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 DC budget

INTRODUCTION

All government budgets are a balance between:

  • Locally raised revenues plus payments from other jurisdictions, and, in the case of the District revenues include a large number of federal grants for carrying out federally-mandated programs, as well as a special--and somewhat controversial-- federal payment for both services provided, and revenues denied as a result of the federal presence within the district. Creative new alternatives are needed here.

  • Local government expenditures

    These disbursements are a combination of both mandatory (federal "entitlement programs" like welfare, retirement benefits, and interest payments on debt) and discretionary (based on annual appropriations for such government functions as police, public works, and education). The majority of expenditures (other than from grants) are normally for government personnel.

  • Summary tables of total DC revenues and expenditures over the past ten years can be found in the Section on DC's Economic Landscape dealing with changing revenues and expenditures.

  • and there are now some strong indications that budget deficits are now being turned around on a permanent basis.

  • The recently published report of the DC Tax Revision Committee could bring a large measure of fiscal stability to the District, if its recommendations are accepted, and.....

  • ....and a new policy brief from Carol O'Cleireacain at Brookings warns that DC's four year budget projections indicate that there is still a "structural imbalance" between revenues and expenditures.

  • But the good news is the new, structurally balanced, FY2000 budget submitted by the mayor to the DC Council for its review in March, 1999. Although it "carries much of the old baggage", it offers a new format which, if filled in properly over the next 2 years, will totally change the budget preparation and rationalization.

  • A preliminary version of the FY2001 budget became available in March of 2000--some two months late--and the mayor's attempts to "Make Vision a Reality" is included. NARPAC is not yet sure that this new budget realizes the promise offered last year.

  • The FY2001 budget as modified by the DC Council and the Control Board was submitted to Congress in early June--some 3 months late. NARPAC provides a detailed analysis of its contents, both encouraging and disappointing, focusing primarily on the growing numbers of full time equivalent (FTE) personnel.

  • The FY2002 DC budget seems like a "business-as-usual" follow-on to FY01, so NARPAC takes a look at the long-term budget trends, and reviews the Budget Office's latest (disappointing) attempts to develop performance-based budgeting and 'benchmarking'.

  • Despite a slight turndown in the economic outlook after 9/11 and the "minirecession" of 2001, the FY03 DC budget continues past trends, but postpones any further tax reductions for the time being;

  • A summary listing is provided for all DC real property assessments, demonstrating how much of DC's limited acreage is devoted to tax- exempt government and non-profit usage, and this in turn....

  • fuels the new drive to demand new annual federal payments to compensate for the "structural imbalances" inherent in DC's financial future. NARPAC does not ride the bandwagon for this proposal and explains why in some detail. For further discussion, see the separate chapter on Structural Imbalance?

  • Late in 2003, the continuing real estate boom in DC forced the DC Council to take a fresh look at putting new caps on the annual increase in homeowner property taxes. The outcome is not exactly what NARPAC had in mind.

  • And earlier in 2003, as a result of a controversial GAO report professing a large, irreconcilable financial 'structural imbalance', NARPAC has done a brief analysis on DC's current Capital Improvement Planning to determine whether in fact it contributes to DC's supposed fiscal plight. We conclude it does not, because the proposed out-year programs exceed reasonable requirements, particularly as a result of exaggerated DCPS facilities planning.

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  • Near the end of 2000, the Mayor and the DC Council prepared legislation in the form of a "New Economy Transformation Act" to provide new tax incentives to bring people and business into DC. Just as with the earlier Norton-proposed Economic Recovery Act, NARPAC finds it difficult to believe that "bribery" should be used to entice people to live and work in the nation's capital.

  • An extremely inaccurate segment on NBC Nightly News "Fleecing of America" segment portrayed DC as primarily squandering US taxpayers' money. NARPAC has tried to set the record straight in a letter to Tom Brokaw, to set the record straight.

  • NARPAC has collected many of the factors addressed here and elsewhere in its separate briefing summary entitled Economic Challenges for DC.

The majority of this section, prepared by NARPAC, Inc. some time ago, still uses numbers from the FY95 budget and makes comparisons between DC and the equivalent budgets for surrounding state and local jurisdictions. NARPAC, Inc. hopes to update these at a later date.

The many sobering issues of DC's current fiscal condition are treated in greater detail in the DC Agenda Final Report, and a GUPPI Backgrounder.


1995 DC BUDGET REVENUES

DC revenue sources bear no relation to those of other urban areas that operate within state jurisdictions. In this respect, nationwide averages are useful. See the accompanying chart on comparative revenue sources On a per capita basis, average government revenues from all sources and levels amounted to some $8240 in 1991 nationally. Of this total, the federal government raised about $4640, the states about $2100, and local governments and school boards, about $1600. The composition of those revenues between property, sales, and income taxes and other sources is indicated. Closer to home, both Maryland and Virginia fall below the national norms, while the DC raised $5900 per capita, not including federal taxes. No wonder some advisors are suggesting that DC residents should pay no federal taxes.

Compared to larger MSAs with inner cities roughly the size of DC, per capita DC revenues from taxes (sales, income, and property) are almost twice as high. The distribution of sources of per capita DC revenues is illustrated on the table, though its credibility is surely subject to question. In this December 1994 budget submission, there was virtually no imbalance between the projected DC expenditures and revenues. In point of fact, the DC was then faced with a deficit of roughly 20%, or $700M. Disregarding this, the DC apparently expected to achieve 23% of its income from property taxes, 24% from individual and corporate income taxes, 17% from sales taxes, and 20% from everything else. In addition, however, it is assured of another 19% of revenues as a federal payment for operating the federal city. It is difficult to judge whether this is a reasonable share for keeping well over 60% of the DC's land area off the tax rolls. It is clear, however, that DC inefficiencies are far larger than 19%. McKinsey & Co. have estimated that the DC loses some $450 million in revenues due to tax-exempt properties, but DC clearly has a surfeit of property that could, if properly developed, add to the city's tax base. Less than 25% of DC's taxable acreage is commercial, and its total value only slightly exceeds that of residential property.

On the other hand, it is not unreasonable to ask Americans to contribute to the stature of their national capital. At the moment, their separately identifiable payment amounts to $2.50 per capita, which is clearly not very much. Should it be $5, or $10? This surely depends on whether they can be proud of what they see. Perhaps they should be allowed to volunteer some share of their federal taxes--as is now allowed for political contributions. Alternatively, a broad-based energy tax of perhaps 5 cents per mega-BTU would provide a very major revenue option for valid but unique DC expenditures.

EQUALIZED TAX BURDEN

As stated in the McKinsey Report, the DC is clearly not receiving any support from its suburban neighbors, despite the unique advantages of living in the shadow of the nation's capitol. Both Maryland and Virginia pay less than the national average in taxes, suggesting that some revised "burden sharing" might be in order. In fact, if those two jurisdictions contributed just 25% of their current underpayment to the district, then DC's equalized tax burden would be a little lower than that of its wealthier neighbors, even without the obvious savings that appear appropriate. A "financially neutral" MSA would not, per se, overcome quality imbalances, but it would certainly help level the playing field, and equalize the costs and benefits of the services provided.

In fact, DC residents are clearly paying too much in some measure because their commuting neighbors are paying too little. A balance must be sought to more equitably share both the burdens and advantages of living in or near our national capital. DC's awkward situation is clearly demonstrated by the extent to which wealth earned inside the DC is banked and spent in the suburbs. Within the GWMSA, the total personal income of DC residents is $14 billion, compared to $40 billion each for the Maryland and Virginia suburbs. If this total personal income were distributed by work place rather than residence, the DC would account for $32B, Maryland for $29B and Virginia for $34B. Hence, DC revenues and expenditures per worker rather than per resident would completely turn the tables. To make matters worse, DC residents often shop in the suburbs, where 97% of new retail sales space has been built since 1960. Moreover, DC has more than its share of military and embassy personnel who do not pay sales taxes in DC. In his FY96 budget the Mayor estimates losses in sales taxes of almost $70 million.

A recent study from a professor at the University of Virginia indicates that the total per capita state and local taxes are highest for DC residents. Virginians rank 47th in the US, while Maryland is "about in the middle".

A recent proposal from the Office of the DC CFO (February, 1998) deals with renewing the tax structure and reducing its burdens. To make its case, the District's total actual tax collections (property, income, and sales) for FY96 ($2.456B) are recomputed using the state and local rates for the four most prominent neighboring jurisdictions (which, of course, present some variation among themselves (+11% to -6%). On average, DC's composite rates are 36% higher, raising $645M more. Compared to Montgomery County and Maryland rates, DC's collections were $642M (35%) higher; using Prince George's County and Maryland rates, DC collections were $437M (22%) higher; using Fairfax County and Virginia rates, $744M (43%) higher; and using Arlington County and Virginia rates, $759M (45%) higher.

This represents a substantial comparative advantage for living and operating businesses in the suburbs. But it also suggests the very high DC costs of providing government services.

FEDERAL GRANTS

Federal grants have risen from 15% of DC's total revenues in 1987 to over 20% in 1996, just under one billion dollars. In fact, these grant payments to support federally mandated programs have been the fastest rising source of income for the District--and a major source of employment, often bookkept separately from those district employees funded by local revenue sources (See DC personnel levels). The Annual Report by the Greater Washington Society of CPAs (Certified Public Accountants) (GWSCPA) provides an independent and reliable source of revenues and expenditures by the DC.

The recent briefings on GWSCPA's audit of the 1997 DC Budget have again brought to light the inability of the DC government to take full advantage of the federal grants process. This appears to be one problem area the Chief Financial Officer has yet to solve (although the grants director has been removed), and for which the DC Council has failed to provide useful oversight. The CPAs noted five ways DC is losing out relative to other jurisdictions:

1. DC does not apply for many of the grants available from the Government;

2. DC often does not spend what it gets;

3. When it does spend the funds, it is often for non-qualifying uses;

4. Its management is often so bad that the grants are withheld or cancelled; and

5. DC often does not apply for reimbursement to those grants paid retroactively.

The amount of unspent funds from grants the District did expect (or more accurately, budgeted for) is by no means trivial. In FY97, they left unspent almost $141 million, in FY96, almost $240 million, and in FY95, almost $33 million. However, NARPAC, Inc. cannot evaluate the level of realism in the original estimates.

In March of 1999, it was reported that DC had again lost substantial 1998 federal grant money: $5.2M was simply "unspent"--an improvement over prior years--but a more substantial $17.1M was spent outside grant limits.

FEDERAL PAYMENT TO DC
(DC Appleseed Center)

The Home Rule Act requires the Mayor to estimate the revenues lost to the DC as a result of the following impositions of the federal government:
o revenues lost due to the relative lack of commercial/industrial property
o revenues lost due to the relative lack of taxable business income
o revenues lost due to federally-dictated exemptions from DC taxes
o net cost of providing services to non-profit, and government-only businesses
o recurring and non-recurring costs of services to the federal government
o benefits of federal grants in aid given to other states and local governments
o unreimbursed services rendered to the DC by the federal government
o relative tax burden on DC residents vs. other metro area jurisdictions

Rather than negotiate these estimates, Congress recently settled on a 3 year "test base" of $660 million annually. The respected DC Appleseed Center believes that a far more reasonable number would be almost double: $1.165 billion. However, the current White House plan for fiscal relief to the District proposes to eliminate this payment completely in return for the federal government taking over some onerous non-city functions and costs. The new DC Rescue Plan reinstates some portion of that annual payment ( $190M vs $660M) for FY98, but phases it out thereafter. A good case could be made for making it considerably higher than that. A recent study by the DC Agenda Project within the Federal City Council recommended a far more substantial continued level of federal support. There are two serious shortcomings in the current Congressional approach:

  • First, the annual payment should not be a subject for annual bargaining and posturing between the Congress and the city. In fact, the funds should be clearly for "services rendered" and be provided as the equivalent of an "entitlement".

