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May 28, 1996

On a Debt and a Prayer

On a Debt and a Prayer

As we enter the Control Board's second year, one would assume that the city is well on the way to returning to fiscal sanity. Yeah, and Martha Stewart buys her Christmas decorations from Walmart. In fact, the District's fiscal future is not hard to comprehend-just more horrible than one can imagine. The District might just get through the current year on a wing and a prayer. Next year, however, looks so bleak that the District ought to build a church where we all can pray.

The House that Barry Built-otherwise known as the District of Columbia--is still struggling for a way out of virtual bankruptcy (unlike the actual House of Barry, which is apparently refurbished mostly by friends and taxpayers). If the House of Barry was a family, Visa and Mastercard would have repossessed the joint. If debtors' prison still existed, the District would be occupying the presidential suite.

Meanwhile, the city's expenses continue to outpace its revenues. In short, the District's problems are virtually the same as any family facing a financial crisis-too little income, out-of-control expenses, and credit abuse.

Pleading for Pesos Labor Secretary Robert Reich introduced us to the idea of the anxious class-the group of families that are not sharing in the prosperity they see around them. The District is the anxious city. As the metropolitan region gets richer, the District sees that its take-home pay has stagnated (and declined the past two years). Fewer and fewer residents are rendering unto Caesar. Many have left for greener empires. Thirteen thousand denizens left last year along with their income and sales tax payments, leaving whole swaths of the realm vacant, especially in Ward 7. The vacancies have, in turn, led to lower property tax assessments, fewer inhabited houses to tax, and a revenue decline.

The District has tried any number of ways to increase its income, so far all to no avail. The mayor has sought a higher federal payment (which has fallen to a historically low level) from Congress. But Congress, playing the role of Mr. Dithers to Barry's Dagwood Bumstead, refuses to up grant the raise because the city does not deserve it, would only squander it, and, hey, Congress does not have the money anyway.

Barry has also dunned tax exempt organizations such as Fannie Mae and National Geographic and commuters-who visit often, party hard, and don't clean up after they leave-for extra cash. But Congress has denied the mayor's request. The District could take a second job to earn more income but it's having a hard enough time keeping up with its current one.

Everything's a Priority Many households get in trouble when their income stagnates and their monthly expenses continue to increase. The District is no exception. The mayor's financial projections-vetted by Chief Financial Officer Anthony Williams-shows expenses increasing 6 percent annually while revenues grow (optimistically) at less than 2 percent. This is when the family is supposed to decide whether it really needs cable TV, the country club membership, and the instant credit line with the Home Shopping Network. Similarly, District leaders have to choose its spending priorities.

After debating this question for years, the mayor's office and the city council have decided that everything remains a priority. Sharon Pratt Kelly eliminated the summer jobs program for one summer and the community issued a fatwa against her. (Rarely seen in District circles, someone might want to inform Kelly that the fatwa has been lifted.) She never dared cutting a program after that. Even Barry's "Vision Thing"-his four-year plan for the District-rethinks, reengineers, and privatizes, but it does not cut programs. For all the budget cuts that city officials have coughed up this year (and the Control Board's cuts as well) to meet Rep. James Walsh's budget mark of $4.994 billion, most have nibbled away at existing programs. Dubious endeavors like summer jobs, the D.C. Law School, and D.C. General still exist.

Meanwhile, critical needs such as the District's crumbling infrastructure go virtually unfunded. Almost all the city's revenues and borrowed money go towards meeting its current expenses. Thus, the city has virtually zilch to pay for streets, roads, schools, and atsug (all that stuff underground). The results are self-evident. The city's infrastructure needs are enormous and beyond frightful.. Perhaps Congress will provide some extra cash if one of its members falls through a behemoth pothole. Otherwise, there is no evident solution.

In addition, most city departments exacerbate the problem by operating as fiefdoms subject to little financial control. It's as if the household breadwinner gave every member of the family a credit card with an unlimited credit line. That's precisely the problem the Control Board has with Vernon Hawkins, czar of the city's $1.6 billion health and human services satrapy. Hawkins apparently won't stay within budget and is trying every which way to sneak contracts passed the eyes of the Control Board. The city's Inspector General, Angela Avant, is supposed to make District workers think twice about committing waste, fraud, and abuse, but instead, appears to be participating in the Bureaucrat Witness Protection Program.

There is a good reason that Hawkins, Tilden J. LeMelle (President of the University of the District of Columbia), and other city administrators should keep to their budgets. They can land in jail if they don't. The Control Board legislation says so. That's why Anthony Williams has acted like a financial fascist, requiring every city financial official to get approval before spending the city's precious money. District bureaucrats are not happy with this inefficient, draconian solution but it's the only way Williams can keep the District from overspending its budget.

Outstripping Its Credit Limit With its income inert and its expenses out of control, the city would like to do what every American dreams of doing-borrow, borrow, borrow! But the District is already in hock to the hilt. Even Jim Palmer couldn't arrange credit from the Money Store. If banks treated the city like a family, the District Building's furniture would be strewn about on the sidewalk of Pennsylvania Avenue.

Fortunately, the Control Board legislation that allows the city to continue to borrow from the U.S. Treasury despite the its deadbeatedness. Borrowed money is the lucre that is allowing the city to limp through this dismal year. Including an expected loan from the U.S. Treasury for $219 million, the District will have borrowed $660 million this year to make up the difference between revenues and expenditures. The loans account for almost 13 percent of the city's revenues in its $4.994 billion budget. So not only is the city continuing to live beyond its means, it's digging a bigger debt hole for itself. But with all this borrowing, the city still could not fill potholes, buy toilet paper, or make the Xerox machines run on time.

Unfortunately, next year will be worse. Look what happens on October 1, 1996, the day when the city usually gets its 1997 federal payment. (This year, the District did not receive the balance of its payment until two weeks ago.) On October 1, the Treasury will cut a check for $660 million, the District will deposit it, and the District will immediately cut a check to pay the Treasury back for this year's loans. In a New York minute, the District will have spent its entire federal payment without buying as much as a pencil sharpener.

The District used to spend the federal payment to pay off the previous year's bills. But beginning on the first day of fiscal year 1997, the District will pay its overdue bills by borrowing against its fiscal year 1998 federal payment. That means the District will have even less credit available to pay its expenses than it did this year. The District will only have enough cash to carry it through the year if Hillary Rodham Clinton becomes its financial advisor.

Thus, next year the District will have fewer proceeds from borrowing from its federal payment to close income/expenses gap and it's gap may be larger than this year's 13 percent. Furthermore, Congress is antsy that the District start generating surpluses to pay off its other debts.

This financial miracle is not going to happen all in one year. It's going to take lots of long-term borrowing from private financial markets to balance the District's books. That's why the Control Board decided it needs to enter the bond market to convert $600-$700 million from short-term to long-term debt. Instead of borrowing hand-to-mouth to make each payroll and pay vendors, city officials could spend more time focusing on cutting expenses. At least that's the theory.

Monkey Miracle This budget synopsis is a best case scenario. The District could be faced with rising interest rates, a health crisis, or emergency infrastructure repairs that could bust apart this tenuous plan.

Alternatively, the District might be the beneficiary of a Monkey Miracle (the chance that, given an infinite number of monkeys and typewriters, one will write Hamlet). Congress might double the federal payment. District bureaucrats might become efficient managers. And surrounding counties might tithe 10 percent of their taxes to the District's coffers for "our mutual welfare." When pigs fly....

Jeffrey Itell


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