[Joint House and Senate Hearing, 107 Congress]
[From the U.S. Government Publishing Office]




 THE OUTLOOK FOR THE DISTRICT OF COLUMBIA GOVERNMENT: THE POST-CONTROL 
                              BOARD PERIOD

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

                             JOINT HEARING

                               before the

                SUBCOMMITTEE ON THE DISTRICT OF COLUMBIA

                                 of the

                     COMMITTEE ON GOVERNMENT REFORM

                        HOUSE OF REPRESENTATIVES

                                and the

                  OVERSIGHT OF GOVERNMENT MANAGEMENT,
                   RESTRUCTURING, AND THE DISTRICT OF
                         COLUMBIA SUBCOMMITTEE

                                 of the

                   COMMITTEE ON GOVERNMENTAL AFFAIRS

                              U.S. SENATE

                      ONE HUNDRED SEVENTH CONGRESS

                             FIRST SESSION

                               __________

                              JUNE 8, 2001

                               __________

                           Serial No. 107-15

                               __________

    Printed for the use of the Committees on Government Reform and 
                          Governmental Affairs


  Available via the World Wide Web: http://www.gpo.gov/congress/house
                      http://www.house.gov/reform


                                ______

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                    U.S. GOVERNMENT PRINTING OFFICE
75-899 PDF                  WASHINGTON : 2001





                     COMMITTEE ON GOVERNMENT REFORM

                     DAN BURTON, Indiana, Chairman
BENJAMIN A. GILMAN, New York         HENRY A. WAXMAN, California
CONSTANCE A. MORELLA, Maryland       TOM LANTOS, California
CHRISTOPHER SHAYS, Connecticut       MAJOR R. OWENS, New York
ILEANA ROS-LEHTINEN, Florida         EDOLPHUS TOWNS, New York
JOHN M. McHUGH, New York             PAUL E. KANJORSKI, Pennsylvania
STEPHEN HORN, California             PATSY T. MINK, Hawaii
JOHN L. MICA, Florida                CAROLYN B. MALONEY, New York
THOMAS M. DAVIS, Virginia            ELEANOR HOLMES NORTON, Washington, 
MARK E. SOUDER, Indiana                  DC
JOE SCARBOROUGH, Florida             ELIJAH E. CUMMINGS, Maryland
STEVEN C. LaTOURETTE, Ohio           DENNIS J. KUCINICH, Ohio
BOB BARR, Georgia                    ROD R. BLAGOJEVICH, Illinois
DAN MILLER, Florida                  DANNY K. DAVIS, Illinois
DOUG OSE, California                 JOHN F. TIERNEY, Massachusetts
RON LEWIS, Kentucky                  JIM TURNER, Texas
JO ANN DAVIS, Virginia               THOMAS H. ALLEN, Maine
TODD RUSSELL PLATTS, Pennsylvania    JANICE D. SCHAKOWSKY, Illinois
DAVE WELDON, Florida                 WM. LACY CLAY, Missouri
CHRIS CANNON, Utah                   ------ ------
ADAM H. PUTNAM, Florida              ------ ------
C.L. ``BUTCH'' OTTER, Idaho                      ------
EDWARD L. SCHROCK, Virginia          BERNARD SANDERS, Vermont 
------ ------                            (Independent)


                      Kevin Binger, Staff Director
                 Daniel R. Moll, Deputy Staff Director
                     James C. Wilson, Chief Counsel
                     Robert A. Briggs, Chief Clerk
                 Phil Schiliro, Minority Staff Director

                Subcommittee on the District of Columbia

                CONSTANCE A. MORELLA, Maryland, Chairman
TODD RUSSELL PLATTS, Pennsylvania    ELEANOR HOLMES NORTON, Washington, 
THOMAS M. DAVIS, Virginia,               DC
JOE SCARBOROUGH, Florida             ------ ------
                                     ------ ------

                               Ex Officio

DAN BURTON, Indiana                  HENRY A. WAXMAN, California
                     Russell Smith, Staff Director
                      Heea Vazirani-Fales, Counsel
                          Matthew Batt, Clerk
                      Jon Bouker, Minority Counsel
                   COMMITTEE ON GOVERNMENTAL AFFAIRS

               JOSEPH I. LIEBERMAN, Connecticut, Chairman
CARL LEVIN, Michigan                 FRED THOMPSON, Tennessee
DANIEL K. AKAKA, Hawaii              TED STEVENS, Alaska
RICHARD J. DURBIN, Illinois          SUSAN M. COLLINS, Maine
ROBERT G. TORRICELLI, New Jersey     GEORGE V. VOINOVICH, Ohio
MAX CLELAND, Georgia                 PETE V. DOMENICI, New Mexico
THOMAS R. CARPER, Delaware           THAD COCHRAN, Mississippi
JEAN CARNAHAN, Missouri              ROBERT F. BENNETT, Utah
MARK DAYTON, Minnesota               JIM BUNNING, Kentucky
           Joyce A. Rechtschaffen, Staff Director and Counsel
         Hannah S. Sistare, Minority Staff Director and Counsel
                     Darla D. Cassell, Chief Clerk

                                 ------                                

SUBCOMMITTEE ON OVERSIGHT OF GOVERNMENT MANAGEMENT, RESTRUCTURING, AND 
                        THE DISTRICT OF COLUMBIA

                 RICHARD J. DURBIN, Illinois, Chairman
DANIEL K. AKAKA, Hawaii              GEORGE V. VOINOVICH, Ohio
ROBERT G. TORRICELLI, New Jersey     TED STEVENS, Alaska
THOMAS R. CARPER, Delaware           SUSAN M. COLLINS, Maine
JEAN CARNAHAN, Missouri              PETE V. DOMENICI, New Mexico
MARK DAYTON, Minnesota               THAD COCHRAN, Mississippi
       Marianne Clifford Upton, Staff Director and Chief Counsel
               Andrew Richardson, Minority Staff Director
                     Julie L. Vincent, Chief Clerk





                            C O N T E N T S

                              ----------                              
                                                                   Page
Hearing held on June 8, 2001.....................................     1
Statement of:
    Gandhi, Natwar M., chief financial officer, District of 
      Columbia government; Charles C. Maddox, inspector general, 
      District of Columbia; Joshua S. Wyner, executive director, 
      DC Appleseed Center; Renee Boicourt, managing director, 
      Moody's Investors Service; and Parry Young, director, 
      public finance department, Standard & Poor's...............    78
    Rivlin, Alice, chair, Financial Control Board; Anthony 
      Williams, Mayor, District of Columbia; Linda W. Cropp, 
      chair, Council of the District of Columbia; and J. 
      Christopher Mihm, Director, Strategic Issues, General 
      Accounting Office..........................................    27
Letters, statements, etc., submitted for the record by:
    Boicourt, Renee, managing director, Moody's Investors 
      Service, prepared statement of.............................   139
    Davis, Hon. Thomas M., a Representative in Congress from the 
      State of Virginia, prepared statement of...................    18
    Gandhi, Natwar, chief financial officer, District of Columbia 
      government, prepared statement of..........................    80
    Maddox, Charles, inspector general, District of Columbia, 
      prepared statement of......................................    96
    Mihm, J. Christopher, Director-Strategic Issues, General 
      Accounting Office, prepared statement of...................    41
    Morella, Hon. Constance A., a Representative in Congress from 
      the State of Maryland, prepared statement of...............     5
    Norton, Hon. Eleanor Holmes, a Representative in Congress 
      from the District of Columbia, prepared statement of.......    12
    Voinovich, Hon. George V., a Senator in Congress from the 
      State of Ohio, prepared statement of.......................    25
    Williams, Anthony, Mayor, District of Columbia; Alice Rivlin, 
      chair, Financial Control Board; and Linda W. Cropp, chair, 
      Council of the District of Columbia, prepared statement of.    33
    Wyner, Joshua S., executive director, DC Appleseed Center, 
      prepared statement of......................................   132
    Young, Parry, director, public finance, Standard & Poor's, 
      prepared statement of......................................   146