  • Second, the notion that the Federal Government is swapping one set of funding for another begs the fundamental issue that District expenditures require per capita revenues far higher than those in any surrounding jurisdiction. There is simply no way to turn a fiscal "zero sum game" into a national capital "get well program". It is but another example of Congressional tinkering in a problem they have not thought through.

In Congressional testimony in January, 1998, DC's Appleseed Center reiterated its claims that "the Federal Government is still not adequately compensating the District for the costs of those [revenue] restrictions [it has placed on DC]". The Center contends that two specific items are particularly costly:

o Federal law prohibits the District from taxing the income that nonresidents earn in the District--and DC "leads the nation in the percentage of income earned by nonresidents"--amounting to 64% of total earnings in 1995. If a "typical" commuter tax rate of 2% had been in place, DC would have raised roughly $460M in 1995.

o Federal law exempts local property taxation for a full 42% of DC's land that is either owned by the Government, foreign embassies, or various nonprofit and other exempt organizations. Appleseed estimates a loss of $690M in 1995 because of this. To rectify this, the concept of a "payment in lieu of taxes (PILOT)" is often mentioned, and this is essentially what the federal payment had become.

Together, these amount to some $1.15B, in lost revenues--roughly 20% of DC's total budget. A separate study by Carol O'Cleireacain at Brookings Institution places these lost revenues at $1.2B. Even if these numbers are high for the items mentioned, NARPAC believes there are many lesser sources of lost revenue due to the massive federal presence: ranging from the provision of security for foreign dignitaries to the height restrictions on downtown buildings.

NARPAC, Inc. further objects to the notion that the repayment for services rendered and tax revenues denied justifies the existence of four Congressional oversight committees vested with the authority to tinker with details of the day to day management of DC (See DC's Seven Mayors. The quaint notion offered by the White House last year of bargaining away Congressional micromanagement in return for forsaking valid costs invoked by the Federal Government (to make our nation's capital first class) is simply cheap politics unbecoming of the masters of world leadership.

By the same token, Appleseed's testimony goes on to make the point that Federal reassumption of the pre-home rule pension plan liabilities should by no means be accepted as a 'quid pro quo' for discontinuing the federal payment. The District's financial problems cannot be solved by 'zero-sum-game' swap offs. The tax base of the District simply does not allow the assumption of inappropriate expenditures, particularly those that are growing much faster than DC's tax base.

Alternative forms of federal payments to DC

On the other hand, the concepts of a "commuter tax" and a perpetual lump sum "federal payment" are probably becoming outdated, and carry excessive political baggage. NARPAC, Inc. believes it is time to develop creative alternatives. For instance:

o Instead of a commuter tax, for instance, one might think in terms of a regional capital dependency surcharge" which would recognize the centrality of the capital presence to most of the workers and residents of the area, and raise revenues to reflect it. It would also recognize that the "information revolution" no longer makes it necessary to commute anywhere--particularly to any central location--in order to benefit from the proximity of the nation's capital. Collected regionally--by some suitably legitimized body--it would also be dispersed regionally where appropriate, although DC might reasonably expect to receive the lion's share.

o To the extent that the federal payment is for specific services provided directly or indirectly by the DC government to the federal government or its "camp followers" without compensation, mechanisms for more direct billings for services might be developed with line items in other federal agency budgets (such as National Park Service, or State Department). In fact, the federal government is already providing substantial assistance to the DC government through many of these agencies, which might serve as partial offsets. In any event, these billings should be recognized as payments for "services rendered", and not some sort of gratuitous largesse from the District's magnanimous Congressional overseers.

A One-Time National Surcharge

[spd] In an interesting OpEd piece by the Washington Post's Courtland Milloy, entitled "If Wishes Came True", the author summarizes the seven pages of "Dear Mr. Mayor" letters published by the Post to mark new Mayor William's inauguration, in early January, 1999. By design, most of the letters referred to very specific local problems from potholes and rats, to graffiti and dead trees. Milloy then goes on to make a mental calculation of how much all this might cost to fix. He then concludes:

I say let's start over, and not just with a new mayor, but with a new relationship with the rest of the United States. Why not subscribe to the view that the District belongs to the nation and let everybody pitch in to make it a great city?

"All citizens benefit from the existence of an independent capital city that is free from the parochial politics of any one state," O'Cleireacain writes in her book "The Orphaned Capital." Such independence, she says, "requires that Congress, on behalf of the nation's citizens, act as a responsible caretaker and provide the resources to allow the District to furnish required services without imposing a punitive tax burden on its residents, who, although not represented in Congress, are fellow citizens of the United States."

What I read in the letters of advice to the new mayor was a sincere desire by District residents to make Washington a place that would inspire visitors from across the country and around the world.

For much of its history, the District has received an annual federal payment, a substitute for revenue lost because of untaxable property. It was an arbitrary sum, usually about $660 million, which amounted to a contribution from every American of about a nickel a week, or $2.50 a year. This District was being shortchanged.

I would favor a one-time assessment -- while long-term restructuring continues -- of $19.95 a person. With contributions from 250 million Americans, you could generate roughly $4 billion for a complete urban makeover, less than what it costs to build one warship. And you just might end up with a nation's capital worth fighting for.

NARPAC, Inc. would certainly support some version of this attempt to get a greater direct contribution from Americans across the country. Elsewhere, we have suggested that there should be a check box on federal income tax returns encouraging taxpayers to contribute, say, five or ten dollars annually to increasing pride in America's capital city. Surely a larger contribution than $2.50 a year is within reason.

A Federal Payment in Lieu of (Property) Taxes?

In a January 1999 OpEd piece in the Washington Post, Dr. Philip Dearborn, director of the Greater Washington Research Center, and staff director of last year's DC Tax Revision Commission, has recommended a new federal payment to DC to partially offset the $660M lost through the DC Revitalization Act trade-off. It would be based on a payment in lieu of taxes (PILOT) to compensate for the absence of real estate taxes on the extensive Federal presence in DC.

Dearborn's argument is based on political realities (emphasis added):

The District won a big improvement in its federal financial relationship in 1997, but more needs to be done to make the relationship equitable. The best bet may be a D.C. Tax Revision Commission recommendation that the federal government make an annual payment in lieu of property taxes. This federal payment would be substantial. It would be based on the argument that federally owned office buildings receive the same services as federally rented and privately owned buildings . Politically, it would not require a direct annual appropriation to the District. Payments could come through the GSA building services revolving fund, just as payments are made to the District for sewer and water services and property tax payments are made to business improvement districts.....

......To ensure that this payment is reasonable, it should be paid on only those types of properties that are like taxable private commercial buildings. Thus, the tax base would not include the Mall, museums, parks, monuments or the Capitol. If a payment had been made in 1997, the Tax Revision Commission estimated it would have been $408 million at current commercial property tax rates. Such a payment would not be new; nor is it unconstitutional. The U.S. Advisory Commission on Intergovernmental Relations identified 18 federal programs in which some federal "payment in lieu of property tax" was made to local governments.

Maryland and Virginia State PILOTs?

NARPAC, Inc. would clearly interpose no objection to such a federal PILOT, but does note that it is proposed as a substitute for DC's inability to tax non- resident earnings (primarily from Maryland and Virginia) because, as Dearborn says: " Politically, however, there is little hope that such a proposal can pass Congress".

On the other hand, we do suggest that consideration be given to an alternative to the "commuter tax" in the form of Maryland and Virginia Payments in Lieu of (Commuter) Taxes, particularly to cover the high costs of poverty which have become concentrated in DC. The combination of a federal PILOT and a states PILOT would essentially "level the playing field" in taxes paid throughout the metro area.

DC BUDGET EXPENDITURES

The accompanying table presents a summary of the DC expenditures as submitted in December 1994 for the 1995 fiscal year. There are six major categories of spending, containing 27 line items which account for 96% of the 3.4 billion dollars proposed to be spent and 98% of the 35,600 "full time equivalent" (FTE) DC government personnel. Subsequent events have made it clear that actual spending would reach almost $3.9 billion, while the Congress decreed it be limited to $3.25 billion. FTE personnel on the city's payroll are now down to 32,500 (although there are about 10,000 more paid for by almost $1 billion more in grant funding.) Excess city employees are key to DC's financial problems.

In fact, much of the city's $600-700M deficit is due to past profligacy and underfunded cost adjustments for Medicare, etc., as well as an ever-mounting debt requiring servicing. The city has been forward funding prior year bills until they now consume an amount almost equal to the DC's federal subsidy. While the newly established Financial Control Board may enforce some needed fiscal discipline in spending, it apparently does not address inefficiencies in what appear to be unjustifiably large federal grants coupled with far too many federal grant administrators.

Since the DC is attempting to exercise the fiscal responsibilities of a state as well as those passed on through federal grants, comparisons with neighboring county jurisdictions should include their less evident state resources in terms of raising revenues, making expenditures, and employing government personnel. DC's mayor estimates that 40% of his budget expenditures are for state functions, and this may be about right. State revenues and expenditures also appear to be about 30-40% of combined state and local spending in both Maryland and Virginia. Clearly, however, not only the shares must be compared but also their overall levels--which remain ss than half of the DC's in terms of both combined expenditures and combined government personnel.

Most of DC's budget items can be compared directly with equivalent items for other cities, MSAs, counties, and states. For this analysis, most comparisons are made with Montgomery and Prince George's Counties (TotMD), and with Arlington and Fairfax counties, as well as Alexandria and Fairfax Cities (TotVA), and their school boards. Additional comparisons are available with nationwide government spending, school districts, and crime figures. These comparisons show clearly that the DC expenditures far surpass those of a typical inner city. Furthermore, with projected deficits expected to exceed 20% of expenditures, there is no way the current financial situation can be fixed by "belt tightening". Structural imbalances surely exist and must be cured.

return to the top of the
page TURNING DC'S BUDGET DEFICIT AROUND

It now appears clear that the Independent Chief Financial Officer for the District has been able to eliminate the large deficits accumulated over the past few years of the Kelly and Barry administrations--primarily due to Congress's agreement to take back the funding of DC's correction systems and the pension liabilities. As of March 1998, surpluses totalling $1.029 billion are expected in each of the next five years: $348M in '98; $197M in '99; $174M in '00; $160M in '01, and $150M in '02. While any rush to reduce taxes or otherwise "cash in on" this newfound fiscal responsibility would be premature, it is clear that DC can begin to plan for a sound future.

The projected "savings" to the DC budget from the National Capital Revitalization Act of 1997 are very substantial indeed. Costs to the DC government are estimated to be $3.118 billion less over the four fiscal years FY98-FY01. 45% of these savings ($1.391B) accrue as a result of federal assumption of the costs of DC's justice system, 21% ($663M) from increased medicaid payments; and 36% ($1.121B) from federal assumption of some pension costs.

Within the justice system, the 4-year costs savings are primarily due to federal assumption of $855M (62%) in felony prisoner costs; $290M (21%) in superior court costs; and $147M (11%) in DC court costs.

The benefits from these 4-year savings are largely offset by withdrawal of $2.478B in federal payments and lost court fees. Nevertheless the DC will be better off by $640M: $227M in FY98, $98M in FY99; $137M in FY00, and $179M in FY01. The FY98 windfall results from the temporary granting of a $190M "federal contribution" in lieu of the $660M "federal payment".

The logic for dropping all federal payments for DC services provided and revenues foregone on the basis of the federal presence--and associated international and non- profit presence as well--is completely lost on NARPAC, Inc. This "easy fix"--almost a "zero-sum game"--essentially provides sufficient funds so that DC can balance its own budget without decreasing its vast internal inefficiencies and exorbitant tax rates, but leaves DC fiscally and bureaucratically non-competitive with its surrounding jurisdictions.

Even worse, in the long run, this fiscal bargain apparently leaves DC's government at the mercy of amateurish (and conflicted) Congressional micromanagement, even though Congress no longer will be providing direct appropriations to DC. In addition to "taxation without representation", DC home rule activists will now be able to decry "(oversight) legislation without appropriation".

