A Metro article yesterday about a possible shortfall in the District's budget should have said that the effect of a planned tax cut is estimated at $59 million this year and $134 million next year. (Published 01/06/2000)

The District government could face a $66 million budget deficit if spending cuts, layoffs or other steps are not taken by the end of the fiscal year, according to a new report that reflects the fragile condition of the city's finances.

Some agencies already have started to make cuts that could affect service delivery and worker morale. The city's mental health services agency trimmed its food service staff by 22 positions and postponed a pay increase scheduled to take effect Oct. 1. Overtime has been reduced at the corrections department, among other agencies, and equipment purchases are being put off.

D.C. Chief Financial Officer Valerie Holt said $66 million in what she called "spending pressures" is a small, "expected" amount out of a $4.7 billion budget. She said she is confident that the dozen agencies reporting shortfalls will be able to make them up before the fiscal year ends Sept. 30. However, some agencies have challenged Holt's findings, saying the city promised them more money than they received this year.

"We need to work with these agencies on their fiscal challenges," said Holt, who wrote the report, a copy of which was obtained by The Washington Post. Holt said the document was intended only for internal use by her office, Mayor Anthony A. Williams, the D.C. Council and the D.C. financial control board.

Although the District's overall fiscal condition has improved in the last few years and the budget carries a $150 million surplus, the recovery is still tenuous. The cost of services and programs is rising at a faster rate than revenue, and the impact of a $134 million tax cut this year is unknown.

Holt's report is a sign of the tighter budget controls imposed on agencies, a marked departure from past practices. Holt required agency heads to flag potential overspending at the beginning of the fiscal year to avoid larger problems at the end. Agency financial officers were required to sign an "anti-deficiency statement" last month pledging to stay within budget.

Seven agencies account for nearly all of the projected shortfall, the report said. They include two independent agencies under receivership--child and family services, and mental health services--as well as the public benefit corporation, another independent agency. The other agencies, all executive, are technology, labor, the disability compensation fund and corrections.

The District's effort to test, repair and replace its computers for the year 2000 date change punched a $24 million hole in the budget, the largest among the executive agencies, though about $4 million in savings already are in place. At a cost of $12.3 million, the labor department was forced to move its unemployment benefits records to a newer data center in Kentucky so checks to jobless workers could be issued after Jan. 1. That cost is still outstanding.

The final tab for the city's Y2K efforts won't be known for several weeks and could add to the $66 million gap. District officials are negotiating with IBM, the main Y2K contractor, over $25 million the company says it is owed.

Another unknown is a $98 million jury verdict returned against the District last fall, the largest ever returned against the D.C. government. A federal judge last month turned down a request from the D.C. government to set aside the verdict in the case of informant Eric Butera, who was killed while trying to help the authorities in the Starbucks triple murder investigation.

Appeals can take several years, so the city may not have to pay an award this year. But if the award is upheld, the deficit could swell to as much as $164 million. The report said the city's attorneys believe "most of the verdict is not sustainable." Until the courts resolve the award, Holt is including the $98.1 million as a potential spending pressure.

The budget for this year does include a $150 million reserve, but Congress put restrictions on how it could be used. The corrections department, for example, is eligible to tap $11 million to plug its maximum potential deficit, $26 million, but the mental health agency cannot use reserve funds because it is under receivership.

The Commission on Mental Health Services contends, however, that the District government had promised the agency $3.8 million, including about $1 million from the $150 million reserve fund. Budget plans were drawn up with that commitment in mind. After Congress denied the agency use of the reserve, the commission is left with a larger shortfall than anticipated.

"The deficit will happen unless the District makes good on its promise," said Sam Fantasia, the commission's chief financial officer.

The city's troubled Child and Family Services Agency, which also is in receivership, is facing a $24 million deficit, largest of all agencies, because of a decrease in subsidies for foster care and adoption and increases in the costs of providing foster care.

The report said the agency did not submit detailed plans explaining how officials will slash its deficit. An agency spokeswoman said yesterday that officials are expecting federal funds to cover most of the deficit. The agency is eligible for up to $15 million in federal money, the report said.

Holt's report chided some agencies for reporting spending gaps without giving full explanations for how the gaps would be addressed. The office of property management, for example, said it would implement a furlough, reduction in force and buyout program to cover a $1 million deficit but gave no details on how it would reduce staff.

The fire department added a fifth person to each firetruck company in November, an overtime cost of $2.3 million for the rest of the year that wasn't budgeted. That cost, Holt's report said, "cannot be absorbed within the department's budget."

POTENTIAL DEFICIT FOR D.C.

The District government could be facing a $66.1 million deficit unless actions are taken by the end of the year to curb spending.

Independent agencies

Agency: Projected deficit

Child and Family Services: $24,000,000

Commission on Mental Health Services: 5,116,000

Public Benefit Corporation: 4,583,333

Subtotal: $33,699,333

Executive agencies

Agency: Projected deficit

Office of the Chief Technology Officer: $12,000,000

Department of Employment Services: 8,000,000

Disability Compensation Fund: 5,000,000

Department of Corrections: 1,946,034

Department of Public Works: 1,600,000

Office of Contracting and Procurement: 1,385,432

Office of Property Management: 1,000,000

Department of Motor Vehicles: 850,000

D.C. Office of Personnel: 660,000

Subtotal: $32,441,466

Total*: $66,140,799

*Does not include a potential liability of up to $98 million resulting from a jury verdict in the case of the slain informant in the Starbucks triple murder.

SOURCE: D.C. chief financial officer