WASHINGTON — The District of Columbia Council on Tuesday approved savings measures to increase reserve funds and reduce borrowing needs in an attempt to offset the drop in the district’s capital cushion resulting from the economic recession.
Democratic Council chairman Vincent C. Gray, who is running for mayor, included language in the district’s fiscal 2010 and 2011 Budget Support Acts to increase reserve funds and establish a ratio of two months of working capital to operating funds, the level recommended by the Government Finance Officers Association. The district’s budget support acts are the final, legal amendments to the fiscal 2011 Budget Request Act that was approved last month.
The savings measures come as the district’s general reserve balance is projected to decline by more than a third through fiscal 2012, district officials said. The district ended fiscal 2009 with a $920 million reserve, according Eric Goulet, the council budget director appointed by Gray. That level is expected to fall to $656 million in fiscal 2011 and to $606 million by the end of fiscal 2012, he said. The district’s fiscal year starts Oct. 1.
Gray’s legislation creates a pay-as-you-go funding account that would reduce the district’s borrowing needs. The account would take 25% of any increase in revenues obtained by the district over the course of a fiscal year. The funds from the pay-go account would most likely be spent on the district’s re-occurring capital costs, like school improvements or the district’s funding for the Metro, reducing the need to borrow for those expenses, Goulet said. They would be tied into the district’s debt-to-expenditures cap so that they do not increase borrowing capacity, he said.
The legislation also creates two new reserve funds to add protection on top of the district’s existing reserves for emergency spending needs: a fiscal stabilization reserve account and a cash flow reserve account. The district has tapped its contingency reserve account, which carries a strict replenishment requirement.
Combined, the two new accounts will add 10.67% to the district’s capital cushion, which, when added to the current reserve accounts, will total 16.67% of the operating budget and equal two months of spending.
Goulet said it could take up to 10 years for the city to reach this level of reserves.
The district currently has two reserve funds, the emergency reserve and the contingency reserve, which it is required by federal law to fund at 2% and 4% of the operating budget, respectively. Additionally, the district can allocate funds to an operating cash reserve, but revenue shortfalls have limited the district’s ability to save. The budget would not fund the operating cash reserve in fiscal years 2011 through 2014.
In fiscal 2009, the district drew on its contingency reserve fund for $47.5 million, according to May bond documents. The district will replenish the funds by the end of fiscal 2010. Using money from the contingency fund could exacerbate future budget shortfalls in the district’s future budgets. Unlike states, the district is required to repay 50% of any funds withdrawn from this fund within the next fiscal year.
The GFOA recommends, at a minimum, that governments, regardless of size, maintain unrestricted fund balance in their general fund of no less than two months of regular general fund operating revenues or regular general fund expenditures, according to its website.
In fiscal 2009, the district’s unreserved working capital balance fell to $284.3 million, or 18 days of operating expenditures.
The city’s pledged revenues plunged 16.6% in fiscal 2009. In February, chief financial officer Natwar M. Gandhi estimated that fiscal 2010 revenues will increase 6.4%. Revised revenue estimates are expected to be released at the end of the month.
