jonetta rose barras: How responsible will DC officials be during this budget cycle?
Finally, DC Chief Financial Officer Glen Lee has decided to close — at least partially — the public’s wallet to Mayor Muriel Bowser and the gang of DC Council spendthrifts. He is demanding that they replenish the Fiscal Stabilization Reserve from which they took money during the COVID-19 pandemic.
The District has four reserve accounts, three of which are available for nonrecurring or unforeseen needs that arise during the fiscal year, with various conditions and repayment requirements. Two of them — the Emergency Reserve and Contingency Reserve — are mandated by federal law; for these, the amount of money required to maintain the funding floor is based on the total annual audited operating budget, minus funds used for debt service.
The other two accounts — Cash Flow Reserve and Fiscal Stabilization Reserve — were created by the council in 2010. They, too, are expected to maintain a certain amount of funds and to be used only for specific activities. It’s the money in the stabilization reserve — for which permissible uses include extended revenue shortfalls and lapses in regular appropriations, according to council budget documents — that’s currently in dispute.
“Over the last two or three years, they frequently dipped into the reserves,” a local finance expert familiar with DC government affairs told me earlier this week.
The raid of reserves came even as the District received as much as $4.7 billion during the pandemic from Congress, through a variety of federal programs including the CARES Act. DC officials spent all of that money, plus locally collected tax revenues.
Now, the government seems to be facing a budget gap of at least $1.1 billion in fiscal year 2025.
How is this possible? It didn’t help that expenditures grew by 37% in recent years while local revenues increased by only 17%, according to several sources.
“They spent the money on recurring costs and new programs,” explained DC Auditor Kathy Patterson, adding that some of the expenditures were legitimate uses. Others, not so much: “We paid our [Washington Metropolitan Area Transit Authority] dues with federal COVID money.”
In an email, Patterson likened the government’s actions to finding money on the sidewalk. “If you or I found a twenty [dollar bill] we’d splurge on an expensive dessert or put it in the bank.
“We wouldn’t do what District [officials] did: they bought a car on an installment plan, assuming they’d find [$20] on the sidewalk every week into infinity. And unfortunately, the federal rules let every state and local government do that — all they had to do was claim a loss in revenue due to the pandemic. If you claimed you’d lost $20 million in restaurant taxes because of COVID you could blow that $20 million on just about anything.
“And that’s what we did,” added Patterson.
To be fair, CFO Lee appears to have facilitated some of that reckless spending and those raids on reserves. Both the executive and legislative branches apparently presumed that the funds would be repaid from end-of-the-year surpluses or other pots of magically appearing money.
But then FY 2023 ended with surpluses insufficient to fully reimburse all the reserves. Consequently, as I wrote last month, the stabilization fund ended up being short by $253.6 million and the Cash Flow Reserve was down $68.9 million, according to that year’s Annual Comprehensive Financial Report.
Lee has demanded that DC’s elected officials reimburse the stabilization reserve in FY 2025 — the year for which the mayor is currently developing the budget which the council is expected to vote on by the summer. From various reports, Bowser appears prepared to acquiesce to that requirement. According to her press office, the proposed budget is in the CFO’s hands for review and certification, with a formal presentation to the council set for April 3.
During a lengthy conversation with me earlier this week, Council Chair Phil Mendelson said he was “not happy with the financial management all around.”
“Over the years, electeds had the opportunity to spend big money and they spent it,” he continued. “When we had the opportunity to invest it, we didn’t and it’s unfortunate.”
Despite that mea culpa, Mendelson has been pushing back against the CFO. He said the mayor has been acting responsibly and been willing to make significant cuts. But Lee’s unreasonable requirement will needlessly increase the pain, in his view.
“That would increase by about 25% the cuts the mayor has to make — cuts that will be broad and deep,” Mendelson said. He cited possibly substantial reductions to the Office of the Deputy Mayor for Planning and Economic Development; the University of the District of Columbia; and Access to Justice, a program that provides legal aid to low-income vulnerable residents.
“There are just going to be cuts everywhere,” continued Mendelson. “This is not a pretty picture.”
That sound you hear is a frustrated politician looking for cover, but knowing there are few escape hatches. It’s a no-win situation.
Mendelson will catch flak from many quarters if he takes the fiscally irresponsible position of fighting against the CFO’s demand to replenish the reserve account. He will take flak from others if he makes the additional reductions to give Lee what he wants.
That unenviable reality may be why Mendelson has continued to argue that the CFO does not have the authority to mandate the repayment. Besides, he says, there is no timetable for such a reimbursement in DC law.
The summary from the council’s budget office suggests a rewrite is sorely needed: “When used for fiscal stabilization, there is no requirement for when it must be replenished. Any amounts used by the [CFO] for cash-flow needs must be replenished in the same fiscal year.”
