Greater Greater Washington

Budget


Budget released; good for transportation, worse for others

DC Council Chairman Kwame Brown released his proposed budget last night. Many transportation priorities will get funded, despite removing graduated RPP. The income tax is replaced with a tax on out-of-state bonds. And many services for the less fortunate remain in limbo.


Photo by quotlumen on Flickr.

Brown's budget proposal maintains transportation programs funded in Mayor Gray's budget and Tommy Wells' additions. Streetcars still get $100 million of capital dollars, $25 million this year. Capital Bikeshare gets $2 million for 40 more stations, meaning DDOT will need your ideas at tonight's meeting to add to locations already proposed.

Metro also gets the money it needs to avoid almost all service cuts. With Maryland and Virginia already ready to contribute, DC's decision should ensure that weekend Metrorail headways don't increase and some bus lines won't get cut, like the E6, whose riders rallied strongly for the line. The N8 and K1 lines are still slated for elimination.

Wells' other measures to fund green alleys, add a few key jobs including a parking manager to DDOT, and keep the Circulator fare at $1 all remain. RPP fees will go up to $35 per car, but will stay flat regardless of how many cars each person owns.

Where does the money come from? Mayor Gray's budget shifted a lot of jobs from the capital to operating budget, mostly in DDOT and OCTO. Doing this saves money in the long run, since capital spending is paid for by borrowing, and that costs interest. Brown's budget reduces this shift, but would put back $21.567 million for it if future revenue estimates come in higher than current estimates, as everyone expects they will.

Some revenue measures proposed by the Mayor remain, including combined reporting, raising the parking tax from 12 to 18%, and allowing liquor sales until midnight. The sales tax on theater tickets and live entertainment events is gone, but sales taxes on armored car services, private investigators and security services remain.

The biggest tax increase, the income tax bracket on people making over $200,000 (which was very popular with DC residents), is gone as Kwame Brown promised. But he's replaced it with another tax measure, removing the exemption for out-of-state bonds that only DC and Indiana offers.

Bringing DC's tax treatment of bonds in line with 49 50 other states makes a lot of sense. Still, replacing the income tax for this is less progressive; the Fair Budget Coalition says ¾ of the savings goes to people making over $200,000, meaning ¼ of this measure will hit households with lower incomes. The proposed income tax, on the other hand, would have only affected those making more than $200,000 and really only strongly affected those making significantly more.

In the past, many councilmembers have opposed the bond measure. Brown seems to be seeking their support by offering to repeal part of this exemption with potential future revenue estimates. However, any repeal would only apply to bonds purchased before October 1, 2011. Any bonds bought after that are going to be taxed regardless, at least unless the Council passes a separate tax repeal before next year.

There's a long list of priorities for what to buy if there are indeed rosier budget outlooks from the CFO's office in coming months. After the $21.567 million for the capital to operating shift, 50% of any additional money would replenish DC's reserve fund and the other 50% would pay for a number of other items.

The table below lists the items and by how much the revenue outlook has to increase in order for that item to get funded under Brown's formula.

ItemCostTotal revenue
increase needed
1. Hiring more police$10.8$43.2
2. Housing First (homeless services)$1.6$46.4
3. Housing Production Trust Fund (affordable housing)$12.0$70.4
4. Mental illness services (housing and children's services)$5.5$81.4
5. Restoring bond exemption for pre-10/1/2011 bonds$13.4$108.2
6. Keeping MLK Library open on Sundays$0.3$108.8
7. Commercial Revitalization Program (Main Streets)$1.8$112.4
8. Parking rates lowered to $1/hr in busiest areas$3.0$118.4
9. Buying books for libraries$1.4$121.3
10. Early childhood education$2.0$125.3
All figures in millions.

The housing for homeless (#2), bond exemption (#5), and parking meter reduction (#8) only kick in if all the revenue is available to fully fund that particular item; if not, the funding goes to the next priority. That means if the future estimate is $90 million more, as Jack Evans predicted, then the money would go to police, homeless, affordable housing, mental illness, (skipping the bonds since it's not enough), the MLK library, Main Streets, (skipping parking), and then buying books. That would be an irony if Evans' guess is right and it means his priorities, the ones that just lower revenues, all get skipped.

Parking rates would decrease if revenue estimates grow by $91.6 million to $108.1 million (which doesn't fund the bond repeal), or $118.4 million or more (which does). Nobody knows what the revenue estimate will be, but Evans' guess of $90 million was seen as high last week. Kwame Brown guessed $20-60 million, which might not be enough to pay for any of these priorities, or might be enough just to fund police and restore some homeless services and a tiny bit of the affordable housing.

