The city budget passed by the D.C. Council last month has “several deficiencies,” the District’s independent chief financial officer told lawmakers Wednesday — a frank acknowledgment that an ambitious tax-cut package has thrown the city’s spending plan out of balance.
Chief Financial Officer Jeffrey S. DeWitt writes in the letter that “several modifications” will be necessary before he can sign off on the budget package, which not only sets the budget for the 2015 fiscal year, which starts Oct. 1, but also balances the city’s fiscal picture through 2018. Among the consequences, DeWitt said, is that he is postponing a planned round of borrowing until he is able to sign off on the budget.
“I cannot certify a budget that removes the necessary financial flexibility, violates the District’s debt cap, or is not structurally balanced due to long-term revenue reduction,” DeWitt writes.
The letter was sent Wednesday night to Chairman Phil Mendelson (D), who orchestrated the tax cut maneuver shortly before the May 28 budget vote, and copied to the council’s other 12 members.
DeWitt criticizes the council’s choice to implement cuts to income, business and estate taxes recommended by the blue-ribbon D.C. Tax Revision Commission without also including the commission’s revenue-raising recommendations — such as a small per-worker levy on city employers. Instead, Mendelson and colleagues voted to make up for the lost revenue by cutting “pay as you go,” or PAYGO — non-borrowed capital funds that can be easily redirected to operating needs should they arise.
“By spending PAYGO to support tax cuts, the Council has fully eliminated an extremely important tool used by state and local governments around the country to manage unanticipated events,” DeWitt wrote. “Council-approved tax relief renders these monies permanently unavailable in the event of a shortfall.” Wall Street bond raters, he added, are likely to view the move as a “credit negative.”
DeWitt also confirms in the letter that the council’s budget violates the city’s debt cap, which limits debt service costs to 12 percent of general-fund expenditures. By cutting PAYGO to fund the tax cuts, the council lessened its borrowing capacity over time, resulting in debt cap violations by 2018.
The good news for Mendelson is that DeWitt says there is a way out of the mess. The tax cuts can be “triggered” by revenue gains that equal or exceed the costs of the tax cuts, the CFO writes. But in fiscal 2016, the tax cuts can only be realized after regaining roughly $180 million in financial flexibility lost with the PAYGO cuts — increasing the likelihood that the tax cuts scheduled to phase in that year will be delayed.