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Gandhi responds to my Chicken Little accusations

On Friday, I tossed off a few paragraphs basically accusing D.C. Council Chairman Vincent Gray and Chief Financial Officer Natwar M. Gandhi of playing Chicken Little when it comes to the state of city finances.

David Umansky, Gandhi's quite personable and very able spokesman, sent me a note over the weekend in response. It reads:

We agree that the reserves are there to be used in tough economic times, but we still have to effectively manage their use and make plans to replenish them so as not to make matters worse. Simply spending down reserves until the account is empty is not effective management if it is an excuse for not making hard decisions about spending and revenue.

Another serious concern is that if the bond ratings slip from their current levels it will cost the District more money to borrow for capital projects. These additional costs would decrease the amount of money otherwise available for the critical services the District provides to its residents. The possibility of rating reductions is not speculation. Other jurisdictions have recently been put on a negative outlook or had their ratings reduced due to their excessive use of fund balance. Most recently, Montgomery County was placed on the watch list for possible downgrade and Chicago was downgraded because of the precipitous drops in the Fund Balances.

Also, as a result of the continuing withdrawals from its Fund Balance, the District is far less liquid that it was previously, forcing it to depend on the capital markets to borrow for cash flow purposes. This dependence on external sources could be a serious vulnerability if the credit markets tighten as they did following the Lehman Brothers bankruptcy.

Please see the attached chart that shows that the District's unrestricted funds (represented in green) available for any purpose have been used up. Thus, the funds available without restrictions are gone.

Because of these concerns, the District's FY 2011 budget, recently approved by City Council and the Mayor, begins the rebuilding of the Fund Balance and provides resources to pay for capital projects without borrowing the money.

Comparison between the U.S., the big guy around the corner with a ready printing press, and the District does not make macro-economic or fiscal sense. The federal government does not have to worry about the credit markets but the District, with its history of insolvency, has to be very careful. Also, even if the District spends away every penny of its reserves, it will have very little macroeconomic impact. So, Krugman is right about the U.S. but, unfortunately, DeBonis is wrong about the District.

Here's the chart Umansky references:

fundchart.jpg

Some thoughts of my own:

I don't know that it's fair to criticize policymakers for not being able to "effectively manage their use and make plans to replenish them" when there has been such uncertainly about the depth and length of the recession (as evidenced by Gandhi's office having to repeatedly adjust revenue projections downward through last year). I think it's pretty clear now that both the mayor and council appreciate that we need to keep a close eye on the savings account as the economy recovers.

As far as downgrade threats, I appreciate what a downgrade would mean to debt service costs, and I understand it is Gandhi's role to yell the sky is falling, but Montgomery County and Chicago were both in much worse fiscal shape than the District when downgraded.

Chicago's budget was so busted that the city mortgaged its parking meters for 75 years to get an $1.15 billion one-time cash hit to balance the budget. That's a no-brainer downgrade if there ever was one.

MoCo's reserves sat at about 5 percent of yearly local operating spending at time of warning; even at low tide according to projections, D.C. is looking at dipping to only slightly under 10 percent. In my view, it seems the policymakers are most responsible when waltzing right up to the line without crossing it, which they appear to have done.

Umansky makes a good and fair point about liquidity, but that doesn't seem to have been much of a concern on the CFO's part at the beginning of the Fenty administration. Fenty's first budget director, Will Singer, told colleague Nikita Stewart earlier this month that "Gandhi's office recommended borrowing money at the beginning of the year to prevent dipping into the fund balance" -- so there seems to be a bit of a Johnny-Come-Lately feel to that argument. Of course, at the beginning of the Fenty administration, no one could have imagined a world where short-term credit would freeze such as it did in October 2008. And Umansky is right to note that the District, not yet 10 years removed from federal fiscal oversight, is held to a higher standard than other jurisdictions.

Also, allow me to clarify that I did not mean to make any macroeconomic claims about District spending -- D.C. certainly can't spend enough year to year to really make a dent in the regional economy. I meant to make the point that in both cases, from the international on down to the local, these calls for fiscal austerity are usually made by folks well removed from those who feel the repercussions.

By Mike DeBonis  |  August 24, 2010; 7:43 PM ET
Categories:  Natwar Gandhi , The District , Vincent Gray  
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Comments

But, part of the point here is that the other jurisdictions have states to help cover the deficits. DC has no such luxury, particularly in the context, as you point out, of the recent control board.

It is up to the Mayor to propose a budget. The council can only do so much to tweak it to come close to making sense. Fenty has yet to submit a balanced budget, and but for the massive surplus left by Tony Williams, we would be looking at Cl. Becton part 2 right now.

Please understand what this mayor has done to our finances.

Posted by: LukasWP | August 25, 2010 12:03 AM | Report abuse

"But for the massive surplus" exactly. To what end do we accumulate a massive surplus?

Posted by: debonisma | August 25, 2010 12:27 AM | Report abuse

Wow! This is DC, we are held to a different standard. Fenty, thanks for your services, give someone else a chance. With all this uncertainty, we need stable well thought out planning. No quick fixes.

Posted by: drfields | August 25, 2010 3:09 AM | Report abuse

Mike, I think you are missing the connection between what Gandhi and/or his people are saying now and what they did in June 2010 to hold up tax refunds for thousands of DC individual taxpayers. Here is the key sentence: "the District is far less liquid that it was previously, forcing it to depend on the capital markets to borrow for cash flow purposes."

The Post reported in June that Office of Tax & Revenue (OTR) claimed a computer programming error by a third-party contractor wrongly ignored payroll withholding taxes paid by thousands of taxpayers. According to that excuse, the "third party" credited only ten percent (10%) of of the withholding taxes that we paid. OTR had our W2s! Our W2s showed exactly what we paid, according to our employers! But the "third party" credited only 10% of the W2 amount. That meant thousands of us were automatically treated as tax cheats: OTR billed us illegally for unpaid taxes, penalties & interest, when instead OTR owed us refunds of millions of dollars.

Some of us did not get our refunds until August, two months late. How many other taxpayers are still waiting for their refunds? How many millions of dollars of overpaid taxes is Gandhi holding onto illegally?

In the process, OTR managed to delay disbursement of millions in refunds right at the end of June 2010. Now Gandhi admits DC had no cash flow and had to borrow to maintain liquidity. He borrowed all right-- he borrowed from DC taxpayers! He delayed refunds of millions of dollars of overpaid taxes just to be able to save on interest costs he would have incurred by borrowing from Wall Street.

OTR & Gandhi owe interest to all the DC taxpayers who were cheated in this way, and apologies to all of us for treating us as tax cheats and billing us illegally. This sort of sleight-of-hand would have the SEC crawling down the CFO's neck if done by one of the money center banks.

The Post needs to ask more questions: how many millions of dollars in refunds were held up by the so-called "third party programming error?" How many millions were finally paid out and how many millions are still being delayed? How many thousands of taxpayers were cheated with this trick? Why is the Post not investigating OTR & Gandhi for fraud? The Post needs to follow up on its reporting instead of just dropping the story. If Gandhi used us taxpayers as an interest-free ATM for two months, we deserve to know about it.

Posted by: Rambler3 | August 25, 2010 12:51 PM | Report abuse

Wow!(Rambler3) Good insight! I felt Fenty needed to find someone else to handle the tax payers money, when he allowed fraud and abuse of stealing millions of tax payers money on Ghandi watch. They had a fall girl, "Mrs. Hobbs" but many more should have been held accountable including Gandhi.

Posted by: drfields | August 27, 2010 9:59 PM | Report abuse

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