Testimony of Tazra Mitchell at the Performance Oversight Hearing for the Office of Chief Financial Officer DC Council Committee on Economic and Business Economic Development

Chairperson McDuffie and members of the Committee, thank you for the opportunity to testify. My name is Tazra Mitchell. I am the policy director at the DC Fiscal Policy Institute (DCFPI). DCFPI is a nonprofit organization that promotes budget choices to address DC’s racial and economic inequities through independent research and policy recommendations.

The District’s Office of Chief Financial Officer (OCFO) is one of the most important institutions in the city, with responsibility for keeping our financial house in order and undergirding all that the DC government does. The OCFO deserves credit for sound management of DC’s finances, with balanced budgets every year, generally clean audits, healthy reserves, and a AAA bond rating. We all benefit tremendously from this.

Beyond sound management, however, it also is critically important that the CFO enable the Mayor and DC Council to use DC’s resources fully and effectively to help residents and businesses. This is especially important since DC’s OCFO is an independent office and has a great deal of influence. DCFPI’s review finds several ways that OCFO operations limit the ability to use DC’s resources, and we recommend several changes to financial operations to improve the ability to invest in the community:

• Build flexibility into the approved budget to better avoid large year-end surpluses;
• Require the OCFO to provide policy options to policymakers on use of reserves, and encourage the agency to lead the way on changing federal restrictions;
• Ensure OCFO keeps within its “bean-counter” role; and,
• Require greater transparency and encourage greater engagement with advocates.

Built-In Budget Flexibility Can Help the District Avoid Large Year-End Surpluses

First, the CFO’s management often leads to substantial year-end budget surpluses. For example, the unobligated surplus was $526 million in FY 2020 and $324 million in FY 2019. Adopting a budget each year that looks balanced but then ends up with a large surplus suggests that our budgeting is overly cautious, leaving a lot of money in the bank that could be used to invest in residents. That’s especially concerning in the midst of a pandemic with widespread unemployment and small businesses struggling to survive.

DCFPI recommends that the CFO explore options to avoid large year-end surpluses. For example, the approved budget could include a small upward adjustment to planned expenditures—such as 1 or 2 percent—that the CFO could trigger into effect in the last quarter of the fiscal year in case there is a projected budget surplus. This would allow the District to adopt a slightly larger budget, with flexibility, and more fully spend available resources.

Encourage More Leadership on DC’s Reserves Policy

The OCFO has stressed the importance of building up cash reserves to equal 60 days of operations, based on guidelines from the Government Finance Officials Association (GFOA), but has shown a great reluctance to use them. The GFOA guidelines note that the point of building up reserves is to address a drop in tax collections or unanticipated spending needs.^[1] In other words, we build up reserves so that we can budget and use them as rainy day funds, not just for short periods and repaid the same year.^[2] The OCFO opposed using reserves during the lengthy federal government shutdown a few years ago and has been reluctant to use more than a small amount in the current, deep recession. By leaving money in the bank, the OCFO approach results in harm to residents and businesses that could be avoided.

The OCFO argues that we need to limit the use of reserves to protect DC’s bond rating, yet most states that used reserves in the Great Recession saw no downgrade to their bond rating. DCFPI believes that the OCFO should provide options to policymakers on use of reserves, highlighting pros and cons, rather than providing directive guidance that lawmakers are reluctant to cross.

Relatedly, DCFPI believes that the OCFO should lead the way to end federal restrictions on DC’s emergency and contingency reserves, which leave almost $500 million unavailable for a rainy day.^[3] The primary restriction is a requirement to start repayment of any reserves used within a year and to fully repay them in two years. The Mayor and DC Council should dictate how and when DC’s reserves are used, not the federal government. Yet, the OCFO has not taken steps in recent years to work with the Mayor and Congress to undo these federal restrictions.

Encourage the OCFO to Keep Within Its “Bean Counter” Role

There are times when the CFO goes beyond the role of “bean counter” to act more as a policymaker. For example, the OCFO tried to stop the Council from tapping the large and growing surplus at Events DC, which the Council wanted to redirect to support public housing repairs. There was no question that the money was there and unlikely to be needed by Events DC.^[4] If the OCFO position had been followed, there would be a lot of money sitting in Events DC reserves while public housing remained in a worse state of disrepair. In another example, the OCFO asserted several years ago the only practical way to finance the region’s increased investment in Metro was a sales tax increase in each jurisdiction, which would have fallen hardest on low-income residents. In the end, this assessment proved wrong, with jurisdictions choosing a variety of ways to finance their Metro obligation. Again, DCFPI believes the OCFO should do more to present options to policymakers rather than try to tip the scales.

Require Greater Transparency and Encourage Stronger Engagement with Advocates

Finally, DCFPI recommends changes to improve transparency around DC’s finances and to improve the OCFO’s engagement with the community. Policymakers and residents would benefit from inclusion of more historical budget and analytical tables in the annual budget, monthly reports on reserve fund levels and uses, and public release of all memos shared with the Council when the Mayor uses reserves or federal pandemic relief funds.

We also recommend that the OCFO engage more with advocates. The hearing on the FY 2020 Comprehensive Annual Financial Report made it clear that the office regularly meets with business leaders, but that’s not the case with advocates working on behalf of residents struggling to get by. Engaging with advocates would help the OCFO better understand the challenges facing DC residents. It would help the public better understand DC’s finances and financial management. And it would inform the OCFO in important ways, such as providing information on proposed legislation as the OCFO develops fiscal impact statements.

These recommendations would support continued sound management of DC’s finances responsibly, while also improving the ability to put DC’s strong finances to use, helping DC residents and supporting our city’s vitality.

Thank you for the opportunity to testify.