DC Has a Surplus and a Deficit? What the Heck is Going On?

The Numbers

People who follow DC policy and politics have the right to be confused by seemingly contradictory news about the city’s finances: The District announced a $200 million surplus, yet there are also reports focus of a looming $240 million budget shortfall. This prompted one astute reader to ask several important questions that deserve answers:

  • How does the District seem to have both a surplus and a deficit?
  • How can a thriving city not have enough taxes?
  • Do we have problem with income or expenses? How is DC’s revenue generated, anyway?

There are reasonable answers to these. Partly it is a matter of timing – the surplus was in 2014 but the shortfall is expected in 2016. Also, DC sets its budget based on projected tax collections that are notoriously hard to predict, and this year some of the projections were off. A third answer is that any jurisdiction, no matter how poor or how wealthy, can find its budget out of balance because things can change from year to year, both on the expense side and the revenue side of the ledger.

Despite the confusing information, DC’s finances are pretty healthy, with more money in the bank than ever before and tax collections that are growing. The shortfall results from a handful of factors that are not cause for alarm. Mayor Bowser will have to work to address the shortfall before she submits a budget in early April, but my prediction is that she will not only be able to fix this problem, but also find money for important campaign promises, such as affordable housing.

Mayor Bowser will make her decisions over budget priorities in March. If you are a parent concerned about education funding, wondering why rec centers are closed on Sundays, hoping the city will address homelessness, or otherwise concerned about the DC budget, now is the time for you to speak up and get involved!

The Budget Surplus Was So Last Year

A surplus means that the District took in more money than it spent last year. That can happen for two reasons: either DC collects more tax revenue than expected or government agencies spend less than what they were budgeted. The District’s recently announced $200 million surplus in 2014 was due to the latter; collectively DC government departments spent much less than what the Mayor and Council allowed them to. 

Since the surplus is a look into the past, it does not say a lot about the future state of the District’s budget or economy. The surplus was in 2014, while the budget shortfall is for 2016, and a lot can change in two years. 

What’s more, surpluses caused by underspending are not necessarily a sign of great financial health. To understand, think about how families spend their money. A high-income household can run a “deficit” if it takes a lot of vacations and eats at a lot of nice restaurants without paying careful attention to its bank statements, while a lower-income family could end the year with a “surplus” if it is very careful with its spending.

In other words, a year-end surplus is more a matter of financial management than an indicator of wealth. 

One key question, though, is what Mayor Bowser and the DC Council will do with the surplus. The city has piled up over $1 billion in surpluses over the last four years, bringing savings (known as “fund balance”) to the highest level on record. The surplus offers a great opportunity to invest in things that will help DC residents and make the city stronger, such as replacing the DC General shelter or buying more technology for schools.

The mayor and council will need to take special action to do that, however, because current law requires every dollar of surplus to be saved in reserves. At a time when the city’s savings are at a record level and resident needs are great, using a portion of the surplus for other needs is a prudent move. 

The 2016 Budget Shortfall: How Can a Thriving City Not Have Enough Taxes?

The District faces a $240 million shortfall for 2016. Unlike the surplus, which is based on past, the shortfall is based on projections of the District’s future ability to pay for services like health care and schools. Those costs tend to rise from year to year, due to health care inflation, rising school enrollment, pay increases for DC workers, and other factors. 

City leaders have known since last year that the trajectory of expenses would outpace revenue growth. The initially predicted shortfall equaled about 2 percent of the city’s budget, which is not an enormous amount. 

But the shortfall got bigger when the city’s Chief Financial Officer revealed that revenues from three sources are coming in lower than previously thought. DC’s traffic cameras are not fully operational and so are generating less money than hoped. The city’s income tax collections are growing, but less than expected because residents are claiming less in capital gains than expected. 

Does DC Have Income Problem? Does It Have a Spending Problem? 

If the city faces a budget shortfall, there must be a problem on the spending side or revenue side, right? Not necessarily.

Each of DC’s three main tax sources – property, income, and sales – will grow at a respectable rate of four percent next year. This reflects underlying economic strengths: a population that continues to grow, more DC residents with jobs, and more occupied office space. (This doesn’t mean everything is rosy. The federal government, the major driver of our economy, is shedding jobs and reducing contracting, which is something that will affect all of us over time.)

There are no major problems on the spending side, either. The city’s expenses continue to grow, though not at an eye-popping rate. The city has chosen to make major investments in a number of areas, but these are long-standing policies. This includes improving DCPS buildings and paying teachers more, supporting a robust charter school sector, having more police per capita than other cities, and covering one of three residents with health care programs for lower-income residents.

In the end, the reasons for DC’s current budget shortfall are more mundane and largely reflect the fluctuations in both revenue and expenses that all cities and states face. It just happens that a few things have broken the wrong way in the past year. It’s a bit like having a year where you needed to get a new car and replace your roof, but your boss didn’t give you a raise.

Bowser’s First Budget Is Still a Chance to Make Important New Investments

While Mayor Bowser faces a challenge to balance her first budget, which will be submitted in early April, residents should not worry that large cuts are coming to services they care about. In fact, Mayor Bowser should still be able to keep campaign promises. How can she do that?

The mayor could find savings that don’t require cutting services, which happens to some extent every year. For example, agencies sometimes plan to hire new staff and a start a new project but then decide that they no longer needs to hire quite as many people. Beyond budget savings, the mayor will probably find unexpected resources to pay for some bills. She could decide, for example, use some of the $200 million surplus to meet its needs next year. 

That means residents who care about particular city services should not give up hope. Chancellor Henderson is warning that the DCPS budget may be flat next year, but parents could advocate to make sure schools get at least a cost-of-living adjustment. Those concerned about rising homelessness should continue to press Mayor Bowser for a solution. And advocates for keeping DC affordable to all residents should urge the mayor to keep her promise to invest $100 million in the city’s housing fund.

In other words, if you care about how the city spends its resources, and you’ve got some great ideas, now is the time for you to let your voice be heard. 

Lazere is executive director of the DC Fiscal Policy Institute (www.dcfpi.org). DCFPI promotes budget and policy solutions to reduce poverty and inequality in the District of Columbia, and to increase the opportunity for residents to build a better future.  

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