[House Hearing, 105 Congress]
[From the U.S. Government Publishing Office]



 MEDICAID AND TREASURY BORROWING SECTIONS OF THE PRESIDENT'S NATIONAL 
      CAPITAL REVITALIZATION AND SELF-GOVERNMENT IMPROVEMENT PLAN

=======================================================================

                                HEARING

                               before the

                          SUBCOMMITTEE ON THE
                          DISTRICT OF COLUMBIA

                                 of the

                              COMMITTEE ON
                           GOVERNMENT REFORM
                             AND OVERSIGHT
                        HOUSE OF REPRESENTATIVES

                       ONE HUNDRED FIFTH CONGRESS

                             FIRST SESSION

                               __________

                             APRIL 25, 1997

                               __________

                           Serial No. 105-25

                               __________

Printed for the use of the Committee on Government Reform and Oversight


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                            WASHINGTON : 2002
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              COMMITTEE ON GOVERNMENT REFORM AND OVERSIGHT

                     DAN BURTON, Indiana, Chairman
BENJAMIN A. GILMAN, New York         HENRY A. WAXMAN, California
J. DENNIS HASTERT, Illinois          TOM LANTOS, California
CONSTANCE A. MORELLA, Maryland       ROBERT E. WISE, Jr., West Virginia
CHRISTOPHER SHAYS, Connecticut       MAJOR R. OWENS, New York
STEVEN H. SCHIFF, New Mexico         EDOLPHUS TOWNS, New York
CHRISTOPHER COX, California          PAUL E. KANJORSKI, Pennsylvania
ILEANA ROS-LEHTINEN, Florida         GARY A. CONDIT, California
JOHN M. McHUGH, New York             CAROLYN B. MALONEY, New York
STEPHEN HORN, California             THOMAS M. BARRETT, Wisconsin
JOHN L. MICA, Florida                ELEANOR HOLMES NORTON, Washington, 
THOMAS M. DAVIS, Virginia                DC
DAVID M. McINTOSH, Indiana           CHAKA FATTAH, Pennsylvania
MARK E. SOUDER, Indiana              ELIJAH E. CUMMINGS, Maryland
JOE SCARBOROUGH, Florida             DENNIS KUCINICH, Ohio
JOHN SHADEGG, Arizona                ROD R. BLAGOJEVICH, Illinois
STEVEN C. LaTOURETTE, Ohio           DANNY K. DAVIS, Illinois
MARSHALL ``MARK'' SANFORD, South     JOHN F. TIERNEY, Massachusetts
    Carolina                         JIM TURNER, Texas
JOHN E. SUNUNU, New Hampshire        THOMAS H. ALLEN, Maine
PETE SESSIONS, Texas                 HAROLD E. FORD, Jr., Tennessee
MIKE PAPPAS, New Jersey                          ------
VINCE SNOWBARGER, Kansas             BERNARD SANDERS, Vermont 
BOB BARR, Georgia                        (Independent)
ROB PORTMAN, Ohio
                      Kevin Binger, Staff Director
                 Daniel R. Moll, Deputy Staff Director
                       Judith McCoy, Chief Clerk
                 Phil Schiliro, Minority Staff Director
                                 ------                                

                Subcommittee on the District of Columbia

                  THOMAS M. DAVIS, Virginia, Chairman
CONSTANCE A. MORELLA, Maryland       ELEANOR HOLMES NORTON, District of 
ILEANA ROS-LEHTINEN, Florida             Columbia
STEPHEN HORN, California             THOMAS H. ALLEN, Maine

                               Ex Officio

DAN BURTON, Indiana                  HENRY A. WAXMAN, California
                        Ron Hamm, Staff Director
                  Anne Mack, Professional Staff Member
                 Roland Gunn, Professional Staff Member
                           Ellen Brown, Clerk
          Cedric Hendricks, Minority Professional Staff Member


                            C O N T E N T S

                              ----------                              
                                                                   Page
Hearing held on April 25, 1997...................................     1
Statement of:
    DeSeve, Edward, Controller, Office of Management and Budget; 
      Debbie I. Chang, Director, Legislative and 
      Intergovernmental Affairs/HCFA, Health and Human Services; 
      and Mozelle Thompson, Principal Deputy Assistant Secretary, 
      Treasury Department........................................     4
    Rogers, Michael, city administrator, District of Columbia; 
      Jalal Greene, deputy CFO/Budget and Planning, District of 
      Columbia; Paul Offner, commissioner, Commission on Health 
      Care Finance, DC Department of Health; Linda Cropp, 
      chairwoman, Committee on Human Services, city council; and 
      Mark Goldstein, deputy director, Financial Responsibility 
      and Management Assistance Authority........................    25
    Huestis, Thomas, deputy CFO/Finance and Treasurer, District 
      of Columbia; Frank Smith, chairman, Finance and Revenue 
      Committee, District of Columbia City Council; and Dexter 
      Lockamy, chief financial officer, Financial Responsibility 
      and Management Assistance Authority........................    73
Letters, statements, etc., submitted for the record by:
    Chang, Debbie I., Director, Legislative and Intergovernmental 
      Affairs/HCFA, Health and Human Services, prepared statement 
      of.........................................................     7
    Cropp, Linda, chairwoman, Committee on Human Services, city 
      council:
        Information concerning identification cards..............    71
        Prepared statement of....................................    50
    Goldstein, Mark, deputy director, Financial Responsibility 
      and Management Assistance Authority, prepared statement of.    59
    Greene, Jalal, deputy CFO/Budget and Planning, District of 
      Columbia, prepared statement of............................    36
    Huestis, Thomas, deputy CFO/Finance and Treasurer, District 
      of Columbia, prepared statement of.........................    76
    Lockamy, Dexter, chief financial officer, Financial 
      Responsibility and Management Assistance Authority, 
      prepared statement of......................................    91
    Offner, Paul, commissioner, Commission on Health Care 
      Finance, DC Department of Health, prepared statement of....    42
    Rogers, Michael, city administrator, District of Columbia, 
      prepared statement of......................................    27
    Smith, Frank, chairman, Finance and Revenue Committee, 
      District of Columbia City Council, prepared statement of...    81
    Thompson, Mozelle, Principal Deputy Assistant Secretary, 
      Treasury Department, prepared statement of.................    12

 
 MEDICAID AND TREASURY BORROWING SECTIONS OF THE PRESIDENT'S NATIONAL 
      CAPITAL REVITALIZATION AND SELF-GOVERNMENT IMPROVEMENT PLAN

                              ----------                              


                         FRIDAY, APRIL 25, 1997

                  House of Representatives,
          Subcommittee on the District of Columbia,
              Committee on Government Reform and Oversight,
                                                    Washington, DC.
    The subcommittee met, pursuant to notice, at 2 p.m., in 
room 2154, Rayburn House Office Building, Hon. Thomas M. Davis 
(chairman of the subcommittee) presiding.
    Present: Representatives Davis, Morella, Horn and Norton.
    Staff present: Ron Hamm, staff director; Howard Denis, 
counsel; Anne Mack, and Roland Gunn, professional staff 
members; Ellen Brown, clerk; and Cedric Hendricks, minority 
professional staff member.
    Mr. Davis. Would the first panel be seated. Thank you.
    Good afternoon and welcome. This is the fifth hearing for 
this subcommittee as we continue our review of the 
administration's National Capital Revitalization and Self-
Government Plan. Today, we will focus on two of the most 
significant aspects of that plan, those sections dealing with 
Medicaid and Treasury borrowing. We are combining two subjects 
in this hearing in an effort to accelerate consideration and 
facilitate what I hope will be the timely emergence of 
consensus legislation.
    We are most definitely at a critical junction in this 
process. This subcommittee has invested considerable time and 
effort to get as many stakeholders as possible moving in the 
same direction. The President has put down his marker, and it 
has been appropriate for us to use his initiatives as a 
starting point. But while we are all in general agreement that 
something significant must be done to revitalize the Nation's 
Capital, as well as the areas in which innovation is necessary, 
we are in danger of losing the momentum created by this rare 
environment.
    I share the administration's goal of restructuring the 
relationship between the District of Columbia and the Federal 
Government. But I also agree with those responsible individuals 
and groups, some of whom have been witnesses at previous 
hearings, that the administration's proposals do not fully 
address concerns about tax relief, economic development, and 
fall short in other areas as well. So while I'm grateful to the 
administration for helping provide us with an opportunity to 
enact necessary reforms, there are also many issues about which 
we differ. And I am grateful for this opportunity to work 
together with all the stakeholders to craft a plan which moves 
up along the path to a revitalized city.
    It is understandable that the administration desires that a 
Memorandum of Understanding be signed among the District 
government, the Control Board, and the Office of Management and 
Budget. Such a document would certainly help to facilitate the 
legislative process. But I must make it absolutely clear that 
neither Congress nor this subcommittee is a rubber stamp. We 
cannot be expected to blindly pass a proposal simply because it 
is reflected in a signed memorandum among only these interested 
parties. That is not the way the legislative process works, and 
that is not the way it is supposed to work.
    In the final analysis, Congress is the branch of Government 
that passes the laws and supplies the resources. So we have not 
only the intention, but an obligation to do what we think best. 
In the meantime, we encourage the city and the administration 
to help us narrow the issues in the very limited amount of time 
remaining.
    Today, we will explore the Medicaid and Treasury borrowing 
sections of the President's proposals. The proposed 70-30 
Medicaid split would result in around $917 million in increased 
payments to the city over 5 years. In return, the city is 
expected to enact many reforms. I look forward to hearing from 
our witnesses today about the specifics and any connection that 
may exist between the formula changes and the implementation of 
reforms.
    As to the critical Treasury borrowing section, the 
subcommittee is interested in the terms, conditions and window 
of availability the District would have. We also want to 
explore any impact on the city's overall cash position and any 
offset due to the suggested elimination of the Federal payment.
    So we are continuing our review of the President's 
proposals in a serious way and will continue to do so.
    Permit me to emphasize that time is now of the essence. 
This subcommittee and Congress are proceeding to keep momentum 
going. But there is just so far that we can go without the city 
and the White House. To the extent that they are absorbed with 
each other, they can't very well be engaged with us in a 
productive way. So, we encourage the move ahead on the 
Memorandum of Understanding and the other issues so we can more 
fully work with you to address the issues. We appreciate the 
initiative the administration is sharing.
    The Chair now recognizes Ms. Norton.
    Ms. Norton. Thank you.
    I want to thank Chairman Davis for calling this hearing 
today on the President's National Capital Revitalization and 
Self-Government Improvement Plan, and for his continuing 
cooperation in moving hearings on President Clinton's plan. A 
systematic and rapid schedule is necessary so that we can meet 
the timeframes necessary to have the changes in place by the 
next fiscal year beginning this October 1st.
    Except for pensions, the two issues that are the subject 
matter of today's hearing are probably the most important in 
the President's plan, Medicaid because its escalating annual 
cost alone is enough to defeat the District's recovery, and a 
Treasury borrowing because its absence alone would preclude 
solvency.
    The District's over $400 million projected Medicaid costs 
for fiscal year 1997, along with the city's $5 billion unfunded 
pension liability were the chief villains taking the city into 
inevitable insolvency. Medicaid ranks with pensions not only 
because of its annual cost, but because it presents a special 
case of unfairness. Cities don't pay for Medicaid; States do. 
Even New York City, the only city that contributes to Medicaid 
funding, pays for only 25 percent of the total city cost, while 
the plan before the subcommittee would leave the District with 
30 percent of its Medicaid costs. Astonishingly, 39 States have 
a better Medicaid match than the District.
    The second subject of our hearing is the sine qua non of 
solvency. Without a Treasury borrowing, the District cannot 
liquidate its almost $500 million accumulated deficit. The 
debate in the District and in our own appropriation committees 
here over progress in decreasing the city's annual deficit has 
failed to discuss or to produce a strategy for eliminating the 
large accumulated deficit. We ignore the debt we have been 
rolling over for 2 years at our peril. Even after a balanced 
budget is achieved on an annual basis, the large accumulated 
deficit could still block credit worthiness and access to the 
market.
    While Congress may still make changes, President Clinton 
deserves great credit and praise for his proposals on Medicaid 
and a Treasury borrowing for deficit elimination in particular 
because of the significance of these two matters in achieving 
anything close to permanent financial stability for the city. 
These are just two more elements in the President's innovative 
package that the city did not entirely expect, but that give 
the plan the comprehensiveness that alone can assure the city's 
financial health.
    It is necessary for the subcommittee to keep pace if we are 
to meet House and Senate timeframes beyond our control. The 
chairman and his staff have our appreciation for the attention 
they are giving to achieving this goal. I welcome today's 
witnesses and look forward to their testimony. Thank you, Mr. 
Chairman.
    Mr. Davis. Thank you very much.
    I also recognize our colleague from California, Mr. Horn.
    Mr. Horn, any opening comment?
    Mr. Horn. No.
    Mr. Davis. Thank you very much.
    At this point, I would call our first panel to testify: 
Edward DeSeve, Controller of Office of Management and Budget; 
Deborah Chang, Director of Legislative and Intergovernmental 
Affairs, Health and Human Services; and the Honorable Mozelle 
Thompson, Principal Deputy Assistant Secretary for Government 
Financial Policy, Department of Treasury.
    As you know, it is the policy of this committee that all 
witnesses be sworn before they testify. Would you please rise 
and raise your right hand.
    [Witnesses sworn.]
    Mr. Davis. I ask your comments be made part of the written 
record, as I request that in the interest of time you limit 
your oral statements to 5 minutes. We have read the statements, 
and we invite questions. I also want to thank you for 
addressing some of the questions in your opening statements. 
That will save us time.
    Miss Chang, we will start with you, or we can start with 
Mr. DeSeve, if you prefer.