As a result of this so-called "improved financial performance", however, DC's bond ratings have now improved to the best level in the "junk bond" category, and that will make it somewhat easier to continue to carry a total debt of $3.4 billion. It is also now agreed that a substantial share of the surplus will be devoted to reducing that to a more manageable share of annual spending. There is no need to "zero out" the debt, as long as it is being used for capital expenditures, but carrying charges should probably not exceed 5% of the city's annual budget expenditures.

DC"s CFO Williams claims that as a result of shedding some federal programs and "trimming the work force", the city no longer faces a "structural deficit". Hence some reasonable share of expected revenues will be available for "discretionary" spending, using federal parlance. It is also clear that aside from escalating Medicare payments, other programs for the poor have been hard hit. However, there are some dubious claims that as the population dropped some 12%, the lowest income households dropped 41%--a number NARPAC, Inc. cannot independently confirm (or deny).

In fact, federal statistics on changes in welfare payments would not support the inference that there has been a significant shift between taxpayers and "taxspenders"--a necessary precondition for the long term health of the city. According to federal DHHS statistics, DC's 10% reduction in TANF grants over the past three years, for instance, has been only half of the national average-- despite the dropping population in DC compared to the rising national population. Furthermore, urban experts generally agree that the poorest members of any community are the ones least likely to have the means to migrate. Hence, welfare rolls generally drop at the least dependent end of the spectrum of want, leaving the "hardcore poor" behind.

DC FY97 Budget Surplus It is of interest to understand why the expected deficit in the DC's FY97 budget turned into a surplus. This theoretically starts the clock running for the eventual dissolution of the Control Board (after three more years of balanced budgets) and the return of home rule--unless the Congress changes the ground rules.

Based on the audit by the Greater Washington Society of CPAs, the surplus resulted from revenues roughly $144 million higher than expected, combined with expenditures from local sources some $41 million less than budgeted. On top of this was a major windfall in non-appropriated items netting some $77 million, mainly due to a decrease in estimated liability for Medicaid accrual refunds to the federal government for prior years, primarily 1994.

The higher than expected revenues came mostly from $110 million higher sales and income tax collections due to the nationwide economic growth (although property taxes fell some $10 million, for reasons not clear to NARPAC, Inc.). In addition, almost $10 million more was collected in fines than expected, and the sale of surplus property netted an extra $29 million above expectations.

Spending from local revenue sources was modestly below expectations in government direction ($4M), in economic development ($5M); public safety ($9M); human support services ($8M); human resource development ($5M); and interest on short-term borrowing ($6M). In some cases, however, these "savings" apparently resulted from the inability of the city to consumate planned procurements--i.e., poor management rather than good management! Moreover, although spending was also considerably lower than budgeted in many accounts due to failure to expend some $140M in higher planned federal grants, the surplus is not affected thereby. How real those higher grant estimates were NARPAC does not know--they were budgeted far above the prior year's levels.

Hence although the surplus is factual, it does not suggest any structural improvements in the way the District conducts its affairs, nor could one conclude the quality of life in DC was improved by FY97 budget expenditures. The risk clearly still exists that the criterion of balanced budgets is, per se, insufficient to assure the needed improvements in living, learning, and working standards in the nation's capital. Warnings from Delegate Eleanor Holmes Norton that the Congress may not abide by its original balanced budget criterion--unless other major improvements in the city's government and physical condition are evident--should not be lightly disregarded.

DC Budget Surplus Larger than Expected

In an unexpected but happy turn of events, the DC FY98 budget has ended up with a $445M surplus, more than wiping out the city's remaining short-term accumulated deficits of $332M. The major reasons, however, illustrate continued DC problems in the financial area. First, the District failed to spend some $175M that had been appropriated, leaving some approved programs underfunded. Second, the DC government collected $275M more in income taxes than forecast. Although part of this resulted from a better-than-expected economy (as true across the US), but also, according to the Post article, because 15,000 new taxpayers paid in "who had not bothered to file in the past".

This dubious performance by the DC tax collectors is further reinforced by a recent report from DC's Finance office acknowledging that "DC is losing big to cheaters" due to weaknesses in the tax processing system as well as straight fraud. Concerns that the DC budget may still be "structurally imbalanced", as expressed by Brookings' Carol O'Cleireacain, may be somewhat exaggerated.

THE REPORT OF THE DC TAX REVISION COMMISSION

The long-awaited report of the DC Tax Revision Commission (DCTRC) was finally made public on May 4th, 1998. It contains many valuable suggestions for revamping DC's convoluted tax code. While there may be some minor areas where NARPAC, Inc. might have preferred some different recommendations re tax rates, the overall thrusts of the report seem to be eminently sensible. The full text can be read on the Tax Commission's web site.

Recommendations for Tax Changes

Changes are recommended in virtually all aspects of the code, but the most important involve:

Overhauling business taxes to scrap the four existing corporate taxes, replacing them with a far more broadly based business activity tax on value added (compensation, interest, and dividends). It appears to be a remarkably expedient way to compensate for DC's inability to tax nonresident incomes. Basic to this proposal is to include for the first time many elements of the services sector . Unlike many other large cities, services account for the largest share of DC's local GDP and are the fastest growing part of DC's economy. Services fundamental to the nation's capital city that are not currently taxed include attorneys, public relations, construction contractors, physicians, engineers, accountants, home repairs, dentists, travel agents, advertising agencies, beauty parlors, and "cultural events". The first two categories alone could raise well over $175M annually, while the next ten could add another $75M (at the lowest proposed rates).

Personal income taxes would be based on the federal net taxable income to simplify tax preparation forms--and tax auditing procedures. This would also have the interesting impact of dropping another 40,000 residents off the DC tax rolls.

Real Property Taxes would be greatly simplified, and tax assessments would revert to annual review as soon as possible. Special residential tax breaks would be eliminated and the number of categories reduced. Commercial property rates would be pegged to the residential rates to reduce the apparently excessive spread between the two, though the DCTRC-proposed rates for each will probably require further review (depending on how many of the total recommendations are accepted).

Minor changes are suggested in taxes on sales and utility services. The DCTRC also recommends eliminating tax "earmarking" for special uses to the extent possible.

The DCTRC also makes three important recommendations to the Federal Government

o Lift the ban on DC's ability to tax all nonresidents' income;

o Make an annual payment in lieu of property taxes (on federally-owned buildings)-- to be paid to DC through the GSA; and

o Adopt a permanent formula federal payment of as much as 30% of locally raised revenues--with payment method unspecified. NARPAC, Inc. would expect a considerably lower rate, and hopefully paid indirectly (as above).

Comparing Tax Rates

Backed by a wealth of data available in their report and on their Web site--much of which is similar to that presented on this web site--the DCTRC compares DC taxes to national and local averages and concludes:

o the DC revenue mix shows "a reasonably balanced use of the major taxes, a high dependence on federal aid; and low uses of charges and other non-tax revenues"

. o revenues from non-tax sources are apparently relatively low for several reasons: lack of income from toll roads, airports, etc.; very low DC fees for higher education, hospitals, and solid waste management; and a "relatively high concentration of low income families".

o the city's taxable assessed value per capita is well in excess of that of other major cities like Baltimore, Philadelphia, Chicago, and Detroit (despite the tax-free federal presence);

o a relatively high sales tax, apparently resulting from a base heavily weighted by parking, hotel, and restaurant sales, and tourist purchases;

o a very low property tax rate for owner-occupied residences, and a difference between commercial and residential rates of almost 4:1, vs a national average of 2:1. DCTRC nevertheless recommends lowering the commercial rate, not raising the residential rate. NARPAC, Inc. presumes this was primarily to retain "tax neutrality" in the final aggregate position.

o an above average tax burden on typical taxpayers in different tax brackets relative to the largest city in every state, but never among the "top ten" cities in any bracket.

o the highest per capita overall tax rates among the 18 jurisdictions of the Greater Washington metro area, but mainly because of property taxes rates on businesses.

o in terms of "tax effort"--the actual per capita total taxes compared to the capacity to pay taxes (tax capacity)--DC was the highest of any state (1.57 in 1991), while Maryland's was only slightly above the national average (1.03), and Virginia was noticeably below the national average (0.91). The DCTRC finds several mitigating statistical circumstances for this, however, and implies that these ratios should be used with caution.

Background Economic Trends

The DCTRC Report has an interesting section devoted to the overall "economic crisis" of the District, noting the 65,000 drop in residents between 1990 and 1996, and the almost identical drop in total employment in the city (primarily due to loss of federal jobs), but the much smaller drop in households (as suggested earlier by NARPAC, Inc. on this web site under population trends).

Perhaps most candid, however, is the acknowledgement that the Commission could not discern any changes in population due to income, property, or sales taxes. In fact, they noted that the majority of those leaving--from relatively poor households--were quite insensitive to taxes, while those coming into the city were relatively wealthy, and therefore relatively more sensitive to higher tax rates. In short, "there is no evidence that suggests tax policies were to blame" (for the emigration). They do note that those who left would have contributed $60 million to tax revenues over five years had they stayed, but no calculation is offered for the additional taxes paid by the wealthier new arrivals.

The Commission also addressed the problem of falling retail sales, and again concluded that tax policies were not the culprit--rather the drop in population and the shift in retail stores to the suburbs were to blame.

Of more concern, but with perhaps less illumination, the report addresses the relatively sharp decline in revenues from real estate property taxes, which fell $182 million (to $624 million) between 1991 and 1996. This was apparently due to an almost 30% drop in commercial property values between 1992 and 1997. At the same time, residential values held essentially constant through 1995, and have since started up. With virtually no expertise in this area, NARPAC, Inc. nevertheless finds this drop in commercial real estate values to be puzzling, if not counter-intuitive, and will be watching for other explanations.

The Federal Presence

The Commission also ventures into the realm of the impact of the federal presence. It notes that there are many benefits from the federal presence--for which the Federal Government does not charge the District. In fact, the entire tourism industry is based on visiting federal properties, not DC landmarks. Less well known, perhaps, is that the federal government also owns and maintains the national zoo, the arboretum, and many museums, parks, recreation facilities--and streets. Clearly, the overall prosperity of the District is also due in large measure to its proximity to the seat of US--if not world--power. It seems ludicrous that the DC government has chosen not to tax some of the wealthiest of these service industries--including the ubiquitous lobbyists themselves!

On the other hand, the DCTRC suggests that "offsetting this prosperity, the District has service demands and problems characteristic of other central cities. For example, the District supports more than 60% of Temporary Assistance for Needy Families (TANF) cases in the immediate metropolitan area. Unlike other cities, however, the District has no state to provide federal assistance in meeting these demands." Perhaps more to the point, DC's costs are not shared with its suburbs. DC does, in fact, share these costs with the federal government.

[NARPAC, Inc. notes that the very large DC deficits in 1993 and 1994 (which led to the imposition of the Financial Control Board), were caused by seemingly runaway costs of "human services", Medicaid accruals, DC General Hospital costs, and federal grant disallowances.]

Furthermore, the report again points out that the federal government forbids by law the District from taxing the income of the two-thirds of the DC work force that live in the suburbs. Furthermore, if the plethora of federal--and foreign-owned--properties were taxed at the same rate as DC's commercial properties, the commercial property tax revenues would essentially be doubled, allowing the rate to be halved, and thereby almost exactly match suburban rates. Clearly, as the report concludes, DC has been almost forced to institute taxing patterns that are "somewhat flawed".

The Value of Proximity

It is, however, interesting to note that throughout these discourses of comparative taxation, there is no value whatsoever ascribed to proximity to the nation's capitol, the White House, or any of the branches of federal government. In fact, the Commission seems primarily driven to equalize tax methods and revenues with either national or metro area norms, even though they found no causation between taxation and emigration.

The implication that proximity is not a taxable commodity is almost certainly fallacious. In fact, at least half of DC's population lives here despite poor schools, despite high crime rates, despite somewhat higher taxes, despite ridicule about our capital city's condition, and despite not being able to vote for any fully-ordained members of Congress. They live in DC for the shear fascination--and measurable benefits--of being within the shadow of the heart of the world's greatest and freest power.