This budget isn't bad, but the Housing Production Trust Fund and other programs deserve to be saved even without such extreme jumps in the revenue outlook. Housing First saves the District money by housing homeless people who would otherwise end up in expensive emergency rooms, and the HPTF builds housing including in parts of the city where there's vacant land that the market can't otherwise fill with units for people who might live there.

Brown could keep the income tax hike or just repay the reserve fund less aggressively. While it's great to build up the reserve, it's also important to invest in programs that help save DC money in the long run and keep our city a diverse place with people of many different income levels.

Updates: A few details to note:

  • Indiana has eliminated their exemption for out-of-state bonds, leaving DC as the only "state" with the rule.
  • As with all non-emergency, non-temporary legislation, the Council has to pass this on two readings. The first will be today, the second June 14.
  • Weekend and evening parking will not be changed under Brown's proposal.
David Alpert is the Founder and Editor-in-Chief of Greater Greater Washington and Greater Greater Education. He worked as a Product Manager for Google for six years and has lived in the Boston, San Francisco, and New York metro areas in addition to Washington, DC. He loves the area which is, in many ways, greater than those others, and wants to see it become even greater. 

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Just want to add that today is the first reading of the budget. There will be minor changes as Council continues to deliberate. The last vote is June 14. The budget is then prepared and transmitted to Council, probably in July.

by Randall M. on May 25, 2011 8:02 am • linkreport

Shame about the income tax. Badly needed. And again, the big problem with the DC income tax is the max rates kicks in too low.

As much as in pains me to say this, LOWERING the rate to $1 in "busiest" areas might not make sense. The problem isn't the "busiest" areas, but a lot of areas around downtown that are included in the highest rate band.

Do we need more police? I thought DC was the safest in 40 years?

And what about weekend/evening parking?

by charlie on May 25, 2011 8:09 am • linkreport

Indiana is eliminating the bond tax exemption, so we may be on our own in allowing this loophole if, as I fear, the council doesn't get rid of it or brings it back as they did in 2002. Chairman Brown lists restoring the exemption as fifth in the priorities for using any extra revenue. Why should a loophole no state has be on the list of priorities at all. Extra revenue should be used for restoring service cuts.

by Keith Ivey on May 25, 2011 8:23 am • linkreport

I'm not understanding the position that priorities #2, 5 and 8 are in. What does it mean that HousingFirst, the Bond Exemption and parking rates at #2, 5 and 8? If none of these 3 get funded unless there is funding for the other 7, shouldn't they be #8, 9 and 10?

by Ken Archer on May 25, 2011 8:33 am • linkreport

Is there any possibility of finding something else to illustrate the article with? Using a graphic that looks representational but which is, in fact, unrelated to the article is both confusing and misleading.

Beyond this, the graph itself has many faults: unnecessary and confusing perspective, uneven x-axis spacing, and displacement of the y-axis so as to hide the zero. In short, it's an awful graph, and the fact that it's unrelated to the article is all the more reason to scrap it as an illustration.

by Craig on May 25, 2011 8:34 am • linkreport

The problem with the out of state bonds issue is manifold:

1) People bought these bonds with a set of rules in place; to change it now is poor governance;

2) This affects mostly seniors who have invested in these instruments and depend on the income to live.

3) DC doesn't have enough latitude as a state to develop and sell a variety of bonds to provide for appropriate investment options. IF DC had a plethora of bond offerings for its residents to invest in, the "loophole" wouldn't be necessary.

This item has been defeated in the past, and should be again this time. The trivial income tax increase is a much better policy that has widespread support. It is the policy proposed by the Mayor and is the one that should be implemented.

by William on May 25, 2011 8:35 am • linkreport

Ken: Sorry if that is unclear. 2, 5, and 7 don't get funded only if there is money for the others. It's just that they only get funded if the money available fully covers that aprticular item. So if the budget outlook improves by more than $43.2 million but less than $46.4 million, there is enough to do #1 and start on #2 but not enough to do all of #2. Instead of partially funding #2, the excess would go to #3. But if $46.4 million or more is available, #2 gets funded ahead of #3.

by David Alpert on May 25, 2011 8:40 am • linkreport

@William; how much income are we talking about here? I mean if I am generating $15,000 in income on out-of-state bonds, that would mean i am holding close to $300,000 in bonds, no? Sorry, I don't have any pity for that grandmother.

What I don't get is how that tax revenue could be even close to increasing the rate on 200K + incomes.

by charlie on May 25, 2011 8:44 am • linkreport

Why is there nothing about K-12 education (Early childhood is pre-K)?
While it is fine and dandy having a great streetcar and bikeshare system, investing in students is investing in the city's future.