 STATEMENTS OF EDWARD DeSEVE, CONTROLLER, OFFICE OF MANAGEMENT 
    AND BUDGET; DEBBIE I. CHANG, DIRECTOR, LEGISLATIVE AND 
INTERGOVERNMENTAL AFFAIRS/HCFA, HEALTH AND HUMAN SERVICES; AND 
    MOZELLE THOMPSON, PRINCIPAL DEPUTY ASSISTANT SECRETARY, 
                      TREASURY DEPARTMENT

    Mr. DeSeve. I would like to briefly thank the committee for 
again having a hearing on these important items and indicate 
three things. One, this is a continuation of work we have done 
jointly with the committee for more than 2 years. The people 
with me today have also been working as part of the 
Presidential Task Force on the District of Columbia. We know 
that we are on a tight timetable with you to try to craft 
legislation, and we are anxious to do so. We think the 
continued cooperation that we have had with you is terribly 
important, and we look forward to continued cooperation with 
the District. You have indicated we have a long way to go, and 
I and my colleagues and my boss Frank Raines are committed and 
dedicated to getting that done.
    We are delighted to have Debbie Chang and Mozelle Thompson 
with us today. I will be happy to answer any questions as well 
after they finish.
    Mr. Davis. Thank you very much.
    Ms. Chang. Thank you, Mr. Chairman and members of the 
subcommittee. I am pleased to be here to talk about the 
Medicaid provisions in the President's plan for DC, as this is 
a vital aspect of the President's plan to reconfigure the 
obligations between the District and the Federal Government in 
terms of providing for a better financial situation and better 
management of the DC programs.
    The committee has expressly asked about the link between 
the Medicaid legislative proposal and the Memorandum of 
Understanding, and I will speak directly to that. The way we 
have designed this is that the enhanced Federal match of 70-30, 
that has been discussed previously would not take effect until 
October 1, 1997, this year, or, when the Secretary has approved 
the management plans that are required in the Memorandum of 
Understanding, whichever is later. So, we have a direct link 
between the enhanced Federal match and the Memorandum of 
Understanding for the Medicaid provisions.
    Now let me go to the logic of the Medicaid matching rate. 
As you may know, under the current law, the District has 50 
percent of its program paid for by the Federal Government. In 
addition, under current law, a State can have localities 
contribute up to 60 percent of the State's share. Now DC, of 
course, is in a very unique position. It is not a State, but it 
is treated as a State under current law, and it is not a State 
in the sense that it cannot get contributions from other places 
either surrounding the District, and it can't use the State's 
economic base to help with the burden of the Medicaid costs.
    So what we would do in the President's plan is we would 
basically change the current formula for DC, so that the 
matching rate is equal to the maximum amount a local government 
can be required to contribute under law, and what that means is 
you take the 60 percent that is permitted under Federal law and 
you apply that to the current States' 50 percent, and that 
results in 30 percent that the District would pay under the 
President's plan.
    I want to stress that we think this is a good way to go for 
equity reasons, and that under this plan the Federal Government 
would pay 70 percent, and the District would pay 30 percent. 
But, in addition to this, we thought it was important to link 
this enhanced Federal match with other provisions in the 
Memorandum of Understanding, which I will now go through.
    The first thing we would do is we would have the District 
develop an ongoing internal system to identify and collect 
moneys owed by third parties. Right now under Medicaid law, 
Medicaid is the payer of last resort; therefore, Medicare or 
other private payers pay first, Medicaid should pay last, and 
we would require the District to identify and collect moneys 
owed by these third parties.
    In addition, we would want the District to address its 
current backlog in cost reports and unaudited cost reports for 
institutional providers, including hospitals, nursing 
facilities, and facilities for the mentally retarded.
    Third, we would ask that the District develop and implement 
a comprehensive data system for management information 
requirements, and our rationale behind that is that we want a 
system where we can verify eligibility across programs, we can 
identify what services our beneficiaries are getting, we can 
monitor claims processing, and we can basically assess the 
overall quality of services and the quality of the program 
under the Medicaid program, under the--for the District of 
Columbia. So this is an essential part of what we think is a 
tool for the District to better manage its program.
    Last, we would work with the District to develop a 
comprehensive behavioral managed health care system, and we 
have already begun discussions with the District on this. The 
purpose of this is to coordinate the services that are 
currently provided with respect to mental health, to both 
coordinate and provide a better set of services to 
beneficiaries.
    You have asked in your request about the--what we feel 
about the capacity of DC, to implement this, in these areas. We 
feel that these conditions are reasonable and practical, and it 
is in the self-interest of the District to do these, and as you 
will hear later from the head of the Medicaid program and 
others, they too believe that the elements identified for the 
Medicaid program are reasonable and a good step toward really 
helping the District in improving its program.
    Let me also mention before I close that we think there are 
a lot of signs that under its current new leadership, the 
Medicaid program has really improved, and, in fact, in terms of 
services, we have recently approved several different waivers 
where the District will provide home care to the mentally ill 
or mentally retarded, and that the District is providing 
comprehensive services to children with special needs. They 
have also taken steps to improve their eligibility verification 
system because, as you may know, they recently found there were 
about 19,000 people who were actually on the Medicaid program 
but were not actually eligible. So they have taken a lot of 
steps to improve the program.
    We think what we have presented represents a set of tools 
that they can buildupon to improve the program further. With 
that, I will stop, and I will be happy to take any questions.
    Mr. Davis. Thank you very much.
    [The prepared statement of Ms. Chang follows:]

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    Mr. Davis. Mr. Thompson.
    Mr. Thompson. Chairman Davis, Congresswoman Norton and 
distinguished members of the subcommittee, I am pleased to 
appear before you today to discuss an important part of the 
President's National Capital Revitalization and Self-Government 
Improvement Plan--the financing of the District of Columbia's 
accumulated deficit.
    As you know, the President's plan is a broad-based proposal 
to change the existing relationship between the Federal 
Government and the District of Columbia. It recognizes the 
District's unique needs and how the Federal Government can help 
to address them. A critical element for restoring the fiscal 
health of the District is providing some method of addressing 
the District's years of accumulated deficits. My testimony 
provides some background about borrowing issues and how the 
Treasury financing will provide an important tool to enable the 
District to better manage its debt and cash-flow needs.
    In the past, Congress authorized the Treasury to provide 
the District with long-term financing for certain capital 
projects on a project-by-project basis. It also authorized the 
Treasury to make short-term advances for seasonal cash-flow 
purposes. Right now of those old loans, $50 million in long-
term capital loans remains outstanding.
    In 1981, the District obtained the authority to go to 
private financial markets to borrow. It borrowed about $6 
billion, and about $3 billion remains outstanding. By the early 
1990's, however, the District began to experience financial 
difficulties and accumulated operating deficits, and this 
deficit is now approximately $500 million.
    Two years ago, when Congress enacted the District of 
Columbia Financial Responsibility and Management Assistance 
Act, Treasury was authorized to provide the District with two 
different kinds of loans. It was able to provide short-term 
loans to help the District finance its growing operating 
deficit on a temporary basis until a long-range solution was 
developed. Since 1995, Treasury has provided the District with 
$689 million in ``transitional'' short-term loans. Most of 
these loans were repaid from the Federal payment, but $223 
million remains outstanding. Treasury's authority to provide 
this kind of loan expires on September 30, 1997.
    The act also authorized the Treasury to make seasonal 
short-term cash-flow loans to the District. The terms of the 
loans are up to 11 months and those loans can cross fiscal 
years. That cash-flow lending window does not expire in 
September with the ``transitional'' loan authority. The 
District has yet to use the seasonal cash-flow window, and all 
of its borrowing instead has been done under the 
``transitional'' facility.
    The President's plan presents a blueprint for satisfying 
the District's long-standing, yet unaddressed, need for deficit 
financing. It would authorize the Secretary of the Treasury to 
make new loans with terms of up to 15 years to assist in 
financing the accumulating operating deficit. The interest rate 
on such loans would be based on Treasury rates and be subject 
to the Credit Reform Act of 1990, and must be scored as part of 
the budget in the year in which the loans are authorized. At 
the same time, the Secretary's authority under the 1995 act to 
make short-term cash-flow loans would continue to be available.
    Providing the District with deficit financing would provide 
substantial benefits for the District and its residents.
    First, it would allow the District to better manage its 
financing by breaking a pattern of annual rollovers of millions 
of dollars of deficit.
    Second, it would allow the District to reduce its debt 
service costs by being able to repay its deficit over a longer 
time, utilizing longer-term interest rates.
    Third, it would enable the District to more quickly rebuild 
access to credit markets to the extent that this vehicle 
provides the District with a stable and responsible means for 
eliminating the deficit.
    The administration believes that any legislation that 
provides a deficit financing mechanism should have sufficient 
flexibility for the Treasury to work with the District and the 
DC Financial Responsibility and Management Assistance Authority 
to structure an appropriate loan. Our plan contemplates such 
flexibility. However, the Treasury also believes any deficit 
financing will only be successful if it also encourages 
appropriate accountability and management of District finances. 
Accordingly, the plan contemplates any deficit financing will 
contain the following elements.
    First, the authority to make deficit loans will be 
available for only a limited time, and for a limited amount. By 
limiting the amount and timing of such borrowing, we will avoid 
creating a financing structure that could encourage the 
accumulation of new deficits.
    Second, the District will continue to be required to 
demonstrate that it is unable to obtain credit from the private 
market on reasonable terms. The Treasury continues to believe 
the District benefits from using and maintaining its own access 
to credit markets. Consistent with this principle, any deficit 
loan mechanism would also allow the Treasury to require the 
District to refinance deficit loans in the private market if 
the Treasury determines the District is able to do so without 
adversely affecting its financial stability.
    Third, any intermediate-term loans would be no longer than 
15 years. We are aware the District believes it may benefit 
from some short-term borrowing on an ``inter-year'' basis, and 
our plan is flexible enough to permit such borrowing. However, 
we believe such loans should be made under conditions that 
would not lead to ``roll-over'' financing of new deficits.
    Fourth, we would continue to require the same kind of 
certificates and supporting materials that we have required in 
the past.
    We believe this is precisely the kind of initiative and 
deficit financing vehicle that is worthy of the Nation's 
Capital. Mr. Chairman and Congresswoman Norton, this concludes 
my testimony.
    Mr. Davis. Thank you very much.
    [The prepared statement of Mr. Thompson follows:]

