Government of the District of Columbia Executive Office of the Mayor Subcommittee on the District of Columbia Committee on Appropriations United States Senate The Honorable Mike DeWine, Chairman The Honorable Mary L. Landrieu, Ranking Member Structural Imbalance in the District of Columbia Testimony of Anthony A. Williams Mayor District of Columbia Tuesday, June 22, 2004
Chairman DeWine, Ranking Member Landrieu, and other distinguished members of the committee, thank you for the opportunity to testify before you today on structural imbalance in the District of Columbia. Chairman DeWine, I appreciate your public support for a solution to the structural imbalance and your efforts to seek the city’s input in the most appropriate and helpful solution. Senator Landrieu, I appreciate your long-standing efforts to resolve this issue, especially your role in requesting the General Accounting Office’s expert analysis of the issue. I appreciate your attention to this issue, and I think this hearing presents an excellent toward achieving a long-term solution to the District’s fiscal structural imbalance.
The Structural Imbalance: What Does it Mean?
The District’s structural challenges are not new. In some ways, the federal government has been deliberating the correct balance of federal and local support for the nation’s capital for the last 200 years. An example of this ongoing effort is the 1997 Revitalization Act, which was one step (and a very helpful step, I may add) in this process towards a rational District-federal fiscal relationship. Several reports that have explored this balance before and after the Revitalization Act have universally concluded that the District faces structural fiscal challenges. The esteemed authors of these studies include two former members of the Federal Reserve Board, Alice Rivlin and Andrew Brimmer, the McKinsey and Company consulting firm, and the U.S. General Accounting Office.
In its recent report to Congress, the GAO concurred with and re-emphasized the conclusions of the previous reports: the District has a structural imbalance, it is large, and fixing the imbalance is outside the control of local officials. The GAO concluded that the District of Columbia’s structural imbalance is between $470 million and $1.1 billion per year.
And what is the source of this imbalance? It stems from various sources. Federal restrictions on taxation constrain our revenues below that of the states. A population that is younger, poorer, and sicker drives our expenditures to be higher than those of the states. Add to this the fact that we are the only major city in America that has no state to equalize and subsidize funding for our service to the region, and you have a “perfect storm,” if you will, for undermining the solvency of a locality.
But despite these unique obstacles, this city government must function. It must provide services to our residents, welcome our visitors, support our businesses, and to balance our budgets. And we have been quite successful at doing so: our accomplishments include seven consecutive years of balanced budgets, “A” ratings from all three rating agencies, and over $250 million in cash reserves.
How is the District Managing the Structural Imbalance?
Now to an outside observer this may seem like a paradox: How can the District achieve remarkable financial performance, yet still face a structural imbalance? The answer is twofold. First, we have a tax structure through which our residents pay some of the highest taxes in the nation; and second, the District is deferring massive investments in critical services and infrastructure improvements. What is the magnitude of this deferral? Approximately $2.5 billion of infrastructure has been deferred, including renovating crumbling schools, repairing the sewer overflow, fixing roads, and putting into place the needed security systems to keep District residents and visitors safe. More specifically, these needs include:
Schools. The D.C. Public Schools have prepared a 10-year modernization program for all facilities in need of repair, and to execute it would cost $250 million per year over the next six years. From its capital financing sources, the D.C. Government can probably finance only $120 million per year. In addition, approximately 10 new charter schools are being established every year, and providing funding for these schools is proving to be increasingly difficult, especially in the current real estate market. While we are pursuing a strong effort to co-locate schools and find other efficiencies, these efforts can in no way address the full infrastructure needs of our traditional and charter schools.
The consequences of not doing so would be requiring children to attend inadequate schools without the necessary classroom space, labs, and athletic facilities needed for a quality education.
Transportation. In the area of transportation, the District is facing major deferred infrastructure needs in bridges, roads, and public transportation networks. In the Metro system, aging infrastructure and a massive increase in rider needs now requires significant rehabilitation and renewal. The District’s share of this expansion cost is estimated to be, on average $140 million over the next six years. The District can finance approximately $70 million of that amount, but no more.
In addition, it is important to note that within the Metro system, the District’s structural imbalance becomes especially meaningful and problematic. Within the WMATA system, most partner jurisdictions share the cost of WMATA with their parent states. The District, with no parent state, bears the entire cost of WMATA itself. This burden is compounded by the high charges that WMATA’s subsidy mechanism allocates to the District. The Federal government is a primary beneficiary but makes no contribution to its operating expenses, resulting in system-wide disinvestments.
Beyond Metro, the District’s roads and bridges face similar deferred investment. If not repaired, the District’s deteriorating transportation network will begin to have negative effects on our local economy, federal workers, tourism, and other fundamental elements that ensure our viability as a city and the nation’s capital
Neighborhood Facilities. The District operates hundreds of facilities that serve residents and businesses across the city. Unfortunately, inadequate funding has left many such facilities in major need of repair. Every year we must consider a long list of fire stations, recreation centers, libraries, and health clinics that have major needs, but we can provide resources for only the most serious needs, and must defer the remainder. These facilities will require an additional $70 million per year over the next six years to restore to an appropriate level of safety and functionality. Without these investments, residents and businesses in the District will see a continuing decline in the quality of public facilities, and this decline will adversely effect the population growth that we are so diligently working to bring about.
