Washington is facing some difficult times, and its leaders are facing some difficult choices amid a mounting funding crisis.
Fewer people are using public transit and working or shopping downtown. More businesses are moving away from the city. Federal pandemic relief funds are ending. And the city government is losing revenue as its base for business and sales taxes shrinks — meaning that tax hikes and/or program cuts lie on the horizon.
“The lapse in federal funding, DC’s slowing revenue growth, and our growing investments in Metro and the workers who keep the District running will make the DC budget process more challenging this year,” D.C. Council member Janeese Lewis George, Ward 4 Democrat, said in a statement.
“It’s going to be a very hard year for elected officials,” said Yesim Sayin, executive director of the D.C. Policy Center, a nonpartisan think tank.
D.C. Mayor Muriel Bowser is scheduled to present her budget proposal for fiscal 2025 on March 20. The Democrat, who was elected to a third term in 2022, has promised to deliver a balanced budget — a prospect that city leaders have said seems unlikely without tax increases or program cuts.
Since COVID-19 broke out in 2020, fewer people have shopped, eaten or worked in downtown Washington, and city officials say that has created the unprecedented funding crisis.
Occupancy in downtown offices has flatlined at about 50% of pre-pandemic rates for the past 18 months as former daily commuters have worked partly from home in Maryland and Virginia, according to D.C. Chief Financial Officer Glen Lee.
The ensuing decline in commercial real estate values will cost the city between $260 million and $300 million in annual tax revenues through 2028, with losses worsening afterward as companies decrease their footprints or let leases expire, Mr. Lee said in an interview with The Washington Times.
“Our forecast is based on our best estimates at the time, not on hope,” said Mr. Lee, who has a mandate under federal law to oversee the District’s financial stability.
The bleak financial prognosis comes as pandemic stimulus funding dries up, crime-plagued retailers pull out of depopulated streets, mass transit ridership declines, struggling restaurants close and officials see no end to remote work.
Last month, the District’s Annual Comprehensive Financial Report found commercial property values dropped by $11 billion from 2021 to 2023. That resulted in $200 million of lost tax revenues, the Washington Business Journal estimated.
Businesses leased 5.8 million square feet in the District last year, down from 8 million square feet in 2021. Additionally, the report noted just 32 new office construction projects in fiscal 2023, the lowest in 10 years and down from 116 in 2021.
On top of that, inflation has begun outpacing the District’s revenue growth, reversing a previous trend.
Mr. Lee said general fund revenue grew annually between 5% and 5.5% from 2017 to 2022, compared with an average 1.8% yearly inflation increase. From 2023 to 2028, he expects revenue to grow annually by 2% to 2.5% while the consumer price index rises by 2.5% to 3%.
“Underlying cost is growing faster than our revenue streams,” Mr. Lee said. “Program reductions and tax increases are all rational reactions to that fundamental story.”
Fitzroy Lee, the District’s deputy CFO and chief economist, predicted the vacancy rate for commercial property will rise from 17% of offices to 26% by 2028.
“We don’t see any vehicle for it coming back right now, and even that forecast could be optimistic,” Fitzroy Lee, who is not related to CFO Glen Lee, told The Times.
Budget matters
The nation’s capital used $4.7 billion in federal coronavirus aid to gradually expand its budget from $15.1 billion in fiscal 2020 to $19.8 billion in fiscal 2024.
The last of that money runs out Sept. 30, the end of fiscal 2024, and Ms. Bowser is set to present a balanced budget proposal.
D.C. Council Chairman Phil Mendelson, at-large Democrat, has said he estimates a $600 million-$800 million deficit in the next fiscal year, which starts Oct. 1.
He told reporters he based that calculation on the end of pandemic stimulus funding, a nearly $200 million commitment to the struggling Washington Metropolitan Area Transit Authority, a $100 million infusion for D.C. Public Schools and a need for $300 million in funding reserves.
“I expect what the mayor will be proposing will be a lot of cuts to programs, and I think this is unavoidable,” Mr. Mendelson said. “What exactly will be cut is not clear. I suspect that new programs are likely to be on the chopping block because they’re new, and there will also be effort looking at some efficiencies, and, I’m going to say, restructuring.”
He said the council also would consider raising the sales, property and income taxes.
D.C. Auditor Kathleen Patterson, a former council member who evaluates the effectiveness of the District’s spending programs, noted that nine agencies overspent their budgets by $442 million in fiscal 2023.
That included $128 million of excess spending by D.C. Public Schools, $127 million by the Metropolitan Police Department, $61 million by the Office of the State Superintendent for Education and $50 million by the Department of General Services, which oversees improvements to public buildings.
“I would see if there’s a history of overspending and try to bring about more budget discipline from those agencies,” Ms. Patterson told The Times.
