By David Nakamura
Washington Post Staff Writer
Friday, December 7, 2007

The District government expects to collect an unanticipated $50 million in tax revenue for the first quarter of fiscal 2008, D.C. officials said yesterday, announcing the city's second surplus in three months. The news comes after finance officials said in September that the District would reap $100 million more than projected in tax revenue for fiscal 2007.

The latest surplus is a rare bright spot recently for Chief Financial Officer Natwar M. Gandhi, who is embroiled in a scandal in the Office of Tax and Revenue. Two employees have been arrested and charged with stealing more than $20 million in false property tax refunds since at least 2001. A Washington Post investigation has determined that the amount of stolen money could reach $44 million.

Gandhi has spent part of this week and last making the rounds to maintain the support of D.C. Council members, business leaders and Wall Street bond raters.

The District's latest windfall also sharply contrasts with the economic situation in other parts of the region. Montgomery County officials, for example, are wrestling with a $401 million budget deficit, and Maryland is trying to close a budget gap of at least $1.5 billion. Gandhi credited the city's strong real estate market for the run of surpluses over the past several years. Although most of the country has faced a downturn in property values, the District's commercial market has remained hot and its housing market has not fallen as much as it has elsewhere, officials said.

Gandhi also said the city has continued to reap the benefits of the hot market of a few years ago because fees from deed taxes sometimes lag. Some D.C. Council members, however, have said that Gandhi routinely low-balls his revenue projections so the city is sure to have a surplus each year.

In a letter to Mayor Adrian M. Fenty (D) and council Chairman Vincent C. Gray (D), Gandhi said the city could soon begin to feel the effects of the real estate downturn.

"The revenue estimate is made in an environment where current indicators for both D.C. and the national economy are mixed and difficulties in real estate and financial markets point to an unusual amount of uncertainty," Gandhi wrote.

Fenty has proposed spending $81 million of the $100 million in surplus revenue from 2007 on improving the public schools. In a letter to Gray yesterday, the mayor said he will recommend allocating the additional $50 million to increasing housing for the homeless.

The funds would enable the city to create 400 units for the chronically homeless who live downtown, Fenty wrote, and 100 units for homeless families. Fenty has promised the Washington Interfaith Network, a large grass-roots organization, that he would reach those goals as part of a larger commitment to increase affordable housing.

The D.C. Council is set to vote Tuesday on the mayor's supplemental spending proposals.

"This type of supportive housing enables special needs populations to live as independently as possible in a stable setting," Fenty wrote.

Gray called the surplus "great news." But he said the council must be certain that money will be available in the future before approving Fenty's spending proposal on affordable housing.

"If we start something this fiscal year that is expected to continue, is there money available to cover it?" Gray said. "We have to clarify that."

The Rev. Lionel Edmonds of Mount Lebanon Baptist Church is hopeful about the funds going to housing: "This is as great a Christmas gift the city can give to the underserved and overlooked. I applaud the priority they are placing on this."

Although a tax surplus is welcomed by city officials, it can't lift the burden of the largest tax fraud case allegedly involving government workers in the city's history. Gandhi has removed 15 employees from their jobs and has announced steps to tighten controls and restore public trust. But he was set back again this week when top lieutenant Sebastian "Ben" Lorigo, whom Gandhi had named interim head of the tax department, announced that he will resign at the end of the year.

His visits to businesses and city officials included meeting last week with the Federal City Council, a group of business leaders, and briefing the D.C. Chamber of Commerce's board of directors Wednesday.

In his remarks, Gandhi has pledged to remain on the job to reform the tax office. He said he has retained a search firm to help him find new managers. He also announced the formation of an audit committee of outside experts to review and recommend policies for the tax department.

"He is enormously saddened," chamber President Barbara Lang said. "You could see this was tearing him apart. He talked about the failure of management controls, the failure of management in this whole thing. He took personal responsibility."