 
 THE OUTLOOK FOR THE DISTRICT OF COLUMBIA GOVERNMENT: THE POST-CONTROL 
                              BOARD PERIOD

                              ----------                              


                          FRIDAY, JUNE 8, 2001

        House of Representatives, Subcommittee on the 
            District of Columbia, Committee on Government 
            Reform, joint with the U.S. Senate, Oversight 
            of Government Management, Restructuring, and 
            the District of Columbia Subcommittee, 
            Committee on Governmental Affairs,
                                                    Washington, DC.
    The subcommittees met, pursuant to notice, at 11:04 a.m., 
in room 2154, Rayburn House Office Building, Hon. Constance A. 
Morella (chairman of the Subcommittee on the District of 
Columbia) presiding.
    Present for the District of Columbia Subcommittee: 
Representatives Morella, Davis, and Norton.
    Present for the Oversight of Government Management, 
Restructuring, and the District of Columbia Subcommittee: 
Senator Voinovich.
    Staff present for the Subcommittee on the District of 
Columbia: Russell Smith, staff director; Heea Vazirani-Fales, 
deputy staff director; Robert White, communications director; 
Matthew Batt, clerk; Carl Picconato, science fellow; Victoria 
Proctor, professional staff member, Committee on Government 
Reform, Subcommittee on Technology and Procurement Policy; 
Howie Denis, counsel, Committee on Government Reform, 
Subcommittee on Technology and Procurement Policy; Melissa 
Wojciak, staff director, Committee on Government Reform, 
Subcommittee on Technology and Procurement Policy; Andrea 
Abrams, intern with Mrs. Morella; Jean Gosa, minority clerk; 
and Jon Bouker, minority counsel.
    Staff present for the Oversight of Government Management, 
Restructuring, and the District of Columbia Subcommittee: 
Marianne Clifford Upton, staff director and chief counsel; Kate 
Eltrich, professional staff member for Senator Mary Landrieu, 
Senate Committee on Appropriations, Subcommittee on the 
District of Columbia; Julie Gunlock, minority clerk; Mason 
Alinger, minority professional staff member; and Andrew 
Richardson, minority staff director.
    Mrs. Morella. I'm going to call to order the Subcommittee 
of the District of Columbia of the Committee on Government 
Reform of the U.S. Congress.
    It's been more than 6 years since the passage of 
legislation establishing the District of Columbia Financial 
Responsibility and Management Authority, and thanks to the 
city's turnaround, it's balanced its budget for 4 consecutive 
years, transformed a half-billion-dollar debt into nearly a 
half-billion-dollar surplus, cut the size of its work force, 
and begun to make improvements in government service. We've 
reached this point: Today we're less than 4 months from the 
demise of the Control Board, and even if we had a crystal ball, 
I doubt we would have foreseen this.
    I wanted to start by publicly thanking the men and women 
who gave their time and considerable talents at the Control 
Board over the past 6 years. They are chairman--or Chairwoman 
Alice Rivlin, who is here to testify; former Chairman Andrew 
Brimmer; Constance Berry Newman; Robert Watkins; Eugene Kinlow; 
Stephen Harlan; Joyce Ladner; Darius Mans; and Edward 
Singletary. Your service to your Nation's Capital at a time of 
great distress will long be appreciated, and I'll be asking my 
colleagues to support a joint resolution recognizing your 
contributions.
    I also want to thank all of our witnesses for being here 
today, including our Mayor Anthony Williams, Council chair 
Linda Cropp, chief financial officer Natwar Gandhi, inspector 
general Charles Maddox, our outside financial experts. I also 
want to recognize our GAO witness who is going to be testifying 
on the report. And in addition, I want to recognize the 
distinguished members of my subcommittee, the House oversight 
Subcommittee on the District of Columbia, Congresswoman Eleanor 
Holmes Norton, the District's Representative, who has been a 
great guide through all of this and very important to this 
committee; our Virginia Congressman Tom Davis, whose leadership 
was crucial in the creation of the Control Board, who is my 
immediate predecessor as Chair of this District of Columbia 
Subcommittee.
    And I am pleased that we will be joined today in about 40 
minutes or so by Senator George Voinovich of Ohio. Senator 
Voinovich was the mayor of Cleveland while that city was 
emerging from a control period, and he is the ranking member of 
the Senate Governmental Affairs Oversight of Government 
Management, Restructuring, and the District of Columbia 
Subcommittee. He has long been active and engaged on D.C. 
oversight issues, and was instrumental in organizing this joint 
hearing.
    The purpose of our hearing today is twofold: First, to look 
back at the progress the District of Columbia has made over the 
past 6 years, to explore whether it has met all of the goals of 
the 1995 Control Board Act, and to gauge the success of that 
legislation. Second, we want to look ahead at ways to ensure 
D.C.'s financial and management success continues.
    I am interested in hearing from our city leaders about 
their proposal to create an independent chief financial 
officer, and we expect to discuss whether other mechanisms are 
necessary to guard the District slipping back into a financial 
abyss and causing the Control Board to return. With appropriate 
safeguards, and strong and effective local leadership, we will 
avoid a return to the bad not-so-old days when the District 
borrowed money from the Federal Treasury just to keep the 
government running, and when political interference transformed 
the city's revenue and expenditure estimates into works of 
fiction.
    In a larger sense the demise of the Control Board presents 
us with an opportunity to revisit the entire Federal-local 
relationship in our Nation's Capital, a chance perhaps to build 
upon the 1997 Revitalization Act. Under that legislation, the 
Federal Government is soon to control many additional State 
functions of the District, in addition to relieving the city of 
its unfunded pension liability and reducing its share of 
Medicare costs. But as we go forward, let's keep in mind one 
important fact: Congress has an explicit constitutional 
obligation to oversee the District of Columbia, and while Mayor 
Williams and other officials have done a very impressive job in 
turning the District around, it's impossible for those of us 
here on the dais to simply turn our backs on that 
responsibility.
    One of my goals as Chair of this subcommittee is to work 
with Congressman Joe Knollenberg, who chairs the D.C. 
Appropriations Subcommittee, and our Senate colleagues to 
further refine the Federal-local relationship and move the 
District closer to full home rule.
    We've been asked to reexamine some of the congressional 
restraints, such as a required cash reserves equal to 7 percent 
of the District's budget, and the 30-day review period of 
legislation, and both Congressman Knollenberg and I have 
expressed our willingness to look into these issues. The 
District's progress over the past 5 years is the reason we're 
able to at least consider these steps. Guided by the firm hand 
of the Control Board, the District moved from the brink of 
insolvency into an era of surpluses and sensible fiscal 
management.
    A city unable to clear the streets of snow, pick up trash 
regularly, open schools on time, or deliver needed human 
services has made significant strides in almost all areas. A 
government that struggles to issue bonds has seen its credit 
ratings rise from junk bond to investment level. To be sure, 
there is more work to be done by the city, as our city leaders 
will be the first to acknowledge. The city's structural budget 
problems need to be addressed before a weakened economy begins 
to slice into revenues. We have to find a way to repair and 
renovate D.C. schools at a faster pace, as well as improve the 
quality of their instruction. And the city is still lagging 
behind in the implementing of its financial management, 
personnel and procurement systems as part of its efforts to 
improve the efficiency of municipal government.
    And that brings us to today's hearing. Let me be very 
clear, I have some reservations about the city's proposal for 
the position of the chief financial officer [CFO], which was 
created along with the Control Board. I believe that the CFO 
must remain independent, autonomous and insulated from 
political pressure. I am not totally convinced that the 
legislation as introduced by Chairwoman Cropp and Councilman 
Evans goes far enough. The proposal does not require the CFO to 
prepare fiscal impact statements on all or even most pieces of 
legislation, and removes some of his powers over personnel and 
his own budget. I am concerned that the individual chief 
financial officers of the various government agencies would not 
be directly appointed by or report to the District's chief 
financial officer.
    In addition, I want to pose the concern that a chief 
financial officer whose term runs virtually concurrent with the 
Mayor's is sufficiently independent. I worry that the CFO could 
be just another political appointment, certainly in the future 
beholden to the chief executive and the City Council.
    Well, as such, I want to explore today the possibility of 
having some sort of special review of the city's revenue 
estimate and financial audit, as the Mayor has recently 
suggested and some Council members publicly have supported this 
week, having an independent body verify the city's revenue 
estimate, a process that would allow for substantial public 
scrutiny, could help ward off any political manipulation of the 
members. A revenue committee or an audit committee to review 
the District's financial audits should not be seen in any way 
as an extension of the Control Board, but as bodies whose 
members would be appointed by and would work with local 
officials.
    We should keep in mind that it is extremely unusual for a 
city to see its control period end so abruptly, as is the case 
here. And because the city did not borrow any Federal money to 
aid in its recovery, there is no provision for a gradual 
phaseout of the Control Board. I know that this is of some 
concern to those who monitor the District's finances, as you 
will hear in the testimony from the managing director of 
Moody's Investment Service. So we have called this hearing to 
gain an honest assessment from city leaders, an honest 
assessment from the Control Board and outside financial experts 
about the District of Columbia's financial and management 
health and the short and long-term challenges it faces. I am 
looking forward to a lively and productive discussion.
    I want to reiterate this is not micromanaging, this is 
looking ahead, congratulating you for what's been done and 
looking ahead to what do we need for the future. And so it's 
now my pleasure to recognize the distinguished ranking member 
of this D.C. Subcommittee, Congresswoman Eleanor Holmes Norton.
    [The prepared statement of Hon. Constance A. Morella 
follows:]
[GRAPHIC] [TIFF OMITTED] T5899.001

[GRAPHIC] [TIFF OMITTED] T5899.002

[GRAPHIC] [TIFF OMITTED] T5899.003

    Ms. Norton. Thank you very much, Mrs. Morella. I thank our 
Chair Connie Morella for convening this hearing and for her 
efforts as a new Chair to assist the District. I also want to 
thank Senator George Voinovich, who served as Chair of the 
Senate D.C. Subcommittee previously and as a former mayor of 
Cleveland and Governor of Ohio, and made a special contribution 
to the city.
    For Congress, of course, this is another in a series of 
important hearings. For the District today is more like a 
celebration. Technically the Authority is in place until 
September 30th. In reality, the District is well into its post-
Control Board period. That period dates from January 1999, when 
Congress returned the powers to a new Mayor and a new City 
Council that had been lost through congressional attachments in 
the years following the enactment of the original Control Board 
statute. On that same date, the current chair Alice Rivlin and 
the second Control Board took office and began the transition 
to a fully empowered D.C. government.
    We are grateful for the hard work of the Authority's first 
chair Andrew Brimmer and of the first Control Board, who got in 
the trenches with the District, helped the city to dig itself 
out of a financial hole. We are grateful as well to Alice 
Rivlin and her board for their many contributions, for 
respecting the home rule prerogative of our elected officials 
and insisting that the Mayor and the City Council run the D.C. 
government, and for beginning the transition to normal 
government 3 years ago.
    The District was fortunate indeed in the quality of the 
extraordinary residents who came forward pro bono to serve on 
the Financial Authority. Unlike other cities that have faced 
the same financial difficulties, the District was the home of 
two of the country's leading economists and urban financial 
experts, who agreed to serve the Financial Authority and 
offered countless hours and suffered untold grief for their 
hometown.
    Those of us who do not work with the city's finances on a 
daily basis may not have a full appreciation for what the 
District has achieved or, for that matter, what further needs 
to be done. Perhaps the best way to understand the city's 
accomplishments is to measure them against the four goal posts 
that Congress itself erected. Congressional goal post No. 1: 
Achieve four consecutive budgets in 4 years or start all over 
again. The District: Four consecutive balanced budgets achieved 
2 years ahead of the congressional mandate, registering 
surpluses all 4 years, and, despite a somewhat weakened 
national economy, projecting yet another surplus year. In 
addition, D.C. has a $150 million budget reserve now and by 
fiscal year 2003 will have a full 7 percent cash reserve as 
well, 3 years ahead of schedule.
    Goal post No. 2: Get access to short and long-term credit 
markets at reasonable rates. The District: Attained investment 
grade bond status by the 3rd year of the control period rather 
than in 4 years.
    Congressional goal post No. 3: Repay all borrowings from 
the U.S. Treasury. The District: Not only repaid all 
borrowings, but also eliminated its accumulated deficit.
    Congressional goal post No. 4: Discharge all obligations 
arising from obligations issued by the Financial Authority. The 
District: No authority obligations ever issued.
    Having surpassed all congressional requirements, the 
testimony we have received today shows District officials 
imposing on themselves an innovative set of controls over and 
above what the Authority statute requires, including a term for 
the chief financial officer and enhanced powers that increase 
the independence of the CFO. Separately the inspector general 
has come forward with proposals to strengthen the oversight and 
independence of his role as the city's primary investigator.
    With the legislation the city now proposes, the District 
has met every statutory mandate imposed upon the city and gone 
well beyond. The time has come for Congress to keep its 
statutory promise. There is a great deal more for Congress to 
do than mull over and tweak what the District is doing for 
itself. Six years ago Congress placed on the District the 
toughest Control Board law in the country. Included in that law 
is a sunset provision. The District has more than kept its end 
of the bargain. Congress has no less an obligation. If Congress 
in any way seeks to renege on its statutory promise or to enact 
its own legislation against the will of the District of 
Columbia, it will find in me neither an affable or a silent 
partner or enabler.
    Despite 4 years of astonishing progress by the District, 
Congress has yet to respond in kind. Textbooks uniformly teach 
that the best way to encourage responsible behavior is to 
reward it. Congress may not have read these texts. In some ways 
that is understandable. The Congress is fully equipped with 
four staffed subcommittees with little to do except watch an 
independent jurisdiction that is doing its job. Isn't it time 
for Congress to reciprocate by streamlining its own processes 
that impose costly burdens on D.C. taxpayers?
    Next week I will ask the members of the subcommittee to be 
original cosponsors of a bill that I believe is justified by 
the progress upon which every member of the subcommittee has 
remarked. Yet this bill is not chiefly a reward to the District 
for a job Congress has said has been well done. The importance 
of this bill lies in the contribution it would allow Congress 
to make to the revitalization that Congress has required of the 
District. At the center of the Control Board mandate has been 
the requirement that the District streamline layers of 
government redundancy and inefficiency and that the city reduce 
the cost of government. However, because Congress has not 
reformed or streamlined its own oversight procedures for the 
city, D.C. taxpayers incur millions of dollars in extra and 
unnecessary expenses and in costly delay. To correct these 
problems, the D.C. Budget and Legislative Autonomy Act would 
provide budget and legislative autonomy for the District while, 
I emphasize, Congress would still retain its full powers under 
article 1, section 8 to exercise its oversight at will.
    While the reform of the District government is a work still 
in progress, the greatest structural barrier to reform no 
longer lies with the District. It is the Congress that takes 
the typical 6-month budget process in States and cities, and 
makes it into a 12 to 18-month process for the District of 
Columbia.
    It is the Congress that guarantees that no matter how well 
the District does financially, it will never have the best 
investment bond rating because of the uncertainty created by 
the congressional budget process.
    It is the Congress that forces the District to engage in 
contortions of temporary and stopgap procedures because D.C. 
legislation cannot become final for 30 or 60 legislative days, 
which often become months because of the congressional calendar 
and congressional recesses.
    Even during the depths of the fiscal crisis and continuing 
into last year, Congress has consistently added delay to its 
already laborious budget process by seeing to it that the 
District budget was virtually last to be voted, often many 
weeks after the end of the fiscal year. These are hardships on 
the people of the District that they do not deserve and that 
Congress should relieve.
    There is another indispensable step Congress should take to 
assure lasting stability. Perhaps inevitably Congress has 
focused almost exclusively on the expenditure side of the 
budget and paid almost no attention to the revenue side. Yet 
Congress is responsible for the most important structural 
revenue barriers the District faces. The District cannot 
collect property taxes from the Federal Government, and yet 
gets no payment in lieu of taxes and gets no payment in lieu of 
taxes for having its prime land off the tax rolls. The 
District's major industry, the Federal Government, exempts 
itself from normal income taxes that, for example, the 
biotechnical industry pays to Montgomery County and that the 
dot-com industry pays to Fairfax County. Yet Congress bars the 
District from collecting any taxes from commuters who wreck the 
city streets and freely use its police, fire and other costly 
services.
    A nonresident tax credit is necessary to relieve 
congressionally imposed structural financial burdens on its 
capital. This revenue would come from the Federal Government at 
no cost to commuters because most of the employees who use D.C. 
services free of charge are Federal employees. The fully 
compensated 2 percent tax credit derived from taxes commuters 
already pay to the Federal Government would initially raise 
$400 million, a fraction of the cost of services to commuters, 
and would rise gradually, with the wages of commuters used as a 
yardstick rather than as a source of revenue. I hope that the 
members of the subcommittee will also become original 
cosponsors of the D.C. Nonresident Tax Credit Act.
    I appreciate the deference to home rule that the committees 
of the House and Senate often have shown the District. I now 
ask the committees to engage in the same self-examination 
Congress has required of the District. Congress can speed 
ongoing reform if city officials know that responsible 
government from them will yield more self-government from 
Congress. Congress can assure that the financial stability the 
District has achieved will be lasting if Congress faces and 
relieves the structural financial burdens for which Congress is 
wholly responsible. I ask no more than that Congress give the 
District the same respect Congress demands for its own 
districts.
    District of Columbia officials have responded, complied, 
and surpassed expectations. Congress must now be mindful that 
the District is not the only party to this process that has 
obligations. Congress now has obligations it must meet to its 
capital.
    I welcome today's witnesses and appreciate their testimony.
    Mrs. Morella. Thank you, Ms. Norton.
    [The prepared statement of Hon. Eleanor Holmes Norton 
follows:]
[GRAPHIC] [TIFF OMITTED] T5899.004

