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JUNE 23, 1999, WEDNESDAY

SECTION: IN THE NEWS

LENGTH: 1682 words

HEADLINE: PREPARED TESTIMONY OF
VALERIE HOLT
CHIEF FINANCIAL OFFICER
GOVERNMENT OF THE DISTRICT OF COLUMBIA
OFFICE OF THE CHIEF FINANCIAL OFFICER
BEFORE THE HOUSE APPROPRIATIONS COMMITTEE
SUBCOMMITTEE ON THE DISTRICT OF COLUMBIA
SUBJECT - FY 2000 BUDGET HEARINGS
FOR THE DISTRICT OF COLUMBIA

BODY:

Good Morning, Chairman Istook and members of the House Appropriations Subcommittee, thank you for the opportunity to appear before you today to present the District's Fiscal Year 2000 Budget and Out-Year Financial Plan.
Public Law 104-8, the District of Columbia Financial Responsibility and Management Assistance Authority Act, requires the District to address dual challenges. First, the District must balance its budget for four consecutive years. A second, broader goal is to have in place a management structure and operating processes to support effective and efficient service delivery. The District is on target to achieve its fourth consecutive balanced budget in FY 2000. We now must focus on the broader based goals of managerial reform coupled with continued financial progress; an emphasis on improving government services, expanding the economy and enhancing the District's fiscal health through the institutionalization of proven financial processes.The FY 2000 Budget and Out-Year Financial Plan takes a step forward toward the hallmark of any well run government: that point at which economic policies are geared to compete for new residents and the tax base is matched with service delivery goals to better serve all citizens. The FY 2000 Budget and Financial Plan incorporates the following strategies to meet this goal.
Debt Restructuring
The District plans to restructure a portion of its debt to take advantage of the substantial opportunity to invest in initiatives that will accelerate infrastructure improvements and expand the local economy. Currently, the District's debt is excessively front-loaded, with future capital borrowing increasing the projected debt service. The debt restructuring, by providing more capacity to invest in capital improvements, enhancing budgetary flexibility, creating near- term cash flow relief and decreasing the debt service burden, offers the District both programmatic and financial advantages.
The debt restructuring facilitates prudent debt management and reflects the District's recent success in broadening the funding sources supporting the CIP, including Barney Circle monies, Sallie Mae funding, equipment lease, increased ISTEA (T-21) contributions for the METRO joint venture and intermediate (10-15 year debt) financing. It also reflects the benefits of the Revitalization Act which eliminated the unfunded pension liability and eliminated the necessity of front loading our debt.
Further, the debt restructuring has been received favorably by the rating agencies as demonstrated by the fact that, as of last week, all three rating agencies had upgraded the District's bonds to investment grade. These upgrades will provide the District with lower interest rates in the future; thereby freeing up more funds to invest in our community.
Tax Restructuring
The second strategy is to restructure the District's taxes. Analysts have long agreed that the District's high tax rates required revision. In fact, District tax burdens are the highest in the region on commercial real property, corporate income, retail sales and utilities. The District, when compared with the largest city in each of the 50 states, has the 14th highest tax burden for a family of four at the $50,000 income level.
Total District taxes are 35 percent higher than Montgomery County and 22 percent higher than Prince George's County. Certainly, these comparisons are not absolute, since the District performs some state and county, functions, as well as city responsibilities; they do show the need for the District to have a tax structure that is more competitive with its neighbors.
The pivotal issue for restructuring the District's tax base is how much, when and what tax? The consensus budget process delivered an agreed upon scenario for these questions.
The FY 2000 Budget and Financial Plan reflects a tax reduction that will be implemented over the next five years, beginning with a $59 million total reduction in FY 2000 and including $135 million in 2001, $186 million in 2002 and $226 million in 2003. These reductions will affect taxes on individual income, personal property, business franchises, and other areas in an effort to stimulate economic development and bring the District's tax structure in line with those of neighboring jurisdictions.
The key provisions include:
- Increasing the filing thresholds on the personal property tax and Arena Fee so that fewer businesses would pay each of these taxes.
- Accelerating the depreciation of computer equipment under the personal property tax.- Changing the net operating loss deduction to assist start-up businesses and eliminate carryback of losses.
- Eliminating the sales tax of 5.75 percent imposed on Internet access.
- Reducing real property tax classes and tax rates (hotel rate reduced from $1.54 to $0.96, commercial property rate reduced from $2.15 to $1.85, vacant property rate reduced from $5.00 to $1.85).
- Lowering corporate and unincorporated business franchise taxes (from 9.975 percent to 8.5 percent).
- Lowering individual income tax rates and increasing the top bracket from $20,000 to $40,000 ($1 to $10,000 bracket from 6 percent to 4 percent; $10,000 to $40,000 bracket from 8 percent to 6 percent; over $40,000 bracket from 9.5 percent to 8.5 percent).
The Reserve
Finally, the budget includes the $150 million reserve required by the Congress, for each fiscal year beginning in FY 2000. This reserve serves to protect the District against future unforeseen expenditures and revenue shortfalls. The District will spend the funds in such a way that an appropriate balance is available in the first, second and third quarters to assure balance between revenue and expenditures at the end of FY 2000. The Authority and Chief Financial Officer, in collaboration with the Mayor and the Council, have established criteria regarding the reserve. The criteria ensures budget balance in case of a shortfall in revenue and funds such expenditures as non- recurring initiatives that support sustainable and measurable increases in revenue, that enhance service delivery, that reduce costs, that are unforeseen or unforeseeable demands on District spending, or that constitute an investment in fostering the District's economic well being. In the FY 2000 and OutYears Financial Plan, the District maintains a portion of the reserve to cover any unrealized savings projections. The reserve is also sized to appropriately reflect the District's fund balance and resource requirements.

