The District’s budget season unofficially opened with the release of the FY 2023 Annual Comprehensive Financial Report on February 1st. This is the annual audit for the city, and it includes a trove of information on the city’s economic and fiscal performance during FY 2023. It is relevant to the FY 2025 budget because it tells us how much excess revenue the city might have to add to its reserves, and whether any amount of this could be used for future year budgets. Here are some highlights that caught our attention:
- The city had its 27th clean audit in a row.
- The city ended fiscal year 2023 with a budgetary surplus of $419 million. .
- The economic and revenue picture was mixed. Local revenue did not grow at all between FY 2022 and FY 2023. Given the inflation rate, this represents a loss of 3.4 percent in the District’s purchasing power. Sales tax revenues were a bright spot growing at nearly 11 percent, though some of this growth is just the impact of inflation. Income tax revenues (individual, corporate franchise, and unincorporated business) grew, too, but this growth was only 2 percent, running below the inflation rate for the year.
- In fiscal year 2023, the taxable assessments for commercial property—and in D.C., most of these are office buildings—were 11 percent below their peak value in 2021. However, this does not reflect current conditions. Commercial property assessments are backwards looking, and the fiscal year 2023 taxable assessments reflect economic activity for two years prior, in 2021.
- The current revenue forecast incorporates further declines to commercial assessments and tax revenue in fiscal year 2024 (about 5 percent) and fiscal year 2025 (about 1.5 percent). We will have to wait until the end of February, when the next forecast is released, to see if this outlook has changed.
- Lack of sales has made it very difficult to tell what commercial property is worth in D.C. There has been an uptick in sales of distressed office buildings with deep asset devaluations around 40 to 50 percent. While not all properties are under distress, if other buildings are similarly devalued it will have large economic and revenue impacts.
- The city’s financial position slightly worsened in 2023 compared to the end of fiscal year 2022.
- At the end of fiscal year 2022, the District was able to replenish all the required reserves to meet the goal of having 60 days’ worth of cash in hand, and still had $440 million extra, which was then used to fund future year’s budgets.
- Even after using the entirety of fiscal year 2023 end-of-year surplus to replenish the required reserves, the District is still short $312 million to reach the 60-day goal. According to the OCFO, the reserves are the equivalent of 51 days of working capital.
This will be a trying budget year. There will be demands on the Executive and the Council including funding for the Housing Production Trust Fund, rent supplements, schools, support programs, and SNAP benefits, but not enough money to pay for these at the previous years’ levels. Demands all compete against other needs such as investments in Downtown. The expiration of the federal fiscal aid and the weakening revenue picture means that difficult and unpopular decisions await elected officials