[GRAPHIC] [TIFF OMITTED] T5899.005

[GRAPHIC] [TIFF OMITTED] T5899.006

[GRAPHIC] [TIFF OMITTED] T5899.007

    Mrs. Morella. It is now my pleasure to yield time to the 
gentleman who is my predecessor as Chair of this subcommittee 
Mr. Davis.
    Mr. Davis. Thank you very much, Mrs. Morella. Thank you for 
continuing to provide outstanding leadership as Chair of this 
subcommittee and for holding this historic hearing. I look 
forward to working with you and our colleagues as we strive to 
maintain momentum for our Nation's Capital. I am confident 
we'll continue to be proactive. Working with the ranking member 
of this subcommittee, my good friend Delegate Holmes Norton, 
I'm certain we'll continue to address the city's many tough 
challenges in the spirit of bipartisan cooperation, respecting 
this city and its rights. That's the best way for us to 
guarantee that we can build on the progress that has been made.
    You know, back in the last millennia the District of 
Columbia was in the midst of a crisis of epic proportions. That 
was just 6 years ago. But it was 10 years ago that a commission 
chaired by Dr. Alice Rivlin prophetically warned of an 
impending disaster. Dr. Rivlin called the numbers down to the 
decimal point on every fiscal issue. We are therefore indeed 
fortunate to have Dr. Rivlin serving as chair of the Control 
Board as it is about to enter its long-planned dormant stage.
    Despite a lot of suspicion at the outset of this 
legislation, we always intended for the Control Board to work 
its way out of a job, which it has done, and the city has 
surpassed expectations for fiscal management earlier than I 
think any of us really anticipated and had some outstanding 
leadership get us there, and I applaud all of those who have--
the Mayor and the Council who have worked together to make this 
historic event come about.
    But I know that Dr. Rivlin and the members and the staff of 
the Control Board will be working until the end to perform 
their statutory responsibilities. Moreover, I fully expect that 
Dr. Rivlin will give us her expert opinion now and after the 
dormant stage is reached as to whether or not the city is in 
danger of reverting to the bad old days.
    An item of great interest to us all is the status of the 
office of chief financial officer, which we created for the 
city as part of the Control Board Act. Again, we're in a unique 
position to get expert opinion on the future of that office not 
only from its outstanding current occupant Nat Gandhi, but from 
its first occupant Mayor Anthony Williams. Congress has worked 
with the city in a constructive way to strengthen and make more 
independent the CFO, and now that we stand at the crossroads, 
it's important that we reach a consensus as to any additional 
adjustments that may be deemed helpful.
    Back in 1995, the District faced a spending problem of 
monumental proportions and a management failure as well. Basic 
service could not be delivered, and there were very real 
concerns that the city would run out of cash to pay its debt 
service or meet its payroll. So when we wrote the Control Board 
Act, we included seven such events, seven deadly sins, if you 
will, that would trigger a new control period. That provision 
is consistent with the other provisions for Control Board-like 
entities in the cities we surveyed that had experienced similar 
problems, such as New York City, Philadelphia and Cleveland.
    I'm aware that reference has been made to structural 
imbalance in the city, and some have pointed to the restriction 
in the Home Rule Act against the commuter tax. I have to 
reiterate my longstanding belief that should additional 
resources be necessary for the Nation's Capital, that this 
would be a Federal responsibility, and that would be unfair to 
impose an undue burden on regional commuters. This is, after 
all, a national responsibility, not just the responsibility of 
two States.
    We were very careful in drafting the original statute to 
name the entity we created as the Financial Responsibility and 
Management Assistance Authority. Dr. Rivlin, I think that was 
your language, as we worked through that.
    Ms. Rivlin. It was sufficiently awkward that no one could 
ever remember it.
    Mr. Davis. We deliberately avoided any such term as 
``Control Board,'' but nevertheless, the Authority was quickly 
morphed into what has ever since been called the Control Board. 
But that should not obscure our original intention, which is 
fully reflected in the various sections of the act. Congress, 
without a dissenting vote, backed up by a Presidential bill-
signing ceremony in the Roosevelt Room of the White House, 
wanted to assist the city with management issues so that a 
higher degree of fiscal responsibility could be achieved, and 
that's been done.
    As we look to the future with optimism, I can only 
reiterate what has been the D.C. Subcommittee's mantra since 
its creation in 1995, you can't have a healthy city--or you 
can't have a healthy region without a healthy city.
    I thank you very much, and my congratulations to all.
    [The prepared statement of Hon. Thomas M. Davis follows:]
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    Mrs. Morella. The timing is incredible of the distinguished 
Senator from Ohio Senator Voinovich.
    Senator Voinovich, if you have time to catch your breath, I 
could raise you for an opening statement. We have already 
commented on your background as mayor of the city that was 
undergoing a financial Control Board. So we welcome you. I'll 
recognize you for any opening remarks.
    Senator Voinovich. Thank you. I'll try to keep my statement 
short because of the important people that we have before us 
today.
    It's a pleasure for me to return to this hearing room. Six 
years ago, I was sitting where Mayor Williams sits today at the 
witness table testifying on the city of Cleveland's success in 
recovering from a 1978 financial default that had ultimately 
spurred our economic recovery that continues today.
    The purpose of the hearing was to learn how other cities 
dealt with their financial troubles in an effort to make the 
right choices for the District of Columbia. I was proud to sit 
at the witness table that day to boast of our accomplishments 
in Cleveland, and I hope, Mayor Williams, you feel the same way 
today.
    As I mentioned at that hearing, I have always felt that the 
District should be a model for the Nation, a shining city on 
the hill, and in that regard I'm pleased to note that 6 years 
after the city was declared financially insolvent, the District 
is well on its way to becoming that shining city on the hill. 
Under the leadership of Mayor Williams, former Control Board 
chair Andrew Brimmer, and current Control Board chair Alice 
Rivlin, the District of Columbia has made great progress. Over 
the past 6 years the District has managed to accomplish all 
requirements necessary to suspend the Control Board. It has 
repaid all outstanding obligations to the Control Board and the 
U.S. Treasury, gained access to the short-term and long-term 
credit markets, and reported four consecutive balanced budgets.
    In addition to achieving these requirements, public and 
private investments have sparked an economic revitalization 
downtown. It has had a positive impact on every aspect of the 
city. Residents have again begun to make an investment in the 
city, and home purchasing and development has soared as a 
result.
    Yet despite these promising advancements, I do not believe 
the District is completely out of the woods. Based on reports 
from the General Accounting Office and the D.C. inspector 
general, as well as the status of the District's health system 
and education system, the majority of the District government 
still has a rough road in front of them. For example, GAO, in 
issuing its report this morning on the District's progress in 
adopting a performance-based government in concurrence with the 
subcommittee's findings at a hearing this past March, GAO 
concluded that District agencies were indeed moving the goal 
posts by holding themselves accountable to goals that were 
submitted in June, 9 months after the fiscal year began, rather 
than the goals established at the beginning of the year. GAO 
diplomatically explains that the late submission, ``limits the 
use of the performance plans.'' And I want you to know that I 
share their concern.
    In addition, as discussed at a House Appropriations 
subcommittee earlier this month, reports show that the 
unqualified opinions of the District's financial statements are 
the result of a tremendous amount of work by a few key 
individuals rather than lasting institutional reforms in the 
financial management system. We're concerned about that. 
Sustaining sound financial management practices requires an 
investment in the human resources of the agencies that will 
allow the training to outlast the efforts of individual 
employees. The system has got to be in place. Without this type 
of investment in employee training, management advancements 
will likely rise and fall with changing administrations.
    Finally, the issues facing the District education system, 
from the deteriorating facilities at the public elementary 
schools to the UDC's difficulties in collecting tuition, 
suggest that the District still has progress to make before it 
can comfortably boast financial recovery. I'll be interested in 
discussing these issues with the witnesses today, and I look 
forward to hearing their views on the future of financial 
oversight in the District of Columbia.
    Thank you, Madam Chair.
    Mrs. Morella. Thank you, Senator Voinovich, and thank you 
for joining with us in making this a joint subcommittee 
hearing.
    [The prepared statement of Hon. George V. Voinovich 
follows:]
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    Mrs. Morella. I'm going to ask the witnesses of this first 
panel if they would stand, and in accordance with the rules of 
the Government Reform Committee, we swear in all of those who 
are going to testify. So if you would raise your right hands.
    [Witnesses sworn.]
    Mrs. Morella. The record will indicate affirmative response 
by all.
    Again, a procedure that we have established, not in terms 
of concrete, but we have established, is to allow each person 
testifying about 5 minutes for testimony to allow us an 
opportunity for questioning, and we have a subsequent panel 
before us, too. The testimony that you have presented to the 
subcommittees will be included in the record in its entirety. 
And so, if I could start with Dr. Rivlin.
    Incidentally, I want to congratulate you on the honorary 
doctorate you received at Harvard yesterday. No small 
achievement.
    Dr. Rivlin, I'll start with you, then, if you would have 
any comments to make.
    Ms. Rivlin. Thank you. We have joint testimony here today. 
We worked very hard together, the Mayor and the Council chair 
and myself. We worked hard at the staff level and at the 
principals' level to agree on a set of proposals, and so this 
is joint testimony, and we had agreed that the Mayor would 
present the testimony.
    Mrs. Morella. All right. Splendid. We'll give you more than 
5 minutes, Mr. Mayor, if you need that, since you're going to 
be testifying for the Control Board as well as the City Council 
and yourself as Mayor. You may proceed.

