Happy Friday District Dime readers! Yesterday, we reintroduced you to the District’s “fund balance” and explained why having a healthy fund balance is part of any city or state’s balanced fiscal diet.
Given that, it is not surprising that DC finance officials and some policymakers have expressed concern that DC’s fund balance has declined in recent years, after rising significantly in the early 2000s.
Yet it is important to note that fund balances are meant to be drawn from at times. DC’s fund balance essentially is its savings account and serves, in part, as a cushion against unforeseen needs. It should be built up in good times, so that it can be used during bad times.
This is precisely what occurred over the past 10 years. District officials made conscious decisions to spend some of DC’s very large fund balance on various critical needs. Despite this use, the District’s fund balance is still greater today as a percentage of the city’s budget than in 41 states.
DC’s fund balance grew at a healthy pace throughout the economic boom of the 2000s, as budget surpluses and higher-than-expected revenue projections were deposited into the city’s savings account. Ultimately the fund balance grew to $1.6 billion, or nearly 40 percent of DC’s budget, far exceeding the informal rule-of-thumb benchmarks for adequate savings recognized by organizations like the National Association of State Budget Officers.
DC’s elected officials chose to utilize the bulging fund balance to finance important needs. A significant amount was used as “paygo capital,” supporting school modernization and other construction projects without having to borrow. The fund balance also has been used to set aside funds towards the cost of health benefits for retired DC government workers, which increased substantially as a result of a change in accounting rules. Once the recession hit, city officials used resources from the fund balance to help prevent even deeper cuts to public services than were made over the past three years.
As the debate over the dwindling fund balance began to unfold over the past year, Washington Post columnist Mike DeBonis accurately framed the debate last year by asking “Why do we keep these reserves if not to spend them in times of need? And is this not a time of need?”
While serving as fiscal cushion is a key function of the fund balance, there’s certainly a point at which spending down the fund balance could go too far. That said, the District’s fund balance will be around $700 million by the end of FY11 under worst-case projections, including over $300 million in “emergency and contingency” rainy day reserves. That fund balance, would still exceed 11 percent of the DC budget, a level that is higher than in 41 states.
Dr. Gandhi and other District officials are right to highlight the need for the District to build its fund balance back up. Just as it is ok to use the fund balance when times are bad, the District needs a plan for building it back up when times are good. Fortunately, key elements of just such a plan are already in place. We will have more to say on this plan and what the city can do to build the fund balance back up in next week’s blog.
