After 10 years, D.C. control board is gone but not forgotten

By Mike DeBonis
Washington Post Staff Writer
Sunday, January 30, 2011; 7:31 PM

He once called it a "rape of democracy."

But ask Marion Barry now whether the federal government's move to take control of the District government was good for the city, and the mayor who watched it happen sees things differently.

"Under the circumstances, yes, it was," said Barry, a D.C. Council member (D-Ward 8). "It was able to do some things that needed to be done that, politically, I would not do, would not do, would not do." For instance, he said, he would not order the firings of about 2,000 human-service workers.

The District faces the most politically difficult budget decisions since that era, and officials are contending with the legacy of the most humiliating episode in the city's 36 years of home rule. From 1995 to 2001, day-to-day management of most District functions was wrested from city officials and placed in the hands of a five-member federally appointed panel.

The financial control board might be gone, but the prospect that it could be resurrected is figuring prominently with some city officials.

"The grim reaper is at the door, and, frankly, I will not sit here and be a part of any exercise that results in having a control board come back to the District of Columbia," said Mayor Vincent C. Gray (D) before a vote on a measure to close the city's budget gap in December, when he was still D.C. Council chairman.

D.C. officials estimate that the coming budget will have a shortfall that could reach $600 million. Although the city is much stronger economically and has balanced its budget every year since 1997, elected officials have not been shy in bringing up the past. The scale of the fiscal challenge is reminiscent of the $722 million budget deficit that led to the control board's creation. A new Republican majority in the House has also stirred memories.

"We have a Republican Congress coming in in January that would like nothing better than to take over this city again and say, 'We told you so,' " D.C. Council member Jack Evans (D-Ward 2) said at the same December meeting, waving 1995-vintage news clips from the dais.

Alice M. Rivlin, a former presidential budget director who served as chairwoman of the control board from 1998 to 2001, said it is "very unlikely" that the board could return. "It's part political rhetoric and part concern that we not slip back," she added.

But that is thanks, in large part, to the changes of the control era. And some say fears over the panel's reappearance prove that the control board is still doing its work.

'Turned the city around'

The D.C. Financial Responsibility and Management Assistance Authority - better known as the D.C. financial control board - technically still exists. But it is dormant and will remain so as long as the city avoids several conditions, such as failing to make its payroll, defaulting on bonds or not funding its pension obligations.

Changes dating to the control era have made those events unlikely. A 1997 reform package ended the practice of offering a yearly federal payment to the city. In return, the federal government assumed the city's debts, took responsibility for the city's courts and prisons, increased the rate for Medicaid reimbursements and took over the city's long-underfunded employee pensions.

The District is prohibited from borrowing to cover regular operating costs - it assumes debt only to pay for capital projects and economic-development activities - and has rigorous reserve requirements.

Perhaps most important, an independent chief financial officer, who is appointed by the mayor but cannot be fired easily, controls the city purse strings and has an incentive to make conservative projections. The officer is required to certify that the budget is balanced before it is sent to Congress for final approval.

"As long as you have a CFO here who knows his or her business, the city will never again go into bankruptcy," said Natwar M. Gandhi, who has held the post since 1998.

It has helped immeasurably in the past decade that a cycle of unprecedented real-estate investment has transformed the city landscape and vastly improved its bottom line. In fiscal 2001, the final year of federal control, the city's taxable property base totaled $43.2 billion. By fiscal 2010, that figure had more than tripled, to $150.1 billion.

"We turned the city around," said former congressman James T. Walsh (R-N.Y.), who led the House appropriations subcommittee overseeing the D.C. budget. "It's a world-class city, but it was an embarrassment to the country when we took it over with the control board. And it's a really good thing to see that it's not anymore."

Franklin D. Raines, who helped orchestrate the 1997 reform package as President Bill Clinton's budget director, said the control period was "overwhelmingly successful."

The expanded tax base, rising incomes, stabilizing population, small-business growth and fiscal clean slate offered by the Revitalization Act meant that the city had built a nearly $1.6 billion budget reserve by the end of fiscal 2005 - more than a quarter of its yearly operating budget. This proportion well outpaced that of most states, which were less able to make up for recession-related revenue shortfalls.

The District's neighbors, Maryland and Virginia, had relatively smaller reserves and have also had to contend with pension deficits and tax structures that are less resilient during downturns. Like most states, Maryland and Virginia rely on sales and income taxes for the bulk of their revenue, but the District also depends heavily on property taxes. In a recession, sales tax revenue tends to drop immediately, followed by income tax revenue and then property tax revenue.

"The District is going to come out smelling like a rose compared to all of the other state and local budgets across the country," said Jim Dinegar, chief executive of the Greater Washington Board of Trade, "because of the threat of the control board."

'It's the bogeyman'

But more than two years of economic slowdown have taken a toll. To preserve city services, then-Mayor Adrian M. Fenty (D) proposed, and Gray and other lawmakers approved, spending heavily from reserves in the past two budgets. Meanwhile, tax revenue is still lagging and federal stimulus aid is slowing, leaving Gray and the council with little wiggle room to balance the budget.

"Its shadow is over every local elected official today," Del. Eleanor Holmes Norton (D-D.C.) said of the control board. "It has promoted, I think, a kind of fiscal responsibility that was not always the case for the District."

That was, in part, by design. Raines knew how a temporary loss of political autonomy might reap benefits for a struggling municipality. His former colleague at the Lazard Freres investment bank, Felix Rohatyn, had orchestrated the largest municipal bailout in U.S. history - bringing Wall Street and New York state officials together to raise $10 billion to save New York City from collapse in 1975.

"Big MAC" - Rohatyn's Municipal Assistance Corp. - and oversight from the state had steeled Gotham politicians into fiscal rectitude. Walsh said he had consulted with Rohatyn when crafting the D.C. control legislation.

"Clearly, it was on my mind what role those bodies had in creating a new political dynamic," Raines said. "Prior to the control board, what were the consequences? Someone might yell at you, but you would still get elected."

Former representative Thomas M. Davis III (R-Va.), who also shepherded the legislation on Capitol Hill, put it more bluntly. "It's the bogeyman," he said. "It allows politicians to do what they need to do. You have a foil: 'Hey, I'd love to help you, but you don't want to go back to the control period.' "

The political debate is whether to close the budget shortfall through service cuts alone or whether to raise income taxes to accompany more modest cuts. It is in that context that control board fears most often arise, tied to concerns about maintaining the city's A-level bond ratings.

But any type of fiscal chaos has D.C. officials on edge. Given the District's short history of self-government, the embarrassment of losing its limited autonomy even temporarily has been an acute motivator.

"For me, who was born and raised here, went to the schools, it really was a moment of hurt. . . . It just felt like our reputation had been tarnished in a very significant way," Gray said in an interview about the control board period. "It motivates me to never want to have to go through that again."

Barry still challenges the legitimacy of the federal takeover, saying he would have fought parts in court if he had it to do over. But he agrees that the management changes instituted in the control period have served the city well.

"They did some wonderful reforms, but we don't need a control board again," he said. "We can count. We can do this."

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