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:
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.
August 24, 2010; 7:43 PM ET
Categories: Natwar Gandhi , The District , Vincent Gray
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