  STATEMENTS OF ALICE RIVLIN, CHAIR, FINANCIAL CONTROL BOARD; 
ANTHONY WILLIAMS, MAYOR, DISTRICT OF COLUMBIA; LINDA W. CROPP, 
CHAIR, COUNCIL OF THE DISTRICT OF COLUMBIA; AND J. CHRISTOPHER 
  MIHM, DIRECTOR, STRATEGIC ISSUES, GENERAL ACCOUNTING OFFICE

    Mayor Williams. I appreciate that, Chairman Morella, and 
our own Congresswoman, Eleanor Holmes Norton, thank you as 
always for your leadership. Senator Voinovich, thank you for 
friendship and partnership with our city, and we value that, 
especially given your own leadership in Cleveland as mayor and 
certainly in Ohio as Governor.
    As Mayor of the District, I am pleased to testify on behalf 
of myself, the D.C. Council chair Linda Cropp, and our D.C. 
Control Board chairman Alice Rivlin, as well as the citizens of 
the District. We're assembled here today at a very important 
milestone in the history of the District. Since entering a 
control period 6 years ago, the District has transformed itself 
from a struggling city on the verge of bankruptcy to a thriving 
community reaching reassuring levels of financial security, 
making rapid progress in service quality, and reaching new 
heights in citizen involvement.
    The District achieved this turnaround by rebuilding and 
reenergizing the financial management structures of government. 
The significance of this change is really threefold: First, we 
restored the financial health of this city so that we can now 
better respond to the needs of citizens. Second, by 
demonstrating our capacity for financial management, we earned 
the return of the autonomy we once knew. And third, we set in 
place a system that will continue improving services, continue 
building financial strength and continue to earn greater levels 
of autonomy and self-governance for the citizens of the 
District.
    The District achieved these advancements in partnership 
with the Congress. In order to achieve our greater goals of 
prosperity and democracy, we hope to continue to work in 
partnership with you. To that end I'll now review these 
achievements for the record so that we may find common 
understanding upon which to build a common future.
    Of all the District's accomplishment, perhaps none stands 
above the tremendous financial recovery achieved over the past 
6 years. You consider our condition at the outset of the 
control period in 1995 and compare the state of affairs today. 
In 1995, you saw serious cash shortages because Wall Street 
downgraded the District's bond rating to junk bond status. Now 
the District's bonds rank as investment grade, and the District 
is building hundreds of millions of dollars in cash reserves, 7 
percent in cash reserves as a percent of local operations, in 
excess of every other State and local government in the 
country, as far as I can tell.
    In 1995, you saw a $484 million accumulated deficit, which 
continued growing through annual budget deficits. Now the 
District balances its budget every year, and we have amassed a 
$464 million accumulated surplus, and this surplus is still 
growing year after year.
    Based on these achievements the Control Board has certified 
that the District has met the terms required for an end to the 
control period, but our achievements don't end there. In 1995, 
you saw financial systems and staff incapable of producing 
reports that would meet the standards of independent auditors. 
Obviously there are still problems, there are still challenges, 
but now the District closes and balances its books on a monthly 
basis, and we achieve clean unqualified reviews from the 
inspector general and our independent financial auditors every 
year.
    And finally, in 1995, you saw major flaws in basic 
financial functions such as paying vendors on time, processing 
tax receipts and validating payroll. Now the District maintains 
the infrastructure to meet and in many cases exceed industry 
standards for financial management. And one indicator I would 
give you, for example, is on tax refunds where we exceed many 
other jurisdictions across the country and in many instances 
the IRS.
    In achieving these advancements we did not move from poor 
operations to average operations and then end our efforts. We 
have strived and continued striving to continuously improve our 
operations. Many observers don't realize this, but facing a 
crisis can actually strengthen an organization and help it grow 
not only to match its peers, but to surpass them. Such is the 
case here in the District. To overcome financial crisis, we 
developed a tremendous amount of positive momentum. We have 
become a learning organization, and we are improving our 
flexibility, our use of technology, and our focus on results.
    I give you just a tidbit on technology. Our Web site has 
gone from essentially nothing to a Web site where last month we 
had over 3 million visitors to the District Web site. That's a 
lot of visitors to any Web site, let alone a government Web 
site, and we're proud of that.
    As such our goal is not to return to the pre-Control Board 
days. We have set our sights on something much greater. Our 
goal is to meet the highest standards of financial strength and 
to use that strength as a foundation for building the quality 
of services and world-class neighborhoods that our citizens 
deserve.
    Given that goal, our testimony today, our joint testimony, 
seeks to accomplish two things: First, to engage Congress in 
devising a rational exit strategy at the end of the control 
period, and, second, to look beyond the control era and set a 
new course for the District's continued evolution.
    To take up the first task, the Council, the Financial 
Authority and I have jointly developed a plan to effect the 
transition of financial control from the Authority to elected 
leadership, the Mayor, yours truly, and the Council under 
Chairman Cropp. In order--in recognition of our restored 
autonomy, we propose to effect this transition through local 
legislation which we have drafted and the Council has 
introduced in anticipation of this hearing. Our intention in 
doing so was to provide a proposal for your review as we devise 
a solution in partnership.
    The plan we propose incorporates the infrastructure 
developed in the control period into the regular operations of 
District government, and in so doing it ensures that the 
District will never deviate from the financial discipline 
developed during this era. To that end the District's plan is 
built on the following provisions: One, insulation of the CFO, 
achieving independence for the CFO without creating the CFO as 
an outpost outside of the regular affairs and operations and 
mission of the District government. First, it maintains the 
functions and operations of the chief financial officer. Under 
the District's plan the office of the CFO will continue to 
manage the treasury, accounting, tax and budget functions of 
the government. Rather than reporting to the Control Board, 
however, the CFO will now report to the Mayor.
    In devising this reporting relationship, the challenge 
became finding a balance between, on the one hand, returning 
financial authority to the elected officials who must be 
accountable for fiscal management and, on the other hand, 
insulating the CFO from pressures that may compromise the 
execution of his duties. We address this challenge by 
incorporating the existing Federal provisions for appointment 
and removal of the CFO. For appointment this plan requires a 
decision of the Mayor and approval of a Council majority and 
allows for renewable appointments. For removal our plan 
requires a decision of the Mayor, which can only be for cause, 
and the approval of two-thirds of Council members present and 
voting. These provisions will allow for the CFO to serve as an 
integrated part of the executive branch while necessarily 
remaining insulated from undue political pressure from any one 
source.
    Moreover, our plan strengthens the CFO's role by requiring 
him or her to complete fiscal impact statements for all local 
legislation and certify funding availability for all labor 
agreements. As an additional check and balance, this plan 
specifies a 4-year term for the CFO to provide for consistency 
in the office's leadership and to ensure the executive fully 
assumes accountability for financial operations of government.
    We have made special provisions for budget formulation and 
revenue estimates, because, as a second provision, the 
District's transition plan recognizes that certain financial 
processes require special definition. Most important among 
these are budget formulation and revenue forecasting. In the 
budget formulation process, we will be best served by following 
the model used by virtually all governments at the Federal, 
State and local level. In this model the executive, supported 
by a strong budget staff, develops a budget proposal based on 
his or her policy direction. This proposal is then reviewed by 
the legislature, which is supported by a strong and separate 
budget staff. The creative tension between these two bodies 
fosters an environment of full transparency and rigorous review 
and accountability. This review in turn results in a process 
whereby only the ideas with the greatest merit and broadest 
support earn the taxpayers' support and, hence, dollars.
    In the District's transition plan, the Office of Budget and 
Planning reports to the CFO as part of the executive branch. 
For purposes of budget formulation, however, the budget office 
executes the dual responsibilities of validating expenditure 
projections with an objective analysis and developing the 
proposed budget as part of the Mayor's policy agenda. This 
provision ensures integrity in the budget numbers and 
appropriate resources for the executive's responsibility for 
policy formulation. So the Mayor should be able to make a 
proposal to the Council on what we want to do with Medicaid 
programming and Medicaid expansion as a matter of policy, but 
it's up to the CFO to really take responsibility to ensure that 
I don't decide, or if some future Mayor decides and proposes to 
the Council, that we're going to save money by assuming that 
Medicaid will never grow. That would be an example of how that 
can and should work.
    Like budget formulation, the revenue estimation process 
also requires special definition. Revenue forecasting requires 
a unique level of advanced and objective analysis where small 
changes in growth rates yield large changes in projected 
revenues. Given this sensitivity, these projections require the 
opposite treatment of the budget formulation process. Although 
revenue estimation must be made transparent and be thoroughly 
understood by policymakers, we believe this function must 
remain insulated from undue influence and, therefore, should 
continue to operate under the direct control of the CFO. The 
District's transition plan maintains this direct control. And 
needless to say, we believe it's in the revenue estimation 
where you get into a lot of trouble, and that's why we give 
this special definition to that function.
    Finally, we want to talk about agency CFOs. The final 
provision of the District's transition plan realizes the 
reporting relationship of agency CFOs. At the onset of the 
control period, I, as CFO, identified a need to position 
agency-level CFOs in the largest and most troubled agencies. 
While this new structure greatly accelerated the financial 
reform of these agencies and certainly helped, needless to say, 
in budget control, it also created two side effects. First, and 
I witnessed this firsthand, it limited the ability of agency 
directors to integrate financial considerations in their 
programmatic decisions as effectively as is necessary in a 
complex organization. And second, it made it difficult to hold 
agency directors directly accountable for the financial 
performance of their operations.
    Now that we've undergone a structural reform of the 
financial operations across the District, we must now 
reintegrate financial and programmatic functions under the 
leadership of agency directors. The District's transition plan 
accomplishes this by maintaining the agency CFO positions and 
creating a dual reporting relationship to the agency director 
and District CFO. To ensure that agency CFOs maintain some 
independent authority, this plan requires that agency directors 
appoint their agency CFOs only with the approval of the 
District CFO. Likewise, both the agency director and the 
District CFO will be responsible for performance evaluations 
and disciplinary action, with each manager devising performance 
standards relevant to their scope of responsibility.
    In the event of termination, however, an authority must 
ultimately lie with the District CFO. We find this provision 
necessary because the District CFO carries the greatest 
expertise in and the most direct responsibility for preserving 
the financial integrity of this government.
    Taken together, these provisions for financial leadership 
and processes are built on the practices developed by the 
Mayor, Council and Financial Authority over the past 6 years. 
You will note that this plan institutionalizes at a local level 
the strong aspects of the structure established by the 
Congress.
    Finally, a plan for performance-based autonomy. As your 
