D.C. braces for funding crisis as the downtown area struggles financially

The District of Columbia is facing difficult times, and its leaders are facing 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. 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, D.C.’s slowing revenue growth, and our growing investments in Metro and the workers who keep the District running will make the D.C. 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 Wednesday. The Democrat, elected to a third term in 2022, has promised to deliver a balanced budget. City leaders have said that seems unlikely without tax increases or program cuts.

Since COVID-19 broke out in 2020, fewer people have shopped, dined or worked downtown. City officials say that has created an unprecedented funding crisis.

Occupancy in downtown offices has flatlined at about 50% of pre-pandemic rates for the past 18 months. D.C. Chief Financial Officer Glen Lee said former daily commuters have been working partly from home in Maryland and Virginia.

The ensuing decline in commercial real estate values will cost the city $260 million to $300 million in annual tax revenue through 2028. Losses are projected to worsen afterward as companies shrink 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.

Pandemic relief funding is drying up, crime-plagued retailers are pulling out of depopulated streets, mass transit ridership is declining, struggling restaurants are closing and officials see no end to remote work.

Last month, the District’s Annual Comprehensive Financial Report said commercial property values dropped by $11 billion from 2021 to 2023. That resulted in $200 million of lost tax revenue, 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. The report noted 32 new office construction projects in fiscal 2023, the fewest in 10 years and down from 116 in 2021.

On top of that, inflation has begun outpacing the District’s revenue growth.

Mr. Lee said general fund revenue grew annually from 5% to 5.5% from 2017 to 2022 while the yearly inflation rate increased by 1.8%. He expects revenue to grow 2% to 2.5% annually from 2023 to 2028 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 chief financial officer 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 Glen Lee, told The Times.

Budget matters

The nation’s capital used $4.7 billion in federal pandemic relief 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 estimated a $600 million to $800 million deficit in the next fiscal year, which starts Oct. 1.

He told reporters that he based that calculation on the end of pandemic relief 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, said nine agencies overspent their budgets by $442 million in fiscal 2023.

That included $128 million in 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 said the Housing Production Trust Fund has received $100 million for affordable housing in recent years. She said it is unlikely to get “the same kind of investments we’ve seen in the past.”

‘Not even the bottom yet’

The D.C. Policy Center said the District increased its budget by roughly 34% from 2019 to 2024 while revenue grew by 17%, or half that amount.

Ms. Sayin noted additional problems for the District: Birthrates have declined to 2005 levels, telework obfuscates employment growth numbers, converting commercial buildings into housing in areas lacking groceries, pharmacies and other conveniences is difficult, crime fears have increased, and numbers show “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 D.C. offices have a 45% to 60% occupancy rate on Tuesdays through Thursdays but the number drops to 25% to 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 said.

With fewer weekday commuters, public transit ridership has dropped and restaurants have shuttered. A surge in thefts has driven retailers such as Walmart out of neighborhoods near 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.

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

During a series of public budget engagement forums last month, the mayor pushed back on the narrative of a crime-plagued, empty downtown.

Ms. Bowser has pledged to prioritize public safety, schools and roads in her budget proposal. Her office referred The Times to statistics showing that hotel revenue has recovered to pre-pandemic levels and crime rates have dropped in the first months of 2024 from the same period last year.

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 criminals.

“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.

Some council members said progress would take time as elected officials push for a long-term transformation of the downtown area into neighborhoods with schools, day care centers, grocery stores and dry cleaners.

In the meantime, they said, they would wait 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 difficult to trim.

She noted that the police department’s 2023 overspending resulted from overtime pay for an understaffed force and 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 and the council must adjust to reduced revenue “and be responsible about it.”

Ms. Lewis George said lawmakers will “need to prioritize the needs of our most vulnerable neighbors. You cannot build a safer and stronger D.C. by underfunding schools, violence prevention, food assistance, rental aid, and other programs that working families in our city depend on.”

Concerning inquiries about reduced funds, most D.C. agencies either 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 the D.C. 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.”