Yesterday, the DC Council took action to address a number of “spending pressures” ‘ areas of the budget with unanticipated increases in costs ‘ and on ways to use a recently identified increase in revenues. The Council largely approved a proposal submitted by Mayor Gray last week, which addressed the spending pressures and used new revenues to start funding budget priorities that had been identified in the approved 2012 budget.
However, the Council also approved a fiscally irresponsible move to use $13 million from DC’s fund balance, or savings account, to maintain until next January a tax break for investors in out-of-state bonds, even though the Council had voted just one month ago to eliminate the tax break. That move was opposed by DC’s Chief Financial Officer because it could put DC’s bond rating at risk. It also put restoring this tax break ahead of restoring cuts to critical programs and services such as libraries, assistance for people with disabilities, and affordable housing. This is exactly the opposite of what DC residents want.
So, what happened in yesterday’s vote? Some $76 million in additional revenues will be used to cover spending pressures in the current fiscal year, in areas like public safety and health care.
The additional revenues in FY 2011 and FY 2012 also will fund a number of programs from the Council’s priority restoration list (passed June 14th) including:
- $1.8 million for a commercial revitalization program (including “˜green teams’ and “˜clean teams’)
- $30 million for a re-negotiated managed care contract for Medicaid and Alliance health care
- $12.5 million for school nurses
- $10.8 million to hire more police officers
- $3.5 million for mental health services
The final significant change came from efforts to put back a tax exemption for residents who currently invest in out-of-state municipal bonds. District Dime readers know that the DC Council had voted to remove this tax exemption ‘ twice ‘ and that it was not included on the priority restoration list included in the approved FY 2012 budget. Despite this, two proposals to roll back the exemption for out of state bondholders were discussed.
The first, sponsored by Councilmember Cheh, would have created a new income tax bracket of 8.9 percent for those who make more than $350,000 (or $700,000 for two-earner families). This would have raised nearly enough revenue to cover the cost of the maintaining the tax exemption for current bondholders, while still eliminating the exemption for future investments. It also would have helped make DC’s tax system more progressive. This was a reasonable approach to addressing a tax change that some Councilmembers find troubling. But this amendment ultimately was not introduced.
Instead, Councilmber Cheh introduced an amendment to take $13 million from DC’s fund balance to delay the implementation of the out-of-state bond tax by one year. This amendment was adopted.
This effort to draw funds from DC’s savings is fiscally irresponsible. DCFPI has argued in the past that DC’s fund balance is in reasonably strong shape and that the Council didn’t need to set half of new revenues in 2012 into savings, as was approved in the 2012 budget. We noted that such rules can often unnecessarily constrain the Mayor and Council’s ability to budget over time. This is largely because once a rule is set in place, it can’t be changed without looking fiscally irresponsible. And that is exactly what this amendment did. It changed the law passed just one month ago, that required half of future revenues to be set aside in DC’s fund balance and instead, used a portion of those planned savings to reinstate a tax break.
Dr. Gandhi, DC’s chief financial officer, has warned the Council of the potential consequences of making changes to fiscal policies such as these. In a fiscal impact statement he issued on this amendment he wrote, “As a cautionary note, rating agencies and potential investors in the District’s bonds may view the reduction in the amounts previously approved for the Cash Flow Reserve as a lack of willingness and commitment to rebuild the General Fund balance and increase liquidity.” He went on to say that this could potentially impact DC’s bond rating.
Unfortunately, the Council chose to prioritize limited resources to delay the implementation of a tax increase over funding critical programs and services like libraries, assistance for people with disabilities, and affordable housing ‘ and did so in a fiscally irresponsible way that could end up costing DC more in the long run.
