Back to the control board for the District?

By Robert D. Ebel
Sunday, June 13, 2010

If you've heard that the District is tumbling headfirst toward another control board, it's time to take a deep breath.

The alarm bells have sounded because the District's "fund balance" has declined from $1.6 billion in 2005 to $656 million in 2011. One can think of the fund balance as a community savings account. In this case, the account has two components: a "reserved" portion that the District must set aside for payment of legal obligations such as debt service, and an "unreserved" portion that can be drawn down to spend on operations. It is the drawdown of this unreserved portion that has set off the back-to-the-control-board talk.

Now to complicate (well, clarify, one hopes) things, there is also something called a "budget reserve" set-aside. This is another pot of money that functions as a rainy-day savings account, but unlike the fund balance, which grows on its own during boom times, the reserve is created through a line item in the annual budget. That is, for budgetary purposes, it is just another spending entry.

The reality is that the District is financially sound. Consider this: Whereas the District's expected fund balance is 10.2 percent of its budget for 2011, two-thirds of the states' balances will be below 5 percent. Maryland is at a respectable 6.1 percent; Virginia is at 2.3 percent. Only eight states are doing better than the District, and five of those are oil states.

Nonetheless, eyebrows have been raised because of the decline in the fund balance. What to do? There are three options:

The first is to fully reestablish the $50 million "budget reserve" that was abolished in 2009. If the city goes this route (again, remember it is an expenditure line item), it can pay for it by increasing taxes. After such an increase, the District would still have lower overall state and local taxes than Maryland's, though they would be a bit higher than Virginia's.

The second option is to enact a council-proposed rule to earmark 100 percent of any future surpluses to replenishing the unreserved portion of the fund balance by about $650 million (it has gone from $175 million in 2005 to zero today). A good case can be made for giving the public's savings account first dibs on a surplus, but it would take an awfully long time to get to $650 million this way. Moreover, such an approach would limit the flexibility the city needs to address unplanned "safety net" needs (or, as the Street Sense newspaper reminds us, "survival net" needs). If the goal is to send a signal to the credit markets that the District is well-managed financially, a lower earmark, say, of 50 percent, would suffice. But let's give credit to the D.C. Council for coming up with this idea.

Third -- and now take that deep breath -- the city could simply choose not to replenish the unreserved portion of the fund balance, especially if the line-item "budget reserve" were reestablished. Why? Two reasons. First, what the District must do is ensure that it has enough money set aside for the reserved portion of the savings account. And we are good on that. Second, the independent office of the chief financial officer serves as a safeguard to keep the financial accounts transparent and honest and balanced, as a record of 14 consecutive balanced budgets attests.

So, a budget reserve tax-and-save strategy? Yes. A new fund balance strategy? Not needed. A return to a control board? Nope.

The writer is a professor of economics at the University of the District of Columbia. He was chief economist in the D.C. Office of the Chief Financial Officer from 2006 to 2009.

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