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Correction to This Article
An earlier version of the chart accompanying this article incorrectly referred to the amount of money in the District's reserve funds. The chart refers to billions of dollars, not millions. This version has been corrected.
Mayor Fenty's use of shrinking budget reserves is at issue in the District

By Nikita Stewart
Washington Post Staff Writer
Friday, August 13, 2010; B01

When Mayor Adrian M. Fenty took office in 2007, he inherited a savings account that mayors in other major U.S. cities would envy: a $1.5 billion rainy-day fund.

The fund -- known to budget professionals as the city's fund balance -- was flush with cash because of an economic boom that had piled up surpluses since 2002, with much of that money coming from more than 200 special-purpose accounts established for specific programs.

But in the past two years, this fiscal cushion has grown much thinner in the face of declining city revenue, Fenty's no-new-taxes pledge and overspending on some programs. Since 2008, the mayor has withdrawn nearly $840 million to subsidize general government operating expenses, causing the fund balance to drop to a projected $654 million in fiscal 2011, according to the Office of the Chief Financial Officer.

In the process, the mayor has tapped those special-purpose accounts -- second only to taxes as a source of city revenue -- and diverted money from their specific programs and agencies to the general government. It is difficult to trace diverted money to a particular part of the general fund, but beneficiaries include the summer youth jobs program, special-education transportation and private tuition subsidies, according to District records.

Redirected funds in the fiscal 2011 budget include $24 million from workers' compensation insurance, $5 million from child support collections, $3 million in natural gas and electric utility contributions to help needy residents pay their bills, $1 million from condominium conversion fees designated for emergency housing, and nearly $179,000 from Hoop Dreams scholarships.

Part of a package

City Administrator Neil O. Albert said the unused balances from the special accounts can and should be put to use. "The budget gap we were facing was enormous," Albert said. "Over the last three years, $1.3 billion in revenue disappeared. . . . We didn't do the gimmicky things some council members were suggesting like putting employees on a one-day furlough."

Drawing on the fund balance was part of a multi-pronged approach that included cutting expenditures, consolidating programs and increasing parking meter fees, other fees and traffic fines, Albert said. He said the District's fund balance remains larger than that of 43 states, an assertion backed by the D.C. Fiscal Policy Institute, a nonprofit watchdog of city finances.

The fund balance withdrawals have been called alarming by Chief Financial Officer Natwar M. Gandhi and some people who served in the Cabinet of Fenty's predecessor, Anthony A. Williams (D). "It becomes very easy to not make difficult decisions," said Robert C. Bobb, who was city administrator under Williams and is now emergency financial manager of the Detroit public schools. "You want to buy a new pair of shoes. You don't have the money. You go to your savings until there's none there. . . . That's what gets cities in trouble."

Ratings agencies look at the fund balance to gauge the city's fiscal health, a process that affects the city's credit standing and its ability to borrow money, Bobb said. The city "has risen like a phoenix from junk bond status to one of the healthiest city-states in the country. It would be a shame to see it flip backward too far," he said.

Jenny Reed, an analyst for the D.C. Fiscal Policy Institute, said that such warnings are exaggerated. "Nearly every state has drawn down its fund balance in the recession," she said. However, she said that in the District's case: "You don't know what they're used for. You don't know where it's going. It's hard to tell how much is affecting cuts and how much is surplus."

The fund balance reductions have also become an issue in the sometimes testy mayoral primary contest between Democrats Fenty and D.C. Council Chairman Vincent C. Gray. At last week's Ward 4 Democrats forum, Fenty said of Gray: "All those budgets that he criticizes -- me passing, balancing, getting the work done. He voted for every single one of them."

Gray countered that he has created a plan to replenish the fund balance because "the budgets that have come to the council . . . have money to cover the overspending by this administration."

Congress requires the city to keep a 6 percent contingency fund, which hovers around $300 million and is included in the fund balance. The Fenty administration dipped into the contingency fund in 2008 when the summer youth jobs program had a $38 million cost overrun. The administration repaid the funds.

Gandhi, who has been signing off on the Fenty administration's policy decisions, became more aggressive about his warnings this year. On July 28, he wrote to the mayor and council that ratings analysts are concerned about the "precipitous drop" in the fund balance.

Rebuilding the balance

He said the analysts were heartened by a plan, sponsored by Gray, to rebuild the fund balance with 100 percent of future surpluses. But Reed said she is worried that Gray's effort could hurt constituents.

"Every dollar that goes into the fund balance is a dollar we can't use for residents who need it," Reed said. "The proposal went too far, too fast. . . . What's really important is that the budget needs to be flexible."

The Fiscal Policy Institute's report recommends that the 100 percent be reduced to 50 percent to free up cash. "Any rule that is set now will be hard to change because loosening the proposal to build up the fund balance may be seen as fiscally responsible," the report says.

In other words, just as Fenty's no-new-taxes pledge contributed to the decision to dip into reserves, Gray's fund balance plan could push the city into other choices, such as raising taxes.

Will Singer, Fenty's former chief of budget execution, was the official behind the mayor's early spending plans. Singer, who said he was not speaking on behalf of the administration, played down the concerns of bond rating agencies and Gandhi.

Gandhi is known for carrying a notecard graph that shows the city's finances going from in the red to well in the black. "It's a point of pride for Gandhi," said Singer, who added that the fund balance is not the only measure of the city's financial health. "He's nervous [about the fund balance]. I don't think it's a well-placed nervousness."

Singer said Gandhi's office recommended borrowing money at the beginning of the year to prevent dipping into the fund balance. "It just didn't make sense," Singer said. He said the city should use its resources to avoid borrowing and paying interest.

And the Fenty administration has kept the mayor's promise not to raise taxes. "Raising taxes would make Wall Street feel really good. . . . People want to see a willingness," Singer said. "That doesn't make it the right thing to do."

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