Please, ask your councilmember to increase funding to our schools.

by thedofc on May 25, 2011 9:11 am • linkreport

Please, ask your councilmember to increase funding to our schools.

It's not at all clear that the problems facing DCPS are with overall funding versus the allocation of existing resources. Investing in streetcar, bikeshare, and other quality of life issues that sustain the city are just as important in improving the overall health of the city.

More middle-class residents means a healthier DCPS.

by oboe on May 25, 2011 9:22 am • linkreport

Looks like the more police item is priority and killing performance parking is low priority.

I wonder if Jack and the Ward 3 beholden CM's will balk about the parking or if the public show was good enough for them. People were hired for the evening shifts on parking and if it's ever abandoned some use will have to be found for them.

Other than politics I don't see why some of these are on a list, especially restoring bond exemption.

by Tom Coumaris on May 25, 2011 9:23 am • linkreport

Housing First saves the District money by housing homeless people who would otherwise end up in expensive emergency rooms...

I've heard good things about programs like Housing First, but almost nothing about DC's implementation. Is there any chance of an article on GGW (or a link to elsewhere) that gives a comprehensive overview? (Who's served; how it compares to similar programs in the country; etc, etc...)

by oboe on May 25, 2011 9:25 am • linkreport

I suggest you correct the municipal bond sentence to "most states" as some do exempt out-of-state municipal bond interest. Utah doesn't tax, for example, if the issuing state exempts Utah bonds.

Some states don't have income taxes (Alaska, Florida, Nevada, South Dakota, Texas, Washington, and Wyoming) and therefore don't tax municipal bonds. Some states don't have income taxes but do tax interest. This is getting more complicated. Better to just say most states don't treat out-of-jurisdiction municipal bond interest as tax-exempt. Oh the joys of SALT. On to my main point...

Metro also gets the money it needs to avoid almost all service cuts. With Maryland and Virginia already ready to contribute, DC's decision should ensure that weekend Metrorail headways don't increase and some bus lines won't get cut.

I hope highlighting this issue shows why Metro needs a dedicated source of operating funds. Forecasts based on last minute budget battles are no way to run a railroad.

by WRD on May 25, 2011 10:34 am • linkreport

@Charlie

You have no sympathy for the elderly couple living on $15K a year plus social security? Thats barely middle class. Also, unless you reinvest some portion of your $15k in interest, the purchasing power of your income will erode over time so you are really talking like $12k in usable income before taxes.

by Falls Church on May 25, 2011 10:35 am • linkreport

This recent development in the Metro budget comes as exciting news for DC Metro residents all over the area. Although any cuts to area bus transit are unfortunate, we are happy that the cuts were kept to a minimum, as well as very enthused by the decision to not extend wait times between Metro rail services!

by Garrett- Sierra Club Intern on May 25, 2011 10:41 am • linkreport

@ Falls Church; I have plenty of sympathy for an elderly couple living on 15K income + Social security.

I don't have much for an elderly couple with half a million in tax exempt bonds + social security.

That bond income will remain tax free from the feds, and even with social security, your hypothetical couple would NOT being paying anything in DC tax.

by charlie on May 25, 2011 10:42 am • linkreport

Sorry, what? The meter reduction thing is insane. There are thousands of things that the money could be better spent on.

Raise the rates, I say.

by andrew on May 25, 2011 11:02 am • linkreport

Where does the money come from? Mayor Gray's budget shifted a lot of jobs from the capital to operating budget, mostly in DDOT and OCTO. Doing this saves money in the long run, since capital spending is paid for by borrowing, and that costs interest.

How can you shift efforts from 'capital' to 'operating'. The distinction between the two isn't where the money is sitting but rather what is intended to be done with that money. For example 'repairing a roof' is an operating expense if you don't expect that repair to significantly extend the life of the roof. 'Replacing a roof' is a capital expense because you know have a new capital asset, a roof, to place in you capital assets account to start depreciating for its expected life.

For Gray to be shifting efforts from capital to expenditures he'd have to be changing the nature of what was being done. E.g., Instead of replacing roofs (capital expense) he'd need to be repairin roofs (operating expense.) Is that what was occuring ... or is the District so messed up in its accounting that it doesn't abide by this very fundamental accounting rule? And if it doesn't abide by this accounting rule, what other rules is it just ignoring?

by Lance on May 25, 2011 11:14 am • linkreport

Lance: The question is whether to pay for a position out of capital or operating. If you have a DDOT engineer who works on capital projects, but is employed full time and works on various projects from year to year, do you pay them as a staff member like your other staff out of the operating budget, or do you pay them using some of the capital dollars as part of the project? Some contractors get paid out of capital regardless.

by David Alpert on May 25, 2011 11:29 am • linkreport

@David If you have a DDOT engineer who works on capital projects, but is employed full time and works on various projects from year to year, do you pay them as a staff member like your other staff out of the operating budget, or do you pay them using some of the capital dollars as part of the project?

