Cap the District's Debt

Thursday, December 1, 2005

THE CITY'S financial performance compared with that of a decade ago represents a remarkable turnaround. Sustaining those hard-won gains, however, will require the same degree of political will that D.C. leaders and the financial control board brought to bear on the city's accumulated budget deficits. There are early warning signs -- masked by a rosy fiscal picture -- that the renaissance could be jeopardized if the city fails to get a grip on its growing debt burden. This is, we know, an unpleasant subject to raise on the eve of an election year, when spending pressures rage like adolescent hormones. But Chief Financial Officer Natwar M. Gandhi has issued a warning about the District's debt that Mayor Anthony A. Williams (D), D.C. Council members and all aspiring elected officials cannot afford to ignore.

An examination of the history of the city's general fund balance and projected spending tells part of the story. In fiscal 1996, the general fund was in the red by $518 million. In fiscal 2005, thanks to improvement in the city's finances, the cumulative general fund had a $1.5 billion surplus. In fiscal 2006, however, the upward trend in cumulative surpluses has turned downward sharply, because of the aggressive spending underway.

The rest of the story is equally sobering. The District already has the highest debt per capita in the nation, far higher than most other jurisdictions, with overall tax-supported debt per capita at $7,663, according to Mr. Gandhi. When the city's spending projections are adjusted to account for money it needs to cover current and projected debts (the ratio of debt service to expenditures) it becomes clear that the District soon could be drifting toward dangerous waters. In a Nov. 22 letter to the mayor and council Chairman Linda W. Cropp, Mr. Gandhi observed: "The District's ratio is approximately 9.2 percent currently and is projected to increase to approximately 11.8 percent by 2009. A debt service-to-total expenditure ratio above 10 percent has been traditionally viewed by many analysts in the industry as a 'red flag' indicating movement into the high range."

Out of concern for its city's current and future financial health, Mr. Gandhi has recommended that the city implement a management cap on its debt at 10 percent. While still somewhat high, a 10 percent cap, he reasons, will allow the city to address current needs while maintaining a solid financial status and its current favorable bond ratings.

A management cap on debt is, we believe, a prudent step. That means, of course, that the city has to take a hard look at its planned projects. Schools modernization, a new mental hospital, a baseball stadium, a new hospital for Howard University, a convention center headquarters and more simply will not fit under a 10 percent cap. That means tough choices will have to be made, and in an election year. But the alternative -- red flags, a backward slide toward accumulating red ink and a return to heavy-handed congressional oversight -- should be too awful to contemplate.


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