Saving surplus for a rainy day
By Vincent C. Gray, Monday, February 6, 7:27 PM
Vincent C. Gray is mayor of the District of Columbia.
The strong state of the District’s finances will be part of my State of the District address Tuesday. The latest Comprehensive Annual Financial Report showed that we ended fiscal 2011 with a $239.7 million surplus and that the city’s Fund Balance — its crucial rainy-day reserve — had rebounded to $1.1 billion.
Just a year ago, things didn’t look nearly so rosy. The previous administration planned to use hundreds of millions of dollars from our reserves to balance the budget for the fourth year in a row. This bad habit resulted in a $700 million decline in our once-healthy Fund Balance.
But over the past year, a combination of sound financial management by my administration and unexpected revenue windfalls has resulted in a dramatic swing in our fiscal fortunes. The bond-rating agencies I visited during a trip to Wall Street last week were very pleased to hear of the increase in our Fund Balance. That is not the reaction we would have received had our savings declined for the fourth year in a row.
So how did we get the District’s fiscal house in order? First, a combination of factors led to unexpected increases in revenue last year in areas such as estate-tax collections and capital gains.
But a significant portion of the turnaround — $150.8 million — is the result of my administration’s aggressive efforts to contain spending. These included implementing such measures as a hiring freeze, dramatically improving efficiency in several programs, and appointing an internal task force to manage unforeseen expenses to historically low levels.
Given this positive news about the District’s return to fiscal health, I find it surprising that some in our city have called for us to fritter away our windfall. Some have advocated repealing last year’s modest tax increase on income above $350,000. Others have called for a boost in spending.
There are many reasons our surplus should be preserved.
First, the surplus goes into our savings accounts as a matter of law. In 2010, as chair of the D.C. Council, I proposed legislation — which the council approved 12 to 1 — that created two accounts designed to restore our Fund Balance to the point where we had two months’ cash on hand. This cushion, an industry best-practice standard recommended by the Government Finance Officers Association, ensures that our government continues to run in the wake of economy-shocking events such as disasters, federal government shutdowns or reductions in federal spending. Most states and localities can only dream of meeting this standard, but here in the District we are making it a reality.
Legally, $194.2 million of this year’s surplus must be deposited into those two accounts. The remaining $45.8 million is dedicated to special accounts reserved for specific purposes, such as cleanup of the Anacostia River, which is funded by a 5-cent fee for shopping bags.
But the most important reason not to spend the surplus is that doing so would be short-sighted and fiscally irresponsible. We have rebuilt our reserves only a third of the way toward having two months’ worth of cash on hand. And our financial picture is uncertain, given an uneven economic recovery and the likelihood of significant reductions in future federal spending. Draconian federal budget cuts scheduled to take effect next year are projected to cause a significant decline in anticipated local revenue. Over the next several years, this decline would create a huge gap between tax revenue and the spending levels necessary to provide just our current level of city services.
Faced with this kind of uncertainty — and congressionally imposed rules that prevent future tax cuts based on a one-time surplus — we absolutely must take extra care to protect our surplus and rebuild our Fund Balance. If we don’t live within our means and save when we have a windfall, we will have squandered a perfect opportunity to cast off outdated perceptions of the District’s fiscal irresponsibility and to chart a new course toward a brighter future.