The Basic Tax Driver

While it may seem too trite to mention, the basic reason for taxes of any sort is to raise revenues to pay for government spending. The less efficient the expenditures, the greater the demand on revenues. A recent study by the Office of DC's Chief Financial Office (see DC Budget) presents the comparison in very simple terms: if DC used the average tax rates of its four closest neighboring counties (including their state tax payments), it would raise $645 million less annually. What could DC do to require $645 million less?

o if DC paid off its "accumulated deficits", i.e. it's debt, it would save almost $400 million in debt service charges;

o In some areas, DC had more personnel on its payroll than the sum of the personnel doing similar jobs in all the surrounding jurisdictions (See personnel levels). Although DC has made some significant progress in reducing personnel levels, there are almost certainly several thousand more that could be eliminated in a fully functional local government. The per capita costs of DC personnel in FY97 was almost exactly $60,000 per year in salary and benefits. Hence dropping another 5000 from the end 1997 level of 30,660 FTE's would produce a saving of $300 million.

o The annual operating losses of the DC General Hospital, and of the University of DC totalled $107 million in FY97. A large share of those costs could be covered by more astute adjustment of fees, and applications for federal grants.

o The 1997 costs of providing "human support services" were $938 million from local DC revenues, and $792 million in federal grants: a full one-third of all local and federal monies spent on the nation's capital city.. A 20% reduction in the DC caseload of needy people would reduce local DC costs by almost $190 million.

In short, the solution to at least a good portion of DC's apparent tax problems lies in more responsible local government spending.

NEW BROOKINGS STUDY PRESSES FOR REFORMING DC REVENUE STRUCTURE

In October, 1998, Brookings non-resident senior fellow, Carol O'Cleireacain, released her policy brief entitled "Bolstering DC's Fragile Fiscal Recovery". In it she points out that the 4-year projected expenditures are growing faster than projected revenues--producing a "structural imbalance" leading eventually to ever-increasing deficits:

The District of Columbia's fiscal recovery is fragile. While many would like to believe that recovery is now complete, the numbers indicate otherwise. Today's budget surplus is temporary and has already been spent, future budgets are perilously balanced, and no resources have been set aside in case of worse times. Without discretionary revenues from any other level of government, the nation's capital remains over-taxed and unable to sustain budget balance.

Ms. O'Cleireacain goes on to illustrate that:

Spending is growing faster than revenues. New spending for FY1998 and FY1999 alone permanently raised ongoing commitments by almost $200 million, half of that in the schools. On average, over the life of the current financial plan, annual spending rises 2.1 percent while revenues grow only 1.7 percent. By FY2002, local fund spending will be up 6.5 percent but revenues only 5.3 percent. This 1.2 percentage point difference represents a $30 million gap in local funding. While this may not seem large, it is a structural imbalance: baseline expenditures are before new or improved programs and baseline revenues are before any tax cutting.

From this, she correctly points out that the 4-year plan "does not restore a meaningful balance to the operating accounts" and that "without a secure and growing revenue base, the District of Columbia will not achieve the long-term fiscal stability that comes with structural budget balance." She then goes on to claim that there is a general consensus on the main elements of a revenue restructuring:

1. Eliminate the existing structure of business taxes, which are archaic and very difficult to enforce, and replace some portion of the revenues with a lower, more broadly based levy, such as a gross receipts tax.

2. Simplify and cut the real property tax, by: (a) reducing the commercial property tax rate; (b) collapsing five classes of property into two--residential and commercial; (c) scrapping the complex relief programs and substituting an income-based circuit breaker; and (d) returning to annual assessments governed by a better and more open process.

3. Modernize the utilities tax to meet deregulation, so that increased competition, fragmentation, and new services (e.g., phone cards) do not result in local tax avoidance.

4. Retain the sales tax rates, since there is no evidence that the current rates, rather than the District's population loss, cause the declining share of area retail activity, and more than half of the tax is paid by tourists and businesses.

5. Simplify the personal income tax by: (a) bringing the base more in line with federal law; and (b) eliminating low income residents from the tax rolls. Debate continues on whether to cut the income tax rate on residents or to spread the burden to commuters in some unspecified way.

6. Establish a federal payment-in-lieu-of-taxes (PILOT) to compensate for the 41 percent of the District's property tax base that is exempt by Congress.

7. Establish a formula-based federal contribution. The Orphaned Capital recommended "state-type aid" common to American cities; the Tax Revision Commission recommended such aid, if the federal government provides neither a PILOT nor the ability to tax commuters.

Although NARPAC, Inc. finds no fault with this analysis, or with the basic need to restructure DC's revenue producing means, we do believe that it is subject to misinterpretation, and that both the press coverage and the reactions from DC officials have focused too highly on the need for restoring direct federal assistance (items 6 and 7 rather than items 1-5).

  • The 0.7% gap between revenues and expenditures over three years in the current out-year projections could easily be eliminated by greater management efficiencies in both the DC government and/or the school system; or slightly improved economic conditions such as lower interest rates or higher income and real estate tax revenues. That out-year plan does not constitute restoration of the desired quality of life in DC, or provide the incentives for attracting a broader "tax base";

  • The amount of assistance DC is already receiving from the federal government (discussed elsewhere under federal assistance) is generally underestimated, and the extent to which the federal presence costs, rather than benefits, DC is seriously overestimated. One need only try to imagine the current conditions in DC (and the surrounding metro area) if the federal government was not here--and was located in Detroit or Baltimore instead. Or think what the protagonists for the Convention Center or the Yr2012 Olympics would be claiming if we were still trying to woo the nation's capital away from Philadelphia!;

  • Arguments for revenue restructuring should not be linked to solving what appears to be a trivial shortfall, or the elimination of the federal payment. Much stronger arguments relate to leveling the playing field between the core city and its hugely successful suburbs, and to eliminating many free-loading enterprises within the shadow of the capitol itself.

NARPAC, Inc. continues to find it almost unbelievable that the core city which hosts America's capital is still considering increased dependence on federal hand-outs or direct bribes to induce people to live or work in it.

DC2000 BUDGET PLOTS A NEW COURSE, BUT CARRIES THE OLD BAGGAGE

This section presents a major analysis of the new direction for DC budgets, and presents detail not covered again in subsequent budgets.

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THE MAYOR PRESENTS HIS FY2001 BUDGET
Summarized from "Making the Vision a Reality, March 6, 2000"
Complete text available at DCWatch

This section presents the rationale behind the mayor's FY2001 budget in some detail.

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ANALYSIS OF FY01 DC BUDGET

This lengthy analysis of the FY2001 budget focuses on a break-out of government personnel, and on the difficulties of achieving the promised benchmarking. It is still highly relevant.

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A BROAD VIEW OF DC'S FY02 BUDGET

NARPAC has taken a somewhat different approach to analyzing DC's FY02 budget for two reasons. First the new budget is essentially a "business-as-usual" continuation of the prior year's budget, and second, the details tend to cloud the broader issues of longer range interest to this organization. The sections that follow provide a general overview of 20 years of DC budgeting 15 in the past, and 5 in the future and further analysis of the Budget Office's attempts to introduce "performance-based budgeting". Neither provide much encouragement. The overview shows that the spending patterns are returning to a continuation of the past, and the performance measures remain virtually bereft of any attempts to achieve government efficiencies. If in fact, the DC Control Board intended to have an impact on either of these issues, it would have difficulty proving itself using the FY02 budget documents.

On the other hand, NARPAC commends the Office of Budget and Planning for producing an outstanding set of documents from the standpoint of clarity and presentation. Having also read both the operating budgets and school system budgets for each of the five neighboring jurisdictions, NARPAC can say without hesitation that DC measures up very well. It is a shame that the formats and presentations are as different as they are between the jurisdictions, but that is irrelevant to this assessment. Elsewhere, we present a comparison of revenues and expenditures

for each of the five other jurisdictions of the "inner metro area" (Alexandria City and Arlington, Fairfax, Montgomery, and Prince George's counties).

To set the stage for the sections that follow, NARPAC views these budgets in the context of whether or not DC is competitive with its suburbs in its use of public funds. We see two primary measures: the major cost-drivers for most government services budgets are a) the number of people on the government payroll or providing contract services; and b) the amount of the budget devoted to "human services" which tends to crowd out other programs to improve quality of life. To the extent that DC has become the "home of last resort" for the region's poor and disadvantaged, then it cannot hope to keep up with suburban jurisdictions that are focusing more on schools, transportation infrastructure, parks, and economic development. To the extent that it takes more DC employees than suburban employees to change a standard light bulb, then even less resources are available for more productive uses, and DC taxpayers must suffer an even more disproportionate tax burden.

Finally, the Great Out-migration Hoax has been exposed as primarily a figment of the imagination of various hucksters and spin doctors. The population did not hemorrhage during the '90s, nor did DC lose its essential Middle Class Tax Base. The official number of DC households (a better indicator of the Least Common Economic Unit) was:

1990: 249,634
2000: 247,500


again suggesting, as NARPAC has before, that the main loss to DC was kids and recent school graduates in search of a better quality of life. The long-term revenue trends certainly do not demonstrate a loss in tax base. To the extent there was a loss, it was self-inflicted.

Long-term DC Budget Trends

The following charts are intended to summarize the past fifteen years of DC budgets (from FY1986) and to show this year's official projections of budget requirements through FY2005. They are intentionally simplified to illustrate gross trends rather than fine details. The upper chart immediately below shows the full extent of the expenditures by the DC government since FY1986 along with projected spending through 2005. The black line shows the total revenues received (both locally and from outside sources) and indicates the "red tip" of deficits in the middle '90s which led to the installation by the Congress of the DC Control Board. The result was a temporary dip in spending for several years which is now being followed by a resurgence back to what might be characterized somewhat cynically as "business as usual".


It should also be noted that the near-perfect match between out-year revenue and expenditure projections is probably neither miraculous nor accidental: It has been shown in each of the past three years (but at substantially different levels). Those who would draw from this a conclusion that DC's financial outlook is tenuous or fragile, are almost certainly deluding themselves. NARPAC believes these are simply projections of "what the traffic will bear".

The lower chart immediately above illustrates the share of those total expenditures (the green area above) that went directly to personnel (and contract service) related costs. It is clear that the major cutback in spending came from a cutback in personnel costs (not necessarily people) but it is also clear that those costs have again begun to rise significantly, and so has the budget topline. NARPAC believes the reduction in "benefits" was primarily due to federal assumption of certain retirement costs. Out-year projections for those "people costs" are not readily available, because out-year projections seem to be based on annual funding increases, not on projections of government personnel levels.

The two charts immediately below indicate the major sources of both expenditures and revenues. On the spending (left hand) side, the three bottom layers are for a) servicing the city's long-term debt (high in comparison to the suburbs); b) human services (welfare) spending (much higher than the suburbs); and c) public safety (much higher than the suburbs). The encouraging decline in public safety spending, however, simply reflects the transfer of correctional system spending to the federal government Spending for public education has grown relatively little (the school population is declining), as has spending for public works, parks and recreation, etc. in the "other" category.


On the income (right hand) side above, the revenues from property taxes have declined (See below) whereas sales taxes, income taxes and all other local revenue sources have continued to rise (where's the declining tax base?). The federal payment has dwindled in accordance with DC's agreement that the federal government would take over several major "state functions", but other federal grants continue to rise ( and to be far larger as a share of total revenues than for any of the suburban jurisdictions).

It might be noted that these future projections are for relatively constant assumptions concerning both DC residents and people who work in DC (resident or commuter). The upper chart below shows the trend lines for both of these key demographic parameters and suggests that DC is planning for only a modest increase in jobs in DC, despite the building boom, and does not expect a rise in residents, despite all the current tax inducements and neighborhood upgrading. It apparently just expects revenues and expenditures to keep rising.


