Spending in the District government has not focused on priorities, and, as a result, it could take years before an economic rebound fully occurs, said Mayor-elect Vincent Gray. Until then, he added, the city has to grapple with a multimillion-dollar hole in its operating budget that threatens a rise in taxes and cuts in programs and services by 2012.

Gray made his brief, hard-hitting comments during a Nov. 22 gathering of local officials at the John A. Wilson Building in downtown Washington, as he sought to bring residents to speed on the state of city’s budget and finances.

With the city facing a $188 million deficit that could escalate to $345 million over the next two years, he said, balancing the budget is mostly a matter of establishing priorities that will also lead to a freeze on capital projects.

“A gap of $345 million clearly would require us to examine what truly are the core service functions of this government,” said Gray, who takes over the helm in January.

“I hope the economy will turn around, but it’ll be a number of years before .”

Gray said, however; that of the $5.3 billion earmarked for the operating budget, spending has automatically been tightened, explaining that $1.5 billion is from fixed costs, debt service payments and inter-jurisdictional obligations such as Metro.

“Those costs don’t give us much room to play with and historically been difficult to achieve substantial savings from,” Gray said. “That leaves us approximately $3.8 billion from which to find remaining savings.”

He said that from those funds, about one-fourth would go to pay for the salaries of District employees in the public schools system, police department and fire and emergency medical services. Another 25 percent would go to pay salaries for other District employees, and yet another 25 percent would go toward matching the District’s Medicaid and public charter school funding.

A final 25 percent, he said would most likely “go for everything else.”

Gray further explained that more than 80 percent of the District’s local revenue comes from property taxes, sales taxes and income taxes. “And as we’ve already seen, the economic slump we’ve been in has resulted in lower than expected revenue,” he said, adding that in recent years officials have had to concede that fee and fine increases are not effective as long-term solutions to increasing the District’s revenue. And that meant the District would not raise significant revenue unless it targets one or more of its tax sources.

Still, he insisted, given the economic burden already borne by D.C. residents and businesses, his administration would not ask them to pay any tax increases without first assuring them of the necessity and that the budget has been adequately scrutinized for alternatives.

Turning his attention to the capital budget, Gray said that since 2002, outstanding debt in that area has more than doubled, going from $3.5 billion at that time to $7.1 million as of this year.

Ward 1 Councilman Jim Graham said he had no explanation for the city’s budget woes and that he was not aware of the deficit figures referenced by Gray.

“The only numbers I heard about was $175 million we’re dealing with now,” Graham said. “I don’t know what to make of the new figures…it’s news to me.”

Graham said the Council is awaiting guidance from Mayor Adrian Fenty’s administration on how to work out the current deficit.

Former Ward 5 Advisory Neighborhood Commissioner Kathy Henderson said one of the ways the city could immediately strengthen its coffers is by enforcement. That covers a slew of concerns, but namely out-of-control rental properties, lowering resources spent for police services and adhering to guidelines in granting liquor licenses, she said.

“In doing so, they would actually provide money into the District’s budget and they would also strengthen neighborhoods,” Henderson said. “I feel Mr. Gray is capable of doing his job undertaking the tasks before him, but I would also encourage him to look at the function of every agency and those that do not fulfill their mandate for serving this city should have their budgets reduced.”

The District’s Office of the Chief Financial Officer refuted Gray’s assertion that the city’s deficit was driven by a lack of prioritizing. “Not at all,” CFO spokeswoman Natalie Wilson said. “The economy is driving revenues down and expenses continue to rise.”

Wilson also said the situation is not as bleak as Gray suggests. “He is correct the District is facing tough financial challenges. However, our financial condition is better than most jurisdictions… we will balance our budget every year, as we traditionally have.”