-----Wednesday’s hearing was an annual affair, whereby the Council is officially presented the results of the Comprehensive Annual Financial Report (“CAFR”) for the District government.
-----It is important to remember that the annual audit reflects the District’s financial position four months ago, that is, the last day of the last fiscal year. So when we discuss the status of our reserve accounts, we’re looking at what existed on September 30th, not what’s been spent in the first third of the current fiscal year. And when we look at the General Fund balance, that includes $435 million that was being held to balance the financial plan, mostly for Fiscal Year 2021. In other words, the money was immediately “spent” (so to speak) the very next day. The fiscal picture four months ago is not the same picture that exists today.
-----The 2020 CAFR shows that we had approximately $9.2 billion of General Fund revenues and $9 billion of General Fund expenditures. The difference of $210 million was excess that was added to the General Fund balance. At the end of the fiscal year the General Fund balance was $3.3 billion.
This $3.3 billion Fund Balance isn’t extra money sitting around, available for worthy programs. Rather, these funds are either: (1) restricted, such as $427.3 million for bond escrows to support our $13 billion debt; (2) committed, such as the $435 million being reserved for future budgets, the bulk of which is for this year; or (3)assigned for specific uses, such as the special purpose funds at the Department of Energy and Environment for environmental programs, and the Office of Unified Communications to support the E-911 call center.
Some might say, well, the General Fund Balance may be spoken for, but within the Fund Balance are the reserve funds. That’s $1.48 billion, 45% of the General Fund Balance. Surely some of these “rainy day” funds can be used – because if not now, in this time of hardship, then when?
Actually, 3 of the 4 rainy day funds are being used. The $218 million Fiscal Stabilization Reserve is being used to fund programs and services this year; we tapped it to balance the budget. The $795 million Cash Flow Reserve is being used to manage cash flow, to avoid short term borrowing called Tax Revenue Anticipation Notes. The $311 million Contingency Reserve is being used to meet one-time unexpected expenses such as those related to the current public health emergency and the numerous First Amendment Demonstrations.
As of January 27th, about $714 million -- almost half -- of the reserves has been spent, leaving a balance of $766 million.
Last year ended with a surplus because 1.3% of the budget went unspent (about $113 million) and revenues came in better than expected despite the recession and the tanking of the entertainment and hospitality industries. The net gain was about $526.8 million. By law, surpluses automatically go half-and-half to the Housing Production Trust Fund and the capital fund for infrastructure needs. So this money is available for new programs only if we redirect it.
It is possible that when the Mayor proposes her next fiscal year budget, at the end of next month, that between us we may redirect some of the surplus to cover the $143 million shortfall that currently exists in our current budget, or cover the $461.8 million shortfall over the four-year financial plan. If we don’t do that, we will have to do more cutting.
I know that may sound confusing – that we may have to cut the budget in the midst of a very large surplus. Last year the Mayor held the line on spending and the Chief Financial Officer tried to estimate worst-case revenues in the midst of a shutdown. Hence the surplus. But one year ago we never imagined that we’d only be in Phase 2 of recovery. Hence the need to cut.
During the Council’s February 3rd hearing, most Councilmembers were critical of last year’s surplus in light of critical, unmet human services needs during the current recession and COVID pandemic. A couple of members actually lamented that the Council did not raise income taxes on the wealthy. But I do not understand how our so-called “failure” to raise taxes is a problem when we had a $526 million surplus.
Rather, the real question is: why did the Mayor and CFO allow such a surplus in the first place. $38 million was left unspent in human services spending. Why? The CFO underestimated revenues (including debt escrow savings) by $525 million. Why?
We are fortunate that the District ended Fiscal Year 2020 in a strong financial position because significant challenges lie ahead. Local fund revenues in fiscal year 2021 are projected to be $421 million less than they were at their peak in fiscal year 2019, and we must address a $462 million deficit in the FY 2021-FY 2024 financial plan.
I thank our Chief Financial Officer Jeff DeWitt, Deputy Chief Financial Officer Bill Slack, Inspector General Daniel Lucas, all their staffs, and our new auditors McConnell & Jones for their work on the CAFR. This is the first year that McConnell & Jones has audited the District’s financial statements – and the first year that anyone has audited anything in a virtual environment.
Finally, it is important to note that for the sixth year in a row no material weaknesses or significant deficiencies were found in the District’s internal financial controls. This assures us that the financial statements are reliable. In this regard I commend Jeff DeWitt, Kevin Donahue (his predecessor Rashad Young), and their teams for the clean audit, which is a testament to the excellence of their financial stewardship during these challenging times.
