What’s In The Mayor’s FY 2008 Budget Request?

On March 23, Mayor Fenty submitted his first budget proposal, for the FY 2008 budget that starts in October of this year.  The FY 2008 general fund budget request totals $6.2 billion.  This reflects a 6.3 percent increase over the revised FY 2007 budget, after adjusting for inflation.[i]  (All figures in this analysis are adjusted for inflation to equal FY 2008 dollars unless otherwise noted.)  Mayor Fenty also proposed an additional $56 million in expenditures that would be implemented if a future revenue estimate shows enough new revenue to cover the services.

Where Would the Budget Grow Under the Mayor’s Proposal?

The District’s budget is divided into seven major functional categories, known as “appropriation titles.” The table shows that the budgets for health and human services (“human support services”), public education, public safety, and financing functions total more than $1 billion in 2008 each. These are the largest portions of the DC budget.

As shown in Table 1, the proposed 2008 budget reflects increases across a number of program areas.  In most cases, the increases were needed to maintain services provided in 2007 (so called “baseline” funding needs).

Financing and Other: Funding for these services would grow by more than one-third under the FY 2008 proposed budget, but much of the increase comes from one-time expenses ‘ such as a payment for health benefits for DC government retirees that is required by a change in accounting rules. Without these changes, the financing budget for 2008 is about five percent higher than the 2007 budget after adjusting for inflation.  This largely reflects an increase in repayments for the District’s general obligation bonds, which are issued to support capital construction projects.  Bond repayments are growing because the District has issued more bonds in recent years.

Public Works:  This area of the budget would receive the largest percentage increase in funding, with a proposed FY 2008 budget that is 15 percent higher than the 2007 budget after adjusting for inflation.  This reflects notable growth in the budgets for many agencies in this group, including the Department of Transportation, the Department of Public works, the Department of the Environment, and the District’s contribution for the Metro system.[ii]

Public Safety & Justice:  Expenditures on public safety are proposed to be 7.0 percent higher in 2008 than in 2007, after adjusting for inflation, largely as a result of a substantial increase in the number of sworn police officers.  This force expansion was adopted in 2007 but will not be fully implemented until 2008.  It also reflects a substantial increase in the budget for the city’s Unified Call Center and the Department of Corrections.

Human Support Services:  The inflation-adjusted increase in local funding for Human Support Services is 4.0 percent.  This stems largely from an increase in health care expenses, including growth in the number of residents enrolled in the Healthcare Alliance, a program for low-income residents who are not eligible for Medicaid.  This appears to have resulted from a change in enrollment processes that have identified more eligible residents.  The 2008 budget also includes increases in costs for the Medicaid program, due largely to rising health care costs, and an increase in funding for the Department of Mental Health that includes expansion of a number of services.  The Human Support Services budget also includes modest increases in funding for substance abuse treatment, cash assistance benefits for poor families with children, and adoption assistance.  The budget also appears to include a modest cut in funding for child care (which is discussed in more detail below).

Economic Development and Regulation:  The proposed FY 2008 budget is 4.3 percent higher than the revised 2007 budget, after adjusting for inflation.  This largely reflects an increase in funding for the Department of Housing and Community Development, mostly in the Home Purchase Assistance Program, which helps low-income residents become first-time homebuyers.  It appears that the proposed budget would spend funds that have accumulated in recent years in a special account for HPAP.

Public Education:  Funding for education functions ‘ including K-12 schools, libraries, and the University of the District of Columbia ‘ would grow one percent under the proposed budget after adjusting for inflation.  This includes a substantial increase in funding for DC Public Charter schools due to rising enrollment and a reduction in funding for DC Public Schools due to enrollment declines. For both sets of schools, the per-pupil funding level would grow four percent in 2008.  As discussed below, the budget also would change the formula for funding DC schools that has the effect of cutting $25 million from the DCPS budget for FY 2008.

Government Direction and Support:  Funding for these services would fall nearly five percent in inflation-adjusted dollars under the proposed budget.  The decline primarily reflects a proposal to change the way that personnel and procurement functions are supported.  Currently, both agencies receive direct appropriations to fund their activities.  Under the proposed 2008 budget, these agencies would receive almost no direct funding, and instead they would charge other agencies for providing personnel and procurement services.  This proposal has raised some controversy, because other DC agencies did not receive funding increases to address these new expenses. Without this funding shift, the FY 2008 budget for the government direction appropriations title would be roughly the same as the inflation-adjusted FY 2007 budget.

The budget for the government direction appropriations title also includes a substantial funding increase for the Office of the Chief Technology Officer ‘ to cover operating costs for technology projects that are being completed ‘ and a cut in the budget for the Chief Financial Officer.

