After the federal workforce was upended as a result of President Trump and Department of Government Efficiency audits and cuts, the U.S. capital is facing a monumental financial challenge, according to the district’s CFO Glen Lee.
Though the district was already expecting a shortfall for this upcoming year, the new cuts to the federal workforce detailed in Lee’s February 2025 Revenue Estimates letter to Mayor Muriel Bowser and district council Chairman Phil Mendelson prompted multiple amendments to previous predictions. Forecasts now predict 40,000 more D.C.-based jobs will be cut from the federal workforce over the next three years, leading to a newly projected deficit of just over $1 billion for the district.
The report also identifies a $21.6 million shortfall for this upcoming year, resulting in the need for immediate action in addressing the problem, which only worsens year-over-year.
“The efforts to reduce the federal workforce are expected to have a disproportionate impact on the district’s economy,” Lee wrote. “While federal jobs (excluding the U.S. Postal Service) make up just 1.4% of the U.S. civilian workforce, they account for close to 25% of total civilian employment in the district.”
Lee’s forecasts indicate that on its current trajectory, the district will lose an average of $342.1 million per year between fiscal years 2025 and 2029 due to the loss of individual income tax, sales tax, property tax and declining property value. He also mentions the district is facing this challenge after most federal employees went home during the pandemic and never returned, an issue DOGE has addressed with results.
“Real property tax revenue in this estimate has also been lowered based on lower assessed values across almost all classes of properties,” Lee wrote. “This reflects ongoing weakness in commercial property values due to expanded remote work since the pandemic and a recent decline in residential home prices.”
The state of D.C.’s local economy as a result of remote work, a challenge other cities have had to address, has put the district’s financial status in a situation that makes dealing with a major loss of labor and tax revenue a significant challenge.
“With fewer federal employees in the region, spending on restaurants, retail, transportation and other taxable goods and services is expected to decline, particularly for businesses that rely on federal workers,” Lee detailed. “Job losses are also anticipated for federal contracting, hospitality and transportation sectors, as reduced federal employment leads to lower demand in these sectors.”
He also highlighted how the Trump administration’s array of executive orders and initiatives has hindered his ability to be confident in his forecasts. “There is a high degree of uncertainty around the forecast as some of the new administration’s executive actions have or likely will be challenged in the courts, as new ones emerge, making meaningful economic impact analysis extremely difficult.”
D.C.’s economic history, real estate and fiscal future
As Lee notes, workers in the capital, many of whom work for the federal government, greatly surpass the income across the rest of the country. Though the district produces largely no goods and has no real economic hub outside of government, nongovernment organization work, lobbying efforts and business services, personal income in D.C. grew 5.1% in the third quarter of 2024, and per capita income increased at the highest level in the country.
In the letter, Lee references U.S. Bureau of Economic data that quantifies the average income in the U.S. in 2023 at $69,810, whereas in D.C., as he mentions, it was $106,816 during the same timeframe.
D.C.’s economic boom started in the 1990s but significantly expanded between 2015 and 2021, quickly making the five counties outside of D.C. area one the highest-earning regions in the U.S. Within that latter timeframe, more than half (54%) of all household growth in the district of D.C. came from households that earned more than $100,000 per year, Lee cites.
“The district serves as a hub for high-paying jobs, driven largely by the substantial presence of the federal government, which offers salaries well above the national average,” he wrote.
Cities in both Maryland and Virginia, and most recently some suburbs of West Virginia, have seen significant economic expansion as a result of the expanding size of the federal government. Though only a portion of the federal workforce resides within the district of D.C. itself, Lee’s concerns about the impact of the real estate market within the district are extensive.
“Higher mortgage interest rates have slowed existing home sales both nationally and regionally from their post-pandemic highs,” he wrote. “In the district, the number of active housing units for sale remains exceptionally low, with closed sales of existing homes in 2024 totaling approximately 6,900 units, the lowest level in over a decade.
“Housing starts have also declined sharply, falling to an annual rate of 1,426 units in the fourth quarter. Although this represents a slight rebound from the decade-low of 972 units in the third quarter, it is still below the 2,131 units recorded in the same period of 2023. This slowdown has had a broad economic impact, reducing revenue in real estate and construction-related sectors and likely contributing to the region’s tight labor market, further limiting economic expansion.”
Despite Lee’s concerns, some real estate experts have said that the district’s recent drop in housing prices is a result of a “rebalance” of the market. Those same experts also predicted a possible market downturn in October if Trump were to be elected, however.
Lee’s predictions for the short-term future are bleak, but he says the district should be able to bounce back. Though he doesn’t detail how the district can recover, he predicts a mild recession followed by a slow recovery.
“The district’s economy is expected to enter a mild recession in fiscal year 2026, with GDP contracting by 1.9%, before beginning a gradual recovery in fiscal year 2027 and returning to trend growth by fiscal years 2028 and 2029. Employment in the district is expected to remain flat in fiscal year 2025, decline by 2.6% in fiscal year 2026 and decrease by 0.4% in fiscal year 2027.”
In a statement from Mayor Bowser, she said the district will have to “reshape” its upcoming budget proposal. Spending initiatives for the district, like the development at the site of RFK stadium, are now much less likely to be approved by the public. The district’s ability to borrow money may also be impacted in the future.
It’s worth noting that nowhere in his letter to the mayor and chairperson does Lee use the terms “President”, “Trump” or “DOGE”.
