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

On March 15th, Mayor Williams submitted his first budget request and financial plan to the DC Council, to begin the budget approval process. After some rather heated debate with the DC Council, which seemed bent on exerting its own political will at the mayor's expense, and after the intervention of the Control Board to resolve several issues (generally in favor of the mayor's position) a budget was submitted to the Congress on June 1st.

NARPAC, Inc. senses that this budget represents a very refreshing set of new directions, although it understandably carries most of the old baggage. It is clearly a place-holder proposal in which the proposed changes are held to a few relatively low-cost new initiatives, while the balance of the $5.5 billion continues "business as usual." In every way it makes no waves, and offers projections which continue a "structurally balanced" budget for the next several years. The budget's mantra is that it is "conservative, but not gloomy". But the fascination lies in the changes in format, and intentions that could well bear fruit later on. The following NARPAC summary includes several (comments from NARPAC's analysis).

Reductions in Income and Business Taxes

The debate over the mayor's budget proposal centered around whether or not there should be a tax cut, how big it should be, and how quickly it should be introduced. The resulting compromise can be looked at as the result of "normal" democratic processes with competing objectives and more than a little hyperbole. NARPAC, Inc. is disappointed that the Control Board had to step in to resolve the issue (so much for "home rule"), and also that the net outcome favors tax relief over long-term debt reduction. The first five years of the six-year plan are shown below, and it should be noted that each year's cuts are predicated on the fiscal performance for the prior year, and the condition of the economy in general:

FIVE-YR REVENUE IMPACT OF PROPOSED TAX CUTS
in $(M)

Tax Category:FY2000FY2001FY2002FY2003 FY20045-yr Tot
Pers Property:3.815.015.816.6 17.468.6
Franchise Tax:0.00.00.016.7 28.745.4
Real Property:34.063.492.892.8 92.8375.8
Individ Income:21.256.277.299.9 148.7403.2
TOTAL:59.0134.6185.8226.0 287.6893.0

In the next five years, DC hopes to shave almost $900 million off its local generated revenues, almost half by reduced individual income taxes. In the process, this will reduce tax rates to be more competitive with the surrounding jurisdictions. Although this is a noble objective with which NARPAC cannot disagree, it may well be premature. While its proponents claim it will help attract residents and businesses back into the District, it is by no means clear that those who emigrated from Washington were driven away by their taxes. Most of those who left did not move to the neighboring jurisdiction with the lowest tax rates!

The more basic questions, of course, are where was the money taken from, and for what else might it have been used. In fact, the mayor's own proposal had offered to "restructure" DC's long-term debt servicing to avoid such high near-term interest payments (now about $400M on a total debt of about $4 billion--a much higher indebtedness than surrounding jurisdictions). Mayor Williams had also proposed to generate substantial--but unallocated--savings in running the DC government. The Council forced his hand, raising the level of debt restructuring, and requiring allocation of the proposal savings. The impact of delaying debt payment is as follows:

IMPACT OF LONG-TERM DEBT RESTRUCTURING
Debt Servicing in $(M)

Time Period:CurrentChangeProposed
FY2000-2007:2790-4612329
FY2008-2015:989+5931582

By stretching out the pay-back (i.e., refinancing the mortgage), the city will save some $460M in interest payments in the next eight years, but as a result, increase the payments in the next eight years by almost $600M--in "today's dollars". Allowing for some modest inflation, those fixed debt dollar payments will, of course, be easier to pay the longer they are delayed. The second benefit of restructuring the debt is to allow taking on more debt--in the form of increased capital projects--without exceeding the allowable debt ceiling. Again, not an ignoble objective (see capital investment below).

On the other hand, NARPAC believes that a more prudent alternative would have been to use those "surplus" tax revenues to pay down the debt itself, and help rid the city of what is yet one more embarrassing statistic: an excessively high debt level, consuming well over 12% of locally-generated revenues. Continued improvement in the city's bond ratings, however, can make the debt burden somewhat more tolerable. Call it conservatism.

