Slippage on a slippery slope

March 26, 2024

By Kathy Patterson, District of Columbia, Auditor

Like other jurisdictions, the District of Columbia faces a tough budget cycle. It was set to begin on March 20 when Mayor Muriel Bowser sent her FY 2025 budget to the Council of the District of Columbia. But that budget submission has been delayed – another sign of the fiscal difficulties facing the nation’s capital.  Council Chairman Phil Mendelson and others anticipate a combination of tax increases and spending cuts in the neighborhood of $1 billion in an all-funds budget that totals $19.8 billion in the current fiscal year.

The last time the budget was in this kind of troubled state came with the 2009 recession and, before that, the financial crisis of the mid-90s when the District’s deficit was more than 1% of the actual local funds budget. That prompted the Congress and White House to impose a financial control board.

Congress and the District set up an oversight framework to preclude the kind of fiscal shenanigans that had landed D.C. in red ink. It created the large, powerful, and independent Office of the Chief Financial Officer (OCFO), essentially a third branch of government in charge of financial operations of the entire District government. The CFO created a financial review process (FRP) that required every agency to report mid-year overspending and produce a written gap-closing plan to keep annual spending within its appropriation.

The institutional changes produced results. I saw this firsthand while serving in the D.C. legislature from 1995 to 2007 and working closely with CFO staffers who managed the FRP process. As chair of the public safety committee, I had oversight responsibility for over-spenders like the police and corrections departments. The CFO analysts took budget execution and their independent authority seriously. Agencies were required to have solid, written gap-closing plans when needed in the course of a fiscal year. The oversight was respectful: program leaders knew to take the CFO analysts seriously and they knew that I had a say over their budgets. We talked spending strategies; it was a collaborative exercise.

The protections built by the District’s financial leaders after the 1990s financial crisis stood the District in good stead for more than two decades of clean audits and strong bond ratings. But today there are failures in oversight of budget execution and those failures, in particular, are likely to loom ever larger when budgets are contentious and cuts and new taxes are on the table.

Rather than mid-year corrections required and facilitated by the CFO team, the District has routinely tapped its large contingency reserves to cover individual agency overspending without really addressing the cause. But the real black magic happens after the end of the fiscal year, when the remaining overspending is papered over by shifting unspent appropriations from other agencies and replenishing the city’s reserves  from large budget surpluses.

The failure of the FRP process was apparent when the Metropolitan Police Department reported a projected deficit in excess of $100 million in the July 23, 2023, quarterly report. What should have been a detailed gap-closing plan presented by the department and approved by the CFO said simply: “supplemental funding needed.” And MPD got the money!

By the time the city closed its books, budget reprogrammings had increased MPD’s FY 2023 budget by $127 million, 24% over its initially approved budget. And this department was not alone: the District’s housing and community development agency received another $31 million (an 88% increase from its initial budget), our facilities and real estate agency got $50 million (13%) more, and the state education agency grew by $61 million (22%).

Such a lax approach works until it doesn’t and the District may now be reaching an endpoint. For the first time since the Great Recession, the District ended FY 2023 unable to fully replenish the amounts it had drawn from reserve funds during the year – draws initiated by the mayor and facilitated by the CFO.

There are other signs of slippage. My office recently reported that the District failed to follow accounting rules in describing the D.C. Housing Authority in the FY 2022 Annual Comprehensive Financial Report (ACFR). As in other jurisdictions, the ACFR is the most important financial document the District publishes, serves as a basis for bond issuances, and reflects the financial decisions elected officials have made. The CFO and the independent audit firm disagreed with our conclusion without contesting any step of our analysis.

Another part of the post-1990s fiscal framework has come under fire and is a likely candidate for an upcoming audit: the fiscal impact statements our OCFO drafts for pending legislation. Testimony by the D.C. Open Government Coalition detailed how the OCFO’s internal controls were ignored to produce cost estimates for new Freedom of Information Act requirements: there was no evidence of research required by OCFO policy and the office relied solely on agency claims they would need new staff.

The optimist’s view? The budget cycle now upon is so contentious that it revives interest in the Financial Review Process, bringing new assurance that budget execution again receives as much attention as budget debate.

The contents of this blog post reflect those of the authors, and not necessarily those of the GFRC.