Natwar M. Gandhi, Chief Financial Officer
Testimony on the mayor's FY2005 proposed budget and financial plan
March 29, 2004

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Before the
Committee of the Whole
Council of the District of Columbia
The Honorable Linda W. Cropp, Chairman

March 29, 2004; 2:00 p.m.
Council Chamber

Remarks of
Natwar M. Gandhi
Chief Financial Officer
Government of the District of Columbia

Good afternoon, Chairman Cropp, Mr. Evans, and members of the Committee of the Whole. I am Natwar M. Gandhi, Chief Financial Officer for the District of Columbia, and I would like to offer brief remarks about the Fiscal Year 2005 Proposed Budget and Financial Plan.

The Office of the Chief Financial Officer has worked with the executive leadership team, as well as agency program and budget staff, to address numerous budget issues to produce a balanced budget. We will continue to support this collaborative process as the Council deliberates.

FY 2005 Budget and Financial Plan Overview

The proposed FY 2005 gross funds operating budget is $6.25 billion, an increase of $545.6 million, or 9.6 percent, over the approved FY 2004 gross funds budget of $5.70 billion. The local funds component of this budget is $4.17 billion, an increase of $340 million, or 8.9 percent over the approved FY 2004 local budget of $3.83 billion. The federal funds component of this budget is $756.6 million, an increase of $8.0 million, or 1.1 percent over the approved FY 2004 budget of $748.6 million. The federal Medicaid payment component of this budget is $993.1 million, an increase of $100.8 million, or 11.3 percent over the approved FY 2004 budget of $892.3 million. The private grant funds component of this budget is $13.3 million, a decrease of $453,000, or 3.3 percent from the approved FY 2004 budget of $13.8 million. The special purpose revenue funds component of this budget is $309.8 million, an increase of $65.3 million, or 26.7 percent over the approved FY 2004 budget of $244.5 million. Attached to my testimony are two charts that provide more detail.

Expenditure Growth Rates

The expenditure growth rate for FY 2005 does not set the mold for FY 2006 and beyond. Expenditures are expected to grow at 4.1, 4.6, and 4.3 percent for fiscal years 2006, 2007, and 2008, respectively. It is important to note for these out years that Medicaid is projected to grow at 6 percent annually. It is clear to the District’s elected leadership that the FY 2005 local funds expenditure growth of 8.9 percent, or $340 million, is not sustainable. The Mayor’s FY 2005 Proposed Budget and Financial Plan includes the impact of $94 million in FY 2004 spending pressures that are recurring in nature. The FY 2005 baseline budget, the starting point for the formulation of the Mayor’s proposed budget, includes important budget corrections or increases to recognize the true cost of providing the current level of services, including entitlements, court order compliance costs, attainable projections of Medicaid reimbursements, and operating costs of completed capital projects. Due to the District’s history of experiencing chronic spending pressures, the baseline budget was built on a realistic but not an overly conservative assessment of operating costs.

The Balancing Proposal

The executive branch began the formulation of the proposed budget with a $249.8 million gap, the difference between baseline revenues and expenditures. Mayoral enhancements of $45.5 million and baseline budget fixes of $16.9 million increased the FY 2005 budget gap to $312.2 million. After a baseline revenue adjustment of $6.4 million, the Mayor took the following actions to balance the FY 2005 operating budget:

1. Drew down $54.0 million of unreserved fund balance, in addition to the $26.0 million that was already assumed as part of the baseline budget;
2. Utilized $58.8 million of tobacco trust funds;
3. Reduced the contingency reserve contribution by $8.3 million, to set aside only the legally minimum level;
4. Cut expenditures by $62.6 million;
5. Transferred $28.1 million of eligible costs to special purpose funds;
6. Capped the dedicated revenues of the Housing Production Trust Fund to $20 million per year, re-directing $20.5 million to local funds;
7. Raised miscellaneous fees, permits and fines to produce additional revenues of $47.8 million; and,
8. Raised selected taxes by $27.4 million.

On a net basis, the Mayoral gap closing actions produced an FY 2005 operating surplus of $1.7 million.

To balance the remainder of the General Fund five-year financial plan (fiscal years 2006 through 2008), the proposed budget continues the following through FY 2008:

1. the annual $20.0 million cap on Housing Production Trust Fund dedicated revenues;
2. maintenance of the enhanced revenues from fees, permits, fines and taxes; and
3. utilization of Tobacco Trust Funds for local funds purposes.

