When Wall Street gets the blues, state and local governments can suffer major depressions – from falling tax revenue income to increased bond payments caused by higher interest rates. Budgets can sink, programs can get cut, workers can be laid off.
From pieces of the puzzle I have pieced together, the District faces the current financial debacle in better shape than its neighbors. Virginia and Maryland and our neighboring counties have been whining about declining revenue for months, and they have cut their budgets accordingly.
D.C., standing alone, has been financially strong, and it could remain in solid shape. Revenue estimates are due out later this week, but I pestered senior financial policy analyst Marcy Edwards for a morsel.
“We’re not projecting a deficit,” she tells me. “That’s for sure.”
That’s in stark contrast to the forecast in Virginia and Maryland. Govs. Tim Kaine and Martin O’Malley have been dealing with billion-dollar shortfalls for years. Fairfax and Loudoun counties have been forced to cut back programs. Ditto Montgomery County.
Prince George’s County is in serious distress. The county is in the red $57 million; for the first time since 1991, it will be forced to furlough 5,900 employees without pay for two weeks. Meanwhile, the District is still hiring and continuing its historic renovation of public schools.
How come?
Marcy Edwards, who advises D.C. Chief Financial Officer Natwar Gandhi, says the central city has a more varied revenue stream than its suburban neighbors. It collects personal income taxes along with business franchise taxes. It brings in sales taxes. But unlike adjacent jurisdictions, D.C. collects property taxes.
“We enjoy a high level of revenue diversity,” she says. “If one is deeply affected, another is not.”
The District government has fattened its coffers for years with commercial real estate property taxes, and though revenue estimates are expected to come in lower than last year’s, the city’s office market remains strong.
“That said,” Edwards warns, “our personal income tax is more dependent on capital gains than the nation as a whole.” Capital gains makes up 13 percent of personal income taxes, so stock market declines will reverberate in the city’s revenues.
D.C. also faces higher bond payments because some of its debt is at variable rates that doubled last week. Edwards says the city saved money for the potential increases, so there are no worries. And the variable rates have saved $100 million in debt payments.
No question the District’s tax and revenue office got a black eye from the corruption scandal that drained $48 million from its coffers over the past 18 years. But under Gandhi’s leadership, and his relationship with Wall Street, the city remains on sound financial footing – despite the slippery terrain facing the financial markets.