committees begin their deliberation in this matter, they will 
be well served by remaining very conscious of the previous 
context and future impact of these decisions. Specifically we 
must be aware of how these decisions will impact, affect the 
continued evolution of the District government and the citizens 
here.
    On the issue of self-government, multiple people have 
proposed multiple solutions, but unfortunately little has 
changed for the more than half-million citizens in the 
District. I'm sure we all agree that taxation without 
representation is wrong, as it was two centuries ago. The 
question now is how to correct this problem. The District, of 
course, would welcome a comprehensive solution from the 
Congress, but in the absence of that, the end of the control 
period at the very least provides an opportunity to 
incrementally improve the level of democratic influence that 
Americans in the District exercise over their local affairs. 
Specifically, we propose that the Congress adopt a performance-
based autonomy plan whereby the District gains incrementally 
greater autonomy based on the continuing strengthening of its 
management.
    Five years ago Congress assumed control of the District's 
finances as a result of the District's performance. Now the 
control period is ending, again as a result of the District's 
performance. This experience, though a difficult one, provides 
a new modeling for how the Congress should exercise oversight 
of the District based on performance.
    Accountability, though, is a two-sided coin. If the 
Congress were to restrict the District's autonomy when our 
performance lags, it should also increase our autonomy when the 
performance is strong. Specifically the Congress should set a 
new set of performance targets similar to those set to bring an 
end to the control period. We propose the following: 
Maintaining a balanced budget, maintaining an investment-grade 
bond rating, receiving an unqualified independent financial 
audit, and establishing a cash reserve equal to 7 percent of 
local operating expenditures, and replenishing any draws within 
3 years.
    After achieving these targets for 3 consecutive years, the 
Congress would exempt the District's budget from the Federal 
appropriations process. Upon achieving those targets for 
another 3 years, the Congress should exempt the District from 
the 30-day legislative review process. If any fiscal year after 
a measure of autonomy is earned the District fails to meet any 
of those criteria, the Congress could suspend budget autonomy 
in order to regain it. This solution allows the Congress to 
fulfill its constitutional charge to provide oversight, while 
at the same time providing the District with the budgetary 
autonomy needed to deliver services effectively.
    Although this performance-based autonomy proposal may not 
be the primary consideration for these committees at this time, 
it represents the critical context for the sunset of the 
control period, and it represents a tremendous opportunity for 
this body to usher in a new era of greater rationality and 
fairness in the congressional oversight of the District of 
Columbia.
    Likewise, by establishing this provision, the Congress will 
create an opportunity for Americans in the District to take a 
small but significant step toward achieving what every other 
American enjoys, and that is a full voice in electing those who 
govern our affairs.
    With that thought in mind, and, again, on behalf of myself, 
Chairman Cropp, Dr. Rivlin and the citizens of the District, I 
conclude my testimony, and all of us are now available for any 
questions you may have.
    Mrs. Morella. Thank you.
    [The joint prepared statement of Mayor Williams, Ms. Rivlin 
and Ms. Cropp follows:]
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    Mrs. Morella. Ms. Cropp, would you like to make any opening 
statement, or do you----
    Ms. Cropp. I'll wait for questioning. The Mayor spoke for 
the Council.
    Mrs. Morella. We'll have order in this hearing room.
    It's now my pleasure to recognize J. Christopher Mihm, who 
is the Director of Strategic Issues of the General Accounting 
Office. Your testimony, sir.
    Mr. Mihm. Thank you, Madam Chairwoman, Congresswoman Norton 
and Senator Voinovich. I am honored and pleased to be here 
today to discuss the outlook for the District of Columbia in a 
post-Authority period.
    I'll briefly cover three topics this morning. First, I will 
note the central elements in the District's financial recovery 
since 1995 and the continuing long-term challenges it faces. 
Second, I'll discuss some of the new reporting requirements 
that Congress has put in place since 1995 to assist it in 
oversight and decisionmaking. And finally, as requested, I'll 
identify some additional mechanisms that Congress may wish to 
consider to ensure that it and the District have the 
information needed to help the District maintain its financial 
viability.
    First, in regards to the city's financial recovery, as has 
been widely noted this morning, since 1995, aided by a strong 
local economy and through the combined and cooperative efforts 
of the Authority, the District government, Congress and the 
citizens of the District, the District has experienced a 
remarkable turnaround in its financial condition. All of the 
Members' opening statements, and as Mayor Williams detailed, 
the District has made outstanding progress in dealing with its 
deficits and paying down its debts, obtaining access to the 
bond markets and obtaining clean financial audit opinions.
    It in no way minimizes this remarkable achievement to note, 
however, that the District, similar to many other cities, 
continues to face a series of substantial long-term challenges 
to its financial status. Addressing these challenges requires 
continued dedicated and inspired leadership to make the hard 
decisions and often painful tradeoffs among equally compelling 
needs and priorities. Sound financial and program costs and 
performance information is and will be critical to making these 
decisions in an economical, efficient and effective manner.
    This then gets to the second point I wish to cover this 
morning. Since 1995, Congress has put in place a number of 
reporting requirements to help provide the financial planning 
and performance information that it needs to conduct effective 
oversight and make decisions. One of the potentially more 
valuable requirements that Congress has put in place for the 
District is similar to the requirements Federal agencies have 
under the Government Performance and Results Act to produce 
annual performance plans and subsequent reports. In that regard 
we are--as Senator Voinovich noted, we are releasing today our 
assessment of the District's fiscal year 2000 performance 
report.
    My point here is that we should keep these new reporting 
requirements in mind as any additional ones are considered and 
debated.
    Third and finally, Congress may wish to consider additional 
mechanisms to ensure that it and the District have the 
information needed to help the District maintain its financial 
viability and address its current and emerging challenges. Such 
mechanisms must be considered and implemented within a context 
that seeks to balance two sets of values, the overriding 
importance of home rule and respect for the District's 
democratic institutions on the one hand, and Congress's 
oversight decisionmaking--oversight decisionmaking 
responsibilities for the Nation's Capital on the other.
    My written statement details a number of options that have 
been widely discussed, including assuring the independence of 
the CFO, which was, of course, discussed by the Mayor and the 
subject of the District's legislative initiative earlier this 
week, maintaining the independence of the inspector general, 
and the possibility of forming an audit committee or similar 
arrangement. One option that Congress may wish to specifically 
consider is requiring the District to notify it if certain 
predefined reportable events occur that require the prompt 
attention of the District and Congress.
    Under the law, an Authority or Control Board could be 
reestablished if any number of a specific set of major events 
occur, such as the default on the District's borrowing or 
failure to meet payroll. The major events that do lead to this 
reestablishment are clearly to be avoided at nearly all cost, 
but to do so, the District and Congress need information in 
time to act before a crisis occurs that would lead to the 
return of an Authority. A reportable event notification system 
could be designed to provide just such information. Such a 
system would be generally consistent with the approaches that 
have been taken from other jurisdictions, and my written 
statement details some principles that Congress may wish to 
keep in mind if it considers such an arrangement.
    In summary, the District and its citizens, the Authority 
and Congress have jointly achieved an enormous accomplishment 
in restoring the District to financial viability. Nevertheless, 
the District and Congress must have reliable, accurate and 
timely financial and program cost information if they are to 
respond to pressures and warning signs that could indicate that 
future difficulties lie ahead; in short, if they are to deal 
with problems before they become full-blown crises.
    Madam Chairwoman, this concludes my prepared statement. I 
would be pleased to respond to any questions you or other 
members of the subcommittees may have.
    Mrs. Morella. I thank you for your statement and want you 
to know that your entire statement as submitted will be 
included in the record.
    [The prepared statement of Mr. Mihm follows:]
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    Mrs. Morella. I'll start off with the questioning, and each 
of us will have several rounds as necessary, maybe 5 minutes 
for each of us to pose questions. I'm going to start off with 
Dr. Rivlin.
    Two of the purposes of the Control Board were to eliminate 
budget deficits and cash shortages of the District of Columbia 
through visionary financial planning, sound budgeting, accurate 
revenue forecasts and careful spending, and to ensure the long-
term financial, fiscal and economic vitality and operational 
efficiency of the District of Columbia. Dr. Rivlin, have these 
two purposes of the Control Board Act been met?
    Ms. Rivlin. Well, certainly the specific criteria for the 
end of the Control Board have been met. The purposes that you 
just enunciated are ongoing challenges. The District has, as 
you know, a very narrow tax base, and there's certainly a very 
strong case, in my opinion, for the Congress looking at the 
structural imbalance of the District and deciding what to do 
about it in the long run. Even if the District is extremely 
well managed and does, as we all hope, improve its economic 
situation through economic development, more population, I 
believe that the narrowness of the tax base caused by the fact 
that the Federal Government is its principal industry is a 
serious problem and should be corrected, and there are options 
on the table, the principal one being Congresswoman Norton's 
bill for a wage tax with a credit against the Federal tax, 
which would meet Congressman Davis' criteria that it not be an 
undue burden on the States of Maryland and Virginia. So that's 
a possibility. So are payments in lieu of taxes.
    The other even more challenging problem, I think, is to 
improve the services of the District, and that is a continuing 
effort that the Mayor and the Council, with the oversight of 
the Congress, with the help of the Congress, have to pay 
attention to.
    But I think that the District is in good shape to take over 
that responsibility itself.
    Mrs. Morella. Both you and the chief financial officer have 
suggested, and you just mentioned, that the District government 
has a structural budget imbalance. What are the revenue and 
expenditure components of this structural imbalance? And then I 
would say--I mean, what is the revenue and expenditure growth 
going forward?
    Ms. Rivlin. Well, the District does have a 5-year plan now 
which projected balanced budgets for the next 5 years, but that 
is based on very careful expenditure control and actually very 
small amount of growth in revenues anticipated over the next 
several years.
    The source of the imbalance is basically that the property 
sales and income tax base is so drastically narrowed both by 
the fact that the Federal Government is the city's principal 
industry and by the actions of the Congress to prohibit 
taxation of nonresident income.
    Mrs. Morella. We will--this subcommittee will be looking at 
the kind of long range. We have that on our agenda to look at.
    But let me ask you directly. In my opening statement, I 
made some statement about the possibility of some special 
review of the city's revenue estimate and financial audit, as 
the Mayor had suggested and some members of the Council had 
supported publicly. I mean, is there some kind of an audit 
committee that would be--I don't want the Congress involved in 
it if you think there is a place for it--where the Council, the 
Mayor would appoint people to kind of do an audit review or be 