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    Mr. Davis. Let me just try to--explain to me in layman's 
terms the scoring provisions of the Treasury borrowing.
    Mr. DeSeve. Under the Credit Reform Act, any borrowing has 
to be scored. You don't know how it will score or what the 
amount is until the terms and conditions of the borrowing are 
presented.
    So let's use an FHA loan as an example. We have a history 
of FHA loans--any FHA loan, and they are bundled together each 
year. You look at the potential loss rate on that loan, and in 
the first year, the year in which it is authorized, you set 
aside enough money to pay for that loan. We have been working 
with the credit rating agencies and the District to try to get 
our scores in OMB comfortable with the nature of that set-
aside, that requirement. Mr. Horn is very familiar with this 
process, he has been working with us in other areas of debt 
collection and credit reform with that. CBO will provide 
scoring as well. When we did the Financial Responsibility and 
Management Assistance Authority Act, we looked at the Federal 
payment as a source of security. With that as a source of 
security, there was no scoring implication that was scored, but 
it was scored at zero by OMB because of the existence of the 
Federal payment.
    Mr. Davis. Does this proposal replace the Treasury 
borrowings?
    Mr. DeSeve. It extends them because they expire, and it 
also adds the 15-year intermediate term as well.
    Mr. Thompson. It also changes it in one way. To the extent 
it provides an express provision for deficit financing over a 
longer term, it is different from what is contained in the act. 
What does remain from the act, though, is the continued 
authority to borrow on a short-term basis for seasonal cash-
flow purposes.
    Mr. Davis. Miss Chang, let me ask a question. How many 
other cities operate their Medicaid programs?
    Ms. Chang. Under current Medicaid law, the counties can 
operate their Medicaid programs, and it is really based on the 
States; the States decide.
    Mr. Davis. Are there a lot of them?
    Ms. Chang. Yes, there are. There are at least 10 States 
where they have the counties operate and contribute financing 
for the Medicaid program.
    Mr. Davis. How about cities; I know L.A. does it, and, I 
guess, New York.
    Ms. Chang. Again, it depends on the State, and in those 
States that I mentioned, they do in those States provide for 
the county to provide both money as well as administering the 
program.
    Mr. Davis. Is it a 70-30 match? Is that a reasonable match, 
or is that a low end or a high end for a city and county 
operating; from the city's perspective, take the State out of 
it?
    Ms. Chang. Right now States can contribute ranging from 20 
to 50 percent in terms of the program, and as I mentioned to 
you earlier, up to 60 percent of the State's share can be used 
by the counties. So it can take 60 percent. It's a range of 
about 12 percent to 30 percent, so in that sense, DC is on the 
high end of what a district would contribute.
    Mr. Davis. Thinking of the city as a city, then, the share 
is on the high end. Thinking of the city as a State, makes it 
very good, so it depends on the perspective.
    Ms. Chang. That is true.
    Mr. Davis. OK. How well do you think the city is doing 
managing a Medicaid program today?
    Ms. Chang. As I said earlier, I think the city has made a 
lot of improvements in managing the program under its new 
leadership, but clearly there are areas of improvement we have 
outlined in the Memorandum of Understanding. One of the key 
things is that the city needs to build an infrastructure of 
both information and accountability, financial accountability, 
and that is why the data system I mentioned, dealing with the 
cost reports, dealing with making sure that we--that the city 
collects all the third-party liability, all those things are 
very important for the city to move forward in improving its 
program.
    Mr. Davis. Well, let me ask, assuming, say, Maryland or 
Virginia wanted to contract collections, is there anything to 
prohibit the city from contracting out collections to Maryland 
or Virginia if they wanted to do that?
    Ms. Chang. That is a complex issue, and there are legal 
issues as well as capacity issues. I don't really know the 
answer to that question.
    Mr. Davis. And do you have any thought on that?
    Mr. DeSeve. I don't. We would like to get back to you with 
a written response.
    Mr. Davis. Or privatized. But say Maryland is next door and 
does a pretty good job and will, for a fee, do that as opposed 
to taking it.
    Mr. DeSeve. Pennsylvania take over Delaware, something like 
that. Let us take a look and get that for you.
    Mr. Davis. Is that feasible; is it easier than trying to 
reinvent the wheel? And I don't have any particular thoughts on 
it, but it is something that has been suggested up here, so I 
wanted to get your thoughts on that.
    Well, let me ask this: Will the Treasury loans be at 
reduced rates or in terms of below the private market?
    Mr. Thompson. The Treasury loans will be based on what the 
Treasury rates are, plus if that is where we have structured 
them now because of our cost of borrowing, we have to go out 
and borrow. Also, subject to whatever the credit story has to 
be, we are not looking to provide a subsidized rate here 
because that would have a substantial credit scoring impact.
    Mr. Davis. I guess my last question I would like to ask all 
panelists--we will send you some other questions. We have two 
other panels here. The private bond markets, especially holders 
or insurers of outstanding District general obligation debt, 
have been concerned about the Treasury using Federal payment as 
collateral and having first called that funding source. How 
does this proposal and the elimination of the Federal payment 
affect future bond rates? Any thought on that?
    Mr. Thompson. Sure. First of all, we at Treasury believe 
that we want to be cautious with someone else's bonds and 
obligations.
    Mr. DeSeve. We have enough of our own to worry about.
    Mr. Thompson. The purpose of----
    Mr. Davis. You also understand you have us down the road.
    Mr. Thompson. Sure. The important part about providing 
deficit financing on a longer-term basis is that will provide 
the District with stability and certainty to the extent that it 
provides a plan to provide stability, to the extent it provides 
certainty, that there is a mechanism to reduce outstanding 
obligations, we think both of those features are things the 
market looks for as a balance.
    Mr. Davis. Plus any others; particularly, first call of 
cash and the predictability and the certainty of being able to 
be sure.
    Mr. Thompson. Sure, but I don't think anybody is looking at 
the Treasury or anywhere else to do anything that threatens the 
District's ability to meet its obligations.
    Mr. Davis. In fact, the whole idea is so the city can meet 
obligations and take obligations within a framework it can 
afford.
    OK. I may have additional questions, but that covers it. 
Thank you very much. Ms. Norton.
    Ms. Norton. Thank you, Mr. Chairman.
    Miss Chang, I appreciate that the 70-30 formula is 
considerably better than what the city has now. I know you 
appreciate that. The Medicaid match you happen to have would 
bring down some States, States that are really struggling with 
Medicaid. Medicaid costs have remained quite uncontrollable, 
despite what I will not call our best efforts, but despite 
efforts here in the Congress. Therefore, this is a cost that I 
look to with some skepticism, particularly since the Congress 
hasn't said what in the world it is going to do with it. Since 
most of the money goes for nursing homes, it is in very many 
ways a middle class entitlement, since they were the people who 
were going in and becoming elderly.
    The fact is the Federal Government has shares with entire 
States that range all the way up to 80 percent. While I 
understand the way in which you get to your figures, and it is 
a rational way, it is not a figure plucked out of the air, I 
wonder if it's possible to justify the Federal Government 
picking up an 80 percent share for a State like Louisiana and 
only a 70 percent share or a lesser share for a city which is 
rapidly losing its middle-income tax base.
    Since the District is treated as a State, whenever it is to 
the advantage of the Federal Government, why was the District 
not treated as a State and looked at in comparison with other 
States in this regard so that we might have had a truer nexus 
to our own underlying economy, which you still have to cough up 
a lot of money because it is Medicaid and because of the 
escalated cost of Medicaid.
    Ms. Chang. You mentioned several things here. Let me try to 
address all of them.
    With respect to the formula under the current program, in 
fact, as I think I already indicated, it ranges from 50 percent 
to 80 percent, and that is the very nature of the program. So 
there are programs that are getting 80 percent, higher than the 
70 percent we propose for the District, and it is really due to 
the way the formula is crafted.
    The way the formula is crafted is States with high per 
capita income basically pay more for their Medicaid program, 
and that is why the District pays the minimum amount, which is 
50 percent, and that is just a function of the formula.
    Now, with respect to your other point, however, I just want 
to underscore that while it is true that the Medicaid program 
does provide some long-term care costs, it is an essential 
safety net for low-income people, and, in fact, 50 percent of 
the recipients under Medicaid are low-income children who need 
health care services, and even the people who spend--who need 
nursing home services----
    Ms. Norton. Excuse me, I am talking about the money. I am 
interested in the money. Two-thirds of the money goes to people 
in nursing homes. The District of Columbia cannot control that. 
The fact is when people use the figures about poor children, 
they hide the real facts, and that is that people spend out 
their money, and they can't help it because it costs $40 to 
$50,000 a year, and that is who gets the money. It is true that 
the children in numbers are the larger representative, but DC, 
when it comes to paying out the money, DC is going to be paying 
it to nursing homes, and there is not anything they can do 
because it remains an entitlement, and that is what I was 
speaking to, and I wish you would respond to.
    Ms. Chang. You are asking me to respond why we came up with 
the 70-30 match?
    Mr. DeSeve. Let me try that.
    It is really a political question. We looked at the 
statutory formula; Congress enacted the formula. We did not 
invent the formula in the administration. In looking at the 
formula, we saw the rationale for city shares and State shares, 
and we chose the most difficult rationale for the District. It 
was a policy choice not done by technicians, but done broadly 
in the context of a plan. So we said, what is the most a city 
could pay? You may argue the proper construction is what is the 
least the State can pay, and I think that is a valid argument 
as well.
    Ms. Norton. Please understand that what you have done 
leaves the city very substantially--we are just killing the 
city. I am up here where I hear the States come forward on 
their knees, who are much richer than the District, and I am 
posing that question for that reason.
    Let me ask another question. One State function that is 
very large that was not transferred, that you did not consider, 
was welfare. Now, if you insist upon treating the city as a 
city, then, of course, I am going to insist that you be 
consistent. If you insist upon treating the city as a city, 
look at the position the city is left in now, and here there is 
very clear and present danger, because if the city doesn't get 
50 percent of its welfare recipients into work activity by 
2002, and 25 percent by the end of this year, it begins to lose 
real money. This is the first time this has ever happened to 
the city, and it could lose up to 21 percent of its grant.
    That could happen, of course, to any State. The difference 
is that in trying to put together, let's say, the 25 percent 
for this year, Maryland will not get anything like that number 
out of Baltimore because it has the whole State of Maryland 
with its State demographic base to draw from. And in the same 
way, Virginia will probably not get a lot of them from 
Richmond. In fact, there are jobs in northern Virginia that 
will make it easier to get, perhaps, a disproportionate share 
from northern Virginia, but the District has no place to get 
them from except its own inner city.
    So if you are insisting upon the city formula, I want to 
ask you why you are not willing to take over some portion of 
welfare in the way you have taken over some portion of 
Medicaid?
    Mr. Horn [presiding]. The question will be answered, and 
then we will go to the next panel.
    Mr. DeSeve. Thank you, Mr. Horn. We are trying to work very 
hard in a new environment for laws, as you put it, in welfare 
reform. And we wanted to allow that new law to begin working. 
We are very sensitive to the District's plight here, and are 
working very closely with the District as they try to fashion 
their response to the new law. And we will look very, very 
carefully at it.
    Ms. Norton. Excuse me, that was a two-part question, sir. 
Would you consider supporting my bill, which would erase the 
discrimination the District now faces in having to essentially 
get its 25 percent and then its 50 percent from the inner-city 
population, erase it by allowing the District, with respect to 
the percentage, to be compared to cities so that if, for 
example, Baltimore and Richmond are contributing X percent to 
the State quota, the District could contribute approximately 
the same percent to the quota, rather than being treated as a 
State where we don't have a State demographic base?
    Mr. DeSeve. May we take a look at that and get back to you? 
We didn't come prepared today to do welfare, I am sorry.
    We would be delighted to take a look at that and get back 
to you with our positions on it.
    Ms. Norton. I appreciate that very much. Thank you, sir.
    Mr. Horn. You are quite welcome.
    The gentleman from California is recognized for 7 minutes 
on the equality of time.
    Mr. DeSeve. The normal rule in the Horn subcommittee is 
only 5 minutes.
    Mr. Horn. No, it isn't. Whenever I go over, I give another 
Member the extra time, so I am giving myself the 7 minutes this 
time.
    Ms. Norton is pursuing a very interesting idea, and that 
was going to be my first question: Whose idea was this? You are 
saying it was the administration's idea. What type of 
consultation occurred with the District of Columbia government, 
and were there other areas you feel would be indeed a better 
increased Federal contribution?
    Mr. DeSeve. Mr. Horn, the proposal of the President, as you 
know, encompasses criminal justice, infrastructure, economic 
development, pensions, Medicaid, borrowing and tax collection. 
We listened very carefully and looked very thoughtfully over 
the last 2 years--before the plan was put in place--at all of 
the testimony in this committee and other committees, read a 
whole series of reports, talked to our counterparts in the 
District of Columbia. And then the President and the Director 
of OMB made a decision that among the collection of proposals 
that we had seen put forward by a variety of the people, that 
this particular collection was the one that provided 
significant and substantial relief to the District; the 
collection provided significant and substantial relief to the 
District.
    Mr. Horn. Well, Medicaid, how are you looking at it, is it 
simply dealing with consumable services, or is there a capital 
outlay program in here somewhere?
    Mr. DeSeve. We know of no capital outlay program. All we 
are doing is mathematically changing the cash formula as it 
exists now to provide fiscal relief for the District at the 
same time we are asking the District to undertake a series of 
management reforms. That was the narrow intent of this 
particular part of the proposal.
    Mr. Horn. Ordinarily when you are using bond money, you 
would have some sort of amortization of infrastructure 
involved, and this one you really don't have amortization of 
infrastructure, you have consumable services. Do you think it 
is improper to use bond money on consumable services?
    Mr. DeSeve. This refers, of course, to the borrowing 
section of the proposal, and in the borrowing section of the 
proposal, we had to recognize that budget crises, as we have 
known them in municipalities, have two characteristics: One, 
you have a budget which you can't balance, and that is OK; it 
is not good, but it's OK for a city, as long as they have 
access to the credit, as long as they have liquidity. On the 
other hand, it's OK to have a balanced budget and no liquidity 
because normally, again, you can access the credit market in 
that case.
    In the District's case, we have an unbalanced budget and 
lack of liquidity. The unbalanced budget occurred over several 
years; it didn't occur in any 1 year. The accumulated fund 
balance deficit as it exists now will be this year estimated in 
excess of $500 million. The question then is if we were an 
individual, would we do a debt consolidation loan, and would we 
finance that over a period of years to try to use the tax base 
as it exists now and savings that the District must achieve? In 
order to be able to afford that debt over time, would we do 
that kind of debt consolidation loan?
    We believe it is the only way to restore liquidity to the 
District. As Mr. Thompson testified, we have--they will be 
holding their own fiscal feet to the fire in achieving a kind 
of capacity, over $50 million a year, I would guess, to pay off 
that accumulated deficit. Do you want to add to that?
    Mr. Thompson. One thing we also looked at is if you look at 
every city that has gotten into some kind of fiscal trouble and 
had some accumulated deficit, there was some way provided to 
buy it off over time. In the case of New York, there was the 
Municipal Assistance Corp.; same thing was true in 
Philadelphia. So, we are providing a vehicle that in some cases 
a State would provide as a financing tool.
    Mr. Horn. Basically, though, it isn't just Medicaid. We are 
really talking money expendable.
    Mr. DeSeve. Right.
    Mr. Horn. It doesn't matter where the operational deficit 
comes from, this is the way to pay for it, and if they fouled 
that up, I don't know what else they would do is what it boils 
down to.
    Mr. DeSeve. That's correct. The fact is, this hearing 
combined Medicaid and borrowing; those were two elements of the 
President's plan. You are correct.
    Mr. Horn. I personally happen to agree with Ms. Norton, and 
many Governors would take this position that maybe the Federal 
Government ought to take unto itself the funding of Medicaid 
because it has been a tremendous burden on the States in terms 
of matching money. It is very difficult to get services because 
repayment of those services is so low. Very few doctors will 
take MediCal in the State of California, and there is no 
question that the nursing home example is a good one. That is 
basically what pays the nursing homes in this country, and it 
is limited to poor people because you become rapidly poor if 
you have to go to a nursing home.
    And I guess I am curious here, though, on the example--
let's take Wyoming, Vermont and New Hampshire, among others, 
which is really about the population of the District of 
Columbia, certainly Wyoming is, and the degree to which there 
is a State/Federal proportion there. If you would put in the 
record at this point, and I would appreciate it--unless you 
have it, Ms. Chang?
    Ms. Chang. You said Wyoming?
    Mr. Horn. Wyoming, Vermont and New Hampshire.
    Ms. Chang. Wyoming's Federal matching rate is 59.88; 
Vermont is 61.05. And, I am sorry, sir, what was the third one?
    Mr. Horn. New Hampshire.
    Ms. Chang. New Hampshire is 50 percent in terms of the 
Medicaid matching rate.
    Mr. Horn. Now let's take the Southern State that has the 
least State payment and the most Federal payment. Which one 
would that be?
    Ms. Chang. Southern State with the--oh, that would be 
Mississippi.
    Mr. Horn. It is usually Mississippi. Nothing has changed in 
30 years then.
    And then what is that number?
    Ms. Chang. Actually, before I gave you what the Federal 
Government paid. The Federal Government pays 77.22, so the 
State pays about 22.8 percent.
    Mr. Horn. Is that the highest Federal payment in the 
country, among States?
    Ms. Chang. I believe it is. Yes, it is, sir.
    Mr. Davis [presiding]. May I ask you to yield for 1 second? 
What is Virginia's Federal matching rate?
    Ms. Chang. I am ready for that one; 51.45.
    Mr. Horn. See, they weren't as poor as you thought they 
were. You never should have given it up during the Civil War; 
the War between the States, as you say.
    Let me ask you, where is the administration of this 
particular financial aspect going to be controlled, or is the 
Control Board going to watch that throughout the life of the 
loans?
    Mr. Thompson. First of all, one of the things we would ask 
for in this structure is that the money go to the Financial 
Control Board, as the loan proceeds do right now. There would 
continue to be required certification that any loans that we 
would make would be consistent with an approved budget and 
financial plan. So, there would be a series of checks and 
balances that would be required before the Secretary of the 
Treasury could make a loan.
    Mr. Horn. In other words, the bondholders and the bond 
providers would be assured of some scrutiny beyond that of the 
District of Columbia.
    Mr. Thompson. Well, I can only say with regard to any loan 
we would give, it would be subject to close scrutiny because we 
would be in charge of looking out for the taxpayers' interest.
    Mr. Horn. What is the current life under law of the Control 
Board?
    Mr. Thompson. I think it depends. It is defined in terms of 
a control period.
    Mr. DeSeve. There are two tests. One is whether the 
Authority itself has any debt outstanding, and the second is 
the number of years after the city has balanced its budget, and 
I believe it is 4 years--I could stand corrected, but I believe 
it was 4 years after the city achieves a balanced budget, if 
they then have a budget that is unbalanced, it springs back 
into existence.
    Mr. Horn. But, in other words, they would not go out of 
existence until these bonds were repaid.
    Mr. DeSeve. If this were the debt of the Authority. The 
proposal is to make a debt of the District of Columbia, not of 
the Authority at this point, so this would not affect the life 
of this entity.
    Mr. Horn. What is the Treasury's concerns that those bonds 
are not repaid?
    Mr. Thompson. We always have a concern when any are not 
repaid, but one of the things that we will seek is assurances. 
We have a test called the reasonable assurance of repayment 
tests. We would be looking to see that the District would be 
able to budget and plan for sufficient debt service to cover 
any loans that we would make, the way we would have for any 
other obligation that they would incur. To the extent there is 
a control period during which the Authority will be in place, 
we would be looking to it to provide certifications, and as Mr. 
DeSeve pointed out, the way the law works is that after the 
point the Authority maybe goes out of business, should the 
District become out of balance again, the Authority comes back. 
So, we will be working closely with the District.
    Mr. Horn. The last question is, do you see these as solely 
Federal bonds, as municipal bonds as that term is understood, 
when municipalities go on the market and secure funding?
    Mr. Thompson. We don't look at them as bonds. We look at 
them as direct obligations between the District and the 
Treasury. So there would be a notice, and there will be direct 
debt from the District to us, not bonds. We don't calculate it 
that way.
    Mr. Horn. How would you define the note versus bond and how 
it is typically retired. I mean, you have a payment schedule 
there?
    Mr. Thompson. Right.
    Mr. Horn. That is what a bond also has.
    Mr. Thompson. Right. Well, there is no document that 
represents a bond that can be transferred, for example, in the 
secondary market or sold. That doesn't exist. So it would be 
like what you would have with any other loan. There would be a 
security agreement indicating that we have, a loan agreement 
with the District, as we have now for the existing debt.
    Mr. DeSeve. For example, if a Member of Congress had a note 
with another Member of Congress that was not transferable, that 
would be a note, where if he had a loan like a mortgage, it 
would be sold in a secondary mortgage, that would have a 
different characteristic.
    Mr. Horn. If it was between Members, you might want to turn 
it over to the mob for collection.
    I am just wondering if the Treasury will be in that mode in 
the District of Columbia. I mean, do you really expect to get 
the money back?
    Mr. Thompson. As I pointed out earlier, one characteristic 
of the District is that it has never defaulted on its debt.
    Mr. Horn. It just kept getting debt. Is that the way they 
solved it? It sounds like the Federal Government to me.
    Mr. Thompson. And also with respect to the long-term loans 
it has had, it has paid us on time or early on every one of 
those. The District owes us still about $50 million, but it is 
current.
    Mr. DeSeve. We would never make a loan if we didn't expect 
it to be repaid.
    Mr. Horn. I hope you are right.
    Mr. Davis. Thank you.
    Ms. Norton had one other question.
    Ms. Norton. I had one other question, and I have to warn 
you before the chairman does, he has to leave here at 4 p.m., 
so we are going to have to move more quickly, and I will 
certainly cooperate in that.
    I do have a question that has to be put on the record. The 
Treasury drove a very hard bargain when it came to Treasury 
borrowings. It insisted that the Federal payment be collateral 
for its borrowings. Now it wants to take away the Federal 
payment and assume that the District will somehow, without 
collateral, be able to borrow from the Treasury, and presumably 
from the market. Will you tell us why you insisted upon 
collateral if you think the District no longer needs 
collateral?
    Mr. Thompson. Well, I think the President's plan 
anticipates that with all the elements in place, that over time 
the District's surplus will grow, and I believe it also deals 
with the issues so the District will be better able to meet 
those obligations. We are currently working with the District 
and the Financial Control Board to determine an appropriate 
security mechanism. We are looking at what the District 
provides now in terms of security for other creditors, so 
that----
    Ms. Norton. Are you going to tell the committee at this 
time what you regard as appropriate security?
    Mr. Thompson. One of the things we are going to look very 
closely at, and we will be talking to the District about, is 
the mechanism it sets up for its own bondholders to see if that 
is adequate security for us.
    Ms. Norton. This is something--this creates some anxiety 
obviously in the District. I hope it means that OMB, put in the 
same position again, would not require the Federal payment for 
collateral. I have to assume you have greater confidence in the 
District as well, and I appreciate what you have done in this 
bill. Thank you, Mr. Chairman.
    Mr. Davis. Thank you. Thank you all very much.
    Second panel. The panel consists of Mike Rogers, the city 
administrator, District of Columbia; Mr. Jalal Greene, the 
deputy chief financial officer of Budget and Planning; Mr. Paul 
Offner, the commissioner of the Commission on Health Care 
Finance, DC Department of Health; the Honorable Charlene Drew-
Jarvis, chairwoman pro tempore; the Honorable Linda Cropp, 
chairwoman of the Committee on Human Services; and Mark 
Goldstein, deputy executive director for the Financial 
Responsibility and Management Assistance Authority.
    Miss Jarvis is not being asked to testify, but if she has 
any general comments, we can hear them at the outset.
    As you know, the policy of this committee is to be sworn 
before they testify. Will you please rise and raise your right 
hand.
    [Witnesses sworn.]
    Mr. Davis. The subcommittee will carefully review any 
statements you care to submit, and they will all be a part of 
the record. I also will ask you to limit your testimony to 5 
minutes or less. We have your full testimony, which we have 
read and have questions based on that subject, so the quicker 
you read it, the faster we can get to questions.
    Let me start with Mr. Rogers. We would like to welcome you.

