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CFO Natwar M. Gandhi’s Comments on the GAO Report Regarding the District of Columbia’s Structural Imbalance

Thursday, June 5, 2003

(Washington, DC) Chief Financial Officer Natwar M. Gandhi announced today that he is pleased with the findings of the US General Accounting Office (GAO) report "District of Columbia: Structural Imbalance and Management Issues" released this afternoon. The report confirms that the District of Columbia has a structural imbalance from $470 million up to more than $1.1 billion.

"The GAO report verifies beyond a shadow of a doubt that the District of Columbia has a structural imbalance that is largely beyond District officials' direct control," said Gandhi, who noted that this is the third report since 2002 that discusses the District's structural imbalance. In March 2002, a McKinsey & Company report funded by the Federal City Council stated, among other things, that federal constraints impose an annual opportunity cost of at least $500-600 million. In October 2002, Alice Rivlin and Carol O'Cleireacain of the Brookings Institution assessed the District's relationship with the federal government and concluded that a strong rationale exists for additional federal financial assistance to the District.

Gandhi also noted, "The GAO report also specifically states, 'Without changes in the underlying factors driving expenses and revenue capacity, the structural imbalance will remain.'"

For years, Gandhi has been detailing the structural imbalance issue to key stakeholders. According to Gandhi, the District's structural imbalance includes a prohibition on taxing federal real property, which comprises 42 percent of the District's property value, and other non-municipal tax-exempt property, such as universities, which comprise an additional 11 percent. Further constraining the District's tax base are restrictions on taxing income at source, which means that the District can tax just 34 percent of the income earned within its borders. The District also provides state-like functions such as human services, mental health, and higher education estimated at $500 million annually.

In testimony before Congress yesterday, Gandhi stated, "Over the past several years, the District has submitted balanced and responsible budgets during periods of increasing as well as stagnating and declining revenues. Our restrained budgeting in the good years helped us work through some of the hard times in FY 2002 and FY 2003. For FY 2004, the District is submitting a balanced budget in a particularly challenging economic environment, a testament to the ability of the District's elected leaders to manage through difficult times. However, despite this balanced budget, and despite the surpluses the District has generated over the past six years, the District has a serious long-term financial problem—a structural imbalance that transcends short-term challenges and cyclical revenue fluctuations. This structural imbalance is a long-term gap between the District's ability to raise revenue at reasonable tax rates and the District's ability to provide services of reasonable quality to its residents.

"When it comes to addressing the structural imbalance, we have few options. Increasing the tax burden on District businesses and residents even further could have an adverse impact on total receipts, because it could influence potential and current residents or businesses to locate in adjacent, lower-tax states. Given the structural imbalance, the District must choose between tax levels that are even higher than the national average, service levels that are lower than the national average, or combinations of both.

"An alternative solution is federal compensation for the District's unique relationship with the federal government. Not only does the District provide unreimbursed services to the federal government and fund itself with a federally restricted tax base, but the federal government has a strong interest in a fiscally secure District of Columbia. Ultimately, the long-term solution to the structural imbalance is a matter to be addressed by District and congressional policy-makers. A dialogue must continue that revisits the federal/local partnership and arrives at a long-term solution for equitable support of District services.

"It is my hope that the GAO report helps Congress and the District move beyond questions of whether there is a structural imbalance to questions of how the federal government and District government can work together to address this problem. And this problem must be addressed with urgency to ensure the long-term financial viability of the nation's capital."