What kind of fiscal management system is it that permits withdrawals without incorporating any specific repayment schedule?
The CFO is right to demand one. He should seek an amendment to the law to prevent officials from deliberately using the reserve as a slush fund.
Mendelson acknowledged in our conversation that Lee is being “fiscally responsible” but asserted that he is “wrong in requiring” the repayment in FY 2025: “He is exceeding his authority.”
Don’t ignore the squabbling and maneuvering; the burden for the city’s fiscal mismanagement of billions of dollars will be carried invariably by District residents and business owners.
Bowser is required under the Home Rule Act to present a balanced budget. She will. And as Mendelson predicted, it almost certainly will include severe cuts. The council will have to live with those or propose increases in fees and taxes to minimize or prevent them. Sources told me that one councilmember is already floating the idea of creating a new tax and dedicating the revenues collected to maintaining the city’s Emergency Rental Assistance Program (ERAP).
Help us!
That kind of imprudence is what landed the city in its current hole without enough shovels to dig itself out without incurring a lot of pain. The decisions made by elected officials and the CFO ultimately will affect DC’s long-term health and viability.
Folks need only consider the intended move by Monumental Sports & Entertainment out of the District, which wasn’t about taxes but still demonstrates the ease with which actions can be made that could further deteriorate DC’s fiscal stability.
I know, someone is yelling while reading this column that I am mixing apples and avocados.
Here’s the point: Many people targeted for tax increases have the means to relocate with a moment’s notice. The city is just starting to rebuild its population after COVID; do officials really want to jeopardize that progress because they lack the fortitude or skill to rightsize the government and correct their wasteful spending?
Of course, as one finance manager told me, the mayor or the council could change the law governing the Fiscal Stabilization Reserve to allow the executive even more flexibility. “If the mayor doesn’t have the gumption, the council could have the gumption.”
Relaxing the rules in the middle of the game and in the middle of a contentious political season might invite a group of unwanted referees. Already, congressional Republicans have jumped into District affairs related to crime. Attempting to diss the CFO surely will get their attention.
After all, Congress — a Republican-controlled Congress in 1995 — established the independent office of the chief financial officer, vesting it with unprecedented control over the city’s finances. Mendelson and others may not like that fact. In those infamous words once spoken by the now-deceased mayor Marion Barry, “Get over it!”
The days of spending every dollar thrown into the hat have ended. Lee and his team have seen the city’s fiscal future, and it ain’t pretty.
“The CFO has privately predicted that there will be bad year after bad year; 2028 may be the worst,” said a knowledgeable fiscal source. “In the middle of the financial plan, the proverbial shit hits the fan.
“The city needs to fill all reserves now. If not, the CFO will be forced to take much more draconian measures than the mayor or the council,” continued the expert.
In a letter dated March 11 to City Administrator Kevin Donahue, the CFO explained that the Fiscal Stabilization Reserve is an “important component of the District’s liquidity or working capital” and must be replenished now — not later.
It is used to meet cash obligations and will be critical “during the FY 2025 – FY 2028 financial plan, as during this period, $2.3 billion or approximately half of the District’s accumulated fund balance will be spent, leaving only the federally and locally mandate[d] reserves to address both routine and unexpected obligations,” Lee wrote in his letter.
He noted that when the stabilization reserve funds were used, there was “clear and consistent communication between our offices regarding the expected timing of the replenishment of the Reserve.” Further, Lee said Donahue told the council last month that “the Executive would replenish the fund in the Proposed FY 2024 Supplemental Budget and/or the Proposed FY 2025 Budget.”
Lee said that the executive’s failure to keep that agreement would result in “a clear deterioration of the District’s financial condition, when coupled with low revenue growth and exhaustion of discretionary surpluses.”
He emphasized that he has the “authority and responsibility to evaluate all aspects of the budget, including its failure to replenish the Reserve, in order to determine whether the proposed budget is balanced, financially sound and supportive of the District’s financial stability.”
In order words, don’t mess with me on this.
Mendelson declined to answer my question about whether he and his colleagues are prepared to challenge the CFO’s authority — to take him to court, perhaps. “I am not going to respond to hypotheticals,” Mendelson said.
“They need to get in a room and stay there until they argue this out and reach a solution. That’s what grown-ups do,” said Patterson. That’s what lawmakers did in the 1990s, she said, when the city faced an even more difficult fiscal crisis; at the time, she was the Ward 3 councilmember.
However, there is a major obstacle to that problem-solving strategy, Patterson said: “These folks don’t talk to each other.
“How do you run a government if you’re not talking to each other?”
How, indeed?
jonetta rose barras is an author and DC-based freelance journalist, covering national and local issues. She can be reached at thebarrasreport@gmail.com.