 STATEMENTS OF MICHAEL ROGERS, CITY ADMINISTRATOR, DISTRICT OF 
    COLUMBIA; JALAL GREENE, DEPUTY CFO/BUDGET AND PLANNING, 
DISTRICT OF COLUMBIA; PAUL OFFNER, COMMISSIONER, COMMISSION ON 
  HEALTH CARE FINANCE, DC DEPARTMENT OF HEALTH; LINDA CROPP, 
CHAIRWOMAN, COMMITTEE ON HUMAN SERVICES, CITY COUNCIL; AND MARK 
   GOLDSTEIN, DEPUTY DIRECTOR, FINANCIAL RESPONSIBILITY AND 
                MANAGEMENT ASSISTANCE AUTHORITY

    Mr. Rogers. Thank you. Good afternoon, Chairman Davis, Ms. 
Norton, Mr. Horn, and members of the subcommittee on the 
District of Columbia. I am pleased to appear before you today 
to discuss the Medicaid provisions contained in President 
Clinton's White House plan for the District.
    Let me first commend the President for recognizing the 
District's unique structure as the seat of the Federal 
Government and unique fiscal constraints and restrictions 
associated with this position. The President's plan has indeed 
energized our city with historic and unprecedented discussions 
of renewal, regrowth and restructuring of our Nation's Capital.
    The President's plan recognizes the structural shortcomings 
of our city, particularly the untenable burden associated with 
misplaced State functions. It also recognizes the Federal 
Government's long-standing role in perpetuating the particular 
imbalances that have so defined the face of the District.
    Mayor Barry welcomes the President's plan. It is by no 
means perfect, nor is it a panacea, but it is a welcome work in 
progress which deserves full attention and commitment.
    Let me turn, specifically, to the Medicaid provisions. You 
have invited Dr. Paul Offner, commissioner of the Health Care 
Finance in the District, to join me today in giving testimony 
on the President's plan regarding Medicaid reform. I will speak 
broadly on this issue, while Mr. Offner follows with more 
specific information regarding program needs and challenges 
within the context of the President's proposal.
    The President's plan proposes to increase the Federal 
Government's share of Medicaid payments from 50 percent to 70 
percent, based on current Medicaid projections provided by the 
Health Care Finance Commission. Savings from the proposed new 
matching rate will be $162 million in fiscal year 1998, $166 in 
fiscal year 1999, to $172 million in the year 2000.
    As you know, as you have just discussed, with the exception 
of New York City, no other city pays Medicaid. Rather, States 
perform that role. One of the previous panelists, when you said 
``city,'' they said ``county,'' and I am saying ``city'' here.
    Even in the case of New York City, the Federal Government 
picks up 75 percent of the program costs.
    The Federal Government picks up 75 percent of program 
costs.
    The DC Financial Authority issued a report earlier this 
month which states that nearly every health and human service 
program provided by the District government has a component 
normally provided by a State. Also, with respect to Medicaid, 
the report indicated that the District has 2 taxpayers for 
every Medicaid recipient, versus 4.4 taxpayers in Maryland and 
4.3 in Virginia per Medicaid recipient. The bottom line is that 
the District's per capita Medicaid expenses are 2.6 times the 
national average.
    Given these figures, I am compelled to ask how much clearer 
can the inequity be? How can the District ever gain any 
semblance of control over rising Medicaid costs and public 
assistance needs with such a skewed participation rate in 
Medicaid costs?
    As I mentioned earlier, the President's plan proposes to 
increase the Federal share from 50 percent to 70 percent. The 
Financial Authority in its April report on the White House plan 
recommends that the District be required to contribute no more 
than 20 percent of Medicaid program expenditures, and that a 
peculiar offset be provided for other assistance.
    The District government supports the Financial Authority's 
Federal participation rate, which exceeds the proposed 70 
percent. Whether that rate is set at 75 to 80 percent is an 
issue that deserves serious consideration by the White House 
and OMB and the Congress.
    I am confident that Mr. Offner will provide more specific 
program comments on this issue. And I will defer to his 
assessment of the President's proposal in this regard. Mr. 
Offner will also provide a candid discussion on the current 
state of the District's Medicaid program and discuss critical 
issues relating to the ability and readiness to implement the 
MOU.
    Let me say that progress has been made in the Medicaid 
program over the past year. We are pleased with the cost 
savings initiatives that have been implemented, but we still 
have a long way to go. But in committing to this MOU process, 
the District must be and is committed to implementing the 
changes required in the MOU. Thank you very much.
    Mr. Davis. Thank you very much.
    [The prepared statement of Mr. Rogers follows:]

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    Mr. Davis. Mr. Greene.
    Mr. Greene. Thank you.
    Good afternoon, Mr. Chairman and Members of the Congress. I 
am Jalal Greene, the chief financial officer for Budget and 
Planning for the District of Columbia. I am pleased to have 
this opportunity to discuss the President's plan for 
revitalizing the District. Today, I will discuss the Medicaid 
portion of the President's plan and offer some brief comments 
on the impact of the overall plan on the District's budget.
    From the perspective of the District's budget, reducing 
Medicaid costs is a critical issue. For fiscal year 1998, the 
District will spend approximately $40 million in local funds on 
the Medicaid program. This expenditure represents approximately 
12 percent of the District's local funds budget. And in the 
recent past, Medicaid spending has grown at a rate that is not 
sustainable. Since 1990, the District's local fund spending on 
Medicaid has more than doubled from approximately $170 million 
in 1990, to $384 million in 1996. Cost containment measures 
instituted by the District will restrain the growth in Medicaid 
to some extent; however, it is clear that something must be 
done to relieve the District of some part of its current 
Medicaid obligation.
    The President's plan called for increasing the 50-50 ratio 
to a 70-30 ratio. We currently estimate that the Medicaid 
provisions of the President's plan will lead to over $160 
million in direct savings in fiscal year 1998. This would 
provide much needed budget relief to the District.
    We believe that the current 50-50 match cannot be 
justified. It was determined according to the standard Federal 
medical assistance percentage. This formula compares State per 
capita personal income with national per capita income. States 
with a lower than average per capita income receive a 
relatively higher match than States with higher per capita 
incomes. According to this formula, the District receives the 
lowest possible match of 50 percent.
    It has been recognized by many authorities, including GAO, 
that the Federal medical assistance percentage formula does not 
accurately reflect the ability of a State to pay for Medicaid 
programs. In the District's case, the formula does not account 
for its high levels of poverty and small size. Currently five 
States, Mississippi, Louisiana, South Carolina, New Mexico, and 
Alabama, receive a 70 percent match. The District receives a 
much smaller Medicaid match than those States even though they 
have comparable levels of poverty.
    Given the congressionally imposed limitations on the 
District's ability to raise revenue, it is unfair to expect it 
to deal with the large and increasing burden of Medicaid at the 
same match rate as wealthy States. The President's plan 
correctly recognizes this fact and offers a reasonable proposal 
for increasing the match to 70 percent.
    A strong argument can be made for increasing the Medicaid 
match above 70 percent. The District faces the challenge of 
serving a high-poverty population in a high-cost area. The 
large percentage of its population which lives in poverty and 
faces serious health problems requires greater Medicaid 
expenditures. In 1995, the District's per capita Medicaid 
expenditures of $1,429 was almost 2.5 times the national 
average. This figure includes both the high percentage of the 
population receiving Medicaid benefits, almost 21 percent in 
1995, and the high cost of medical services in the Washington 
metropolitan area. Furthermore, the District's small size makes 
it difficult to achieve economies of scale for administration. 
I recommend that Congress consider these factors as it decides 
what is the appropriate Medicaid match for the District.
    The President's plan will provide approximately $49 million 
in net benefits to the District in fiscal year 1998. This 
benefit will grow to around $140 million in fiscal year 2001. 
The net benefits of the President's plan will represent a 
significant step toward resolving the District's financial 
crisis.
    However, I must emphasize the fact that the President's 
plan alone will not bring long-term financial stability to the 
District. To restore financial stability over the long run, the 
District must continue to improve in areas of management 
efficiency and service delivery. The District must also take 
steps to reduce the tax burden on businesses and residents to 
levels that are competitive with surrounding jurisdictions.
    I urge the Congress to pass the President's plan as it 
stands. It provides significant benefits to the District which 
will grow over time. Thank you.
    Mr. Horn [presiding]. We thank you very much for your 
testimony.
    [The prepared statement of Mr. Greene follows:]

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    Mr. Horn. And the next giver is Mr. Offner, the 
commissioner of Health Care Finance for the District of 
Columbia.
    Mr. Offner. Members of the committee, my name is Paul 
Offner. I am in charge of the District's Medicaid program. 
Before this I was in charge of health and welfare on the Senate 
Finance Committee. I want to assure you that this is harder 
work.
    The District of Columbia has a problem because historically 
it has not invested the resources both in systems and in 
personnel that should have been invested, and the four 
specifics that have been identified in this Memorandum of 
Understanding are really testament to that. They represent 
management failings that we are now beginning to cope with but 
that historically have not gotten the attention they should 
have.
    Third-party recovery. There are literally millions and 
millions of dollars to be made by States in making sure that 
Medicaid is the payor of last resort. The District's third-
party recovery program is underfunded, understaffed and 
underautomated. It has nowhere near the level of sophistication 
of other States. I used to run the Medicaid program in the 
State of Ohio. We have begun to make some progress here. The 
last 6 months the recoveries have risen. We have a long way to 
go.
    The second item is audits. We have providers of health care 
for whom we don't have a settled audit for 6 or even 8 years. 
Trying to run a Medicaid program under those circumstances is 
like trying to navigate a ship in the dark. It's impossible. We 
need desperately to get those audits up to date. You can't 
reform reimbursement systems if you don't know what the costs 
are, and in too many cases we don't. We have made some progress 
in that area, but again, we have a long way to go.
    The most important, and the most expensive area is, of 
course, the Medicaid Management Information System. The 
District has an antiquated system that provides management with 
very little of the information that is really needed to manage 
a program like this. Here we are spending close to $1 billion a 
year, yet we don't know where the money is going, or who is 
getting paid. We have none of the management information that a 
manager ought to have for a program of this size. We have 
started over the last few months to plan a total overhaul of 
this system, but we still have a long ways to go, and the 
inclusion of this item in Memorandum of Understanding, I think, 
is important.
    Finally, there is the mental health initiative. Some time 
ago, Mayor Barry launched a comprehensive effort to integrate 
the mental health system. The District spends more money on 
mental health than any jurisdiction in the world. It is a 
remarkably expensive program, largely because our clients spend 
too much time in hospitals, and our whole mental health system 
is not integrated in any meaningful way. We have now hired the 
former Commissioner of Mental Health from Massachusetts to come 
in and head up this effort, and I think it has enormous promise 
both to improve services and over time to save money.
    Over the last year, the District's Medicaid program has 
undergone a total overhaul. We have--as was, I think, just 
referenced--we have removed 25,000 individuals from the rolls, 
representing over 15 percent of our caseload, people who were 
found to be ineligible. We have reduced our inpatient hospital 
rates by 25 percent. We have reduced our HMO rates by 17 
percent. We have cut long-term care rates by $14 million. We 
are in the process over the next 12 months of moving all of our 
AFDC recipients into HMOs, and are now implementing a waiver so 
we can provide comprehensive services in the community to 
disabled people to keep them out of our group homes for the 
mentally retarded, which also are the most expensive in the 
country; over $100,000 per person per year.
    So we have made enormous progress, but we still have a long 
way to go, and I believe the provisions in this Memorandum of 
Understanding will be a major asset.
    Mr. Davis [presiding]. Thank you very much.
    [The prepared statement of Mr. Offner follows:]

