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.
| Item | Cost | Total 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 |
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:
 | 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.   |
Comments
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by Randall M. on May 25, 2011 8:02 am • link • report
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 • link • report
by Keith Ivey on May 25, 2011 8:23 am • link • report
by Ken Archer on May 25, 2011 8:33 am • link • report
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 • link • report
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 • link • report
by David Alpert on May 25, 2011 8:40 am • link • report
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 • link • report
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 • link • report
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 • link • report
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 • link • report
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 • link • report
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 • link • report
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 • link • report
by Garrett- Sierra Club Intern on May 25, 2011 10:41 am • link • report
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 • link • report
Raise the rates, I say.
by andrew on May 25, 2011 11:02 am • link • report
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 • link • report
by David Alpert on May 25, 2011 11:29 am • link • report
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 • link • report
by Lance on May 25, 2011 11:43 am • link • report
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 • link • report
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 • link • report
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 • link • report
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 • link • report
http://www.washingtonpost.com/wp-dyn/content/article/2008/10/19/AR2008101901420.html
by Tina on May 25, 2011 12:44 pm • link • report
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 • link • report
by Lance on May 25, 2011 1:13 pm • link • report
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 • link • report
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 • link • report
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 • link • report
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 • link • report
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 • link • report
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 • link • report
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 • link • report
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