Two of the major sources of increasing demands on the DC budget, according to the budget projections, are for human services and public education, even though DC is under the gun to reduce the welfare workload in the near future, and planning for a level near-term school enrollment (which NARPAC analysis of the proposed DCPS Facilities Modernization Plan finds highly unlikely). In both of these key areas, the budget again seems predicated on "business as usual" not a forecast of what is most likely to happen. In these two areas, such projections are in fact conservative, and reduce the risks of budget fragility. Nevertheless, under these out-year estimates, human services continues to grow faster than the budget top line, reaching 45% of all DC spending by 2005, and perhaps 50% by 2010. It would also appear to indicate that DCPS does not see any major increases in efficiency in its near-term future and, after being "pinched" under the Control Board era is also about to return to "business as usual".

Finally, the two charts below demonstrate the biggest cause of weakening DC revenues in the '90s (which clearly amplified the impact of excessive spending). Through mechanisms which NARPAC does not clearly understand, DC real estate assessments stopped rising in the early part of the decade, driven by commercial real estate (bottom red layer on right hand chart). Continued increases in residential valuation was not sufficient to compensate (green layer) and the unusually large DC tax-exempt real estate sector (blue layer) began to seem like the bugaboo.


In fact, DC revenues from taxing real estate, personal, and rental properties (of which real estate, both commercial and residential, is the predominant source) declined and leveled out in the late '90s, and is only due to start rising again in FY02.(see right hand chart above). Had real property revenues continued to climb (as they did in all the suburban jurisdictions) the looming deficits of the late '90s would not have been there. On the other side of that coin, however, DC would have had much higher property taxes than its suburbs and an even larger and more inefficient government now!

Performance-based Budgeting

Not surprisingly from the above, NARPAC then took a more careful look at the DC budget documents and their efforts (for the third year) to establish some sort of credible performance- based budgeting. To their credit, there is a separate and easily readable chapter of the Operating Budget Volume dealing with this effort. The Budget Office (OBP) and the Office of the City Administrator (OCA) worked with seven agencies to develop both performance measures and benchmarks by which evaluate progress. The performance measures are intended to be essentially quantitative goals by which to mark progress towards some objective ("have 98% of snow vehicles ready for a storm"). The benchmarks, on the other hand, are intended to be standard parameters which can be used to compare DC performance with that of other (hopefully relevant) jurisdictions (SATS scores, or "vehicles maintained per fleet management FTE (full time employee)").

At this time last year, NARPAC wrote an extensive commentary at the end of its FY01 budget analysis (preceding chapter) which expressed both hope and skepticism for this effort. A year later (an eternity for NARPAC!), the effort seems to have progressed, but very, very little. We seem to have picked some measures, but are now in "the dog ate my homework" phase, where DPW, for instance, claims that other cities report "average fleet maintenance costs per vehicle" or "collection costs per ton of garbage" in incompatible formats (!). The Department of Health has yet to find a benchmark for its Breast and Cervical Cancer program; and the Fire Department finds that "dollar loss per fire incident" depends on whether or not the city has a big fire. The police Department is settling on polls of public satisfaction with police efforts (!), and the DCPS is using a measure of the percent of enrolled kids requiring special ed. And the DMV falls back on average time to get a license renewed.

Unfortunately, it is all too easy to find fault with these fledgling efforts, and to underestimate the unwillingness of an entrenched bureaucracy to accept and abide by any scoring system. If teachers' unions can keep teachers from being tested for proficiency, imagine getting cooperation from the Teamsters. On the other side of the coin, however--and this appears vital more quantitative data are beginning to surface, and the fact that any of it is being compared with other jurisdictions is an improvement. After all, the city government can hardly afford to badly embarrass itself by flashing its scorecard, or be embarrassed by the recalcitrance of its workers.

Nevertheless, NARPAC has serious reservations over whether the benchmarks are moving in the right direction. Having developed its own target values for indicators (and not recently updated them), we favor efficiency-oriented indicators wherever possible. Whether or not such indicators are precisely "compatible" seems almost irrelevant. Differences in efficiency of a few percent are not significant. It is parameters thatvary by orders of magnitude that should be addressed first. Why, for instance, does DC need 3.4 times as many police per household and 2.4 times as many firemen per household as the average of the inner suburbs? Why did DC General need so many more nurses per patient than comparable hospitals? And so forth. If what appear to be major discrepancies can be fixed, the smaller differences may begin to fix themselves.

NARPAC urges the city to persist in its development of performance measures and benchmarks, but strongly recommends that the current preliminary benchmarks be replaced by ones dealing more directly with productivity so much output per unit of input. Unless that it is done, the budget out-years will continue to look like "business as usual".

TESTIMONY OF ALICE M. RIVLIN ON THE DC FY2001 BUDGET
Before the House Appropriations Subcommittee on DC, July 12, 2000

NARPAC offers below a very much abridged version of Control Board Chair Alice Rivlin's testimony supporting DC's FY2001 Budget. The full version can be found at the Control Board's website: ......This budget is the product of a consensus process, which also reflects the Authority's (i.e., Control Board-Ed) effort to restore increasing levels of responsibility for this government's operations to local elected leaders..... Confidence in DC's elected leadership continues to grow, and as a result, the Authority's role in developing the FY 2001 Budget, although important, has been principally advisory.

...Under Public Law 104-8, this is likely to be the last DC Budget that this Authority must approve and send to Congress. If any of the principal conditions that led to the financial crisis in 1995 recur, however, legislative action to re-activate the Authority is not necessary. The President can do so simply by appointing new members.

....Five years (after the Authority was created in April of 1995 by an Act of Congress), the District is in much better shape, and the Authority's statutory role, as well as its relationship with the local elected leadership, has evolved. Many of the suggestions for management improvements recommended earlier in the Control Period are being implemented across many local government agencies....Some of the best news for citizens is that the District's accounting practices for business tax receivables are much improved... Taxpayers in the District were issued tax refunds within 15 days during the 1999 tax-filing period....(and) the city and its citizens now enjoy an investment grade bond rating.

.... Although delayed, DC's FY1999 Comprehensive Annual Financial Report showed that the District is in sound financial health.... The delay in completing the financial report is troubling. More important are the problems that working through this process revealed. These serious problems must be addressed. The District's executive branch agencies, especially the Office of the Chief Financial Officer (OCFO), have much work to do to ensure that the books will be closed accurately and on time next year. The challenges involve a commitment to staff training, information system remediation, and strong management leadership. The solutions require strong central leadership, but they must be addressed throughout the decentralized financial management system....

The FY 2001 Budget, which also includes out-year projections for FY 2002 to 2004, shows a modest growth in total revenues and expenditures. The budget for FY 2001 has... a modest surplus of $57 million,... (and assured fulfillment of) the statutory reserve requirement (of $150 million) for FY 2001.

Reforming the District's tax system in order to provide balance and equity has been a high priority for local elected leadership. The District began this effort with the FY 2000 Budget, which included significant tax reductions and restructuring. The FY 2001 Budget continues these efforts with a plan to enact an earned income tax credit for low income working families valued at approximately $3.9 million in taxes.

DC's Public Schools remain among the highest of priorities. The FY 2000 Budget for DCPS was the result of a compromise intended to balance the funding requirements for children throughout the system, including those attending public charter schools. Actual attendance for both traditional and charter public schools increased in the current year. The number of charter school students is projected to increase from approximately 7,000 this year to nearly 12,000 students for FY 2001.

...The District has made significant progress in eliminating the backlog of student assessments needed to determine eligibility for special education services.., result(ing) in a higher number of placements for children requiring special education services in the current year. These two factors alone resulted in a major shortfall in education funding for FY 2000. Fully funding schools is a critically important commitment for FY 2001....

...Last week, the Authority, in consultation with local elected leaders, appointed Mr. Paul Vance, formerly Superintendent of the Montgomery County /ublic Schools to lead the school system. His selection will bring deep experience, administrative skill, and a commitment to continued reform and improving student achievement.

...Before concluding, Mr. Chairman, it is important to raise the question of the continuing structural challenges to the District Government. The District has benefited from the Revitalization Act, as well as the economic expansion. It will also continue to benefit from the fact that a heavy concentration of services and public sector employment in this region can provide marginal insulation from the worst effects of an economic turndown. However, persistent structural deficiencies will continue to imperil this community's fiscal health until they are adequately addressed.

A significant number of District residents, for example, remain eligible and entitled to public assistance, despite the record length of the national economic expansion. Those numbers, along with program costs, will only grow in a turndown.

...Another clear concern is DC's exceptionally narrow tax base. Appropriate efforts to reduce the tax burden on residents and to compete with regional rivals for business development opportunities are beginning. These important initiatives must be balanced, however, against the necessity for generating sufficient revenues to support public services.

Economic development is one answer, and it is among the District's highest priorities. Economic development is also a priority for the Congress, as made clear from its support of the Infrastructure Fund and the National Capital Revitalization Corporation. The Authority believes that a strong, growing economy in the District is essential, not only to the fiscal health of the city, but to the economic prosperity of the whole Washington region.

...Many of DC's structural deficiencies are the result of its unique relationship with the national government and with surrounding jurisdictions. As the Authority begins to work with the Congress to enact the FY 2001 Budget, the transition to local governance also continues. Before it phases out its activities, the Authority plans to develop and to share with local elected leaders, the public and the Congress recommendations for structural reform.

...In partnership with Mayor Williams, Chairman Cropp, and the Council, the Authority has worked very hard to fulfill a commitment to ensure a timely return to local governance. There is plentiful evidence of a sense of renewal, including the rebounding residential real estate market and downtown construction activity. The best evidence, however, is the heightened attention to educating this city's children.

Much progress has been made in Washington. The fiscal health of the District has improved. Delivery of primary services is also improved. However, there is much work still to be done before the citizens receive modern, efficient government. The Authority's work during the next, and I add, our last year of activity, will be to support the Mayor and the Council in making further progress in the District. Chief among the issues that must still be addressed is the effort to expand DC's economic foundation. Without a broad economic base on which to build, this city cannot sustain its recovery, and will begin to suffer financial peril. I strongly urge you and the other members of the Subcommittee to assist the City's elected leadership with the necessary resources and support to continue the revitalization of this great City.

This concludes my testimony, Mr. Chairman.

NARPAC Commentary:

As in the case of last year's Control Board testimony, NARPAC finds this summary of the "state of the District" to be unfortunately rosy. While there is nothing to be gained in this venue by exaggerating DC's continuing problems, there is something to be lost by compressing DC's continuing troubles into the simple observation that "there is much work still to be done before the citizens receive modern, efficient government".

On the other hand, NARPAC welcomes her promised "recommendations for structural reform", and her urging of the Congress "to assist the City's elected leadership with the necessary resources and support to continue the revitalization of this great City."

Nevertheless, it becomes increasingly unlikely that the major changes still needed to make DC the truly outstanding core of a truly outstanding metro area will be made when the overall impression is given that the crisis is over.

return to the top of the page THE FY03 DC BUDGET PROPOSAL

The mayor submitted his proposed city budget for FY03 to the DC Council on time in the spring of 2002. This was the first budget to be impacted by the nation's weakest (and shortest?) recession in half a century, and the impact of 9/11 and the subsequent "war on terrorism". The net result was that projected revenues dropped by almost exactly as much as revenues would have dropped due to tax reductions planned for the next few years under the Tax Parity Act of 1999. The mayor hence proposed to terminate, or at least suspend, the remaining planned cuts, and the DC Council agreed. This act called for five straight years of lower business and personal income taxes to bring DC's tax structure in line with those of its suburbs.

The mood had changed for several reasons: the seemingly endless economic boom had come to a temporary end; there are new costs associated with being "at war" (though some analysts believe this will improve the DC economy as all past wars have); and an independent analysis from the new DC Fiscal Policy Institute (DCFPI) makes a strong case that DC's taxes are already competitive with neighboring jurisdictions.