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    Mr. Davis. Ms. Cropp.
    Ms. Cropp. Thank you very much.
    Good afternoon, Mr. Davis, Ms. Norton, Mr. Horn. I am Linda 
W. Cropp, chair of Council's Committee on Human Services. On 
behalf of council, I am pleased to appear before you today to 
testify on the Medicaid section of the President's plan.
    The President's proposal on Medicaid begins to create a 
more equitable relationship between the District and the 
Federal Government by recognizing that the District, unlike any 
other city in the Nation, is not supported by a State. This 
lack of support by a State has been felt in many areas 
including the funding and managing of health and human services 
programs. State-type functions account for approximately 85 
percent of the District's Department of Human Services budget. 
These State-type programs, and I believe someone had asked that 
question earlier, within the department include Medicaid, 
public assistance, mental health, foster care, child day care, 
and substance abuse treatment and prevention.
    By far the District's most costly health and human services 
program, as it is in all States, is the Medicaid program. The 
Medicaid program accounts for approximately 48 percent of 
District appropriations for the Department of Human Services.
    The current use of the per capita income standard is an 
inequitable standard when applied to the District. The District 
of Columbia is an urban jurisdiction with a high percentage--
approximately 38 percent--of our population living at or below 
the poverty line. The District, not unlike many other cities, 
has a population that is older, sicker, and poor. But unlike 
other cities, it cannot be normed in with the more affluent 
suburban areas of other States to help offset the high cost of 
the city.
    The President's proposal would increase the Federal 
Government's share of Medicaid costs from 50 percent to 70 
percent, thereby reducing the District's share to 30 percent. 
While the council enthusiastically supports the increased 
Federal share of Medicaid costs, the District would still 
remain the only city in the Nation to contribute such a high 
percentage toward Medicaid costs, and five other States would 
receive a higher matching rate. New York has been cited as a 
city which pays 25 percent because of its county-type status.
    The effect of the increased Federal match would be a 
reduction in the District's Medicaid expenditures. The District 
and the Office of Management and Budget have agreed on the 
extent of the Medicaid savings that ought to be achieved over 
the 5-year period, and, in fact, our figures were extremely 
closely aligned.
    I am pleased to report that the Council further agrees with 
OMB on the conditions placed upon the District in return for 
the increased Medicaid. Under the President's plan, the 
District would develop and implement an effective system for 
identification and collection of amounts owed by third parties. 
Mr. Offner just talked about that, and, in fact, the council's 
committee just approved additional personnel positions in that 
line area so that we could start this process of increasing the 
third parties.
    We also support a system to ensure the timely audit and 
settlement of cost reports. In fact, if you look at where 
Medicaid was 3 years ago, there has been an awful lot achieved 
in a short period of time with regard to the audits. An awful 
lot of work still needs to be done.
    A comprehensive behavioral managed health care system which 
combines substance abuse and mental health grant programs has 
already been moving forward and is already in the planning 
stage, and we look forward to its implementation.
    All of these conditions reflect sound management policies 
that, regardless of the President's plan, the District is 
already moving forward to implement. Collections from third 
parties will benefit by both the District and the Federal 
Government. The District has made progress in eliminating the 
backlog of audits and settlements.
    The implementation of these conditions will require 
commitment and additional resources on the part of the 
District. I have requested that the Medicaid Administration 
prepare an analysis of what additional resources will be 
necessary to carry out the President's plan. I am pleased that 
under the plan, the U.S. Department of Health and Human 
Services will continue to provide more intensive technical 
assistance to help the District move toward improving the 
management of the Medicaid program. They have been very helpful 
in the recent past.
    The District is making progress in the implementation of 
Medicaid cost containment measures. Reimbursement rates for 
hospitals, nursing homes, and the intermediate care facilities 
for the mentally retarded have been reduced significantly. All 
Medicaid beneficiaries who receive public assistance will be 
enrolled in the managed care organizations that are compensated 
at a capitated rate, and we should receive savings there. The 
contract to implement mandatory managed care enrollment is 
close to the award stage. Quite frankly, it has been a long 
time coming, but I am happy it is about to be awarded.
    Other initiatives include reducing the pharmacy dispensing 
fee, increasing pharmacy copayments, reducing reimbursement for 
transportation, and reducing payments for day treatment and 
residential treatment facilities.
    In addition, the District has recently obtained a home- and 
community-based services waiver for the developmentally 
disabled population. A similar waiver for the elderly 
population will be submitted this fiscal year, and as Ms. 
Norton had talked about, the cost of nursing homes, this would 
help to significantly reduce the costs in that particular area.
    Many of the delays in implementing reforms in the Medicaid 
program are due to systemic problems with the District's 
procurement process. The council is addressing this problem 
with the enactment of procurement reform legislation. In 
addition, the Medicaid program will be able to take advantage 
of the Federal procurement system through a Memorandum of 
Understanding executed by the District and Federal Governments.
    The council has reviewed the District's 26 optional 
Medicaid services for possible Medicaid expenditure reductions. 
It is my understanding that Virginia funds 21, Maryland 22, 
optional services. However, the District is not out of line 
when compared with other jurisdictions.
    In working with the Medicaid Administration, it has been 
determined that significant savings would not be realized, as 
some beneficiaries would be eligible for those services whether 
an option or not existed, such as ICF/MR services. The District 
would still be left to bear the full cost of the service, and 
in essence that would mean the District would end up paying 
more money if that option were to be implemented.
    In conclusion, the Medicaid proposal within the President's 
plan begins to address the financial burden placed on the 
District by assuming the financial responsibility of State 
functions. With the additional Federal funding of State 
functions, the District will be able to focus its resources on 
quality of life issues. The District must focus on these 
quality of life issues, such as education and public safety, if 
it is to restore the health and viability of our Nation's 
Capital.
    I thank you very much for this opportunity to testify 
before you.
    Mr. Davis. Thank you very much.
    [The prepared statement of Ms. Cropp follows:]

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    Mr. Davis. Mr. Goldstein.
    Mr. Goldstein. Good afternoon, Mr. Chairman, Members of the 
committee. My name is Mark Goldstein. I am deputy director of 
the Financial Authority. I'll be brief. I know you have a lot 
of witnesses here today. With me is Doneg McDonough, the 
program manager for Health and Human Services at the Authority. 
He can respond to any questions you may have that I can't 
answer.
    The President's plan proposes to increase the Federal 
Government's contribution for District Medicaid expenditures to 
70 percent. This will have the effect of increasing the Federal 
Government's contribution for the District's Medicaid benefit 
expenditures from the 50 percent rate that is in place today to 
70 percent for fiscal years 1998 and beyond. The President's 
plan does not include recommendations for changing the 
financing of the other State-type health and human service 
programs.
    The Authority applauds the administration's recommendation 
on Medicaid, but believes it is necessary to expand the 
proposal to include a greater share of Medicaid program 
expenditures and to address other health and human service 
programs.
    The Authority has been working over the past several months 
to re-examine the relationship between the District and the 
Federal Government. Two weeks ago, as Mr. Rogers has mentioned, 
the Authority issued a report entitled ``Toward a More 
Equitable Relationship: Structuring the District of Columbia's 
State Functions.'' The report identified that if the District 
were to have a relationship with its ``State,'' the Federal 
Government, that is akin to the State-local financial 
relationship found across the country, the District would be 
required to contribute no more than 20 percent of the State-
type health and human service programs. At present, the 
District covers 100 percent of these costs.
    Today, I would like to make the specific recommendation of 
Authority that the Federal Government contribute 100 percent of 
the funding for Medicaid, TANF, Temporary Assistance to Needy 
Families, formerly the AFDC program, and the related child care 
expenditures.
    The Authority's recommendation was generated after 
reviewing the relationships States have with their local 
jurisdictions in regard to financing a range of health and 
human services. In addition to our own research, the Authority 
commissioned a study by the Urban Institute to assemble more 
detailed information regarding the financing and administration 
of State Medicaid programs and to consider various options. The 
Authority's recommendation was also framed by the fact that all 
major State-type health and human service programs are either 
federally mandated or require the maintenance of a minimum 
funding level.
    If I may, I would like to request that the Authority's 
report on State functions and the Urban Institute report be 
entered into the record.
    Briefly I will review the information that led the 
Authority to make these recommendations.
    Rather than recommend a refashioning of the financial and 
administrative relationships across the myriad of State-type 
functions, the Authority has chosen to limit the proposed 
changes to the two largest Federal-State programs.
    Three structural factors exist in the District that when 
combined produce relative demands on the District that are 
multiples of the demands shouldered by other jurisdictions. The 
first structural factor is high per beneficiary costs under 
Medicaid. The District's per beneficiary Medicaid expenditures 
are nearly 70 percent higher than the country as a whole. This 
finding is not surprising as urban settings are typically 
associated with higher costs of living as well as more intense 
health problems, such as the number of AIDS cases and the level 
of violence.
    In the Urban Institute report, the District's Medicaid 
program costs were compared against those of high-cost States 
such as New York and Massachusetts. The District's average 
costs were actually lower than the average costs in these 
States. The message from this is the District has higher than 
average Medicaid per beneficiary costs, although it is not out 
of line with what might be considered reasonable for a high-
cost jurisdiction.
    The second structural factor is a high concentration of 
poverty. This reality lends for a greater demand for public 
assistance and as such a relatively higher percentage of 
population enrolled in Medicaid and other public assistance 
programs.
    The third structural factor is the narrow pool of 
individuals available to support these relatively high demands 
for services. The District does not have suburban populations 
over which to spread these costs, of course.
    If you take the relatively high cost of services, compound 
that with the greater percentages of the population requiring 
these services, and add a third factor, the narrow pool of 
individuals that comprise the District's tax base, it produces 
an insupportable situation.
    The District has, for instance, only two taxpayers per 
Medicaid recipient, whereas Maryland and Virginia have 4.4 and 
4.3 respectively. From this it is evident that the burden of 
Medicaid is tremendously greater in the District as each 
District taxpayer is required to carry not only a 
proportionately greater number of public assistance recipients, 
but the cost per recipient is higher.
    These findings provide ample justification for a major 
restructuring of the financing of the District's Medicaid 
program. An additional finding of the Urban Institute is that 
if the District were treated similar to the counties in New 
York, the State that requires the greatest contribution of its 
local jurisdiction, the District's effective contribution for 
Medicaid would be 16.5 percent of expenditures versus the 30 
percent required under the President's plan.
    Another relevant comparison is that if the District had a 
relationship with its State, the Federal Government, akin to 
the relationship between State and local government in three-
quarters of the States today, the District would be required to 
make no direct contribution toward Medicaid program 
expenditures.
    It is this comparative analysis of how States interact with 
their local jurisdictions, as well as the disproportionate 
burden found in the District which is the result of its urban 
characteristics, that requires the Authority to recommend that 
the Federal Government act in the capacity of the District's 
State and assume full financing of the District's Medicaid 
program. The savings to the District resulting from such a 
Medicaid policy change are estimated to be approximately $2.4 
billion over fiscal years 1998 to 2002.
    The findings in the Authority's April 15th report show that 
on average States cover 92 percent of the costs of the major 
health and human service programs, including health care, 
mental health services, welfare, et cetera, which led the 
Authority to recommend that, as a step to begin to equalize the 
District's overall burden, the TANF program and related child 
care expenditure should be assumed by the Federal Government. 
The savings to the District resulting from such a change are 
estimated to be $550 million over fiscal years 1998 to 2002.
    It should be recognized that the Authority's 
recommendations are not overly generous for the District. Even 
with the implementation of the Authority's recommendations, the 
District would be in a relatively less favorable position than 
all other local jurisdictions in the country.
    If the recommendations of the Authority are implemented 
whereby the funding for the two largest State-Federal programs 
is assumed by the Federal Government, the District would 
continue to carry a relatively greater share of program costs 
than local jurisdictions nationally at 33 percent, but the 
relationship would be tremendously improved over what exists 
today.
    Mr. Chairman, that concludes my statement, and my colleague 
and I would be happy to respond to questions you or the 
committee have.
    Mr. Davis. Thank you.
    [The prepared statement of Mr. Goldstein follows:]