Long-Term Budget Growth Shows Different Trends

It is worthwhile to place these annual funding changes in a broader, more long-term context.  A comparison of the proposed FY 2008 budget with expenditures in FY 2000 shows the following trends.

• The proposed 2008 budget for economic development and regulation programs represents average growth of 16 percent per year since 2000, after adjusting for inflation.  This stems largely from the substantial increase in local funding for affordable housing that has been adopted in recent years.  In 2000, there was almost no local funding for this purpose.  In addition, the growth reflects nearly $40 million in planned expenditures under the “neighborhood investment fund” for a variety of community investments.  The fund was established in 2004 with annual funding of roughly $10 million, but it has been used only modestly since then.  Most of the accumulated funds would be spent in 2008 under the proposed budget.

• Funding for public safety and government direction have grown at roughly five percent per year between 2000 and the proposed 2008 budget.

• Public Education funding in the FY 2008 budget reflects average increases of 4.4 percent since 2000, or somewhat below the average for all program areas.

• Human Support Services expenditures have grown most slowly since 2000, with an average annual increase of 3.9 percent after adjusting for inflation.

Contingent Funding

The proposed FY 2008 budget includes a provision to allocate an additional $56 million to a variety of purposes if tax and other revenues collected in FY 2008 come in at higher levels than currently expected.  The Chief Financial Officer updates revenue forecasts four times a year, and often the forecasts for a given year change as the year progresses. The contingent funding items in the Mayor’s proposed budget includes:

• $25 million for transportation projects, include street, alley, and sidewalk repairs, and streetscape improvements in commercial corridors;

• $10 million for parks, particularly Stead Park;

• $10 million in environmental initiatives for storm water control and green roof incentives; and

• $11 million for arts-based economic development activities, health and youth initiatives.

Revenue Issues in the FY 2008 Budget

The Mayor’s 2008 budget request includes two notable revenue proposals.

Increase in the 911/311 Fee:  The budget would increase the monthly fee applied to all phones lines, which is used to fund 911 and 311 services.  The fee would increase from 76 cents per month to $1.55 per month, and this would raise $17 million in revenue.

Property Tax Rate Cut combined with Elimination of the Calculated Property Tax Rate:  In 2005, the DC Council also adopted a provision, known as the “calculated rate” under which the property tax rate for homeowners and landlords is reduced automatically if total property tax revenues are expected to rise more than a specified amount.  The calculated rate resulted in cut in the property tax rate in 2007, from 92 cents per $100 of assessed value to 88 cents.

The FY 2008 budget would eliminate the “calculated rate” mechanism while also lowering the residential tax rate to 86 cents per $100 of assessed value.  The DC Fiscal Policy Institute supports elimination of the calculated rate for a number of reasons.

• DC’s property taxes on homeowners are the lowest in the region.  Among homes worth $400,000, for example, the average 2006 property tax in DC was $2,900, compared with $3,800 in Montgomery County, $4,700 in Prince George’s County, $4,900 in Fairfax County, and $4,500 in Arlington County.

• Most DC homeowners are paying less today than two years ago.  As a result of several property tax relief measures adopted in recent years, 2007 property tax bills will be lower than 2005 property tax bills for 66 percent of DC homeowners, despite the nearly 50 percent increase in median assessed values since then.

These findings suggest that a provision to automatically reduce the residential property tax rate is not warranted at this time.  Even if the calculated rate is eliminated, the District can still consider property tax relief in the future.  Rather than allowing the rate to drop automatically, policymakers can assess the need for tax relief annually, and consider the need for property tax relief in light of the city’s overall budget situation and other possible budget priorities.

Other Issues to Track in the FY 2008 Budget

Possible reductions in housing funding due to slowing real estate market:  Funding for many DC housing programs are tied to revenues derived from deed recordation and transfer taxes.  The Housing Production Trust Fund receives 15 percent of deed taxes each year. In addition, deed tax rates were raised in 2007, with a portion devoted to housing programs.

Since then, however, the District’s real estate market has started to cool down, and as a result deed tax collections are projected to slow down, too.  Last year, deed tax collections were projected to rise from $330 million in 2006 to $462 million in 2008 (in part due to an increase in the tax rate).  Under more recent projections, deed tax collections in FY 2008 are projected to be $380 million.  While this is an increase over the 2006 level, that is only as a result of the deed tax increase adopted in 2007.  Without it, deed tax collections would be lower in FY 2008 than in FY 2006.