NARPAC, on the other hand, has argued that such tax parity was not needed or wise for two reasons. First, as the nation's, if not the world's, capital city, its residents should be willing to pay a premium to live and work in close proximity to the seat of power. Second, DC's "fragile" economic balance, resulting from its overwhelming load of poor households, makes it unwise for DC to induce businesses or families to settle in the District is a small increment in taxes makes their presence marginal.


In any event, the resulting projection of DC revenues is on track with prior projections (as shown above), and the vast bulk of the still-increasing DC budget is devoted to two budget accounts: the public school system (DCPS) and the Department of Human Support Services (DHHS). While DCFPI makes the case that this year's budget increases are not sufficient to continue to fund "baseline" (ongoing) programs without some belt-tightening, NARPAC suspects that both of these areas could readily sop up almost unlimited increases in funds with unpredictable results. As indicated on the chart below, annual projections for each of the most recent four years show an increasing need compared to the prior projection, and the current DCPS outyear projection seems somewhat unrealistic.


In fact, from this chart, it would be difficult to divine that the welfare rate in DC is supposed to be dropping, and the number of kids enrolled in DCPS is continuing to drop, albeit slowly, as predicted by NARPAC based on a gradually declining birth rate among DC's mostly single moms. It would also be difficult to understand why the DC government payroll should continue to increase in almost every major department, with the lion's share (over 500) planned for DHHS. In fact, however, these manpower increases do not necessarily come into being, based on past experience.

Whether or not the projected growth in DC revenues over the next few years is realistic remains subject to some question. The optimism reflected in the mayor's State of the District speech regarding growth in housing and resident population is not repeated in the Budget's Forecast of Economic Assumptions. Neither is the fact that the commercial building boom in DC is continuing unabated with $6 billion in new construction reported by the Downtown DC BID.

The fact seems to be that the DC budget is reasonably flexible, and that the spending can be adjusted to the levels of revenues received. There is nothing to reinforce the notion that a precarious "structural imbalance" threatens the city's fiscal future.

return to the top of the page ASSESSING DC'S TOTAL PROPERTY

There is a growing chorus of "thought leaders" singing that DC is on the edge of financial calamity that can only be solved by a permanent federal bailout of several hundred million dollars a year. A key part of the "structural imbalance" argument hinges on the fact that much of DC's property, both parkland and fully developed, is tax-exempt even though it requires some regular (some call them 'standard') services from the DC government. For a city that appears to be seriously land-limited, this could be a significant disadvantage.

Based on information provided by the Office of the Chief Financial Officer, the total property assessment value for DC's 29,800 acres in FY02 is 88.5 billion. This includes $40B for land and $48.5B for improvements. And in fact, $33.6B (38%) is exempt from DC taxes, comprising some 17,000 acres (57%) of the total. Perhaps more surprising, $19.5B of that tax-free total is land, and only $14.6B for improvements. These breakouts are elaborated below:

The upper chart shows these break-outs in a somewhat different fashion, differentiating land and improvements for each major and sub-category. It is of some interest that between the taxed properties, the residential and commercial components have become equal at $27.4B each. Among the tax-exempt, the non-government share is $8.8B (and 2900 acres), while the government share is $24.8B (14,100 acres). Within the government property category, the Federal Government vastly out-values the DC share ($20.8B to $3.3B). Perhaps more surprising, however, is that the federal share needs to be broken into two almost equal parts: $11.1B in major federal buildings (on 3800 acres), and $9.7B in 8500 acres parklands. The two parts need to be considered differently, particularly since the National Park Service provides most of its own needed services (and, in fact, until recently, was lending its helicopters to the DC police department). These issues are expanded in the structural imbalance section that follows.

The non-government tax-exempt entities provide some extraordinary American treasures. Within the religious/cemeteries category of $11.4B is the famous National Cathedral, appraised at $148M (see photo below). The $2B in universities includes the famous Georgetown University and its hospital ($414M) (see NARPAC's photo album. Hospital and charity properties are assessed at $1B, and a large "miscellaneous" category of $2.4B includes such major institutions as the Smithsonian museums, and many other nationally known properties declared tax-exempt by Congressional fiat. Another nationally unique category of $1.3B includes over 600 foreign properties including their embassies and chancelleries (see photo below), for which, of course, the US has (untaxed) counterparts around the world.

The lower chart above shows revenues per acre that could be generated at current DC tax rates. Of particular interest is that DC residential properties return little more ($28K) than federal parklands would ($22K), while federal buildings would return no more than the non-governmental entities ($57K), since the proportions of land and buildings are about the same. The single stand- out category is DC's commercial properties that return more than $250K per acre in property taxes, presumably because in general, the property is developed from edge to edge for high- density use.

In summary, in FY02, DC should collect almost $800M in real property taxes this year, as shown below, with $537M derived from commercial properties. It will forgo $166M in non- governmental tax-exempt properties; $65M in DC government property; $190M in federal parklands, and $217M on federal buildings such as the capitol itself and the Lincoln Memorial.


How much the DC Government contributes to the welfare of these tax-exempt properties is one matter of conjecture, and whether DC's financial situation justifies federal subsidies is quite another. But there is no question but that these extraordinary institutions contribute more to DC's stature and fiscal welfare than they cost. Please refer to Sructural Imbalance? for more discussion of this issue.

Two typical non-governmental properties in DC are shown below. On the left is the south transcept entrance to the National Cathedral which leads to the Bishop's Garden. The modern structure to the right is the chancellery of the Embassy of Brazil on Massachusetts Ave, NW, just below the British Embassy. Reflected in its glass walls is the Spanish style Embassy of Bolivia.


return to the top of the page DC'S STRUCTURAL IMBALANCE A Concept Out of Control?

It is becoming increasingly popular to refer to a concept called "structural imbalance" as the root cause of DC's supposedly precarious financial situation which, according the the Mayor in his State of the District Address for 2002 "is one emergency away from a financial crisis". What structural imbalance? The imbalance is between the amount of revenues DC can raise given its current revenue-generating systems (taxes, etc.) and the perceived needs for greater expenditures to satisfy local quality of life requirements. This imbalance is described as "structural" because it is supposedly "built in" to DC's financial world by circumstances beyond its control.

The several structural reasons include the revenues denied by a) the large percentage of tax-exempt acres within the District due the federal and federal-related properties; b) the inability to levy income taxes on the very large number of highly paid persons who work in the city but live in the suburbs; c) Congressionally-mandated limits such as commercial building height; and d) the inability to raise taxes (or even keep them at current levels) for fear of driving residents and businesses to the suburbs. These negatives are reinforced by the added expenditures required to e) provide "standard city services" to these federal and other tax-exempt properties; f) perform certain required "state functions" even though DC lacks a statewide tax base to provide the revenues; and g) expanded "needed" DC programs.

To remedy this structural imbalance, nothing short of a teetering world trade tower to some advocates, it is proposed that the Federal Government provide DC some fixed payment for services rendered (quoted at about $200M), plus an annual federal payment to compensate for the prohibition against collecting a (nominally 2%) commuter tax (quoted at $400M+) from suburbanites cluttering DC's streets and polluting its air. Enthusiasts for complete "home rule" see no inconsistency in the quest for complete political autonomy and representation in Congress, and the need for an annual hand-out in perpetuity for permanent financial disability. And the management consulting firm of McKinsey & Co. has recently released an "authoritative" report Assessing DC's Financial Position which slavishly supports the claims of structural imbalance.

Implicit in this exposition is the assumption that DC has no other ways to lower its expenditures, and no other way to raise its revenues. It is here that NARPAC gets off the accelerating bandwagon. NARPAC does not believe that DC needs to spend more per capita than it already does, which is very high compared to other similar jurisdictions that do not host the world's greatest nation's capital city. And NARPAC can present scores of ways to increase revenues other than returning to slurp at the federal trough. After all, the federal payment of $600M every year to DC was only stopped a few years ago when the Federal Government assumed nearly $1 billion in annual DC expenditures for state-level courts and correctional facilities, and growing retired pay obligations to former federal workers.

But what NARPAC objects to most is the concealment of the basic "structural" reason for DC's need for abnormally high per capita expenditures: the fact that it harbors 29% of the poor families in the entire metropolitan area, while having a tax base that includes only 8% of the region's household income, and only 3% of its assessed housing value (based on the 2000 Census, and 2001 housing sales). NARPAC can demonstrate (only approximately, of course) that just about half of DC's gross operating funds (of $5.436 billion in 2002) are spent for the poor health, poor education, poor housing, poor income, and poor safety of over 150,000 persons below the poverty line. That amounts to $18,000 per disadvantaged capita.

NARPAC can also demonstrate that there is a "structural imbalance" between the 9500 acres devoted to residential use and the 2000 acres devoted to commercial use. At one extreme, a single acre of public housing can cost the city over $3M in expenditures over revenues, while an acre of high density offices can provide $4-5M more in net revenues over the cost of its city services. Clearly, a local "re-apportionment" of zoning can adjust the balance without federal aid, if the strident politics of poverty and demagoguery can be overcome.

NARPAC fervently believes that the nation's capital should only accept federal hand-outs as a last resort to paying its own way the American way. To this end, we laboriously confront every assertion made by the proponents of federal handouts in an effort to put this key issue in perspective.

Tax-exempt Properties

As NARPAC demonstrates in its separate section on citywide property assessments above, some 17,000 of DC's 29,800 acres are in fact tax-exempt (57%), and would bring in $638M fall were taxed at current DC rates. But would DC really propose to tax the White House, the Capitol, the FBI, the National Cathedral, Georgetown University, 600 embassy structures and 8500 acres of national parks throughout the city which DC neither maintains nor secures. The questions are really a) whether these assets should be taxed: without them, DC would look like Camden, NJ; and b) whether they really consume much in city services: probably not.

No Commuter Tax

NARPAC does not question that commuters get off Scott free not paying any commuter tax to DC. Whether an enlightened Congress, appointing DC oversight subcommittee members without conflicts of interest (i.e., not from the commuters' jurisdictions), might relent and permit such taxation, is another thing. Current legislation before the Congress introduced by DC's delegate would essentially let Congress appropriate an equivalent sum from the national treasury instead. But NARPAC does question the amount to be gleaned from a 2% tax on commuter income, even though McKinsey & Co. do not. Proponents expect to raise $440M from 400,000 commuters, which would imply an average (not median) individual (not household) taxable (not gross) income from each of $55,000. NARPAC doubts that this figure is above $33,000 and estimates the receipts would not exceed $250M.

Building Height Limits

Congress's 1910 Height of Buildings Act does severely limit building heights within DC, and NARPAC has suggested relaxing them East of the Anacostia NARPAC is not aware of whether Congress might be willing to rescind this act, but it does know that many involved advocates for keeping DC pristine would strenuously object. The compromise that has not been tested, and needs to be broached, is to relax building heights within, say, 3000 feet of the city's land borders with its suburbs in key spots. 100 acres of borderline zoning without building height restrictions (facing the existing "edge cities") could probably produce $500M annually in DC revenues (property, sales, and income taxes combined). This is one of many ways to better use DC's 13,000 revenue-producing acres (see below).

Tax Parity with the Suburbs

It is popular to suggest that DC will frighten its businesses and residents away unless its taxes are no steeper than those outside the national capital city. This seems to be an unsupportable myth since current tax reductions have not brought any noticeable immigration, and the major reason for leaving was poor schools and poor quality of life. NARPAC objects to this boogeyman for two basic reasons. First, surely the nation's (if not the world's) capital city can charge a quite significant premium for living and working within the city limits in the shadows of national power. And second, DC cannot afford to attract or hold onto businesses or residents for whom a small tax increment is a serious problem. DC needs wealthy residents and profitable businesses to offset the high costs of its large impoverished population. Furthermore, DC business taxes are structured to favor service industries, including lobbyists, the very firms who are most willing to pay for proximity to power!