available? I mean, how do you feel about that?
    I have said to everybody--I am going to ask all of you 
that. And if my time elapses before I get back to everybody, 
but I will get back to you later, but I want for the record to 
know how you feel about that.
    Ms. Rivlin. Should I start?
    Mrs. Morella. Whatever.
    Ms. Rivlin. I have mixed feelings about it. We all talked 
about this, and when I first thought about it, I thought that 
the idea of having a validation group of experts for the chief 
financial officer is a very valuable one. And I still think so. 
But I believed that the chief financial officer can appoint 
such a group. In fact, the current chief financial officer has 
such a group to assist in--a group to bounce off the 
projections.
    The trouble with putting such a group into law and having 
it appointed by the elected officials is, I think, the risk of 
what do you do if such a group then differs with the chief 
financial officer? Then you have a problem. And it is possible, 
though one would hope not likely, that a group appointed by an 
elected official might in some future years become a political 
group itself; and that I think would be unfortunate.
    Mrs. Morella. Maybe there would be a different group of a 
different composition or whatever.
    I know my time has elapsed. I will get back to all of you 
to answer that specific question so I know how you really feel 
things should be done.
    Now I am pleased to defer and recognize the ranking member 
of this subcommittee, Ms. Norton.
    Ms. Norton. Thank you, Mrs. Morella.
    I would just like to clear up a difference between Mrs. 
Morella's statement and the Mayor's statement, just so that I 
can have the record clarify and have the city officials 
clarify.
    Her statement says--this is her statement. Her statement 
says that the proposal does not require the CFO to prepare 
fiscal impact statements on all or even most pieces of 
legislation. Now the Mayor testified our plan strengthens the 
CFO's role by requiring him or her to complete fiscal impact 
statements for all local legislation. Which is the case, 
please? I mean, does the CFO have to prepare fiscal impact 
statements or not?
    Ms. Cropp. Well, I think it is two parts. The fiscal impact 
statements on legislation that are submitted by the Mayor, the 
CFO would provide fiscal impact statements. The legislation 
that is provided by the Council, as the legislation is 
currently written, it would not have the fiscal impact 
statements. That would be the Budget Office from the Council 
that would have to supply the fiscal impact statements.
    However, Council legislation requires that all legislation 
that is passed must be accompanied with a fiscal impact 
statement. And I have been extremely vigilant during my tenure, 
and that is part of our Council role. So all legislation will 
have fiscal impact statements accompanied with them.
    Ms. Norton. So essentially what the city does is to leave 
in place, is to take onto itself the function that is now 
performed by the Control Board, which, as I understand, looks 
at the fiscal impact statements?
    Ms. Cropp. Yes. And our Budget Office also works usually in 
conjunction with the CFO's office.
    Ms. Norton. Just let me give some sense of context here. As 
long as there is going to be a local government anywhere--I 
address this specifically to the gentleman from the GAO. As 
long as there is a government anywhere, especially a city 
government, there will never be a time when there will not be 
many problems to put on the table, especially today when cities 
have been--are bereft of the many people who used to live there 
who now moved to the suburbs. So it is a truism that if what 
you are doing is looking for problems, you will always find 
them in this government and any other government. Can I have 
your agreement to that?
    Mr. Mihm. Yes, ma'am. I mean, well, there are certainly 
issues that we have seen in the D.C. government, Federal 
Government and the GAO, we have management challenges that we 
deal with. The key is, do you have--are you identifying them? 
Do you have an action plan in order to address them and is the 
organization moving forward? And that is----
    Ms. Norton. Answer those three questions with respect to 
the District of Columbia.
    Mr. Mihm. With the District, we have been very pleased with 
the types of relationships we have had with them with their 
understandings of the challenges that we faced. We work very 
closely with the Mayor's office and in particular the Deputy 
Mayor's office and his staff on the issues that concern us. 
They clearly understand some of the substantial challenges that 
they face and financial management and performance management, 
have taken the hard recommendations and are taking actions to 
address those.
    Ms. Norton. Do you see any operational problems that the 
District government has now that a competent and committed 
government cannot or will not deal with on its own?
    Mr. Mihm. Operational problems?
    Ms. Norton. Yes.
    Mr. Mihm. No, ma'am. Our concern is--is that as we look at 
the--as has been discussed, some of the longer term fiscal 
challenges that the District faces, in order to address those 
challenges the District and Congress need to have good 
performance and financial information in place in order to 
address those.
    Our concerns have been when we have looked at the financial 
management system that is still a work in progress. They are 
working real hard at it, but it is a work in progress.
    The performance information is still a work in progress, 
again working very hard at it. The concern we have is making 
sure that we continue to make progress in getting this good 
information in place so that the District leadership and others 
can make the decisions that need to be made.
    Ms. Norton. You are quick to point out what you, yourself, 
say the District is already doing. And I appreciate the balance 
in your testimony. But you say nothing about structural 
imbalances that the District can do nothing about.
    Suppose the District were to do everything it is supposed 
to do. Would there be structural imbalances in its tax 
structure imposed on it by the Federal Government that it could 
do nothing about and that threatens the future viability of the 
city?
    Mr. Mihm. I understand your question, ma'am, and I 
understand the importance of that question. But the work that 
we would need to do in order to answer that question has been--
was beyond the scope of the work that we do.
    Ms. Norton. It is not beyond the scope of common sense, if 
I may say so. I put it on the table because the District has 
come here as good soldiers, and I appreciate it, saying this is 
what we have done and, please, Congress, let us continue to do 
what we are doing on our own, and has had little to say about 
its own structural revenue challenges.
    I would like to invite the District to speak further about 
its structural revenue challenges. Because if those challenges 
are to be met, it will put this Member of Congress in the 
position of having to prepare the Congress, perhaps in too 
short a time, to understand that if the District itself does 
not give the same early warning to the Congress that the GAO 
keeps telling us we need from you--in other words, somehow we 
need you to warn us that you are in trouble.
    Who is to warn the Congress if structural revenue problems 
are, in fact, overtaking all that the District can do? What is 
in place now to keep another financial crisis from coming to 
the District based on pressures outside of the control of the 
District imposed on it by the requirements that the Congress 
has put upon the city?
    Mrs. Morella. Actually, the gentlewoman's time has expired. 
If you can all remember that when we get back to you for the 
next round, I would appreciate that.
    Senator.
    Senator Voinovich. Thank you very much.
    First of all, I would like to congratulate Dr. Rivlin and 
the Mayor and the chairwoman for coming together and joining in 
your testimony. I am very interested in the proposal that you 
have put together for continued solvency and recovery of the 
District in terms of the CFO and its relationship to the 
Council and to the Mayor and so forth.
    I would like very much for Mr. Mihm to look at the proposal 
that the city has put together, to opine, from the GAO's 
opinion as to whether or not it does the kind of thing that is 
being presented here in terms of continued fiscal 
responsibility and financial management on the part of the 
city.
    Mr. Mihm. Yes, sir.
    Senator Voinovich. Mr. Mihm has also raised some issues 
today in terms of the District's plans, and I would ask you, 
Mayor, to sit down and look at some of his suggestions and to 
come back to see what you think of them and how, perhaps, you 
could incorporate some of his concerns into what you are doing.
    We are very interested in just seeing progress and doing 
something that is very realistic, and as far as I am concerned 
you are the ones that are closest to the problem and most 
responsible, and we want to cooperate with you.
    Mayor, you were interviewed in ``the Hill'' a Capitol Hill 
newspaper and said, ``it makes sense to have strength in 
oversight controls, that we ought to have special review of our 
revenue estimate in the city and a special review of our 
audit,'' and I strongly support that.
    You didn't specifically mention that in your testimony. And 
when you did talk about this independent, unbiased review of 
the District's financial numbers, is the plan that you 
submitted or discussed today what you were considering when you 
made that statement in the newspaper?
    Mayor Williams. Yes, it is, Senator. I believe that having 
the CFO have direct support for the revenue estimate 
accomplishes an important goal of sequestering or segregating 
the revenue estimate from political influence. I believe that 
is where we get into trouble.
    And I believe that, if I can kind of partner questions, if 
our 5-year plan, based on an objective revenue estimate of the 
CFO, and right now the outstanding forecasting of Julia 
Freedman, who does an outstanding job as our chief economist, 
shows that we are in trouble, it is going to be reflected in 
the 5-year plan.
    And, believe me, everybody will hear the chorus of voices 
complaining about us elected officials not doing A, B or C, 
because we don't have the money, because we are operating under 
legitimate revenue constraints.
    As to the audit function, I believe that we have a very 
strong inspector general. We support continuing the 
independence of the inspector general and the special autonomy 
that he or she has; and we believe that the inspector general, 
with the responsibility for the audit, presenting it to the 
Mayor, the Council Chair, and the Chair of the Finance and 
Revenue Committee of the Council, can form that audit committee 
function in a transparent way.
    Senator Voinovich. What is your response to Mr. Mihm's 
testimony that the GAO noted that last year's unqualified 
opinion was largely the result of the extraordinary efforts of 
a few key individuals, despite serious weaknesses in the 
District's financial system? What's your response to that?
    That basically says you have some really good people that 
busted their back to put together and get it done, but the 
financial management system itself is not yet in place to have 
this occur on a regular basis without extraordinary work on the 
part of special individuals.
    Mayor Williams. I believe that when we look at systems, our 
city administrator, Deputy Mayor, John Koskinen and Nat Gandhi, 
when we look at a system, we look always at not just hardware 
and software but organization processes and, very importantly, 
people.
    John Koskinen and the Chair of the Finance and Revenue 
Committee, Jack Evans, serve on a committee called the SOAR, 
which is an intergovernmental committee, with everybody 
involved responsible for seeing that this system gets 
implemented, working, with managers taking responsibility for 
the implementation of a system. And we are confident that we 
are going to be--continue to make advances in the area of 
reorganizing our operations and procedures so this system can 
work.
    To give you an example, in our labor negotiations, we are 
working in cooperation with labor to reduce dramatically the 
number of bargaining units in the city. Why is that important? 
Because the more bargaining units you have, permutations, 
combinations and more pay tables you have, if you have the 
infinite number of pay tables we have, there's no way that any 
payroll system is going to pay reliably because you have so 
much complication.
    We are trying to reengine our processes down to an off-the-
shelf system as opposed to vice versa that we have been doing 
in the past.
    Senator Voinovich. Now, you agree that the financial 
management system isn't yet in place?
    Mayor Williams. It isn't yet in place, but I believe we are 
putting the systematic--have put in and are putting in the 
systematic tactics and strategies in place to see that it gets 
implemented right. And we get full advantage of this system, 
particularly in the area of cost accounting, which is critical, 