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    Mr. Davis. I have just got a couple questions for the 
panel. Mr. Goldstein, let's start with you. The Authority is 
basically recommending the Feds pick up 100 percent of the 
costs----
    Mr. Goldstein. Yes, Mr. Chairman.
    Mr. Davis [continuing]. In its capacity as the District's 
State government, but you haven't said that the District will 
give up its taxing powers, specifically income and sales that 
States use to pay for Medicaid and other programs. So in effect 
you are asking the Federal taxpayers to pay 100 percent of the 
State share without the State share being apportioned amongst 
District taxpayers. That is OK, but we need to understand the 
policy and ramifications. Is this basically because the city's 
tax base is just too low?
    Mr. Goldstein. Yes, Mr. Chairman, we recognize that is an 
issue that needs to be resolved as this process went forward, 
but that is the Authority's recommendation.
    Mr. Davis. Yes. It is always dangerous to think out loud, 
but my gut feeling is this, as the Federal Government takes 
over some things, we should look for some tax relief in the 
city, because I think that would make the city more competitive 
economically over the long term. But we will be working with 
everybody involved here as we fashion a solution.
    Linda, let me ask a question, and, Charlene, you can chime 
in. The city has basically cut the Medicaid benefits that they 
were giving out 2, 3 years ago, and it is more on a par with 
Virginia and Maryland.
    Ms. Cropp. We have initiated an awful lot of savings----
    Mr. Davis. I don't mean cuts, that is a radioactive word, 
but you have adjusted the way that it is sorted out, and it is 
more in line with Virginia and Maryland.
    Ms. Cropp. Yes, and also our benefits actually were not too 
far out of line. We offer 26 benefits. Maryland and Virginia 
offer, I think, 21 and 22. We offer 26. We are in line. And 
with the other services, we are fairly comparable with those 
services.
    Mr. Davis. What we'd like, and I am not sure if we have it 
in the record, we would like a chart showing what the city 
offers and what the two suburban jurisdictions offer. Not that 
you need to model everything after what the other jurisdictions 
do, and I think you pointed out that there are other costs to 
not offering these programs that are paid in other areas.
    Ms. Cropp. Exactly. For example, the ICFMRs, if we did not 
have them in the Medicaid program. The District would be 
responsible for paying the entire cost of that program, and in 
essence it would end up costing the District more money. That 
is one of the optional benefits that we offer that perhaps some 
of the other States don't offer, but it would not be beneficial 
for us to eliminate that option.
    Mr. Davis. Thanks.
    Let me ask Mr. Rogers and you, Mr. Offner, and others, have 
the issues regarding the payments to the Charter Health Plan 
been resolved?
    Mr. Rogers. That matter is still under review by the CFO, 
and I don't believe it has been resolved.
    Mr. Davis. OK. Those are my questions.
    We had some others. We appreciate your heading some of the 
questions up in your testimony that we have had already.
    Ms. Norton. Yes, Mr. Chairman. I will--I have only a few 
questions in that regard as well.
    Mr. Offner, first of all I want to congratulate you for the 
work you are doing in Medicaid. I know how difficult it is in 
the best of circumstances, and I can't imagine how you have 
done what you have done.
    I want to ask Ms. Cropp, I guess Mr. Rogers, I am not sure, 
Ms. Jarvis, it has to do with the state of the welfare reform 
or welfare reform in the District of Columbia, and I would like 
to know from you whether or not the District is, my bill 
notwithstanding--and I am going to try to get my bill into this 
bill--is in danger of simply losing before it gets started. 
That is to say it looks like you are trying to do something 
that is very difficult under the circumstances, and the whole 
government--the Department of Human Services is in collapse 
apparently. At least it has not begun to be reformed. Training 
has been--all of the training, I take it, has been in the 
Department of Human Services at the same time you are trying to 
get up a welfare reform bill, which at least, as it is 
presently, as it presently stands, would mean that you are on 
line to lose, what is it, 5 percent this year. You are on line 
to lose money. And I just have to ask you what is the state of 
that? Is anybody being trained? Is the welfare program--is DC 
going to lose money from its welfare grant this year? I want to 
be able to know whether or not you are on line to lose some 
money, and you should have planned for that in your budget if 
that is going to happen.
    Ms. Cropp. The District has developed quite a few work 
activities that would fit within job definitions of the new 
Federal bill. However, by nature of the District being a city 
and not having suburban areas that would offer jobs, we are in 
a very precarious situation in actually placing our welfare 
recipients in those particular areas.
    We are developing them, we are moving forward, and we hope 
that we would be fairly successful. We have already placed I 
believe it is about 18 percent at this point within the job 
definition. But my anxiety level is extremely high because I 
think the District is penalized by the bill, but we are still 
working toward trying not to lose any money.
    Ms. Norton. It really is penalized. That is why I have a 
bill in to correct that. I am going to have a hard time getting 
that bill out in any case, but particularly if I can't show 
that the District is doing the very best it could, because I 
have nothing to do with whether or not the District is starting 
up its own program to place people in work activities. I would 
like to have someone--perhaps Mr. Rogers can tell me some 
progress on that.
    Mr. Rogers. Well, we will give you a more complete response 
subsequent to this hearing, but let me say it certainly is our 
intent to lose not one nickel, and we are positioning ourselves 
so that that won't happen. There are----
    Ms. Norton. That means that you are going to have 25 
percent in work activities by--what is the month?
    Ms. Cropp. September, I think, of this year.
    Ms. Norton. Twenty-five percent by worker activities. 
Otherwise--the reason I ask is otherwise you are going to begin 
the fiscal year the way you did last time, making cuts before 
you spend, and all without a plan to do so, and just picking up 
the cuts wherever you can find them.
    Mr. Rogers. We have, as you know, the Welfare Reform Task 
Force, the external and internal task force that made its 
report. We are acquiring technical assistance to complete the 
last leg of the process in preparation for a better training 
program. The recent issues with training notwithstanding, we 
intend to move forward if it is on a contracted basis. We don't 
have to provide it in-house. There are ways to, you know, 
contract out the training so that we can meet our mission.
    Ms. Norton. I am having a very hard time, because they are 
not going to give anybody any slack. I am not going to be able 
to get any slack for the District because everybody else is 
running for something. So I have to have some early warning, 
too, if there are problems in meeting that.
    Could I just quickly ask on two issues that I raised at the 
last hearing? I don't know if--Ms. Cropp was not here, but I 
have sent her a letter about people who came to see me that I 
referred the city to, but I was so concerned about it that I 
looked into the matter myself, and that is I was told in spite 
of our foster care problem, and it is just like everybody 
else's, it is not any different from New York and Philadelphia 
and anybody else, but it is heartbreaking, that there was a 
backlog of people wanting to adopt children in the District of 
Columbia and couldn't get through our court systems.
    I called up the chief judge and said, my God, and he said 
that it was the--the way the law was written, and it had been 
very strictly construed, and obviously once you have a 
precedent, it is hard to get over that precedent. And he 
suggested if the law were changed, and that it could be 
changed, and I have sent you the relevant sections of the 1997 
Uniform Adoption Act. Could I ask what is the status of that?
    Ms. Cropp. Ms. Norton, I have had a dialog with Chief Judge 
Hamilton with regard to that. We have decided we were going to 
meet. There is one component of that act of which he has great 
concern. We are prepared to move that act as expeditiously as 
possible.
    Ms. Norton. What does that mean, though, Ms. Cropp? The 
notion that there would be people who would come to me to say, 
we represent providers who want to adopt children, we can't do 
that. Can you give me a month, are you going out for summer, 
what are--can this be done before you go out on your summer 
vacation so the courts could move this backlog?
    Ms. Cropp. Could I get back with you? Judge Hamilton wanted 
to speak----
    Ms. Norton. I will talk to Judge Hamilton. I thought the 
whole problem is they needed people to adopt children, and to 
find out they can't do it in the District because of the way 
this law is construed, seems to me there ought to be some kind 
of a fast track on which to put that before you go to summer 
vacation.
    Ms. Cropp. We could look a that, but I don't think it is in 
isolation, I think it is in combination, and we do have a 
policy of available parents----
    Ms. Norton. I understand that, but to the extent that there 
are people who line up in court who can't get through, it seems 
the first thing we should do is clear the legal paraphernalia 
out of the way.
    Ms. Cropp. As I said, Judge Hamilton and I are working to 
move that as quickly as possible.
    Ms. Norton. I wish you would provide me information on 
whether you will be able to get a bill passed before you go out 
on summer vacation.
    Finally, Mr. Rogers, I wrote you concerning something that 
cities would kill for, and that is to get on the so-called FTS-
2000 system of the Federal Government. We could have been on 
that for at least the last 4 years. We are informed that GSA 
tried and has repeatedly failed to be able to get you to do 
that. I have to ask this question, because they have told us 
you could be paying about $13 per, what is it, per line, and 
that they estimate you are now paying something close to $30 at 
a time when you are having to cut the hell out of everything. I 
have to ask you, what you provided me indicated you are not 
using FTS. If you are not using FTS, I would like to know why.
    Mr. Rogers. Well, one, we will, and that directive has been 
given. Second, with respect to the ISDN platform, the system 
that we have, that helps us in terms of our instruments. It 
helps us in terms of our local call costs----
    Ms. Norton. What is that; what is the ISDN?
    Mr. Rogers. The ISDN is a telephone platform that helps us 
tie in the local telephone company, Bell Atlantic, in providing 
our service. It helps us reduce our costs and manage our system 
better. The FTS-2000 relates to long distance costs. There is 
information we are collecting from the agencies that will help 
us implement that system.
    Ms. Norton. Are you working with anyone from GSA? I would 
like to facilitate that if I could.
    Mr. Rogers. I am advised that the staff of the Department 
of Administrative Services has been working with GSA and AT&T. 
Once the information that we have out to the agencies is back 
in, it will be furnished over to AT&T, and we will be able to--
--
    Ms. Norton. Mr. Rogers, that will take us back to where we 
were. That is where it was last time we were waiting from 
information from the District that would then allow them to 
proceed. The amounts are so great here. You are paying, it 
looks like, more than twice what you could be paying at a time 
when you are having to cut everything. Could I ask that you 
provide us for the record the information that you provided to 
GSA----
    Mr. Rogers. OK.
    Ms. Norton [continuing]. Before we close our record? When 
would that be?
    Mr. Davis. Ten days.
    Ms. Norton. Thank you very much, Mr. Chairman.
    Mr. Davis. Thank you.
    Mr. Horn.
    Mr. Horn. Thank you Mr. Chairman.
    Mr. Rogers, following up on that, since I Chair the 
investigating subcommittee that relates to GSA and the FTS-
2000, do you need any particular legal authority in order to 
access the GSA rates, or do you already have that?
    Mr. Rogers. I believe we already have that.
    Mr. Horn. All right. Because Ms. Norton is right, the best 
deal in America are the GSA rates. We don't know where we are 
going next, but hopefully it will be a better deal, and the 
District ought to be taking advantage of that.
    Mr. Offner, you indicated the need for the authority in 
your testimony. Could you describe what that would permit you 
to do?
    Mr. Offner. Mr. Horn, the 1115 waiver is a broad authority 
that the Government has, and in this application, as a State 
cuts its reimbursement or its expenditures, different States 
have been able to get waivers to allow them to capture the 
Federal part of those savings to, in effect, expand coverage to 
the uninsured. Obviously every time the District of Columbia 
cuts Medicaid by $1, we not only save ourselves 50 cents, but 
we save the Federal Government 50 cents. If we could capture 
that Federal 50 cents and use that to expand coverage to the 
uninsured, which is a proposition that Tennessee and a lot of 
States have gone with, it would allow us to do something about 
the 110,000 uninsured people.
    Mr. Horn. If--I think you need specific authority in law so 
you don't have to go through the appeal like the other State 
does; is that what your desire is?
    Mr. Offner. Well, at this point, Mr. Horn, we are about to 
start working with a consultant to develop our proposal, and 
the people at the Health Care Finance Administration have been 
extremely cooperative. If we run into problems, maybe we could 
reserve the right to----
    Mr. Horn. I was going to say, if they are going to sign 
off, wonderful, but many Governors have found it takes them 
forever to sign off, and since you are in a unique relationship 
to the Congress, we ought to be able to consider that if they 
don't approve it and make sure you get those economies.
    Mr. Rogers, I am curious, is there an inspector general in 
the District of Columbia?
    Mr. Rogers. Yes.
    Mr. Horn. And to whom does he report?
    Mr. Rogers. Reports to the Mayor, the Council, and the 
Financial Authority; or shall I say sends information, kind of 
reports. They are independent.
    Mr. Horn. I understand that.
    Has the inspector general ever inspected the Medicaid 
situation in the District of Columbia?
    Mr. Offner. Actually, Mr. Horn, we have four separate 
investigations, again, not cosmic ones, but as I indicated, we 
removed 125,000 ineligible people from the rolls. The Inspector 
General initiated an investigation of whether or not we could 
recover for the expenditures that were made for those people 
while they were being covered inappropriately, and that is 
still in progress. And there are several other investigations 
that we are currently working with them on.
    Mr. Horn. Now, do you have your own audit staff in your 
agency?
    Mr. Offner. I have a small audit staff. We also contract 
out the field audits. I have a small audit staff of five 
people.
    Mr. Horn. How much fraud have we found in Medicaid 
recipients?
    Mr. Offner. Recipients?
    Mr. Horn. Among the recipients, how much are on there 
fraudulently?
    Mr. Offner. Mr. Horn, I will tell you I don't know the 
answer to that, but I will tell you the 25,000 people that we 
removed, it was not a fraud issue. It was an issue of computer 
systems that weren't talking to each other. My experience as a 
newcomer to the District is that more of our problems are due 
to systems malfunctioning and inadequate staffing and resources 
than to fraud. We are much more involved with provider fraud, 
and we hand over those cases to the Corporation Counsel, but 
again, we need to do much more in that area, and that is the 
kind of improvement that I think we would want to make as we 
get some additional resources.
    Mr. Horn. Now, do you have any jurisdiction over the 
Welfare Department?
    Mr. Offner. No.
    Mr. Horn. Is there much need for cooperation between the 
Medicaid services and the Welfare Department?
    Mr. Offner. There is enormous need. The eligibility 
function for Medicaid is in the Welfare Department, so we have 
to work very closely with them on the eligibility side, but 
that is not something directly under my control.
    Mr. Horn. Maybe the members of the Council know, is there 
an identification card when one has welfare and a photo on it 
as well as a fingerprint?
    Ms. Cropp. I am not certain about an identification card. 
If I can get that information back.
    [The information referred to follows:]

    In the District, TANF recipients receive two identification 
cards for public assistance benefits. Food Stamp recipients 
receive a photo identification card without fingerprint 
identification, Medicaid recipients receive a Medicaid 
identification card which does not include photograph or 
fingerprint identification.

    Mr. Offner. But there is an identification card for 
Medicaid, and it does not have either a photograph or a 
thumbprint. Most States don't do that. Now, what does happen, 
someone walks into a provider's office, the provider types in 
the number into the telephone and accesses an electronic 
system. So, you know, if the computer is working properly, we, 
in fact, can verify eligibility with great accuracy.
    Mr. Horn. You verify eligibility of the card, but you don't 
know that the person carrying the card that day is the same 
person that is presumably represented by the card.
    Mr. Offner. That is correct.
    Mr. Horn. Los Angeles County found years ago when you put a 
photo, thumbprint on it, thousands left the welfare roll, 
because they were double-dipping in terms of separate names, 
whatever. It seems the Council ought to be energetically 
demanding of the administration, and the administration on its 
own initiative ought to be undertaking simple little things 
like that to make sure that the limited money we have in the 
District of Columbia goes to people that really need it and not 
people that are simply tapping the till.
    Now I get to doctors, and the question is has there been 
any investigation by auditors of the billing of the doctors in 
the District of Columbia under Medicaid, and the nursing homes 
under Medicaid, and home care? Has any home care come up during 
Medicaid? All of those areas----
    Mr. Offner. We have audits for all of them, most of those 
providers, and we are working right now with the Corporation 
Counsel on--and we have a staff of people who work on ferreting 
out cases that look questionable, which we then hand over to 
the Corporation Counsel's office, and we are working with them 
to pursue those. Now, I will admit we could be doing more, and 
if we had more staff, we would do more.
    Mr. Horn. Well, it would be nice if you only had four, if 
they are targeted in on some of these areas that have shown up 
in other States. When I came here in 1993-94, I was on Mr. 
Towns' subcommittee on the Government Reform, then known as the 
Government Operations Committee, and his subcommittee went to 
New York, found substantial fraud in the Medicaid program, in 
this case by doctors. And many doctors in California don't even 
take MediCal because the rates are so low, but in New York they 
had their hands in the till substantially, and there were 
indictments brought.
    So I just would commend the administration to a little more 
vigor in terms of examining those situations and getting 
yourself your own audit staff if you need it, if the inspector 
general isn't going to do it, to zero in on this. That would 
give everybody a better sense that the fiscal concerns of the 
District are being taken seriously by the people responsible 
for administrating. Thank you.
    Ms. Morella [presiding]. Thank you, Mr. Horn.
    I think that Ms. Norton doesn't have any other questions.
    I want to thank this panel very much for your testimony and 
for appearing here today. Thank you.
    I am now going to call on the third panel, the next panel, 
which is going to testify on the Treasury borrowing section of 
the President's plan from the perspective of local officials.
    And this panel is going to consist of Mr. Thomas Huestis, 
who is the deputy chief financial officer for finance and 
treasurer of the District of Columbia; Mr. Rogers; Council 
Chair Pro Tempore Jarvis; the Honorable Frank Smith, chairman 
of the Council's Committee on Finance and Revenue; and Mr. 
Dexter Lockamy, CFO for the Control Board. Also present, but 
not at the witness table, is Ms. Marguerite Owen, deputy 
general counsel to the Control Board, who will be available to 
answer any questions.
    I think as you all know, it is the policy of this committee 
that all witnesses be sworn in before they may testify, and so 
I would kindly ask you if you would please rise with me and 
raise your right hand.
    [Witnesses sworn.]
    Mrs. Morella. The record will show that you responded in 
the affirmative. Thank you.
    Ms. Drew-Jarvis. Madam Chair, excuse me, since there is an 
able complement of officials from the District of Columbia 
here, and since we are to meet with Dr. Brimmer at 4 p.m., and 
my colleagues have already gone ahead, do you think I might be 
excused from this panel, since you have such an array of 
experts here?
    Mrs. Morella. As you presented, Ms. Jarvis, it is so hard 
to refuse. I can understand why you are in politics, and indeed 
I think it is all right with this subcommittee, yes, indeed. 
Thank you.
    Mr. Rogers. Madam Chair.
    Mrs. Morella. And I wanted to mention, Ms. Jarvis, that 
there is no objection, so we have unanimous consent, that your 
statement will be included in the record.
    Mr. Rogers. Madam Chair, I have to attend the same meeting. 
My statement has been provided. Mr. Huestis is very able on 
these matters, and if you look at our testimony, we are totally 
in sync with the issues raised with respect to the President's 
plan and the borrowing opportunity for the District. I would 
like to be excused as well.
    Mrs. Morella. Mr. Rogers, we will also excuse you, and your 
testimony will also be in the record.
    Mr. Huestis, I am glad you are not leaving.
    Mr. Huestis. Madam Chair, I am not going to leave.
    Mrs. Morella. You have an awesome responsibility now.