Servicing Tax-exempt Properties

Advocates of federal payments use gee-whiz numbers of between $200 and 250M as the cost of services to tax-exempt facilities, quoting public works and public safety as the most involved DC departments. NARPAC has struggled to confirm these numbers without success. DC garbage pick-up applies only to up to 3-family homes. Annual road repair bills for the whole city run less than $40M, and 75 miles of the most heavily traveled main roads to downtown tax-exempt properties are now maintained by the Federal Government anyway under a new "DC Streets" program. Fire and Emergency Services have less than 20% of their assets deployed near downtown, and only 65% of downtown is tax exempt. The situation for the police department is somewhat similar, but there are something over 3000 federal "policemen' employed by every government agency from the General Services Administration and the National Park Service, to the Secret Service, and Federal Protective Agency and Capitol Police Force. NARPAC doubts that more than $60M in city services could be justified. That would include 10% of the DPW budget (i.e, $10M), 15% of the Fire/EMS budget (i.e, $20M), and 10% of the police budget (i.e., $30M). Big events and demonstrations, and even presidential inaugurations, are a different matter, and DC has begun to bill the Feds for these special costs, and successfully.

State Functions

Here is yet another anomaly: DC wants to become a state, but now asserts it should not be required to pay for its "state functions" of $450M-$500M. NARPAC has been unable to get a good independent handle on these costs recently, but accepts the stated costs on face value. However, a substantial fraction of these dollars are federally provided. The point is so what? Tax Parity for DC would prescribe local taxes equal to local + state taxes for other jurisdictions. If DC's equivalent state tax requires less than 15% of locally generated revenues, it would seem to be a bargain.

$400M in Unmet DC Budgetary Needs

The Mayor's State of the District Address asserts that the FY2003 DC budget falls short of city needs by some $400M. There is no elaboration of this figure, nor does it appear anywhere that NARPAC has found in the DC FY03 budget document. Your average cynical analyst would be forced to note the similarity between this number and the inflated estimate of $400M-$450M to be derived from a commuter tax or a substitute federal payment.

NARPAC's Alternative Current Budget Savings

The McKinsey Report acknowledges that in comparison to other similar inner cities, "benchmarking" would indicate that DC government inefficiencies are about $600M- 900M. However, adding several degrees of realism(?) their analysts seem satisfied to recoup 30% of these inefficiencies, but only after 5 years from go-ahead. NARPAC believes many of the preliminary steps required to achieve such savings have already been taken, and that the savings can be realized sooner, and somewhat higher. Save $250M-$400M

Some means must be found to reduce the suffocating burden of the poor residing in DC, and unwilling or unable to escape to the suburbs where the future (and the jobs) lie. In substantial measure, this is because there is insufficient affordable housing and insufficient job training programs in the neighboring suburbs. Instead of subsidizing DC's poor, the Congress could chose to oblige Maryland and Virginia to expand their welfare-to-work opportunities to DC residents. If 50,000 below-poverty individuals could be taken off DC's rolls, Save $300-$400M.

If DC could contract with Prince George's County to educate our special ed kids at their average per student cost, then the DCPS budget could Save $100M-$120M

NARPAC's Alternative Revenue Sources, Not Land-related

If Congress would add to the IRS 1040 forms a check-box that would allow individual taxpayers to allocate $2 to a "Fix Up Our Nation's Capital City Fund", it might Raise $200M- $400M;

If DC could replace some of its poor households with moderate income households and match Pr. George's median household income, DC could Raise $500M- $600M;

If we could attract 5 million more tourists or other visitors to DC, (perhaps by getting all our senior government officials back out of their counter-terrorist caves in the suburbs), DC could probably Raise $200M-$300M;

NARPAC's Alternative Revenue Sources, Land Use-related

If DC and WMATA could increase the density of development of 200 available acres around metro stations, (even over neighborhood resistance) DC could Raise $300M- 500M;

If DC would develop one-third of DCPS's surplus property for moderate density development (by more realistic planning for future enrollment), the city could Raise $150M- $200M;

If DC could get Congressional relief from building height restrictions on 100 borderline acres near its mushrooming "edge cities", DC could Raise $400- 500M;

If DC could convert 200 acres of low-utilization federal property to high-density revenue- producing uses (perhaps through suitable "land-swap" arrangements), DC could Raise $500M-$700M;

NARPAC recognizes the need to continue to develop a cityscape in keeping with the best interests of our national capital metro area. The best way to do this may be to agree that the capital city's interests are best served by working cooperatively with federal agencies to assure its sound economic growth as a proud but not dependent entity.

For a longer discussion of the pitfalls in this area, please refer to the full-length NARPAC chapter on Structural Imbalance?

return to the top of the pageTHE GREAT PROPERTY TAX RELIEF DEBATE OF '04

background
(drawn from recent CFO testimony and reports)

In the fall of 2003, it became clear to many Washingtonians of modest means who consider their home their primary, if not sole, investment that the continuing boom in real estate prices was going to generate a burdensome increase in property taxes. In fact, property values have been rising steadily since 1999, some 34% in four years, resulting in an increase in real property tax receipts of 38%. This has generated additional revenues to the city of some $225M, and raised this category of revenues into second place (after income taxes), and to 25% of total locally derived receipts. (The Feds still kick in 30% of DC's total general operating funds, primarily for the federally-sponsored entitlement programs.)

These startling increases in property values came into being at the same time that DC was streamlining and changing its taxing policies. The Tax Parity Act of 1999, and two subsequent "tax clarity acts", had greatly simplified the administrative burdens of DC's awkward tax collection procedures. They had also resulted in the (still continuing) phase-out of the dubious triennial assessment process, by which properties have only been re-assessed every three years and sometimes introduced shocking surprises.

The first two years of annual reassessments have already been instituted, as indicated on the barely legible chart to the left, with the blue areas adopting the yearly assessments first (in areas of relatively low housing values), followed by the purple (?) areas of relatively high value homes. It should be noted that a cap was established at that time to keep the increases in taxes paid (not asessments) to no more than 25%. In this next year, the white areas will be addressed, and the pressure was on to decide the maximum tax rates before the tax bills were mailed out.

NARPAC thinks it's fair to say that the homeowners living in this "Tri-group 3" are those most concerned about the rise in their property taxes compared to their income, and probably the most active in making their discontent known to the evil purveyors of municipal authority. These homeowners are sometimes referred to as NIMBYs for their distaste for change in or near their own backyards (see the current controversies over upgrading the Upper Wisconsin Avenue Corriodor). They are now joined by the chorus of NOOMPs ("not out of my pocketbook") who are often seen as favoring greater government spending for virtually anything, but not at their expense.

The basic arguments of the NOOMPs are: a) that these tax increases would exceed their income increases; b) that real estate taxes, unlike income taxes, are not progressive and thus disadvantage those of more limited means; c) that unlike other investments, capital gains are not taxed until the investments are cashed in (this will come as a surprise for those who invest successfully in growth mutual funds!); and d) that those unable to keep up with tax payments would be "gentrified" right out of their neighborhoods, or more honestly right out of someone else's neighborhood.

While there was little if any opposition to making some change in the property taxes for those most in need of it, a few observers (including NARPAC) felt that it was important to limit the benefit to those truly in need, and avoid providing windfalls to those who pay with little complaint the majority of DC's property taxes (the gentry, we presume). Since many (NARPAC excluded) see a dire "structural imbalance" in DC's ability to finances its own legitimate needs, it seems odd that so many were so willing to reject this unexpected revenue increase.

The net result has been considerable pressure to reduce the tax cap from 25% to 10%, and several Council members rose to offer various reductions, including those not up for re-election this year (2004). It appeared almost as manna from heaven, and a clear opportunity to bestow largesse without consequences. One accepted way of providing some "progressiveness" to real estate taxes has been to set a "homestead exemption". This exemption, unchanged for many years, in essence reduces the assessed value of homes lived in by their owners (a smart limitation) by a fixed sum significant for modest dwellings ($30,000), but relatively minor for dwellings appraised near the million dollar mark.

The several bills introduced and other proposals floated included caps as low as 10%; deferred payments of the excess to the following year or until the sale of the property; reductions in the tax rate (0.96%); and homestead exemptions, either graduated or reset up to $100,000. The eventual compromise placed the cap at 12%, and raised the homestead exemption to $38,000. All in all, not a bad compromise.

NARPAC commentary

Most disappointing to NARPAC, however, was the lack of consideration of alternate uses for this seemingly valuable windfall (increased funding for schools, affordable housing, or debt reduction come quickly to mind). Even DC's CFO with his usual conservatism dutifully provided estimates of lost revenues for each alternative, with practical comments on their impact on the difficulties of tax collection. In muted tones, he evoked the specter of the huge and preposterous 'structural imbalance' (which should justify large revenue increases), while applauding all the city's leaders with the wisdom to look before they leapt:

"Over the last year, the Mayor and the Council have taken several significant steps to strengthen DC's revenue stream and to enhance its long term financial viability. However, the recent GAO report, by confirming DC's structural imbalance of $470M to $1.143 billion annually, makes it clear that we must guard our tax base closely........The type of tax relief offered today can have significant implications for future revenues, as already indicated [in his prior testimony]. That is why I applaud the Mayor and the Council for considering each proposal very carefully."

These do not sound to NARPAC like the words of a fully engaged Chief Financial Officer standing on the brink.

Finally, no comparisons were offered of DC's current real estate tax load compared to its (supposedly) under-taxed neighbors in the national capital metro area. In fact, however, the CFO has provided such numbers on other occasions when comparing DC's overall tax burden with that of the metro area average, as indicated on this chart. DC real estate taxes for household incomes up to $150K are substantially below those of the whole metro area, and in fact, they could be interpreted as providing incentives for low income homeowners to move into the city, thereby making DC's financial viability less certain!


exploring recent DC real estate and income taxes

The following charts, drawn from Federal income tax returns of DC taxpayers between 1997 and 2001, provide some insights into who pays how much for what. A review of these kinds of data before voting on real estate tax caps would appear to be appropriate.

The first four charts below indicate trends in DC taxes as reflected in federal returns (local data are unavailable, at least to NARPAC).

Upper left indicates that virtually all trends have been rising since 1997: numbers of taxpayers; returns; itemized deductions (while standard deductions have declined); taxpayers reporting income taxes and real estate taxes; and, with the exception of the bad stock market year of 2001, taxpayers with capital gains as well.

Lower left shows that the value of state and local income taxes, as reported to the Feds, has been climbing, and real estate taxes have risen after a "correction" in 1999 reflecting simplifaction of the tax code.

Upper right shows that the CFO's five year projections for property revenues have consistently fallen short of reality, though there is no reason why a conservative CFO should have forecast the (continuing) boom of recent years. It is primarily important because if the trend continues, the CFO may also underestimate the magnitude of the losses associated with various real estate tax alternatives.

Lower right indicates that despite the increases in real estate tax revenues, the increases in income tax revenues have been greater. As a result, the real estate share compared to income has declined from 27% to 20%, and then started up again (but perhaps only due to a temporary drop in capital gains).

are DC taxes "progressive"?

The next stack of three charts delves into the extent to which current DC taxes are already "progressive", i.e., hitting wealthier residents more than the less wealthy. Understanding who is paying how much of DC's revenues should color decisions on changing tax policies.

The top chart displays how several primary tax revenue indicators are currently shared among the various Adjusted Gross Income (AGI) brackets used by the IRS. For each of the five parameters shown, the total across the 12 brackets sums to 100%. To pick a few samples, the bracket with the most dependents is $10K-$20K; the bracket with the largest number of tax returns is $30- $50K; the bracket with the highest number of real estate owners is $50K-$75K; the bracket contributing the most in real estate tax revenues is $200-$500K; and the bracket providing the most income tax revenue is the 602 DC households with an AGI over $1 million!