That gets answered by very clearly laid out rules in GAAP (Generally Accepted Accounting Priciples). My point is that if the Council is moving $ around here without changing the type of work done, they are either not minding the rules ... or clearly ignorant of them.

by Lance on May 25, 2011 11:40 am • linkreport

Incidentally, I think the answer to your specific question is that he needs to be paid out of Capital funds because his work is to increasing the capital assests of the district ... and not operating or maintaining them.

by Lance on May 25, 2011 11:43 am • linkreport

@Charlie

What matters is not the absolute value of your nest egg but the amount of sustainable income you can produce from it. Even if an elderly couple had a $500K nest egg, the sustainable amount of income from that would be less than $20K. That would mean they could spend $20K a year (plus inflation adjustment) from their nest egg from age 65 to 95, at which point they would be left with nothing. So, this theoretical couple would not be living on much even after adding in Social Security.

I don't know whether DC taxes Soc Sec but it is often federally taxable. It's also worth noting that the theoretical couple paid taxes on the income they generated to save up the $500K and social security itself is a tax.

The bottom line is that $500K in savings sounds like you're rich but it only allows for a very modest middle class lifestyle if you're retired. How much money do you think you need to save to have a middle class retirement?

by Falls Church on May 25, 2011 11:58 am • linkreport

@FallsChurch; I'm not arguing what level of income, I'm talking taxation. You clearly don't understand the difference.

15K of interest income + 24K of social security (for two) = 40K income.

That is 24K of federal taxable income. DC doesn't tax SSN income. So that is 15K of income, or $640. I'm not even factoring in any state deductions.

So, a very small amount. As I said, the real issue is who has such large amounts of interest income that this tax even makes sense?

And again -- if you've got 500K in interest free bonds at retirement, you're doing OK. Not great, but OK.

by charlie on May 25, 2011 12:08 pm • linkreport

Charlie, if you have a 401k or other retirement account and when you turn 67, the city government decides to retroactively tax your account so you only have 60-75% of what you thought you had, that would be unfair, wouldn't it? It doesn't matter how much is in your account, but you were counting on the rules at the time that you invested in the 401k for your retirement.

This is what is happening now. People made decisions based on rules, and our government is changing the rules with little notification or ability for input, particularly to a segment of the population least likely to be reading this blog or following the proceedings on twitter.

Bad government, bad policy. Shouldn't happen, at least not this way and not retroactively. If the Council wants to pass legislation taxing the income for bonds purchased after October 1, 2011, then I would have no issue with it.

by William on May 25, 2011 12:26 pm • linkreport

@ Lance and David Alpert--

Governments don't follow GAAP. They follow their own Government GAAP issued by the GASB, not the FASB.

Although the "correct" (GAAP) answer to the question about the DOT worker--

If he's working on a project that extends the life of an asset, his time should be allocated to that project, capitalized, and paid for by the capital budget. Otherwise, his salary is operating and should be expensed as incurred.

by WRD on May 25, 2011 12:31 pm • linkreport

@oboe -here's an article in the WaPo from 2008 about DC's Housing First program
http://www.washingtonpost.com/wp-dyn/content/article/2008/10/19/AR2008101901420.html

by Tina on May 25, 2011 12:44 pm • linkreport

@William; apples to oranges. What is being taxed is the interest, not the principal. You always have the option to convert that to a higher yielding instrument if you think that's a problem. After all, if you've been buying tax-exempt bonds for your 401(k) then you are already bona fide stupid.

And you don't understand marginal rates. Exactly how many households in DC are earning enough in tax-free interest income is going to bump them to a much higher rate?

I think you need both -- an income tax on 200K+ income, and this tax on out of state bonds.

by charlie on May 25, 2011 12:51 pm • linkreport

@WRD, thanks for concurring. I find it kind of frightening that our city leaders think they can just 'reclassify' a payment ... and all is fine. There are reasons why certain expenses get classified as capital expenses and others as operating expenses ... and they all have to do with sound economic planning. If you don't even understand the difference in why one thing gets classified as a 'capital expense' and another as an 'operating expense', then how can you possible execute sound economic planning? You're either not even bothering to do so (which would require being able to agregate and classify your capital vs. operating expenses) or your doing so with faulty data if you're (for example) sticking a capital expense (the engineer's salary) into an operating expenses bucket. While I maybe wouldn't expect your average elected official (who's usually a lawyer and not a business person) to know the difference, I would expect their staffs and others in the district to be educating them on this.

by Lance on May 25, 2011 1:13 pm • linkreport

Charlie, I do not know the threshold - this hasn't been vetted so it is unclear exactly what the Council is proposing to tax. A tax on income from bonds doesn't parse a threshold.