Information Technology. Eight years ago, the District government found itself far behind average government operations in the use of personal computers, information databases, and Internet technology. Rotary telephones were not uncommon, for example, and the District Government’s Web site consisted of 20 pages.
Having first stabilized the basic infrastructure and then developing data security and access, the District has the platform from which it has begun building integrated enterprise applications. In the next phase, the District must systematically reengineer and automate its mission critical business processes (from procurement, budget, and payroll to social services case management and regulatory enforcement). Although the development of these enterprise applications has begun, the District will require approximately $130 million per year for the next six years. The District can only finance approximately $30 million of this amount, however.
These systems are essential not only to basic government effectiveness, but to providing the information tools that will allow us to better track and serve school children, track and solve crime, and provide a much more cost efficient government systems in future years. Without additional funding, these goals cannot be fully met.
We have resorted to these harmful measures of deferring infrastructure investment because our options for addressing our structural imbalance are truly limited: we can either increase taxes or reduce expenditures. The District already charges some of the highest tax rates in the country. We have resorted to high rates in part because of restrictions on our tax base. A vast amount of federal property in the District is not taxable and we cannot tax the income earned by the 70 percent of our workforce that lives outside the District. The other option for maintaining a balanced budget is to decrease our spending on public services. Our efforts to keep down public service costs not only limit services to District residents, but they hurt tourists, federal workers, and visitors from your home states.
As we seek solutions to address the structural imbalance and our long-standing problems, it is clear that taxing our residents more or providing fewer services are not viable alternatives. Though the GAO report noted areas where the District can improve management, the report is quite clear that the structural deficit would exist under any management structure and even if operational efficiencies were improved even more. Even so, it has been a driving priority of my administration to improve the efficiency of our government. At the request of this committee, I submitted a report in February that presented work being performed across the government to enhance operational efficiency and effectiveness. These efforts cover the spectrum of administrative, financial, and service delivery operations. Through these efforts our government has made major strides in improving efficiency and effectiveness in many areas. As noted, however, these improvements provide only a small part of the solution to the structural imbalance, and therefore, I believe the District and Congress have no alternative but to make a fundamental change to the financing of District operations.
Proposed Solutions to the Structural Imbalance
As the GAO considered solutions for the structural imbalance, it identified options of changing federal policy to expand the District’s tax base or providing additional financial support. There are several alternative funding mechanisms that could be adopted by the federal government to provide this support. In my report to this committee I highlighted one very promising vehicle and I would like to emphasize this same legislation here today, the “District of Columbia Fair Federal Compensation Act of 2004” which was recently introduced by Representative Eleanor Holmes Norton. This bill would provide the District with a dedicated federal contribution of $800 million a year, which is indexed to inflation and may only be used to fund infrastructure investments.
This approach to redressing the District’s structural imbalance provides what appears to be the best solution because it provides relief to the areas we need it most, it addresses the root of the structural imbalance problem, and it would allow the federal government to invest in infrastructure that benefits the federal government itself and the entire Washington metropolitan area, not just the District of Columbia. The Congresswoman is also to be commended for the broad regional and bi-partisan support she has garnered for her bill. The bill also has support from a broad spectrum of community leaders, including Our Nation’s Capital, the business community, labor groups, environmentalists and health care advocates.
This bill is not the only viable approach, however. A second approach would be for the Federal government to recognize that its charter and presence restrict the District’s taxing authority and impose additional costs on the District. To offset these restrictions and costs, the Federal government could reinstitute a formula-driven Federal payment. This federal payment could be indexed to the taxation restrictions imposed by the federal government such as a payment in lieu of taxes for federal property in the District or a payment in lieu of non-resident taxation authority that is linked to income earned in the District by non-residents.
A final approach could be for the Federal government to recognize the extraordinary financial burdens placed on the District as a locality without a parent state. The District must incur infrastructure and operating costs for a wide range of programs that would normally be undertaken by or underwritten in whole or part by the state. Included are such activities as income tax administration, Department of Motor Vehicles, Alcohol Beverage Control, State University (University of the District of Columbia), regulatory commissions (public utilities, securities, insurance), and mental health facilities. Under this approach, the Federal government could either assume responsibility for the operation of state type functions, as it has with the incarceration of felons, or reimburse the District for the operation of such functions.
Given the importance of this issue to the District and the Federal government, I encourage you to move legislation that provides a structural imbalance solution quickly and urgently. Your public support for this issue is paramount for our upcoming efforts to request funding for the imbalance in the President’s budget.
There was a time when you and your colleagues may have been reluctant to move forward on a structural imbalance solution because of a belief that the District was incapable of running itself. This premise is no longer valid. At a minimum, the District of Columbia merits the fundamental financial foundation that every other city’s enjoy. In my view, the District of Columbia is the crown jewel of the nation and our resources and financial standing should reflect the District’s status as the nation’s capital.
Chairman DeWine, members of the Committee, this concludes my remarks. Thank you for the opportunity to testify before you today. I look forward to answering any questions you may have.