The center chart above is perhaps easier to interpret. It sums the shares in each of those five categories, so that they all reach 100% at the right-hand end bracket. The extent to which these lines diverge should give some pause for thought. For instance:

o 80% of DC's dependents are in households at or below $50K in AGI, and their taxpayers provide 20% of DC's real estate tax revenues, and 10% of its income tax revenues. Those dependents are certainly the best single (albeit oversimplified) indicator of demands on DC expenditures;

o 80% of DC's taxpaying households report less that $75K in AGI and generate only 30% of DC's real estate taxes and 20% of its income tax revenues.

o 80% of DC's property owners report $150K or less in AGI, and contribute less than 60% of DC's real estate revenues, and only 45% of its income tax revenues;

o and reading back from the highest bracket, the top 10% of DC's taxpaying households provide declare more than $100K in AGI and provide 40% of real estate revenues and about 70% of all income tax revenues;

o considerably more disturbing to some, if those 51% of returns with an AGI below $30K vote as a block, they can run the city while representing only 13% of DC's home owners, 8% of its real estate value, and 2.5% of its household income.

a limited progressive real estate tax

The bottom chart demonstrates why some low income taxpayers are concerned for their rising real estate costs. Above the $50K-$75K AGI bracket, household real estate taxes are a quarter or less of their income taxes. At the $10-$20K bracket that rises on average to 100%, and could well be alarming if it is rising steadily while income does not. The poor become truly "land- poor".

The red line suggests one type of real estate tax cap that would be limited to those whose real estate taxes rise above some fixed percent of their (last year's) income taxes. It would not be applied to those in higher brackets for whom the real estate burden is a relatively small fraction of their taxable income, and hence their income taxes. For instance:

* a 30% cap would have cost DC $9.6M (7.1%) of its real estate revenues in 2001;
* a 25% cap would have cost DC $13.3M (9.8%) of its real estate revenues in 2001;
* a 20% cap would have cost DC $20.9M (15.4%) of its real estate revenues in 2001;

These numbers are a lot smaller than the $58.2M lost by an arbitrary $100K homestead deduction for the 50% of home owners with 70% of DC's homeowner property value who probably do not need it. It seems obvious that whatever cap is applied should address only those in need, and not give gratuitous relief to those who don't need it, and might not even notice it. This requires relating the offending real estate taxes to the recipient's ability to pay as indicated by their income taxes.

another approach to helping only those with modest incomes

A somewhat more difficult-to-enforce approach to accomplishing the same thing would be to establish a variable homestead deduction that phases out at an income level where, on average, the real estate burden has declined to a DC "norm". While professing no tax-writing expertise at all, and living in a world where everything is easy and straightforward, NARPAC might suggest a homestead exemption of $75,000 minus last year's federally reported AGI. In short, the exemption would phase out completely for those with an AGI over $75K. There may be better ways to make real estate taxes "progressive", and suggestions from others would be welcome. It might be noted in passing that the IRS uses a similar device to keep the relatively well-off (over $140K AGI) from avoiding taxes through excessive (?) itemized deductions.

The final chart below belabors the extent to which the "taxpayer demography" is already bipolar.

The 10.4% of Washingtonians with an AGI above $100K comprise:
* only 9.7% of DC's dependents, and 12% of returns with taxable income;
* 36% of those reporting capital gains, but 94% of the total amount;
* 33% of those reporting stock dividends, but 78% of the total amount;
* 33% of those reporting real estate taxes, but 58% of the total amount;
* 26% of those reporting income dividends, but 71% of the total amount;
* 28% of those reporting salaries or wages, but only 22% of those salaries;
* 14% of those reporting pensions, but only 28% of those salaries;

NARPAC advice to the DC Council

Unlike DC's enigmatic CFO, it is not difficult to discern where NARPAC stands on this issue. It is summarized in our blunt, unheeded advice to all Council members shortly before their final vote on the tax cap issue:

NARPAC objects to further capping property tax increases across the board because it sends the following negative messages:

Our National Capital City Government is apparently....

o more anxious to pander to a few vocal activists than accept its financial responsibilities;

o unwilling to add funding to key poverty-related urban problems such as education, crime, poor health, and teen pregnancy;

o more dedicated to keeping existing housing more affordable for the more fortunate than providing any housing for the less fortunate;

o willing to con the Federal Gov't for hand-outs to solve its (bogus) "structural imbalance" claims, but not willing to achieve its own sustainable socioeconomic balance;

o trying to force commuters to pay DC's city bills, even though they already pay (on average) higher property taxes at home, while their employers pay higher commercial property taxes in DC;

o unable to differentiate between the genuine needs of a few disadvantaged homeowners and the greed of some of the nation's richest and least taxed lawyers and lobbyists;

o willing to skew incentives for moving into the city towards residents the city can't afford; and

o prefers socialism to capitalism, and populist to representative democracy in its own back yard.

NARPAC believes limited and discriminating increases in homestead exemptions would be more appropriate, but only if the legislation requires means-testing for age, dependents, and infirmity.

return to the top of the pageDC'S CAPITAL IMPROVEMENT PLANNING IN 2003

Summary

NARPAC has paid little if any attention to capital improvements budget since it commented favorably on Mayor Williams' vastly increased FY00 capital budget plan. At that time, he first proposed a six-year plan to spend over $2.75 billion to catch up on DC's growing infrastructure maintenance backlog. Since that time, capital improvement spending has grown substantially, although NARPAC has yet to discover a good source of actual rather than planned spending detail.

Capital improvement needs came to the forefront again in 2003, as the GAO published a report estimating that DC a large 'structural imbalance' beyond its own resource capabilities to overcome. NARPAC has taken serious objection to these inflated claims of poverty that bring demands from local politicos for state and/or federal bail- outs. The supposedly sad state of DC's capital improvement budget capacity added fuel to this self-set fire. In essence, GAO asserted without critical analysis that DC had worthy acquisition and maintenance programs totaling some $2.5 billion beyond that which could be accommodated in DC's current FY03-08 Capital Improvement Plan (CIP) which totals some $3.3 billion. Such a shortfall, if true, is a serious cause for concern in the nation's capital city.

On closer inspection, however, NARPAC concludes that these assertions leave a great deal to be desired. To the contrary, we estimate that DC's own six-year CIP plan (excluding the $1.1 billion in federal grants) has room for as much as $660M more in "missing" out- year planning, while the extent of the "deferred" (i.e. unfunded) infrastructure needs for the school system alone may be overstated by $1300 million. These apparently unchallenged 'excess' demands from the DCPS result from unrealistically high projections of public school enrollment, and plans to remodel all existing schools rather than consolidate operations in fewer schools of a somewhat larger size typical of better-performing urban school districts. If both of these conclusions hold water, there is no unmanageable deficit in capital spending potential. This is demonstrated in the summary chart immediately below, and explored in the sections that follow.

CIP content

It should be noted from the outset that DC's CIP plan focuses on the funding that the city will have to raise on its own, primarily from general obligation bonds. It does not treat those grants provided by the federal government which account for almost 40% of DC's capital improvement needs. The laundry list of needy and unfunded programs runs the full gamut from $1.1 billion in DCPS school repairs, $87M to renovate DC's Municipal Center, and $4.5M for street light pole replacement, to $125M for paving DC's alleys, $2.2M to buy new library equipment, and $25M for improvements to DC's parks and 'aquatic centers'. But as shown on the chart above, the vast majority of the funds are required for public education (including UDC and DC's library system) and transportation (including DC's excessive contribution to the Metro (WMATA)). "All the rest" would take many pages to explain.

funding sources

The primary funding source, as mentioned above, consist of General Obligation Bonds issued almost every year by the city and paid off ad finitum over subsequent years much like a regular household mortgage. The second source has been the continued supply of grant funds from the federal government, many of them covering transportation needs (including the new New York Ave Metro station). NARPAC has not explored the process by which the number and size of these awards are determined, but they are substantial, and could presumably become an avenue for additional federal support to DC which would not subsidize DC's high operating costs. The Highway Trust Fund has provided significant support as well (beyond the federal grant program). DC also raises funds for capital expenditures from "rights of way fees" (including, NARPAC believes, the new optical cable routes buried under DC streets), from "equipment leasing" which seems to be phasing out, and the customary "other" category that defies quantification.

Most significant of course, is the need to pay off the borrowing costs (and principal) of the general obligation bonds. DC's total debt has, until recently refinanced to stretch it out, remained in excess of $3 billion. This, the GAO correctly notes, represents a substantial per capita debt, higher than most other state/local jurisdictions. But more important is the often-overlooked fact that this debt must be serviced annually from the city's general operating budget. As shown on the chart to the left, paying off the principal and the interest reached almost $450M in FY2000 and was subsequently reduced by both refinancing, unusually low interest rates, and significant improvement in DC's bond rating, which further reduced interest rates. Nevertheless, such borrowing appears to be unavoidable in the immediate future, and might well creep up again to $400M by FY2010 when hopefully, DC will be better able to afford it.

It is also interesting to note that the carrying costs of the city's debt with few exceptions exceeds 10% of that debt each year. The total outstanding debt divided by ten (the orange line) represents the 10% line which has been only momentarily bettered. Nevertheless, there is an important nexus here between operating costs and capital investment. As the GAO report quite correctly points out, DC's ability to borrow for its future is clearly limited by the more pressing demands on its operating budget, mostly in education and human support. The GAO report does not point out the obverse, however. Increasing efficiency of routine government operations can lead to greater capacity for capital funding. The total annual budgetary cost of the average DC employee is now almost exactly $60,000 per year. In purely analytical budgetary terms, that person could be swapped for a long-term $500,000 capital investment. This is a trade worth thinking about, given the disturbingly low efficiency of DC government workers.


planning trends

It seems evident that DC, like many other jurisdictions and agencies (including the Department if Defense, NARPAC might add) favors its near term needs while remaining remarkably indifferent to its longer term needs. Perhaps most Americans do, unless they are trying to put their kids through college. Nevertheless, the chart to the right shows the history of, and five successive six- year CIP plan 'top lines' from 2000 to 2004. It illustrates the never-ending "bow wave" of too- high expectations in the near years, and too little interest in the outyears. In fact, the "actuals", the real funding from prior years, is seldom even recorded.. While this may simply be a quirk of human, or bureaucratic, nature, it makes six-year projections unreliable: both by promising too much tomorrow, and too little next week. The chart also shows the equivalent outyear plans for DCPS facilities, each one falling off to zero before the six-year period ends. Not a very practical way to plan the continued modernization of a 100-school system!

The real importance of inadequate forward planning, in this case at least, is that while the near- term funding may be exaggerated, the outyear funding may be seriously underestimated. NARPAC concludes that this is the case in accepting without question the current DC CIP. It appears to underestimate the total to be available in the next few years by some $660M, thereby over-amplifying GAO's concern for the unfunded projects that didn't make the cut. This is shown on the chart to the right, giving NARPAC's best guess for realistic CIP funding in the foreseeable future. Note that it shows gradually increasing requirements out into the future, not a near-term cessation of funding.

the wish-list syndrome

The final aspect of this longer range CIP planning is the inevitable existence of "nice to get" items on the unfunded list. Instead of offending their advocates by killing them, these programs are allowed to linger indefinitely just beyond reach. Again, the only harm done here is that if nearer term plans include the precursor expenditures towards the elusive Nirvana, they are likely to be wasted. Adding helipads to each DC district police headquarters, for instance, with no assurance of ever buying helicopters for MPD would be a case in point (a pure figment of NARPAC's imagination).

On the other hand, if DC's school system sets out to replace worn-out school buildings with ones that are abnormally small (by urban standards) or begins to build or modernize too many schools in the same area for an unrealistic growth in school attendance, then the incorrect vision of the future can result in substantial additional costs or ineffectiveness. NARPAC believes that the DCPS Facilities Plan is 'structurally imbalanced' and that this could seriously and unnecessarily skew DC's perceived CIP capacity. It could also raise needless and ultimately embarrassing issues about state and federal subsidies. This is covered in a separate section of this web site dealing with DCPS Facilities.

DC'S NEW ECONOMY TRANSFORMATION ACT OF 2000

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THE FLEECING OF WHOM, BY WHOM?
NBC NIGHTLY NEWS GETS IT DEAD WRONG

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This page was updated on Feb 5, 2004


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