District must decide whether to save or spend $89 million budget surplus

September 16, 2011

The District is ending the fiscal year with an $89 million budget windfall, but the city’s chief financial adviser warns that difficult spending choices loom amid uncertainty about the federal budget and the international economy.

In a revised revenue forecast released Friday afternoon, Chief Financial Officer Natwar M. Gandhi said the extra money in the fiscal 2011 budget was the result of stronger-than-expected property tax revenue.

The additional money will probably set off a scramble at Tuesday’s D.C. Council meeting as members begin deciding whether to spend the money or put it in the city’s savings account. The decision will have an impact on whether the city raises the income tax rate for its wealthiest residents.

Gandhi is urging the council to sock it away in the city’s reserve, noting that there are mounting signs that the District’s finances face uncertainty in fiscal 2012, which starts Oct. 1 .

Despite the growth in property tax revenue, Gandhi said there has been a worrisome leveling off of income and sales tax revenue growth. In a letter to Mayor Vincent C. Gray (D) and council Chairman Kwame R. Brown (D), Gandhi warned Friday that the District is still at risk for a downgrade of its credit rating.

“The potential for severe federal cutbacks and the crisis in the European debt markets could have significant effects on the District economy,” Gandhi said.

In recent years, as it tried to weather the national recession, the city has spent down its reserve fund from about $1.5 billion to $700 million. Gandhi said the fund needs to be replenished because the rating agencies have “expressed concerns” about the city’s “overall lack of liquidity.”

In an interview, Brown said he is also “strongly leaning toward” putting all the extra money in the city’s reserve account.

“We have to replenish our fund balance and make sure the cash flows and cash on hand is sufficient according to where it needs to be,” said Brown, adding that he hopes to get the fund to $900 million.

But the additional revenue could also get caught up in a debate over the future of the city’s controversial new tax on out-of-state municipal bonds.

To help close a $320 million budget gap, the council approved a plan in the spring to charge income tax on municipal bonds not issued by the District. The move, which applied to all interest earned on out-of-state bonds after Jan. 1, 2011, allowed the council to avoid a tax increase and deeper cuts to some social programs.

In early July, under pressure from those holding municipal bonds, including many retirees, the council approved an amendment to delay collection of the bond tax for a year. The council then diverted about $13 million from the city’s reserve fund to keep the budget balanced until the tax is collected in 2012.

In July, Gray vetoed the delay, expressing concern about how the city was paying for the move.

On Tuesday, the council will debate whether the new tax should be repealed or if it should be assessed only on future bond purchases.

To offset the potential loss of revenue, several council members have proposed raising the income tax rate from 8.5 to 8.9 percent on residents who earn $350,000 a year or more, starting in fiscal 2012.

Some council members may try to use some of the additional $89 million in revenue to stave off a tax increase. Brown, for example, said he doesn’t want to raise taxes.

“It seems we don’t have to raise income taxes for the sake of just eliminating the bond tax,” Brown said.

But it remained unclear Friday afternoon whether the council could transfer the excess revenue from fiscal 2011 to fiscal 2012. And even if it can, the budget language approved by the council in the spring mandates that any extra money in fiscal 2012 be prioritized toward affordable housing and some human services programs that had been hard hit by recent budget cuts.

Tim Craig is The Post’s bureau chief in Pakistan. He has also covered conflicts in Iraq, Afghanistan and within the District of Columbia government.
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