Although she could not predict which programs the city will prune, Ms. Patterson noted that the Housing Production Trust Fund has received $100 million for affordable housing in recent years, making it unlikely to get “the same kind of investments we’ve seen in the past.”
‘Not even the bottom yet’
According to the D.C. Policy Center, the District increased its budget by roughly 34% from 2019 to 2024 while revenues grew by 17%, or half that amount.
Ms. Sayin said the District faces the added problems of birth rates declining to 2005 levels, telework making employment growth numbers unclear; the difficulty of converting commercial buildings into housing in areas lacking groceries, pharmacies and other conveniences; increased crime fears; and “more people leaving the city than are moving in.”
“It’s not even the bottom yet,” the think tank executive director said. “It’s like if you woke up one morning in Alaska and there was no more oil.”
Ms. Sayin said that while D.C. offices have a 45%-60% occupancy rate on Tuesdays to Thursdays, it drops to 25%-30% on Mondays and Fridays.
Elected officials “will get all kinds of requests for downtown investments, food stamps and housing assistance, and there will be no money to cover any of this stuff,” she added.
With fewer weekday commuters, public transit ridership has dropped and restaurants have shuttered, and a surge in thefts has driven retailers such as Walmart out of Capitol Hill.
“If we don’t address the concerns about public safety from business owners who invest in our city, we risk seeing more businesses close or choose to locate elsewhere,” said council member Vincent Gray, Ward 7 Democrat and a former mayor. “Ultimately, that means fewer employment opportunities and job losses for District residents, which we know can lead to more crime.”
Led by the U.S. Chamber of Commerce, 70 national business trade groups with offices in the District urged the mayor and council members in a Feb. 29 letter to take “immediate action” to curb a surge in violent crimes, carjackings and random shootings over the past year.
They pointed to high-profile examples such as the shooting death last month of local business leader Mike Gill, a former Trump administration official, during a carjacking on K Street.
“Our organizations are committed to bringing our employees back to work in our physical office locations downtown and across the District, which will contribute to the city’s tax base and give a boost to the local economy,” the letter stated. “Together, we can create an environment that fosters economic growth, prosperity, and security for all.”
Waiting for change
Last month, the mayor pushed back on the narrative of a crime-plagued, empty downtown during a series of public budget engagement forums.
Ms. Bowser has pledged to prioritize public safety, schools and roads in her upcoming budget proposal. Her office referred The Times to statistics showing that hotel revenues have recovered to pre-pandemic levels and crime rates have dropped in the first months of 2024 from a year ago.
Bowing to pressure from the mayor and Congress, the D.C. Council voted unanimously this month to pass a crime bill expanding temporary drug-free zones, restoring pre-pandemic prohibitions against wearing ski masks and allowing police to engage in car chases to catch dangerous suspects.
“We are a city that is committed to creating opportunity and that believes in second chances, but we will not tolerate violence and we will not tolerate criminal activity that disrupts our sense of safety and our ability to build thriving neighborhoods,” Ms. Bowser said after the vote.
According to some council members, it will take time for that to happen as elected officials push for a long-term transformation of the downtown area into neighborhoods with schools, daycare centers, grocery stores and dry cleaners.
In the meantime, they said they are waiting to review the mayor’s budget proposal before recommending specific program cuts and tax increases.
“I think people are going to continue to work from home no matter what,” said council member Robert White, at-large Democrat. “We’re not going back to a downtown work environment that looks like 2019, and improvements in crime are not going to change that outcome, even though we need to get a handle on crime so that empty sidewalks and a hollowed-out downtown don’t exacerbate it.”
Council member Christina Henderson, at-large independent and a former D.C. Public Schools employee, said some expenditures will be harder to trim than others.
For example, she noted that MPD’s 2023 overspending came from overtime pay for an understaffed police force, while the State Superintendent for Education’s overspending came from increased special education needs as the city’s immigrant population grows.
“The public school system is one agency that’s required to serve children, no matter how many show up after we budget for it,” Ms. Henderson said. “With the migrant crisis, we’re a very transient city.”
On the other hand, she said she has worked to “level expectations” among constituents for other funding requests, noting the council has to adjust to reduced revenues “and be responsible about it.”
Ward 4’s Ms. Lewis George said lawmakers will “need to prioritize the needs of our most vulnerable neighbors. You cannot build a safer and stronger DC by underfunding schools, violence prevention, food assistance, rental aid, and other programs that working families in our city depend on.”
Concerning inquiries about the possibility of reduced funds, most D.C. agencies referred The Times to City Hall, offered no comment or did not respond.
A spokesman for the public library system, which did not overspend its fiscal 2023 budget, said it will weigh financial impacts after the mayor releases her proposal.
“We recognize the city is facing a challenging economic environment,” said George Williams, media relations manager for DC Public Library. “The Library will implement the budget ultimately approved by the Mayor and City Council in a responsible manner to ensure we continue to provide great service to District residents.”