Chairman Gray and other members of the DC Council, thank you for the opportunity to speak today. My name is Ed Lazere, and I am the executive director of the DC Fiscal Policy Institute. DCFPI engages in research and public education on the fiscal and economic health of the District of Columbia, with a particular emphasis on policies that affect low- and moderate-income residents. I appreciate the opportunity to testify on this important issue.
Every day, we read new things about the worsening economic conditions in the U.S. and in the world, and about the adverse impact on the finances of state and local governments. DC is not alone in trying to deal with a revenue shortfall. The states of Maryland and Virginia, most local counties, and many other state and local governments nationally are struggling with difficult decisions over how to balance their budgets.
I greatly appreciate that the Council is holding this hearing on the Mayor’s proposal, and I have a number of comments to make. As I will discuss, there are some clear policy actions reflected in the plan, but in many cases there are serious unanswered questions that make it difficult to assess the range of budget savings proposals. I appreciate the letter that you sent to the CFO in an effort to get answers to many of these critical questions.
The clearest proposal in the Mayor’s plan is to delay implementation until FY 2011 of planned improvements in the retirement benefits for DC government employees. This represents a significant delay and a significant cut – $10 million this year and $20 million next year. DCFPI does not endorse or oppose this, but we do not think it should be accepted without discussion. If DC needs to improve its retirement benefits to attract and retain good workers, complete delay for two years of new retirement benefits is significant.
Beyond that, the impacts of the key elements of many major elements of the Mayor’s proposal are less clear.
- Agency cuts based on vacancies – $31 million in FY 2009 and $32 million in FY 2010: The Mayor has identified agency-by-agency savings tied to the number of currently vacant positions. While this approach is reasonable, we do not know what kinds of positions would be eliminated, and we don’t know the extent to which the Mayor attempted to assess the reason for the vacancies or the impact of eliminating them. This is important because the agency cuts vary a lot and some agencies have been asked to absorb large reductions. For example, Parks and Recreation would lose $1.6 million, or 4 percent of their budget, the Department of Health would lose $2.9 million (3 percent), Child and Family Services would lose $1.5 million, and Mental Health would lose $1.7 million. The Council should not approve these cuts until more justification for eliminating the funding for each agency.
- Use of Special Purpose Funds – $63 million in FY 2009 and $15 million in FY 2010: The Mayor’s plan would withdraw $48 million from a variety of special purpose (or O-Type) accounts and use them as general revenue. The Mayor’s legislation specifies which funds would be tapped, but not how much would be taken from them. The list of special purpose accounts that could lose funding includes the condo conversion fund, the nuisance abatement fund, the home purchase assistance program fund, and the nursing facility quality of care fund. Taking money from these funds is in effect a budget cut for the activities they support. The Council should not consider approving these transfers until is has information on how much would be taken from each fund and why those resources are not needed for the fund in question.
Similarly, the Mayor’s plan would take $15 million of agency staff currently funded with local (non-dedicated) funds and fund them instead through a variety of special purpose accounts. The legislation does not identify the accounts, the amount of funding responsibilities that would be shifted to them, or the types of responsibilities that would be shifted. Since these shifts may limit the ability of the special purpose accounts to meet their intended purposes, these are in effect cuts. The Council should not consider approving them until it has information on the affected accounts, the amounts involved, and a justification for each funding shift.
This exercise points out that we simply do not know enough about the multitude of special purpose accounts in the DC budget – their funding sources, their balances, and their planned uses.
- Failure to address spending pressures: The FY 2009 budget already includes some spending pressures, at least $25 million and possibly much more. We feel that the plan to address the current shortfall should also include steps to address the spending pressures, given that there is no operating reserve in this year’s budget.
- Balancing out-year budgets through across the board cuts: The Mayor’s plan would balance the budget in FY 2010 and beyond through a 5.5 percent cut in most non-personnel costs in the DC budget. This would include a cut in all subsidy programs, like Medicaid or foster care. This could mean cuts in vital services. To the extent that some subsidies could not be cut, it would require greater than 5.5 percent cuts elsewhere. This proposal does not seem warranted.
The proposal for across the board cuts beyond FY 2009 reflects the requirement to show a balanced budget over four years. While this is desirable, I do not feel that the plan adopted to address the FY 2009 shortfall needs to fully address the shortfalls projected for FY 2010. Mayor Fenty will submit a budget for FY 2010 in five months that by law will be balanced, and it will reflect more recent budget and revenue projections. While it would be wise to take as many steps now that create long-term savings, we should not feel pressure to address the long-term budget shortfall entirely in such a short amount of time. Most other states balance their budget one year at a time, especially in the middle of a budget shortfall.
Finally, it is worth noting that the District’s budget situation could get worse very soon, and we should start preparing for that possibility. The $131 million shortfall was identified before the world-wide financial collapse was evident. We now know that the stock market has fallen dramatically as is likely to remain well below where it was at the start of 2008, and there are many signs that employment trends and consumer purchase trends will worsen significantly over the next year or more
Given that an additional shortfall is very possible, the District’s leaders should start developing proposals to address such a problem. This should include identifying lower-priority initiatives within each agency, developing revenue-raising options, and considering use of DC’s rainy day fund. In the case of the Rainy Day Fund, the Mayor and Council should consider working with Congressional leaders to loosen the very tight restrictions placed by the federal government on the use of the fund, including the rules requiring swift repayment of any funds withdrawn.
Thank you again for the opportunity to testify.