Extending Medicaid Insurance Coverage

Perhaps the more discouraging--but possibly the more realistic--Council change to the Mayor's budget proposal was the severe limiting of the number of uninsured poor people to be brought under the Medicaid umbrella. The Mayor has proposed to extend coverage to some 89,000 kids and adults now lacking medical insurance, and thereby costing the city more in both hospital costs--and in untreated illness. However, the source of funds for the insurance was to have come from those hospitals serving the poor, often at outrageously non-competitive costs. Unfortunately, these same hospitals (DC General, SE Community, and to a lesser extent Howard University) could not keep their doors open if denied the city's over-generous payments. Caught in this Hobson's Choice, the compromise has been to greatly lower the number of new insurees, which appointing a commission to solve the dilemma of unreimbursed hospital care for the city's large number of very poor--most of which are "East of the Anacostia River", in what NARPAC thinks of as "Anacostia County". A major consolidation and size reduction in these red-ink hospitals is almost sure to come--eventually.

Economic and Demographic Projections through 2003:

The budget provides a drearily normal outlook:

o Gross State GDP, personal income, and retail sales continue to grow at about 4% annually;

o Population, numbers of households, resident and atplace employment grow less than 1% per year, while housing stock drop 1% per year.

NARPAC notes, somewhat tongue-in-cheek, that these mid-range economic projections remain completely unchanged from those made without the substantial tax reductions. But if these projections are correct, DC will be little different than it is today. However, the Mayor makes clear that his budget is intended to be conservative, and these projections leave ample room for more positive actualities.

(NARPAC would also like to note that the future financial solvency of most inner cities depends not so much on population growth, per se, but on a significant shift in the number of revenue-producers (taxpayers, land owners, etc.) compared to revenue-consumers. As is discussed in a recently added analysis of impact of income mix on gov't spending, DC's financial problems stem primarily from the terrible ratio of taxpayers to welfare recipients: currently only about 2.6:1.)

Revenue and Expenditure Projections through 2003:

o Revenues are projected to grow at about 3% per year with individual income taxes, sales taxes, and receipts taxes growing somewhat faster, and property taxes, "other taxes", and "other non-tax revenues" declining. Each of these projections is surely subject to refinement, and NARPAC would still bet on faster increases in revenues under this Williams administration. Compared to a (somewhat outdated) US "norm", however, DC still depends on an unusually high level of federal grants, the result of its unusually high population below the poverty line.

SUMMARY OF DC FY2000 REVENUES
$(M)

Revenue Source:$(M)% TotalUS "Norm"
All Taxes:2847.360.8%58.2%
Property:655.914.0%.
Sales:620.013.2%.
Gross Rcpts:226.44.8%.
Other:122.12.6%.
Indiv Income:933.419.9%.
Corp Income:230.54.9%.
Non-Taxes:302.06.5%24.7%
Local Revenues:3090.366.0%82.9%
Federal + Other:1590.334.0%17.1%
TOTAL:4680.6100.0%100.0%

o Expenditures are also projected to grow at 3% per year, with public education growing somewhat more slowly, and government direction (!), public safety, and public works growing somewhat faster. But the faster growth is expected in "human support services" (almost 5% annually). This again forecasts a city which still attracts residents with government dependence, and that their numbers will continue to grow. In fact, there is little similarity between the national norm for state & local spending (combined) in each major category and that of DC. For instance, DC spends almost twice as much for public safety and humasn sevicess, but only half as much for public education.

SUMMARY OF DC FY2000 EXPENDITURES
(1) = Includes Agencies In Receivership
(2) = Includes Reserves and Mgmt Savings

Major Expenditures:Local $(M)Total $(M) % of Total US "Norm"
Govt Direx/EcDev:190.0365.07.9%5.4%
Public Safety:564.2778.716.7%8.8%
Public Education:704.8850.418.3%34.7%
(1)Health/HumanSupt:635.11526.040.0%23.4%
Public Works:258.3271.45.8%16.7
(2)Financing/Other:525.1525.111.3%11.0%
TOTAL:3090.34653.7100.0%100.0%

o In these projections, it is appears that the authorized full time equivalent (FTE) personnel levels also decline very slightly over time. In fact, the FY2000 budget proposes a decrease of some 1200-odd FTE's compared to the 33,753 "authorized" for FY99, including some 7651 FTE's paid for by federal and "other" funding sources. However, there does not seem to be any close correlation between these authorized levels and "actuals". Nor is there any ready correlation between FTE's in the revised budget and the Mayor's original proposal.