The adjustment to the reserve reflects prudent fiscal planning and responsibly balances the need for conservative and prudent budgeting by not including significant "one-time" spending items year after year, but investing in needed service delivery and tax relief.
Economic Outlook
Of course, the District's ability to sustain fiscal balance will continue to be influenced by the United States economy.' The United States is enjoying the longest peacetime economic expansion in its history, and the District of Columbia is sharing in that prosperity. Improved tax collections and a strong economy led to the District's record $445 million excess of revenue over expenses in FY 1998. The budget improvement experienced by the District parallels comparable improvements all across the country - 46 states had excess revenues in FY 1997 and even the federal government enjoyed a surplus in FY 1998.Underlying strength in the economy and continued improvements in tax collections bode well for continued revenue growth.
Against the backdrop of a strong national and regional economy, the District of Columbia's economy is forecast to show steady growth in FY 1999 and FY 2000. Although at rates below the preceding two years, the District is expected to have some small increase in employment. In addition, the population decline has abated. Between 1990 and 1997, the District's population declined by 12.6 percent. Between 1999 and 2004, it is estimated that the population will decline by less than one percent.
Growth in the real estate sector should also continue to sustain our economy. In 1998, over 3 million square feet of new office space were added, while the vacancy rate declined 2 percent from the 1997 level of 9.2 percent. In addition, 32 percent of available residential inventory was absorbed in 1998. Moreover, housing sales in the District are up 35 percent over 1997. In fact, realtors are currently saying that if a house remains on the market for more than one week it is not properly priced.
In looking further ahead to the years 2001 through 2003, the key economic issues are how much the national economy can continue to expand and the extent to which the District's economy will reflect national trends.
These conditions enhance our ability to improve service delivery, reduce costs and stimulate economic development. We, in the District, must continue to make fiscally prudent decisions in order to realize the benefits of a healthy economy.
Conclusion
Over the next two years, the District should move forward to more traditional government operations. During this period, the District must achieve the right balance of authority and support as it evolves from its current control structure. In doing so, we must remain committed to sustaining the financial and service delivery gains achieved over the last three years, which include more accurate budgets and revenue forecasts; restored credibility in the financial markets; and improved expenditure control, cash management and financial reporting.
The FY 2000 Budget and Out-Year Financial Plan is an ambitious effort and will require commitment from the Mayor, the Council, the Authority and staff to achieve the right results. We must all continue to understand that the District is competing to attract residents, businesses and jobs, well into the next millennium. Our best chance to successfully compete is to work together to provide affordable services and equitable taxes. The FY 2000 Budget provides the framework for meeting these challenges.
END

LOAD-DATE: June 30, 1999

Document 78 of 133.


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