I wasn't talking about bond investments within a 401k, I was talking about changing the rules on a 401k so the individual is retroactively penalized. It is not apples to apples. There are residents in the city who have been advised (rightly) by financial planners to move to stable bond investments as they age and prepare for retirement. These are former civil servants, middle and yes, if we have to play class wars, upper class residents. They have depended on a certain set of rules to make their retirement decisions, which the Council has just undermined.

I ask again, if you find out when you are 67 that the Federal Government has suspended social security benefits, medicare/medicaid benefits and decides to tax your 401k at 25% (just using a number here), how will you feel?

by William on May 25, 2011 1:42 pm • linkreport

@Lance--

Governments have different rules than private (that is, publicly-traded) companies do.

The distinction between operating and capital budgets at the state and local level isn't very useful, in my opinion. Money is fungible, why have different budgets? The government has certain expenses they want/need to pay for. Categorizing them correctly is important for decision-making (and what's called "presentation") but the strict difference between the two budgets is political, not economic. Perhaps it's a useful political constraint to require a balanced operating budget, but that's beyond the scope of this discussion.

Fair warning here: although I am a financial accountant, I don't have any professional experience with governmental financial statements.

by WRD on May 25, 2011 1:59 pm • linkreport

@ William--

They have depended on a certain set of rules to make their retirement decisions, which the Council has just undermined.

Yes, they made decisions based on certain assumptions. However they were certainly aware the Government could change the rules at any time. It's a risk everyone knows. By your logic, the government couldn't change any rule because there were people who relied on the existing rule. No one is promised a certain tax policy forever, only until the government changes its mind.

I do agree the government should take this into account when making policy. But they don't have to.

Perhaps the best policy is one of reciprocity. If a state allows their residents to purchase tax-exempt bonds issued by DC, DC should allow our residents to purchase that state's tax-exempt bonds.

by WRD on May 25, 2011 2:05 pm • linkreport

@WRD, I don't disagree with your assessment, but I was just pointing out to @charlie why some segments of the DC taxpaying segment might be upset about this vote. Yes, tax policy can change, but this is a pretty significant one for retirees, particularly since DC doesn't issue a pantheon of bonds that local residents can invest in. That is why the tax-free rules were created.

If DC somehow can justify issuing a wide variety of bonds for the DC public to invest in, it wouldn't be an issue. It doesn't, so it limits retirement planning choices for the residents of the city, who otherwise contribute in other wise (income tax, sales tax, property tax) without burdens of say, school age children, etc.

by William on May 25, 2011 2:16 pm • linkreport

@ William; I can see why segments of DC taxpayers are upset. But how big is that segment, and how upset are they.

Let's say I have a million dollars in tax free bonds. That is about 50K in tax free income a year for DC and no other income. Under this new rule, you are talking about $3000 in taxes.

And again, I don't know many lower-middle class families with a million dollars in bonds.

DC council is saying they can raise $14M on this. I don't think they can.

by charlie on May 25, 2011 2:33 pm • linkreport

No one is promised a certain tax policy forever, only until the government changes its mind.

I do agree the government should take this into account when making policy. But they don't have to. Right, and the Supreme Court doesn't have to based their decisions on precedent but it's good policy for them to stick to precedent in virtually all cases but a few.

The point is that states payer a lower interest rate on their bonds because they are tax free. So, the tax is basically implicit in the interest rate. Rather than pay someone 10% interest and tax 30% of it so they are left with 7%, they say, we'll just give you 7% tax free. So, to say they are paying no taxes on the interest is technically true but they are receiving proportionally less interest.

Of course, since we're talking about out of state bonds, the beneficiaries of paying a lower interest rate are other states. Hence, I would agree with the above reciprocation idea.

by Falls Church on May 25, 2011 5:15 pm • linkreport

GGW - thanks for a great budget summary. I wanted to point out that restoring the mental health funds, like Housing First, prevents the city from incurring more expensive costs.

If the cuts to mental health services caused just 11 more children to enter residential treatment centers -- like those featured in the City Paper's cover story this week -- then the city would have spent more money than it saved from the cut.

Because community-based treatment is cheaper AND more effective, we're pleased that restoring mental health funds was prioritized.

by SH on May 26, 2011 8:44 am • linkreport

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