as you know, to linking performance information and budget 
information.
    Mrs. Morella. The gentleman's time is expired.
    I want to pick up--and I know that, Mayor Williams, you 
seem to have been answering in response to the Senator's 
questioning that you do not think that any separate audit 
committee appointed by the Council or whatever would be 
necessary for revenue estimates.
    Mayor Williams. Chairman Cropp and Dr. Rivlin can speak for 
themselves, but in my approach or our joint approach to this 
has been to look at what is the function we are trying to serve 
and how can we reach agreement on serving that important 
function.
    To achieve authenticity, validity, credibility in your 
audit, there are a number of different ways to do that. 
Certainly in a lot of organizations, an audit committee does 
that. We believe, given our circumstances and given where we 
are, having again an indispensable, independent Inspector 
General with overall responsibility for the audit, working with 
an outside accounting firm, reporting to the elected officials 
in committee can serve that function of transparency and 
accountability.
    We have one of the strongest IGs in the country now, and we 
want to keep it that way.
    Mrs. Morella. I am impressed with the IG, with whom I met 
and who will be on the next panel, too.
    Councilwoman Cropp, let's hear from you about that specific 
item.
    Ms. Cropp. Congresswoman, the issue of the revenue 
commission was one that we probably had the largest amount of 
debate. If I was sitting here 2 months ago, I probably would 
have been more supportive and gung ho and said, yes, we must 
have that revenue commission.
    There has been another bill that was introduced to the 
Council to form a revenue commission; and at the time that we 
have the hearing on our CFO legislation we are going to also 
have it on this revenue commission bill that was introduced by 
Councilmember Patterson. Our hearing is scheduled for June 19th 
at 2 p.m., because we want to move quickly.
    That is an issue that I think we worked very diligently on 
in our joint presentation to you, that we agreed that we wanted 
to leave that issue open a little more and get some more 
information and testimony. So I hope that we will come to a 
resolution on that issue after that June 19th hearing.
    We did have great concern, however, that as we have this 
revenue commission, that it could become extremely political in 
the final analysis. If that estimate is quite different from 
the estimate of the CFO who has some independence, then what? 
Then we create a whole new set of political problems; and we 
may, in fact, be shooting ourselves in the foot with that.
    That was one of the greatest concerns that we had. We have 
been extremely fortunate in the District of Columbia to have 
CFOs to give revenue estimates under Julia Freedman, and I am 
going to tell you sometimes we have not been happy with them. 
But the conservative estimates that have come, I think, have 
bode well for the District of Columbia, and I think it will 
continue in that mechanism.
    Mrs. Morella. OK. I am pleased to hear about the hearing. 
You will have to, of course, apprise us of the results of it.
    It is really important that I hear from GAO, Mr. Mihm, your 
response to the possibility of the audit committee of some 
sort.
    Mr. Mihm. I think there's two things here, Madam 
Chairwoman. One is, as Dr. Rivlin pointed out, we are all in 
agreement that revenue estimates are strengthened by a level of 
external revenue. And, indeed, we are very pleased to see that 
the CFO is reaching out to professionals to help them in that 
regard, both in terms of looking at the assumptions--the 
particular assumption and then in the broader methodology.
    Revenue--doing revenue estimates is very difficult and 
technical, but it is something that is done frequently around 
the country, so there is certainly best practice that can be 
learned from that.
    The second point I would make, though, and the challenge is 
not just in making an initial estimate that is accurate. The 
challenge is also in making sure that you routinely have the 
information that you can check on. How is that revenue estimate 
going? What sort of adjustments do we need to make? And that is 
where we get back into the questions about--or the importance 
of the District carrying through on the implementation of its 
financial management system.
    In terms of an audit committee, they typically have a 
separate set of functions and are not typically involved in 
revenue estimates. Rather, they are typically responsible for 
overseeing the independent financial audit, that is, the 
selection of the auditor and making sure that they carry out 
the audit correctly and that there is resolution of the 
auditor's findings.
    And there's a wide range of how this model is actually 
implemented across the country. Most typically, they are a 
function or--rather, they are part of, in this case, what would 
be the City Council, and do the financial--rather oversee the 
financial audit of what would be the executive branch.
    Mrs. Morella. I note accurately my time has just expired. 
So I will be back for the next round.
    Now I am pleased to recognize Congresswoman Norton. I hope 
you remember her question. I won't count the time if she 
repeats it.
    Ms. Norton. No, frankly, because you didn't get to answer 
it, rather than to go back over that, I think I will save that 
question on the structural revenue problems that may be flowing 
to the District that you did not speak in detail to, to the 
chief financial officer, whose job it is to look at the 
outyears. The GAO tells me that is not even a part of what 
Congress, what it's to look at. So perhaps no one can 
authoritatively speak to that at the table.
    Ms. Cropp, you speak--on this question about a revenue 
commission--which the Mayor kind of threw out off the top of 
his head. Watch out what you ask for, Mayor, you may get it, if 
we 1 day are speaking out loud--was something I was completely 
open to.
    May I compliment you on the way that you are looking at it? 
By listening to you, I have learned the pros and cons. And when 
you talk about how political it could be, that strikes a real 
note in this Member who has watched the District through her 
entire life.
    I also am concerned--again, I am completely neutral on it 
until I hear your discussion. I am concerned. But what I think 
you have been fortunate in is not only that you had very good 
financial officers but that the financial officer has been 
independent and had nothing to fear but fear itself.
    I don't know what it is that would keep somebody appointed 
by the Mayor or, for that matter, or somebody on the City 
Council, people on the City Council, what would make them 
independent.
    I don't understand why they would feel the same 
independence the CFO feels or why somebody from the private 
sector would necessarily--or, for that matter, some parts of 
the public sector--would necessarily bring to the table 
anything but an adversarial and redundance process for somebody 
to figure out.
    Again, you would be asking the Congress to figure it out if 
there were a difference here. So I think for every provision we 
have to do a costs benefit and find out, weigh both sides and 
find out where we come.
    I would like to ask Mr. Mihm. Your testimony calls for, 
again, this notion of an early warning so that Congress and 
presumably the District will know that financial problems are 
coming up. But isn't that the job of the CFO? I mean, why would 
you need anything more than an independent CFO with a term, 
they can't be fired, who is competent to do that?
    I mean, sometimes I think we don't have anything to do but 
think of things for people to do. One of the things we are 
supposed to be doing is streamlining the government, not 
thinking of revenue commissions on top of things just to have 
them, but thinking, do we need this? Is there somebody who does 
this? Every time we put in a bill, someone asks us, are you 
putting in a new bureaucracy? Are you putting in a new 
structure for the Congress to pay for?
    Well, I am asking you, what in the world is the job of the 
CFO if it is not to give the District years out, early 
warnings? And I will ask you further, if not--whether or not 
the CFO has, indeed, been doing that.
    It is my recollection that, just by reading the newspaper, 
that as the fiscal year began, even though there was plenty of 
time to alert people much later in the year, the fiscal year 
just began, and he alerted the whole city to the fact that 
there was some agency spending beyond their budget. And, of 
course, everyone apparently took care of it, because I haven't 
heard another thing. So I want to know why you think, in 
addition to an independent CFO now who would have a term, you 
would need some other mechanism to give an early warning.
    Mr. Mihm. I think--ma'am, I would agree with certainly the 
first part of your statement in that--about the importance of 
an independent and qualified CFO. In fact, an early warning 
system, the success of that is predicated, absolutely, on the 
existence of that CFO.
    And as we note in the statement, presumably much of the 
information that would be in an early warning system is already 
tracked and monitored and examined by the CFO; and, I would 
agree with you that much of that information is certainly 
there.
    The idea here would be for Congress and the District to try 
and work together and say are there a select few, and we would 
call them in the statement the ``vital few,'' types of 
indicators that we could all agree to focus on, that if this 
type of event occurs it will lead--if we don't deal with it, 6, 
8, 10 months, a year down the road, it could lead to a turning 
event.
    Ms. Norton. I don't understand why the CFO's job would not 
be to do just that. If you are looking for work for us to do, 
let us know, but I don't know why that is not the CFO's job.
    I don't disagree with you at all. I am just trying to find 
out whether you need another mechanism, whether somebody needs 
to spell out because the CFO hasn't been doing its job, or you 
think there should have been some things spelled out that have 
not been spelled out.
    Mr. Mihm. No. This is not based in any way on a belief that 
the CFO has not been doing its job. What it is based on is a 
belief that there are--or a hope that there is a way that 
Congress and the District could agree to focus on some vital 
few indicators.
    Ms. Norton. Give me an example of a vital few indicators.
    Mr. Mihm. We identify some potential ones, and this is one 
of the things that our first principle is that Congress and--
hopefully, Congress and the District could come together and 
agree on some.
    But I am flipping to page 10 of our statement. We provide 
some of those cash-flow pressures that show projected 
difficulties in meeting any of the District's financial 
responsibilities, projected difficulties in meeting any of the 
District's operational programs, service obligations to 
citizens.
    The idea would be to take the seven deadly sins, I think as 
referred to earlier, that lead to the imposition of a new 
authority, move back off of those and say what are the types of 
things that would warn us about that in the future, agree that 
those--get Congress and the District to agree, OK, these are 
the ones that we are going to focus on.
    And I should add what that allows then, at least the 
potential, is the opportunity to then reach agreement, OK, we 
are not going to focus on other things. We will not necessarily 
need congressional notification on other things.
    Ms. Norton. I will save my questions for the CFO, because I 
think that the real issue now becomes what does the CFO do with 
respect to the indicators you have named.
    Thank you, Madam Chair.
    Mrs. Morella. Senator Voinovich.
    Senator Voinovich. Ms. Rivlin, you have done an outstanding 
job with your responsibilities as the Chair of the District of 
Columbia Financial Responsibility and Management Authority; and 
you joined in the testimony here this morning.
    You can well imagine that, as a Member of Congress, I am 
concerned that, at least during my watch, that the District 
doesn't fall back into a situation where the supervisory 
commission would have to be reinstated. Are you satisfied that 
the things that the Mayor talked about today will provide the 
safeguards and the warnings that are necessary so that doesn't 
occur?
    Ms. Rivlin. I am, Senator. But let me add a couple of 
strengthening points.
    I think that the early warning indicators idea is a good 
one and that most of those things would be normally coming out 
of the CFO's office, but I think agreement that these would be 
regularly transmitted to Congress seems to me perfectly good 
reinforcement.
    The important thing about the CFO, it seems to me, is not 
just the independence but that the CFO be able to build a 
strong, continuing professional staff that is respected by 
everybody and known to do a good job. Without that, it won't 
work. And the protection of the CFO is partly to protect the 
ability of the CFO to build such a strong professional staff 
over time.