(NARPAC would strongly suggest that future budgets have a separate cross- cutting section on all aspects of personnel levels and costs. They are still the cost driver, and available comparisons suggest that DC salaries are considerably above those of surrounding jurisdictions. )

o Outside revenues from federal grants, private and "other" sources, reaching $2.39 billion in FY2000, continue to provide almost 40% of DC's general funds through FY03-- and still provide employment for over 7600 FTE's. On the one hand, federal assistance grants include money for personnel to administer them (15-20%). At the other extreme, some of the teachers at UDC are paid by the (modest) tuition received from students.

o Perhaps most important, there is a substantial increase in spending for capital investment--and almost twice as much as originally proposed by the Mayor in March. Over six years a total of over $2.75 billion is now proposed. About 23% of that six-year total is earmarked for the DC public school system:

SUMMARY OF DC 6-YR CAPITAL BUDGET

Major Category:6-yr $(M)% Total
Govt Direx/EcDev:143.55.2%
Police/Fire/Correxn:160.15.8%
Transportation:1265.746.0%
WMATA:129.04.7%
Housing/Property:119.04.3%
UDC:21.30.8%
Schools/Libraries:634.623.1%
Health/HumSupt:278.310.1%
TOTAL:2751.5100.0%

Unlike many such six-year promises however, this one is front-loaded--with FY2000 allocating $741M, up from $333 in FY99, and declining slowly to $245M in FY05:

DC 6-YR CAPITAL BUDGET SPENDING PLAN

Fiscal Year:$(M)% TotalCum %
2000:74126.9%26.9%
2001:65023.6%50.5%
2002:46316.8%67.4%
2003:37613.7%81.0%
2004:27710.1%91.1%
2005:2458.9%100.0%

o The budget continues to provide an estimate of $1.21 billion in revenues foregone due to the federal presence (property tax exemptions, $540M; 3% non- resident wage tax, $600M; and sales taxes, $70M). It also breaks out agencies in receivership (some $337M), but these must be re-categorized (under human services) before making comparisons to other jurisdictions.

(On the other hand, no estimate is given of the total budget expenditures--and administering staff--for carrying out non-municipal functions. The NARPAC estimate indicates over 5000 FTE's and $950M--from local funds only, and even more through federal grants!--but this is clearly little more than a rough guess. It would be another good budget addition.)

New Initiatives

Williams' first budget (as mayor) contains a few new initiatives indicative of where he intends to go--with a focus on education, children, health care, neighborhood revitalization, and small, minority owned businesses. His proposal to fund a post- secondary education commission which would look at relocating the University of DC to a more affordable site East of the Anacostia River drew heated reactions totally out of proportion to the importance of the issue. Nevertheless, it was withdrawn from the final budget sent to Congress. On the other hand, a commission will now be formed to look at the future of DC's hospitals primarily serving DC's uninsured poor.

In NARPAC's view, the most significant initiative is one that recognizes the need to provide alternative environments for many DC kids outside of school--linking, however weakly at first, the problems of neighborhood blight to educational blight.

At the other extreme, NARPAC was least impressed with the increase in training for the government workers. Instead of a massive effort to train the existing workers (as part of an essential bargain in "managed competition"), very small sums are identified for such training, and virtually no goals are established in this key area.(NARPAC would encourage an explicit section on personnel training--perhaps as part of the separate personnel section mentioned above.)

The Reduced Promise in the FY2000 Budget Format:

Perhaps most intriguing to NARPAC's analysts was the test run of a new budget format which obliged each of some 70-odd budget elements to begin to compare their operational parameters with those of other cities--primarily the ones visited by Mayor Williams shortly after his inauguration. Unfortunately, the final budget proposal eliminates these comparisons, probably because most of these comparisons are yet to be developed, and all of them will be controversial. Nevertheless, as NARPAC asserted here in May, 1999, if pursued, these benchmarks would offer a substantial challenge if DC is indeed to transform itself into an urban role model. In fact, the final management report submitted with the budget includes the following statement:

Benchmarking

The District conducted benchmarking research studies in preparing the FY 1999 and FY 2000 budgets. The January-March 1999 study compared selected operating and financial measures for a dozen District agencies with five "best practice" cities: Detroit, Indianapolis, Philadelphia, Phoenix, and Portland, Oregon. This summer, the District will mount a more extensive benchmarking effort of services in these five cities and additional jurisdictions. The selection criteria for benchmarking are:

1. Neighboring jurisdictions in the region regardless of differences or similarities 2. Comparable urban jurisdictions around the nation similar in population size, demographic mix, geographical features and other dimensions 3. Best-practice jurisdictions regardless of differences or similarities

Benchmarking will help us understand how the District compares to our neighbors, identify strategies used in similar urban settings, and set our goals as high as the best performing jurisdictions in the nation.

