D.C. Faces $95.8 Million Budget Gap

WASHINGTON - The District is joining its neighbors in Virginia and Maryland as another local government facing a huge budget shortfall.

Natwar Gandhi, the District's Chief Financial Officer, informed City Council members that the city has a projected $95.8 million revenue gap.

At their monthly breakfast meeting with Mayor Adrian Fenty, Council members sat silently as Gandhi presented the numbers.

"In general, the District's revenues still look quite good," Gandhi said Wednesday morning. "It's not a dire scenario. We don't have a recession. This is not a worse-case scenario. This is a simple slowing of the economy. The bottom line is about a $95 million gap."

Gandhi pointed to a combination of factors that have caused the projected shortfall, including a drop in sales and income tax revenues caused by a reduction in capital gains.

That alone will cost the city $62.5 million. The impact of "policy changes included in the fiscal year 2008 budget" will reduce revenues by another $14.8 million.

But at the Council briefing, Gandhi breezed over another item that will have a negative impact on the District's finances.

Last month, the Council and the Mayor approved a new calculated rate for commercial property taxes. The new rate was intended to give small businesses tax relief from rising property taxes.

The calculated rate decreases the amount taxes property owners pay in direct proportion to their property assessment. So, as assessments go up, the tax rate goes down. The problem is the assessments went up so fast it caused the rates to drop in half, creating a $95.7 million revenue reduction, Gandhi says.

In January, Ed Lazere with the D.C. Fiscal Policy Institute warned that the new calculated rate could create a budget gap of between $65 and $130 million. Lazere's warning went largely ignored by city leaders and the press.

Lazere says Council members were shortsighted when they approved the new rates.

"The calculated rate will reduce revenues by $95 million next year. The Council has gotten into a habit that is not a fiscally responsible habit of trying to design tax relief measures that appear to have no effect on the budget until they actually kick in, when of course they did have an effect on the budget," Lazere says.

Fenty would not say whether he would seek to cut or reduce the calculated rate tax cut for business owners or look to other ways, such as budget cuts, to close the gap.

"We will absolutely make sure that on March 20 the budget we present to the Council is balanced," Fenty says.

Council member Jack Evans, who chairs the finance committee, says the second shoe has yet to fall on the District's budget.

"What's surprising is that commercial property tax revenues continue to remain strong. I think that's the next place you'll see shortfalls coming in," Evans says.

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