DC Chief Financial Officer Presents District of Columbia Revenue Estimates for FY2021-FY2024

District of Columbia Chief Financial Officer Jeff DeWitt presented the revenue estimates for the FY2021-FY2024 Budget and Financial Plan, in a letter to Mayor Muriel Bowser and Council Chairman Phil Mendelson, dated April 24, 2020.

The economic outlook for the District's economy is much like that for the national economy, with sharp contractions in April, May, and June 2020, followed by a recovery process that will last through the end of calendar year 2021. Jeff DeWitt reports that employment levels will take even longer to return to pre-pandemic levels. The CFO's outlook is generally consistent with the Congressional Budget Office's forecasts for the U.S. economy, and with the national and District forecasts prepared by IHS Markit and Moody's Analytics.

Economic Outlook Summary

• Jobs located in DC are expected to decrease by 5.1% in FY2020, followed by increases of 0.5% in FY2021 and 2.9% in FY2022
• Resident employment will decline by 5.1% in FY2020, with increases of 0.6% and 3.3% in the following years
• The unemployment rate – 5.5% in FY2019 – will rise to an average 11.6% rate in FY2020, with a peak of 18% in the current quarter, and 11.8% in FY2021
• The unemployment rate will decline to 7.6% in FY2024 – close to the rate (7.1%) that existed in FY2015
• DC personal income growth is expected to be 0.2% in FY2020 and −0.5% in FY2021, rebounding by 5.2% in FY2022, as the recovery progresses
• The S&P 500 Index is forecasted to decline by 15%, year over year, in 4Q2020, recovering to its prior peak by the end of calendar year 2021

Revenue and Budget

With the major hit on the hospitality industry, the City has lost 56% of sales tax revenue (about 18% of DC's total revenue), and 93,000 jobs are forecasted to be lost by July. In addition, the City has spent $192 million on COVID-19 recovery efforts.

The current forecast is that the City will face the following necessary budget cuts:

Jeff DeWitt noted that the City's recovery is expected to be better than that in most places. The District was in a better financial position than most states prior to the pandemic, and the federal government is located in DC. In addition, DeWitt assumes that some businesses will open by the summer – with social distancing in place – but that federal aid will not offset revenue loss. With this, he notes that recovery will be U-shaped. Specifically, DeWitt anticipates that improvements will begin in the fall of 2020, and the stock market will recover materially in 2021. He projects a "new normal" will begin in September 2021.

In his letter to the Mayor and Chairman Phil Mendelson, DeWitt notes that March real property tax revenue came in as expected. He further notes that most of the impact on real property tax revenues from the 2020 economic environment will become apparent in tax year 2022, as assessments made at the end of 2020 will be the basis for bills sent out in February 2022. Projected revenue in FY2022 is revised downward by $139 million (mostly due to commercial property assessments), $150 million in FY2023, and $142 million in FY2024, compared to the February 2020 estimate. The CFO's letter also includes impacts and estimates for sales tax, income taxes, deed taxes, nontax revenue, and lottery revenue.

The mayor noted that the significant impact of COVID-19 to the District's budget cannot be covered with tax increases. DeWitt plans to "stress test" the City's new paid family leave program to see whether the revenues raised so far to pay for that program (approximately $220 million) would be enough to pay out benefits.

DeWitt is also concerned about the City's bond rating, which has been Triple-A. To maintain the rating, he has completed $300 million in short-term borrowing and has taken a $200 million line of credit to ensure adequate cash flow. He noted that while every jurisdiction is going through this unprecedented difficulty, the credit agencies will be monitoring how revenues are managed.

Federal Aid

The District has received roughly $500 million in direct federal aid through the CARES ACT, but has been told that the funds cannot be used for revenue replacement. States – each getting $1.25 billion – cannot use the money for revenue replacement either. (DC was treated as a territory for the purposes of this federal aid, instead of being treated as a state for funding purposes, as is the usual practice. Thus, the District received less than half of the aid it had anticipated.)

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It should be noted that the revenue picture and other economic indicators could change rapidly over the next few months of the pandemic, especially if another wave of infection strikes. The CFO will share the next set of revenue estimates in August, instead of the normally scheduled June release.

For questions or comments, contact:

Claude E. Bailey
Partner
Tel: 202.344.8057
cebailey@Venable.com