STATEMENTS OF THOMAS HUESTIS, DEPUTY CFO/FINANCE AND TREASURER, 
   DISTRICT OF COLUMBIA; FRANK SMITH, CHAIRMAN, FINANCE AND 
   REVENUE COMMITTEE, DISTRICT OF COLUMBIA CITY COUNCIL; AND 
      DEXTER LOCKAMY, CHIEF FINANCIAL OFFICER, FINANCIAL 
       RESPONSIBILITY AND MANAGEMENT ASSISTANCE AUTHORITY

    Mr. Huestis. Good afternoon, members of the committee, and 
thank you very much for having me. My name is Tom Huestis, 
deputy CFO and treasurer for the District, and thank you again 
for inviting me to appear before the subcommittee to comment on 
the President's plan.
    The President's plan includes a funding proposal that will 
help solve the District's cash-flow problem. Included in this 
plan is a proposal for up to $500 million U.S. Treasury 
borrowing with a 15-year repayment term, and this is designed 
to fund the cash needs and a portion of the accumulated 
deficit. In addition, the U.S. Treasury is proposing a short-
term financing vehicle that would be structured similar to the 
current U.S. Treasury advance provisions.
    My staff has worked closely with Mr. Rogers' staff, the 
Office of Management and Budget, the Council's staff and the 
Authority's staff on evaluating this and how it would be 
implemented, and I'd like to address that now. Currently the 
District has an accumulated deficit of approximately $453 
million, as a result of cumulative net operating deficits in 
the past. At the end of fiscal year 1997, the District's 
accumulated deficit is projected to increase to $527 million as 
a result of the budget deficit for fiscal year 1997. Although 
the accumulated deficit is expected to be over $500 million, 
the District's cash deficit is only approximately $300 million. 
That means what the District has had to do, in order to stay 
liquid, is borrow at least $300 million from next year into 
this year in order to make payments.
    It has accomplished that this year through the use of U.S. 
Treasury advances. So it has advanced payments from next fiscal 
year, brought against next fiscal year's Federal payment in 
order to pay its bills currently.
    One of the things that happens with the President's plan 
is, it proposed that the Federal payment goes away. That means 
the District will be left with no source to repay these $300 
million Treasury advances. So in the first, in advance, the 
financing portion of this plan is essential because the 
District has no other source of repaying its U.S. Treasury 
advances.
    Second, the financing portion of this plan is, in itself, 
healthy for the District. Currently, these advanced provisions, 
where we have to do three or four borrowing Treasury advances 
every year in order to get that money up to this year from next 
year's Federal payment, are extremely burdensome. By 
implementing this plan, we can take those Treasury advances and 
finance those into a long-term obligation, thereby eliminating 
the annual advances and giving some order into the market.
    In addition, the credit markets--we believe that by 
changing these advances into a long-term financing will give us 
better access into the credit markets. There are some concerns. 
Our existing bond holders have relied on the Federal payment as 
a source of repayment, a last source of repayment. So 
eliminating the Federal payment does provide our existing 
bondholders with some concern.
    However, the word we get back from them is, if the plan 
does what it is designed to do, give the District significant 
expenditure relief, and takes care of the ever present pension 
problem, which is projected to explode, if the President's plan 
takes care of those items, that it will be a net benefit to the 
District and to those bondholders.
    Because of the time, I would like to cut through a lot of 
my testimony and it will be in the record.
    One of the major things that we have done is, we have gone 
to the rating agencies and the credit market participants, or 
bondholders, and talked to them about the size of the financing 
and about how much we should essentially borrow and how much 
Congress should authorize.
    What they have come back to us and said is that the 
Congress needs to authorize $500 million of this financing, but 
the District should only borrow the minimum amount it needs up 
front, so all it needs to borrow is the $300 million up front, 
but the Congress and the administration need to authorize the 
entire $500 million because, essentially, what we are doing is, 
we are financing our cash deficit and then using the surpluses 
that will be generated from the President's plan to pay down 
the balance of the accumulated deficit.
    From the Office of the Chief Financial Officer and the 
rating agencies, we agree that this is the most prudent course 
and this will allow the District to not become cash flushed, so 
it doesn't have to stop, so it won't have to stop, the critical 
reforms in management initiatives that need to happen in the 
District, but it will provide the District with a sufficient 
amount of cash to operate efficiently and then pay down the 
balance of the accumulated deficit over time.
    There is a cost to this plan. We talk about it here, of $13 
million if we borrow the $300 million, or $15 million if we 
borrow the $500 million. The cost is due not to the borrowing 
in itself, it is due really to the loss of the Federal payment.
    If you think about it, we receive $660 million day one, and 
we are trading that for expenditure relief, spread across the 
fiscal year, all 12 months. And because we operate at such a 
narrow cash margin, by that cash tradeoff, we have to borrow 
more money and we have to borrow it sooner in the fiscal year. 
We have to essentially borrow day one into the fiscal year to 
match the cash that we would have normally received through the 
Federal payment.
    So the increase in the cost of this financing that we talk 
about in our analysis and our budget and in our testimony here 
is not due to the deficit borrowing itself, it is due to the 
tradeoff between the Federal payment and the expenditure 
reductions.
    Thank you. That concludes a summary of my testimony, and 
thank you very much, and I will be happy to answer questions.
    [The prepared statement of Mr. Huestis follows:]

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    Mrs. Morella. Thank you, Mr. Huestis.
    And for all of our panelists, your testimony in total will 
be included in the record.
    I now recognize Mr. Smith.
    Thank you for being with us.
    Mr. Smith. Thank you very much, to Congresswoman Norton and 
you as acting chairman.
    I am Frank Smith, I am the chairman of the City Council 
Committee on Finance and Revenue. I guess I would have to say 
that I have to rely on my other 10 colleagues to adequately 
represent me with Mr. Brimmer in the Control Board; I am sure 
they are capable.
    Mrs. Morella. You are very noble to stay here to testify.
    Mr. Smith. Since this is my first opportunity to testify on 
this matter, I figured I would stay around myself.
    I am chairman of the Council Committee on Finance and 
Revenue, pleased to appear before you, to appear to discuss the 
Treasury borrowing element of the President's National 
Revitalization Government Improvement Plan.
    First, just a little bit of history. The Home Rule Act has 
served the District government since January 1975. They granted 
the District autonomy on how to spend its money, both locally 
raised revenue as well as the Federal payment. Indeed, the Home 
Rule Act specified that the Mayor had to provide meaningful 
information to the Congress regarding expenditures and to show 
how these expenditures benefited the District population.
    The comparison was to include an estimate of the amount of 
property tax lost because of taxes on land and the amount of 
unreimbursed services to the Federal Government, and a tax 
burden relative to the suburbs.
    The question of how local government could possibly cover 
costs associated with running a city was raised at the 
beginning. This leads me to conclude the proposed Treasury 
borrowing authorization does not offset the proposed 
elimination of the Federal payment, even from a cash 
standpoint. Absent the Federal payment, projections by the 
Authority show that the District will experience a surplus for 
only 1 or 2 years, even with the financing of the deficit.
    In the beginning of the Home Rule period between 1972 and 
1989, they were good financial years for the District. Although 
there were severe fiscal problems during this period, we 
believed we could overcome the problems, and you probably know 
we had some good times and the District fared well.
    In the past few years, we experienced a growing deficit. 
The Council is struggling to find a solution within the 
confines of the limitations of the financial realities with 
which we are now confronted. Two immediate hurdles face us, 
however, if we use the proposal for Treasury assistance in 
eliminating the accumulated deficit. One is the need to 
restructure the District's debt limitation requirements as 
currently imposed by the Home Rule Act. And I think you 
probably know this already, that the home rule act limits the 
amount of borrowing we can do to, I believe, 14 percent of what 
all of our revenues are, and that 14 percent application 
applies to our revenues, including the Federal payment.
    The other city long-term financing debt service of the 
accumulated deficit would exceed the statutory debt limit if 
you do not either amend that provision or exempt us from it.
    And so that is one of the problems that I think you have to 
look at, and I am sure you intend to do that in an effort to 
pursue this. Without a waiver or increase in the current debt 
limitations, the District will not be able to finance its 
multiyear programs because, as I said earlier, the culmination 
of these two would exceed our ability to borrow, unless you 
exempt us from the ceiling.
    The impact of the terms proposed by the President's plan on 
the District's overall financial conditions, its cash position, 
and cash-flow is significant. It would free up current cash to 
pay operating expenses. The Office of the Chief Financial 
Officer projects in the absence of any borrowing, the District 
would end 1997, with a negative cash position of approximately 
$247 million.
    The negative cash position is caused by advancing revenues 
from future fiscal years to meet current year's expenditures, 
which is, of course, our accumulated deficit. I think the 
District's accumulated deficit and any approved deficit should 
be fully funded through long-term borrowing and other means, 
including the need for capital projects funding pending the 
ability of the District to access the private market, the 
Treasury loan provisions, with continued authority that exists 
in the Home Rule Act but has been suspended by the Authority.
    Finally, Madam Chair, I would like to remind everyone, in 
August 1991, Public Law 102-102 was passed by the Congress and 
signed by the President to establish a formula-based Federal 
payment. The amount of the Federal payment was set at 24 
percent of the prior year's revenue source collected by the 
District.
    Since that time, the legislation has been introduced by the 
Congress, but to change the Federal payment, but you know as I 
do, that has never been changed, so that we never had an 
adequate Federal payment to take care of our problems, and, 
therefore, we have had this accumulated deficit develop for us 
here in the District of Columbia.
    Let me also say in closing, the Council has taken the view 
that it wanted the Congress to continue the Federal payment, 
primarily for the purpose of trying to find a way to provide 
some tax relief to our businesses and to our citizens, and if 
you don't do that, you must enact some form of Ms. Norton's 
bill in order to provide some tax relief for our citizens. That 
is the only way to guarantee the long-term sustained growth of 
the District of Columbia and the ability of our citizens to 
take care of themselves and also to provide for the Nation's 
Capital.
    Thank you.
    [The prepared statement of Mr. Smith follows:]

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    Mrs. Morella. Thank you, Mr. Smith.
    I note your last commentary is not in the written 
testimony, and obviously it was very heartfelt in you and 
spontaneous. Thank you.
    Mr. Lockamy, delighted to hear from you, sir.
    Mr. Lockamy. Thank you, Madam Chair, members of the 
committee. I am Dexter Lockamy, chief financial officer of the 
District of Columbia, Financial Responsibility and Management 
Assistance Authority, which I will refer to as the Authority. 
And with me, I would like to recognize, is Marguerite Owen, 
deputy counsel to the Authority.
    We are pleased to appear before you to present the 
Authority's assessment into Treasury borrowing. I will be 
brief, given that the testimony is in the record, but I do want 
to point out a couple of things.
    Madam Chairwoman, Dr. Brimmer, the Authority's chair, 
stated in his remarks to the subcommittee on March 13, the 
Authority advocated in a strategic plan the District ought to 
take a long-term borrowing to pay down its accumulated 
deficits, and we are pleased that the present plan also calls 
for such a borrowing and proposes that the U.S. Treasury 
provide a financing.
    I will not go into the details of the specifics of what is 
being proposed, but I do want to say the Authority fully 
endorses the concept that the District be provided with the 
Authority to obtain 15-year term financing of the District's 
accumulated deficit of the Treasury. However, we do have some 
observations that I would like to point out.
    In our remarks, we would like to emphasize two very 
important points: That a Treasury borrowing facility for the 
District's accumulated deficit, while extremely helpful, will 
not, without a continued Federal payment, allow the District to 
achieve financial stability with respect to its present and 
future capital and financing needs.
    Second, the current uncertainty concerning the Federal 
payment caused by this proposal and the District's borrowing 
authority must be clarified and settled as soon as possible. 
Otherwise, we believe the District's ability to finance its 
1997 and 1998 could be jeopardized.
    Clearly, we believe Congress must enact additional 
borrowing authority for the District. We believe the proposal 
in the President's plan for intermediate-term borrowing 
facility with the Treasury will provide most, if not all, of 
the necessary additional borrowing authority that is required 
by the District. But we also believe that the provisions for 
transitional short-term Treasury advances, which are due to 
expire on September 30, need to be extended by the Congress.
    With respect to specific recommendations, we realize that 
some of the savings that people anticipate in terms of asset 
sale surpluses may not be realized in the next couple years, 
and so we therefore recommend that the District have the 
ability to finance the full accumulated deficit at its 
discretion, subject of course to the approval of the Authority 
as provided in Public Law 104-8.
    The Authority further suggests the District be granted the 
authority to borrow the entire amount of the accumulated 
deficit from the Treasury in tranches over a period of not more 
than 3 years.
    The Authority urges the Congress to extend the transitional 
short-term Treasury borrowing authority provided in DC Code 47-
3401, and/or modify the seasonal cash management provisions of 
that section to include any short-term borrowing requirement of 
the District.
    We also recommend that the authorizing legislation 
specifically provide the intermediate-term borrowings have a 
maximum term of 15 years, and allow the District to elect a 
shorter period if it so desires, and that there be no penalty 
for prepayment.
    And while we do not object to the Secretary having the 
provision to suggest refinancing by the District, we strongly 
recommend that any decision to refinance the Treasury borrowing 
in the capital markets be left to the District's discretion, 
after consultation and approval by the Authority and made 
subject to--by specific criteria, which will not result in 
increased financing costs to the District.
    Last, because the current structure of the District's debt 
includes large principal payments through fiscal year 2003, we 
request the legislation should provide principal payments be 
deferred until fiscal year 2004, when level debt service could 
begin, and that the Treasury borrowings be exempt from the 
requirements of DC Code 47-25, which requires that general 
obligation bond principal payments begin not more than 3 years 
after the date of such bonds.
    Regarding my conclusions, in conclusion, Madam Chairwoman, 
we view the Treasury borrowing projections in the President's 
plan are acceptable, provided the details and conditions 
associated with the borrowing be finalized as soon as possible, 
along the lines that we have proposed.
    We emphasize that prompt clarification of the issues 
discussed is necessary to avoid any market confusion and 
concerns that may be generated as the District moves forward 
with its planned fiscal year 1997 and 1998 capital borrowings.
    We are happy to answer any questions that you might have.
    [The prepared statement of Mr. Lockamy follows:]