As a result of the slowdown in deed tax collections, funding for affordable housing in 2008 will be lower than had been expected.

• Funding for the Housing Trust Fund in 2008 will be $57 million ‘ which is roughly the same as in 2006 and 2007.  As recently as last summer, projected Trust Fund revenues for 2008 were nearly $70 million.

• A new “Comprehensive Housing Fund” was established in 2007 based on a portion of revenues raised through a deed tax increase.  At the time, this was expected to create $43 million in new housing funds in 2008.  Under current projections, this fund will received less than $30 million in 2008.  This may mean that certain planned expenditures from the fund ‘  including energy assistance, emergency rental assistance, workforce housing, and New Communities funding ‘  may need to be scaled back unless additional funds can be found.  The FY 2008 budget did not include an appropriation to address this shortfall.  This also means that additional funding will be needed to reach the recommendations of a 2006 mayoral housing task force, which called for $200 million in new housing funds for each of the next 15 years to address major affordable housing needs.

Change in Funding Method for DC Public Schools Will Result in $25 Million Funding Cut:  Until this year, the funding for DCPS that is tied to enrollment ‘ the per-pupil funding allotment ‘ has been based on enrollment as certified in the prior year.  For example, funding for school year 2006-07 was based on enrollment as of school year 2005-06. This method was used to provide stability to school funding.  DCPS enrollment has dropped sharply in recent years, primarily as students move to charter schools.  But the actual enrollment drop for a particular school is difficult to predict before the school year starts.  If funding were based on actual enrollment, a school’s budget would not be known until the school year starts, and a school that loses a large number of students could face a large budget cut just as the school year starts.

Funding for charter schools, on the other hand, has been based on actual enrollment.  This means that a school that has lower-than-expected enrollment gets less funding than it had planned, while schools with higher-than-expected enrollment get more.

The Mayor’s FY 2008 budget proposes to fund DC Public Schools the way that DC Public Charter schools are funded ‘ based on projected enrollment.  The DCPS school enrollment projection for the 2007-08 school year would include an adjustment to reflect average enrollment declines over the past three years.  This results in a projected enrollment decline of six percent, or 3,000 students.

While this creates parity with the funding formula for charter schools, it could present problems some DC Public Schools.  This change will have the effect of providing $25 million less for DC Public Schools than would expect without the formula change.  While the budget includes a four percent increase in per-pupil funding, the formula change results in an effective two percent cut in the per-pupil funding amount for DC Public Schools when compared with per-pupil funding this year.

Are there hidden cuts in the FY 2008 budget?  Each fall, DC each agency prepares a budget request for the upcoming year ‘ known as the “baseline budget” request ‘ that is intended to reflect the cost of maintaining services at existing levels.  As preparations for the FY 2008 budget began last fall, however, there were signs that increases in expenditures would outpace increases in revenue, due largely to large increases in a few budget areas.  As a result, each agency was asked to prepare a baseline budget request that was eight percent lower than its approved 2007 budget.

Clearly, it would be difficult or impossible in many cases to submit a budget request that maintains all existing services while spending eight percent less.  For this reason, each agency was allowed to appeal its budget request to both the Chief Financial Officer and the Mayor if it believed that meeting the eight percent reduction target would greatly reduce its ability to provide services.  Through this process, many the baseline budgets were adjusted upward for many agencies.

Yet there remain cases where the baseline budget for FY 2008 remains well below the approved 2007 budget:

• The proposed budget for child care in FY 2008 is $100.8 million, lower than the $103.4 million appropriated for FY 2007.  Yet the budget document suggests that the 2008 funding level meets the child care division’s baseline needs ‘  that the number of children served in 2008 will be the same as in 2007 ‘  and even includes a $1 million program enhancement.

• The proposed budget for adoption and guardianship subsidies within the Child and Family Services Agency is $41 million, three million lower than in 2007.  The budget document, however, indicates that this program is being expanded by $5 million to support an additional 200 adoptions.  The explanation for this discrepancy is that the agency submitted a baseline budget request that reflected a large reduction from its FY 2007 budget.  It is not clear how the agency expected to maintain services while cutting expenditures.

There are many references in the FY 2008 budget document to budget reductions made in order to meet the reduction targets, generally with little explanation.

End Notes:

[i] This figure reflects adjustments for certain large one-time expenses, such as recent requirements to budget for health benefits for retired DC government employees, as well as other technical adjustments to make the 2008 and 2007 budgets comparable.

[ii] This increase does not reflect a $68 million in transportation funds that were held in special accounts in 2007 but would be transferred to the general fund budget of the Department of transportation under the proposed 2008 budget.