NARPAC, Inc. will do whatever it can to make sure that this promise is fulfilled. We are particularly pleased to see that some of the peer comparisons will be made with neighboring jurisdictions. One prime objective for DC is certainly to be as good--if not better--than other American cities where people like to live. But the primary means to achieve this is to level the socioeconomic playing field within its own metro area. Hence regional parameters that directly influence demographic/migration decisions need to be included, quite possibly developed jointly with the COG or the Greater Washington Research Center.)

A few starkly different examples from the March 15th draft budget demonstrate the potential of this benchmarking approach:

o The processing of contracts in DC takes on average 120 days, whereas the five peer jurisdictions have achieved 57 days. At the same time, DC's procurement bid threshold of $25,000 is significantly lower than for these peer procurement operations.

o The DC Metropolitan Police Force has about 7 uniformed officers per 1000 residents, while the average for other cities is closer to 4: implying as much as 75% too much spending for police (FY2000 MPD budget is $305 M).

o Likewise, the Fire and Emergency Services department has more than twice as many people per resident as do the five other cities--as well as perhaps four times too many fire stations.

o Perhaps more surprising, the DC Library system with its modest $23M budget for FY2000, has 50% more personnel and more than twice as many libraries per capita, but only one-third the circulation rate.

Unfortunately, in none of these four cases did the budget appear to reflect any plans to become more efficient. As yet, the elements of the problems are not linked to elements of the solution.

The other innovation--setting up quantitative output performance measures has been substantially expanded: 17 agencies plus the Mayor's Office have all adopted performance measures (from lowering crime rates and improving tests scores, to increasing restaurant inspections and lowering contract approval time)--114 altogether. In addition, 22 other agencies already operating under "performance accountability measures" have also set out another 93 measures--many of them customer satisfaction scores. It would not be difficult to poke holes in some of the parameters chosen, but it would also be counterproductive. There is every reason to believe that the new city management will gradually oblige the bureaucracy meet goals in terms of services provided. Still to come are measures of efficiency with which those services are provided. In this latter area, we will have to stayed tuned until next year. Meanwhile, NARPAC's preliminary listing is (at the moment) better than Mayor Williams'. Let's hope that will not be true for long!

Progress is also being made in providing quantification of basic parameters that can make comparisons and analysis easier. Such values run the gamut from vehicles to be maintained (4900), to the number of recipients of various government-provided benefits (e.g., HIV/AIDS patients (7000)). The following typical indirectly derived numbers have value in the decision-making arena...BUT ONLY IF THEY ARE TRUE:

Pay and fringe benefits for average city worker: $47,500
Annual cost of average DC patient's mental health care: $23,100
Average annual cost for each child in foster care: $19,400
Full cost to educate average student in DCPS: $10,535 per year
Average annual cost of vocational training per DoC inmate: $4700
Total average cost per UDC degree conferred this year: $94,000
Average cost of health/human services to 195,000 (?) recipients: $9500


Hopefully, future budgets will allow meaningful comparisons of such statistics.

Superficial Comparisons with the Montgomery County Budget

Shortly after the release of the proposed DC budget, the Montgomery County proposal was released. The county now has just short of 1,000,000 residents, and their locally-raised budget has been upped $161M to $2.42B. Not only does that represent a per capita tax burden about 57% lower than DC's, but the composition of the budget is radically different. In four salient areas the comparisons are noteworthy: Montgomery County will devote 6.5% of its budget to debt service, compared to DC's 14.3%; 10.2% of its budget to safety and justice, compared to DC's 17.8%; 50.6% to education, compared to DC's 22.1%; and 7.1% of its budget for health and human services compared to 40.0% for DC.

NARPAC congratulates the Williams administration--and his Office of Budget and Planning in particular-- for its improvements in the budget process, and hopes its efforts will continue to bear fruit.


This item was archived in September, 2002

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