D.C. faces projected shortfall of $175 million next year

By Nikita Stewart and Tim Craig
Washington Post Staff Writers
Tuesday, September 28, 2010; 11:06 AM

The D.C. government, grappling with budget shortfalls since 2008, was hit with another projected gap of $175 million for fiscal 2011 - an estimate that presents an immediate challenge for D.C. Council Chairman Vincent C. Gray, the presumptive next mayor.

Sales and income tax collections have dropped dramatically, accounting for about $100 million. Chief Financial Officer Natwar M. Gandhi said that more than half of the city's sales tax revenue is generated by tourism, an industry that has seen an estimated decline of $52 million. Income tax revenue has declined by $69 million, he said, partly as a result of a drop in capital gains tax collections. Some of the brunt has been offset by increases in property and property transfer taxes, attributed to several large commercial sales last year.

"The national economy has caught up with the District," Gandhi said.

Gandhi briefed Gray (D) and council member Jack Evans (D-Ward 2) Monday morning after speaking to Mayor Adrian M. Fenty (D). By Monday afternoon, City Administrator Neil Albert and the mayor's budget chief, Merav Bushlin, were meeting with Gandhi and his staff.

"The Administration is committed to producing a balanced budget just as we have over the past 3 years, and will present a gap closing plan to council in the coming days," Mafara Hobson, a spokeswoman for the mayor, said in an e-mail.

Although Gray defeated Fenty for the Democratic nomination for mayor, he still faces a general election, and Fenty is not leaving office until January. It will be business as usual until then, with the Fenty administration probably proposing cuts and the council weighing in.

The shortfall "is not one that I haven't tackled," Gray said. "I've been dealing with this in the last two years."

The difference with this year's crisis, he said, is that "we clearly have fewer options."

Gandhi and Gray criticized the Fenty administration for dipping into the city's reserves to balance the budget and fill previous gaps. Fenty, who promised in 2006 to propose no new taxes, stuck to that pledge, instead using rainy-day funds and raising parking meter rates and other fees.

"We are at rock bottom at emergency contingency funds," said Gandhi, adding that about $300 million remained in the rainy-day fund.

In addition to lower-than-expected tax revenue, the 2011 budget has a shortfall of $66 million to $75 million because of spending pressures.

D.C. public schools overspent the special education budget by about $25 million to $30 million, Gandhi said. The District also did not get about $35 million in stimulus money it had budgeted for Medicaid. Gandhi is forecasting that United Medical Center, which the city took over from a for-profit company over the summer, will cost taxpayers an additional $3 million in the coming fiscal year.

Evans has been saying that residents are tapped out when it comes to fees and taxes and that it's time for the city to make tough decisions about reducing the size of government.

"It's much worse than we expected," said Evans, chairman of the Committee on Finance and Revenue. "You can't even tax your way out of this thing. We are in a position to have to make substantial cuts, and you have to make them quickly to get the full year's bang for the cut."

If Fenty chooses across-the-board cuts, Evans said, each agency will have to take a hit of 3 to 5 percent to their 2011 spending plans.

He said the city should consider furloughs and layoffs. "Everything is on the table," he said.

Gray, who had tremendous backing from labor unions in his campaign, said furloughs should not be one of the few options. "Furloughs only work if you think it's a short-term problem," he said.

The process could be a test for Gray as well as council member Kwame R. Brown (D-At Large), the next likely council chairman. During Brown's successful campaign for the Democratic nomination, some of his critics questioned whether he had the intellectual heft to lead the often raucous body in challenging times.

In an interview Monday, Brown said it would be premature for him to speculate on a remedy until after Fenty submits his revised spending plan. "I'm pretty sure on the table will be cuts and looking at ways to run the government more efficiently, but I am also positive there will also be revenue-enhancement proposals from different members of the council, like there are every single year," said Brown. He said he had not decided whether he would support a tax increase.

Council members are lining up to question Gandhi's projections.

David A. Catania (I-At Large), chairman of the Health Committee, disputes that the hospital requires an additional $3 million infusion from the city. He also said that Gandhi failed to budget for the estimated savings the city will reap this year as part of the federal health-care reform law.

Gandhi said he doesn't think there will be substantial savings, but his stance is worsening the feud between him and Catania.

In an interview, Catania faulted Gandhi for the overspending in the schools budget, which the city's chief financial officer oversees.

Gandhi said that he takes "full responsibility for the budget" but that he has been warning the council and mayor for years about the potential for overspending.

"It's easy in this town to blame the CFO for everything," he said.

stewartn@washpost.com craigt@washpost.com

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