, to devote half of the additional revenue to DC’s fund balance ‘ essentially its savings account ‘ one-fourth for programs that help vulnerable residents, and one-fourth for areas like police, public infrastructure or rolling back taxes and fee increases.
That proposal would make building up DC’s fund balance the number one priority. While a healthy fund balance is critical to the District’s finances, so are areas like homeless services, public sanitation, and libraries’ all of which would face cuts under the 2012 budget. There are several reasons, described below, why it would make more sense to use any additional revenues first to restore cuts to services.
DC built up a significant fund balance during the boom years of the past decade and, just like nearly every other state, it used part of that fund balance over the last four years to help close budget gaps in the midst of one of the worst recessions on record. With the economy recovering, now is the right time to start thinking about building DC’s savings back up. But Monday’s debate over how to spend the anticipated new revenue missed several key points about DC’s fund balance.
- The District already has a solid plan to replenish the fund balance. The DC Council adopted legislation last year, at the urging of then-Chair Vincent Gray, to put half of all undesignated end-of-year surplus aside as a special reserve, until it equals 8.33% of expenditures which would be roughly $600 million. Moreover, the FY 2012 proposed budget would add $12 million to DC’s fund balance in FY 2012.
- To protect DC’s bond rating, the city must stop dipping into reserves, but it is fine to spend revenues that are collected in 2012. Standard and Poor’s, a bond rating agency, recently stated that DC’s financial management practices are “strong,” but that DC should stop the recent trend of using reserves to balance the budget. Dr. Gandhi, DC’s CFO, sent a letter to the Mayor and Council this year echoing this point. He noted that it is important in 2012 that “current-year revenues equal or exceed current-year expenditures.” While Dr. Gandhi would love to see our fund balance built up quickly, his letter — and Standard and Poor’s ‘ effectively said it was fine to spend whatever revenues are collected, as long as the city doesn’t dip into reserves. The budget before the DC Council wouldn’t use any reserve funds.
- DC’s fund balance remains larger than most states, despite use during the Great Recession. Based on expected use of the fund balance in FY 2011, DC’s fund balance is estimated to be $690 million at the end of FY 2011 ‘ equal to 12 percent of expenditures and higher than in 40 other states.[1] By FY 2012, DC no longer plans to use fund balance and would actually add $12 million.
Given all this, further replenishment of the fund balance beyond current plans should not be the number one priority for new revenue, particularly when those funds could be used to preserve services that help make the District stronger. The Council should consider these facts before designating so large a share of new revenue toward something they are already working to rebuild.
[1] This figure was obtained by subtracting the planned fund balance use in FY 2011 from the certified fund balance at the end of FY 2010. This is likely a lower-bound estimate and actual amounts are likely to change based on actual revenues collected and actual spending throughout FY 2011.