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    Mrs. Morella. Thank you very much, Mr. Lockamy.
    I just thought I would ask several questions and then look 
to Ms. Norton for her questioning.
    First of all, I think that from your testimony, I pretty 
much heard a response to the fact that you do support the 
Treasury proposal as you understand it. Did I hear you say 
that?
    Mr. Huestis. Yes.
    Mrs. Morella. What is the status of the MOU, the Memorandum 
of Understanding, which includes the Treasury proposal, as I 
understand?
    Mr. Smith. Do you want me to answer that?
    Mrs. Morella. Yes.
    Mr. Smith. We have--just this afternoon, actually--the 
Council had a few minutes of consultation on that matter, and 
we will be taking it up again over the weekend.
    As you know, we are scheduled to vote upon it on Tuesday, 
the 29th, and I would not presume to tell you what my 
colleagues are going to do in a vote before it happens. You 
operate in a body similar to mine, and I am sure you 
understand.
    Mrs. Morella. Do you know how you are going to vote?
    Mr. Smith. Yes.
    Mrs. Morella. Shall I ask you? Shall I ask you, or would 
you prefer to wait?
    Mr. Smith. Well, they might be watching this. I know we are 
on television. I don't want to tip my hat too early.
    Mrs. Morella. That's perfectly understandable. But Tuesday, 
the 29th.
    Mr. Smith. Yes. And I will say this to you. I am sure you 
are aware the Council had some concerns with some aspects of 
it. We have returned what we consider to be a proposal that we 
could all work off of, and some negotiations are going back and 
forth on it now, and I hope those will be concluded by the time 
we get to the Tuesday vote.
    Mrs. Morella. That will be good, because we want to move 
the whole program ahead.
    You know, the Home Rule Act, like most city charges, 
requires the District to have a balanced budget and not run 
deficits. We know that the District inherited and accumulated 
operating deficit of more than $200 million. You mentioned that 
in your testimony, Mr. Huestis.
    In 1991, Congress allowed the city to sell $331 million in 
deficit financing bonds to liquidate its accumulated deficit, 
and now we are faced with the prospect of authorizing the 
District to liquidate an accumulated deficit of more than $400 
million well before the 1991 bonds are paid off.
    What can Congress do to ensure that the District not get 
into that kind of deficit situation in the future, requiring 
such action? I mean, what kind of assurance do we have on top 
of the concept of debtor budget?
    What else can we do? What can Congress do to restrict or 
require of the District government?
    And then I wonder, whatever you will see, if you do have 
something to offer that we should suggest, should it be 
legislated? And I guess, let's start out that way.
    Mr. Smith. I think that Congress is doing many things now 
to help us to solve that problem. And let me just say, I think 
the District government itself, too, has done a great deal to 
help solve the problem. It has sobered up to the reality it has 
to control spending, and that was one of the missing elements 
back in the early days when you did the first refinancing, and 
the Council itself did not engage itself in the kind of arduous 
process we have been engaged in in the last 2 years to try to 
cut spending and then to get it under control.
    Second, you know, already you have given us a Control Board 
and CFO and various other stopgap measures you have employed to 
help us maintain the discipline and the cuts that we have put 
in place.
    Third, you have taken a step to try to take over some of 
the State functions that the District government should never 
have been saddled with in the first place.
    And fourth, I guess among those things, you have taken over 
some responsibility for a pension payment that the Congress 
said it was going to take over, and it is just now getting 
around to doing so. And let me say any budget that would have 
had to carry an item in it that large for such a long period of 
time would probably eventually run into a wall the way we did 
in this one.
    But I think we are taking steps that can assure you and 
others that we will get this matter under control, we will 
discipline ourselves to keep it under control, and with a 
little help to reseed our economy of tax breaks and things like 
that, we think we can guarantee you a future in the Nation's 
Capital that we can all be proud of.
    Mrs. Morella. I mean, that sounds all well and good, and I 
appreciate you saying it, and I know you truly mean it. I am 
also saying we are going to have a hard time selling this to 
other Members of Congress, and they are going to say, what 
assurances do you have? And it is easy to say, well, now we 
have a Control Board and now things are going better. I think 
Congress is probably going to ask for more than that, maybe 
something a little more tangible.
    And if anyone else has any comment--Mr. Huestis, did you 
want to comment? Mr. Lockamy.
    Mr. Huestis. I agree with Mr. Smith. I think Congress has 
already done a lot. I think the Control Board and CFO have been 
a big part of the District turning around and good--a very good 
reason why the deficit bonds are not going to be wasted this 
time.
    And I think if you just look at the results of last fiscal 
year, where we had a budgeted deficit of $116 million and we 
ended up with an operating deficit of less than $60, and that 
is quite extraordinary, and that was, in part, to the good work 
of the Control Board and the CFO of ratcheting down spending 
and making sure that agencies did not overspend their budgets 
and deficits were not acceptable--so I think there is already 
some history that the actions that Congress has taken in the 
past have been effective.
    I think that the other thing is that, in reviewing the 
President's plan, you want to make sure that the--when, after 
the plan is implemented, that expenditure growth does not 
outpace revenue growth.
    I mean, what we have now is, we have expenditure growth of 
6 or 7 percent in the District; if left unattended and revenue 
growths are very, very small, 1 percent, 2 percent. So you have 
this structural imbalance, and the President's plan is designed 
to narrow it. But the District will never be able to fully 
function as a normal operating government unless that 
structural imbalance is narrowed, and so the Congress must make 
sure that that structural imbalance is taken care of with the 
President's plan or another plan.
    Mrs. Morella. I would like to ask Mr. CFO himself to 
comment on that.
    Mr. Lockamy. Well, Madam Chair, the meeting both Ms. Jarvis 
and Mr. Rogers left and that is being held right now at the 
Control Board is in an attempt to try to reach a balanced 
budget for fiscal year 1998, 1 year earlier than what was 
required by the law. And the struggle is balancing the budget 
in such a way that we try to achieve true structural balance 
going forward, rather than rely upon various sorts of 
conventions that will balance it this year but then to bring 
about a recurring problem in the future.
    I think the Congress, I think, has done a lot. I think I 
concur with my colleagues on this panel that the independent 
CFO, ourselves, the new leadership that we see on the City 
Council is going a long way in terms of restoring confidence. 
But one of the things that could derail all of these efforts is 
the flat revenue stream that the District has to contend with, 
and that is why we feel that pulling away the Federal payment 
without having identified new, viable revenue sources is only 
going to put in jeopardy a lot of the efforts that are under 
way.
    Mrs. Morella. Yes. I guess we also--I hear that often too.
    I wanted to also ask: You know, the private bond market, 
especially holders or insurers of outstanding District general 
obligation debt, was concerned about Treasury, using the 
Federal payment as collateral, and having first call on that 
funding source.
    How do you think this proposal and the elimination of the 
Federal payment will affect current district bonds and future 
bond ratings? And remember, you have spoken about that, Mr. 
Huestis. You may all just want to briefly respond to that so we 
have it on the record.
    Mr. Huestis. I did respond to that in my testimony, and I 
think that our conversations with the holders think that if the 
goals of the President's plan are carried out, that the 
pensions are taken care of, and that the structural imbalance 
is narrowed in any way, that this would be a positive for the 
bondholders, even losing the Federal payment, which is part of 
the existing security structure of the GO bonds.
    Mrs. Morella. Mr. Smith, you also feel that the Federal 
payment is critical?
    Mr. Smith. Yes, I think Mr. Huestis has made it plain, and 
I think Mr. Lockamy said in his testimony, we need to be 
settling this issue early, as soon as possible, and early in 
the next fiscal year, because we have some outstanding bonds 
out there that are going to come due in 19--in fiscal year 
1998, one of which I know is--says right at the bond issue, we 
are going to use the full faith and credit, District government 
included in Federal payment, and I can tell you right now, 
bondholders are looking to the Federal payment. So, if it is 
not there, or, alternatively, if we don't do this long-term 
debt restructuring quickly, they are going to get very nervous.
    Mr. Lockamy. I would like to say that we have been in touch 
with Mr. Huestis and his office and his conversations with 
rating agencies. We independently have had conversations with 
the rating agencies to explore this issue.
    One of the things we are concerned about is what the 
collateral is that the U.S. Treasury will require with respect 
to this loan, and so long as there is nothing that is created 
that would create a higher order of priority over the existing 
general obligation bondholders, we feel the market would be 
comforted.
    I think going forward, the market is really looking for a 
reasonableness that they can get paid back in terms of the full 
general obligation pledge of the District.
    Surely, pulling out the $660 Federal payment does have a 
negative impact, and so long as there is a corresponding sort 
of cost avoidance or reduction in expenditure, the market could 
probably get comforted. And I think the real issue for the 
market is liquidity of the District going forward and 
flexibility to deal with unforeseen and unexpected issues. If 
the District--you know, if the debt becomes such a burden to 
the District going forward, I think the market will have an 
unfavorable reaction.
    Mrs. Morella. Do you want to speculate about what you think 
the Federal payment should be if the other reforms are enacted?
    Mr. Lockamy. I am sorry?
    Mrs. Morella. Do you want to speculate what you think the 
Federal payment should be if the other reforms are enacted?
    Mr. Lockamy. The Authority's position is, the full Federal 
payments stay in place with the President's plan.
    Mrs. Morella. With the President's plan.
    Mr. Smith.
    Mr. Smith. Yes, I would say we ought to do it, at least for 
a--for a considerable period of time, the full Federal payment, 
because, as I said earlier, among other things, the District 
government would like to--the Council, certainly, on the 
leadership of the Finance and Revenue Committee, would like to 
find a way to make the tax structure of the District of 
Columbia more compatible with surrounding jurisdictions. That 
is the only way to ever guarantee a full economy there where we 
can have a tax base that can produce the kind of revenue that 
will give us a sustained base so that all of our creditors and 
our citizens, too, can be employed and also can be--our 
creditors can be paid back. So we would like to have a Federal 
payment so we have flexibility. Without the Federal payment, we 
do not have any flexibility or capability to do that.
    Mrs. Morella. You think it should be $660 also, Mr. 
Huestis, or you don't have any comment?
    Mr. Huestis. It is a policy decision, and I think the 
revenue should be sufficient for the District to continue to 
operate, and whether that is a Federal payment or increased 
taxes from Congresswoman Norton's plan or another facility that 
is a policy decision, we will evaluate that.
    Mrs. Morella. Thank you. I want to thank you, gentlemen.
    I am now going to recognize Ms. Norton, the ranking member 
of this subcommittee, for her line of questioning.
    Ms. Norton. Madam Chair, I don't have specific questions. I 
do note the difference here on the Federal payment, some 
difference between the CFO and Control Board.
    Mr. Huestis. No difference.
    Ms. Norton. In any case, it is not in any of your hands.
    Mr. Huestis. Right.
    Ms. Norton. And we are just going to have to do the best as 
we can.
    What we would most like is to keep the Federal payment. I 
feel irresponsible if I simply say we are going to keep the 
Federal payment and want everybody to try to help us to figure 
out what to do in case we don't get to keep it all. I want 
everybody to know that the Federal payment is going to be used 
to pay for the plan and don't want to leave the impression that 
there is any free lunch up here.
    Therefore, what we have got to figure, and I think what you 
all ought to be figuring out right now, you want the Federal 
payment, you can probably get it. It is now worth $500 million. 
You will lose some part of what the President's plan has.
    And so what I would like the Control Board and the 
Authority and the Council and the Mayor to engage in is some 
thought about tradeoffs, because the chairman and I are now 
engaging in tradeoffs.
    In other words, the chance that what we will do is to get 
the President's plan, which is more than any of us thought he 
would come through on in the first place. And on top of that is 
$660 million.
    You must not be living where the Washington Post comes out 
every day to talk about deficit reduction. I do that only 
because I cannot pander on an issue as critical as this. We 
need that cash. It would make us much more stable, much more 
secure.
    All you say about collateral and bondholders is exactly 
right. They also understand the President's plan to be the 
substantial linchpin to the District's payment, not the Federal 
payment.
    I have to be very careful because, in essence, I want the 
Federal payment, and I also do not want to pull the rug from 
under the plan, and I do not want to give Members who don't 
want to give the District 2 cents the opportunity to say, well, 
you all really haven't figured out this plan, there is no 
understanding about what would be traded off, and we don't want 
to do this any way.
    So one of the things I would like to ask you to do in your 
own councils is to think if, in fact, the Congress of the 
United States is unwilling in a year, when there is only one 
issue on the table, and that is deficit reduction, to give the 
District everything the President's plan says plus--and the 
Control Board of course says, also, other State functions plus 
the Federal payment--if for some reason that doesn't happen, we 
can't beat something with nothing, and what I am never caught 
up here with is, they come back and at some point somebody is 
going to come back, and they are going to say, OK, here is what 
we want.
    The only way I am able to get anything for the District up 
here is, I am the one that comes and says this is the tradeoff 
we make, because it will otherwise be on their terms.
    Any thought you can give and any advice and counsel you can 
give on that, considering the plan has some things in it we 
never thought would be in it--economic development corporation, 
infrastructure, all kinds of things about the prisons we didn't 
think would be in it; we were not sure they would take 100 
percent of the pensions; on Medicaid, we had no idea they would 
go to 70, 30.
    That is how it works up here. I just want everybody to know 
that. It does not work like, here is some more. The President 
hardly gets what he asks for--now we are going--hardly ever 
gets what he asks for, much less, here is what you asked for, 
and here is more. There may be ways for us to still come out 
ahead.
    When I say tradeoffs, I don't mean we end up with a lesser 
package than we have now necessarily, but I am very, very 
anxious about being caught with somebody listening, overhearing 
our conversations in our hearings, and coming back, because it 
has happened to me before.
    Let me say, the chair asked about the MOU. First let me 
say, with the Council, which I think just handled this very 
well, I mean the Council, which, after all, has a constituency, 
and we have lived with the Federal payment for almost 200 
years, can't be expected to say, OK, take the Federal payment. 
Therefore, it is perfectly understandable you would want some 
accommodation with the Federal payment. And what you have--what 
you have come forward with, all, it seems to me, ought to be 
taken into account as we try to figure out what to do.
    The MOU, I think everybody ought to get the chairman's 
opening remarks on the MOU. And I want to caution everybody 
that there is needless polarization out here in conversations 
that I think progresses somewhat with the chair pro tem, and 
with the Mayor, and Mr. Evans.
    That was this week. I have also had conversations with the 
senior operatives at OMB. And I know that the Council has had 
conversations, and I believe progress is being made.
    The chairman has told me--I think you heard it--that in a 
real sense, we want the MOU, we want to be able to point to it 
to undergird us when Members lack confidence that this thing is 
going to go well.
    But it would be a monumental mistake to let the fight over 
the President's plan take place on the MOU. It would be a 
monumental mistake, because it would then feed into people who 
would say, look, they have problems.
    What we get back then is, they are fighting over the 
particulars of whether they even do what their own 
administration wants them to do, and you want me to vote for 
this bill when, in fact, what is being fought over doesn't have 
anything to do with that, it has to do with Mr. Davis's plan. 
And I think one of the first rules of politics is, understand 
when you have won, declare victory, go home.
    So we are fighting over Mr. Davis's bill, and he is the 
one, that Mr. Davis's prison section--I can't understand what 
the fight between two parties, neither of whom have the 
ultimate say on that, the administration on the one hand, the 
Council on the other. We know where you both stand on that, so 
I think we can get over that, and I think there is kind of 
language that we can deal with that on the Federal payment.
    There was already a victory that could have been declared 
and everybody went home, when it wasn't in the MOU. Then it got 
back in the MOU, rubbing the administration's face in it. You 
hit somebody that hits you back. Once it was out, it seems to 
me somebody had a victory somewhere who could say, you know, 
you hadn't signed anything with the Federal payment in it; I am 
talking to everybody concerned.
    I am sure, having talked with everybody concerned, that 
this is not going to be a problem. I just raise this now 
because I would like everybody to understand, I have said the 
same thing to the OMB. They are now going back with some 
suggested language we have been talking about. Ms. Jarvis knows 
about some suggested language.
    And I just want to say for the record, there is not real 
disagreement on the two items such that they affect the MOU; 
that is to say, the Federal payment and the prison section. 
They are matters for Congress, and the administration and the 
city have worked so well up until now that it has really helped 
the bill, and so I encourage you to really work as you have, 
and I am going to continue to work with both sides, because you 
have both come very far, in my judgment, and I appreciate the 
way in which you have responded to what would otherwise be a 
very difficult situation.
    Mr. Smith. Let me say on behalf of the Council, we 
appreciate your effort in this, too, your effort and also the 
effort of our colleagues from the surrounding jurisdictions, 
from Maryland and Virginia, in helping us with this fight. I 
know it hasn't been easy, and this is, I think, an important 
step for all of us, for our city and for the Nation's Capital.
    My understanding is that the--these--that there is a 
considerable amount of progress in negotiations and some 
language that is being worked out and might enable us all to go 
forward. I hope that will happen over the weekend and, by the 
time we vote on Tuesday, we will be ready to go.
    Ms. Norton. It won't happen over the weekend, but I have 
already spoken with your chair pro tem.
    One thing that would be helpful is, given the fact, only 
today, for example, if I talk with people from the OMB, 
particularly since the MOU is not up against any timeframe 
wall, we won't have answers back from OMB before then, but we 
are making progress. So I hope you are not up against a wall on 
a vote that won't be necessary, but I already talked to Ms. 
Jarvis about that. And, again, you all have helped in what you 
did, I guess it was yesterday. And while we are not there yet, 
I have every confidence, based on how you all have been moving 
and based on my conversation, that we are going to get there. 
We will not be there, though, by Tuesday.
    Mrs. Morella. Thank you, Ms. Norton.
    And I think all of us on the subcommittee agree with what 
you said. I know I have some concerns about the criminal 
justice element, and I think we will probably be changing that, 
but we are all committed to do everything that we can, working 
cooperatively with you to make sure that this capital city is 
the capital with a capital C.
    I am going to ask unanimous consent that written statements 
from this panel and from anyone else who has testified, that 
written statements be included in the permanent record.
    I want to thank you for being here. The record will be open 
for 10 days, and there may be some other questions we will get 
back to you on, other Members that may not be here, if that is 
acceptable.
    Thank you very much, and the subcommittee hearing is 
adjourned. Thank you.
    [Whereupon, at 4:43 p.m., the subcommittee was adjourned.]
    [Additional information submitted for the hearing record 
follows:]

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