In addition, the plan requires the deferral of additional tax parity provisions through FY 2007.

The Impact of the Structural Imbalance

It is precisely these types of actions needed to balance the five-year plan that demonstrate the impact of the District’s structural imbalance. As noted by the U.S. General Accounting Office, the District has a substantial recurring need for infrastructure improvements and has a disproportionate number of persons living at the federal poverty level who need a wide range of human support and educational services. These factors, combined with a high cost of living, result in a structural imbalance between resources and needs, ranging from $0.5 billion to $1.1 billion per year. This problem is particularly evident during economic downturns, when demands for social services are even higher, but fewer resources from the District’s economically sensitive taxes are available to meet program needs.

Impact on FY 2006 and Beyond

It is important to note the impact of the proposals in this budget submission on the subsequent years of the multi-year plan. The first is that virtually all projected subsequent year revenue increases will need to be dedicated to meeting baseline costs. Any flexibility to fund new program initiatives will have to come from corresponding program reductions elsewhere or additional revenue enhancements. Second, the proposal assumes that the provisions of the Tax Parity Act are further deferred for two years, so that tax reductions would resume in FY 2008 rather than FY 2006. Third, the set-aside for the tobacco trust fund has been eliminated and the funds will continue to be used to cover operating expenses.

While I am committed to protecting the fiscal integrity of the District at all costs, I want to emphasize what I believe are some of the effects of the District’s long-term fiscal structural imbalance. Due to the structural imbalance, the District is forced to tax its residents and businesses at higher tax rates than the surrounding jurisdictions just to provide basic-level services. As a result, attempts to reduce the tax burden in the District must be delayed, so that we can continue to finance policy priorities and government operations, or essential services will have to be cut to balance the budget in the out years.

As the following charts illustrate, if the District were to proceed with Tax Parity and funding of the Tobacco Trust Fund per current law, expenditures would significantly exceed revenue not just in FY 2005, but for the foreseeable future. By suspending Tax Parity and the Tobacco Trust Fund, the District is able to maintain a balanced budget. Again, these choices are not easy, but the structural imbalance forces us to make these and other difficult choices.

Chart 1: Projected Revenues and Expenditures FY 2005-2008 including Tax Parity and Funding the Tobacco Trust Fund

Without Suspension of Tax Parity and Tobacco Contributions

Chart 2: Projected Revenues and Expenditures FY 2005-2008 without Tax Parity and not Funding the Tobacco Trust Fund

With Suspension of Tax Parity and Tobacco Contributions

The District’s FY 2005-2010 Capital Improvement Plan (CIP)

The proposed FY 2005 capital budget is $556 million, and the six-year total budget is $1.96 billion. The FY 2005 –FY 2010 local CIP proposes an increase in funding of $824 million over the next six fiscal years for 97 ongoing projects and 114 new projects, with a rescission of $418 million. The net increase of funding is $406 million. D.C. Public Schools constitutes the majority of the planned expenditures, and a significant portion of the funding also goes to the Washington Metropolitan Area Transit Authority and the Office of the Chief Technology Officer. This budget proposes $389 million in General Obligation Bond funding, $101 million in reallocated General Obligation Bond proceeds, $37 million in Rights of Way funding, $19.5 million in Equipment leases, $5 million in sales of assets, and $3.5 million in other grants.

Performance-Based Budgeting

This budget also continues our progress in implementing performance-based budgeting (PBB), increasing the total number of agencies transitioned to 57. Under PBB there is a clear relationship between the funding agencies receive, the programs they operate, and the results that they must achieve. Agency narratives have been restructured to better emphasize this relationship. In addition, we have begun the process of developing program benchmarks to supplement the program information in the budget documents. The benchmarks will assist all District officials, as well as the public, to more clearly assess the value of the District’s programs and determine where opportunities for improvement exist.

While the District continues to face fiscal challenges, I know that the leadership provided by the Mayor and the Council, along with the hard work of the Office of Budget and Planning and others in the Office of the Chief Financial Officer, allowed us to produce a balanced budget for FY 2005. As a result, I am certifying that the FY 2005 Budget and Financial Plan, as proposed, is balanced for FY 2005 and beyond.

I look forward to continuing to work with the Mayor and the Council during the forthcoming budget deliberations.

FY 2005 - FY 2008 Proposed Budget and Financial Plan: General Fund
($ thousands)

Local Funds Component of the General Fund Financial Plan
($ thousands)

Special Purpose Revenue Component of the General Fund Financial Plan
($ thousands)