    I also think that the Council needs to have a strong 
professional staff. And if you are thinking about how the 
revenue estimates should be reviewed, one model I think that 
the District ought to think about is, similar to what the 
Congress does with the Joint Committee on Taxation, staff a 
good, strong staff on the legislative side to review the 
revenue estimates.
    There's nothing like having both the executive branch and 
the legislative branch have good professional staffs to ensure 
that you get adequate warning and nonpolitical estimates on 
both revenues and expenditures.
    Senator Voinovich. In putting together your 
recommendations, Mayor, on some of the things that you do in 
relationship to the CFO, have you discussed this at all with 
any of the rating agencies?
    What I found many times you have had your bond rating 
increased, but one of things I've always tried to do is try and 
make sure that the rating agencies are happy with what I am 
doing, because they are real important, and I'm sure you would 
like to see your rating increased. Have you got any response 
back from them in terms of what they think you ought to do?
    Mayor Williams. No. Our conversations with our rating 
agencies, staff of the Control Board, Chairman Cropp and I, we 
assure the rating agencies that we all are steadfast in our 
support for a strong, independent CFO and for a strong, 
independent CFO relationship with the agencies. But we didn't 
get into the detail of exactly how evaluations were done and 
terminations would be done, but we definitely share with them 
our commitment to strong, autonomous CFO function.
    Senator Voinovich. One of the things when I was Governor, 
we had a strong Office of Management and Budget; and the 
legislature also had some very strong people that worked for 
them. But we did meet twice a year with economic experts that 
represented a cross-section of businesses in our State to get 
their feel on terms of where we were going as far as our 
estimates and what was happening to the economy. We just 
thought that was an additional help for us.
    And it seems to me that you might give some consideration 
to having something like that in place. Though Dr. Gandhi said 
he had some folks, that do meet with him, but that might be 
something that you might give some thought to.
    Chairwoman Cropp, I was pleased to see that the Council 
held hearings earlier this year on the implementation of the 
Mayor's performance management system. It has been a focus of 
my subcommittee, and I applaud Council's focusing in on that.
    What do you think are of the most significant problems that 
the Mayor faces in implementing an effective performance 
management system and how do you intend to help him get it 
done?
    Ms. Cropp. Our hearing process, I think, has been very 
helpful to try to focus on what the concerns are. I think the 
new approach that you will see in our 2002 budget process will 
be one that will help us considerably.
    We will look at the budget and actually--we are budgeting 
now based on activity-based budgeting. And as we do an 
activity-based budget we can very clearly see, for example, if 
the Mayor is stating in his performance objective that I will 
now cut 10 lawns, the new budgeting process that was developed 
by the office in conjunction with the Mayor and part of our 
hearing process on the legislative side, we will now be able to 
look and see whether or not this activity was actually 
achieved.
    The Council is committed to continue to hold these 
performance-based hearings outside of the budget, but you see 
whether or not the government is really doing what we said that 
we were going to do. And in this 2002 budget you will see 
additional staff and programs being developed for us to do this 
type of activity-based budgeting that will help us in looking 
at our performance of the government.
    Senator Voinovich. In other words, you are in sync with 
what the new performance goals that have been put together by 
Mr. Koskinen and others are?
    Ms. Cropp. Very much in support, and we have been working 
together in trying to help to develop it.
    Our whole budget process this year was extremely smooth. 
There has been much better dialog between the executive and the 
legislative branch as we all try to work to try to make sure 
that whatever activities the government is stating that it is 
going to achieve that we all work together to help it get 
completed.
    Senator Voinovich. Thank you.
    Ms. Cropp. We are learning, and we have a long way to go 
with it, but we are learning. And I think we are moving in the 
right direction.
    Senator Voinovich. It is really important that you agree to 
the performance goals that the administration is talking about, 
because that is the only way that--our problem is that we have 
changed the goalposts several times, and it has been difficult 
for our subcommittee that is doing the oversight to find out 
whether or not things are really being achieved.
    I think it is time that you agree and the city agree, the 
administrative branch, so that we are using the same numbers 
and the same standards in terms of evaluation.
    Ms. Cropp. Senator, if I could add, the Council for the 
past 2 years has developed--4 years actually--developed a 
legislative agenda. And this year, as we develop the budget, 
the executive branch also looked at the legislative agenda of 
the Council, and you will see there is great agreement as to 
what the goals are, and the budget reflects that.
    Now, whether or not we agree on 100 percent of the--I've 
been married 31 years, and I don't agree with my husband 100 
percent, but, for most of it, we are on the same wavelength.
    Senator Voinovich. Thank you.
    Mrs. Morella. And this subcommittee, obviously, would agree 
with the Senator's comments and your response to it, so do keep 
us posted.
    I wanted to ask--in my opening statement, first of all, we 
all have recognized and everybody I think has mentioned about 
the fact that the current CFO has done an admirable job of 
recognizing and publicizing the early warning signs and the 
importance of good staffing.
    Under the legislation that you have submitted, which I find 
very interesting and would concur with a lot of it, just having 
read your draft, the CFO's term would run concurrently with the 
term of the Mayor. And I just wonder, is there a possibility 
that a CFO in the future could be beholden to a mayor and to a 
council and not have that kind of independence we have talked 
about throughout this hearing?
    The IG, the inspector general, has a 6-year term. Would it 
not be advisable to make that term for the CFO also 6 years?
    Ms. Cropp. Let me assure you that the intent of all of us 
was to try to have the independence of the CFO. We were not 
trying to negate that by putting the term concurrent with the 
Mayor. In fact, at that point all data that we received seemed 
somewhat--showed that would be supportive.
    During this hearing process, I think we are open to looking 
at that issue to see whether or not that approach would be much 
better, because all of us sitting at this table certainly 
supported the idea for there to be independence with the CFO.
    So we can certainly look at that issue, and we hope that 
our whole hearing process will give us information so that the 
final piece of legislation that comes out will be even stronger 
and more comprehensive than the one that we introduced.
    I do want to also just add that another important component 
of the legislation is that it requires the CFO to develop 
standards by which the deputy CFOs and the agencies would be 
able to live by, and that has been something that I think has 
been lacking in the past.
    It also enables the CFO to develop a pool of potential CFOs 
for the agencies, and then the agency heads would be able to 
select from that pool. And, once again, I think it will solve a 
couple of the issues that we have faced with the city in the 
past.
    Mrs. Morella. I also mentioned in my opening comments, too, 
with regard to that, that the CFOs of the various government 
agencies would not be appointed by or report to the District's 
CFO. Yes, there would be a list that would be submitted but 
would not be directly appointed by or reported. Would you like 
to comment on that?
    Ms. Cropp. That was a very important issue that we looked 
at, because we were looking at approaches where we needed to 
have an integrated government. Even though we want the 
independence of the CFO, the CFO still has the function to 
function within the government.
    So we are trying to figure out approaches that would make 
sure that we had financial stability. And by having the CFO, 
the directors chose from--select from a pool that was developed 
by the CFO, it would ensure that those agency-level CFOs met 
the standards, met the qualifications. But it would also allow 
input from the agency heads.
    That was, Madam Chair, extremely important as we looked at 
some of the potential problems. But it will also enable the CFO 
to terminate that deputy CFO if, in fact, the deputy CFO did 
not meet the standards; and that termination would be in 
consultation with the Mayor and with the Council.
    So I think that addresses the concerns that you raised, 
while, at the same time, addressing very legitimate concerns 
that agencies have in that the CFO needs to be able to also 
work well with the agency director.
    And, on the term piece, the legislation allows for the term 
of the CFO to start July 1st, so not immediately after the 
Mayor would take office. The existing CFO would continue in 
office if a Mayor comes in in January until July, and then July 
1st the new one would come in.
    Mrs. Morella. Mayor Williams.
    Mayor Williams. If I could just--from my own personal 
experience, having been the CFO and been a CFO in different 
levels of government and now an executive, I think that there 
really are two extremes that we are trying to avoid.
    We are trying to avoid one extreme, and this is obvious. 
The CFO is a model--the CFO is dormant, basically whatever you 
want. The CFO gives you drive-up service. We don't want that.
    But, on the other hand, I don't think we want a situation 
where the CFO is reigning king or queen and everybody else is 
subservient to the CFO, and the CFO feels no responsibility for 
helping the government meet legitimate performance goals on 
which this government is selected and which the government has 
got to serve.
    An example would be, let's say the CFO is too removed and 
too sequestered. We are trying to get an economic development 
project done. And let's say the CFO doesn't like TIF or does 
like TIF for this kind of project versus this kind of project, 
clearly into a policy area.
    Or let's say that the CFO decides that the Police 
Department has got a budget problem, but it is very, very 
relaxed and very, very processional and less than aggressive 
about helping the Police Department solve that problem.
    Somehow or another we have--we are trying to find out a way 
jointly where the CFO has the necessary level of independence 
without being completely independent of legitimate performance 
goals of the government. And I think that we have struck that 
balance here.
    So, for example, if you are the agency, we don't want a 
situation where the agency head can say, well, I don't know 
what my budget was, because the CFO didn't tell me. Because the 
CFO is completely independent. They don't report to me, and 
they don't care whether I know about the budget or the 
financial system. Well, I don't care what happens with the 
financial system. That is the CFO's problem.
    Well, it is everybody's problem, getting a financial system 
done.
    Mrs. Morella. It is like the whole world is a balancing act 
in some way. I understand what you are saying. It just seems 
the 6-year term might be good, and, also, from what you say, it 
also sounds like some kind of an audit advisory group would 
kind of take it out of any political situation. But this is all 
a work in progress. And my time has expired.
    Congresswoman Norton.
    Ms. Norton. Thank you, Mrs. Morella.
    Mayor Williams, you testified before the Appropriations 
Subcommittee that the District should have budget autonomy, 
that it would simplify the process and reduce the costs, and 
you have so testified here today.
    When you say there should be--after you met these targets 
for 3 consecutive years, I assume that you are counting the 4 
years you have already met them and that the 3 consecutive 
years is included within that period?
    Mayor Williams. Yes, I would include them.
    Ms. Norton. When it comes to the 30-day legislative 
process, as cumbersome as that is, that is a process for which 
you almost already have complete freedom.
    To the credit of Chairman Tom Davis, not once did he agree 
to use the 30-day period in order to override a provision of 
District law; and in more than almost 25 years of home rule, 
there have not been a half a dozen laws that have been 
overturned. The way in which laws have been overturned has been 
misuse of the budget process, not the 30-day layover process.
    Therefore, I can't understand--since you are almost free of 
it anyway and all you are left with is the most tortious 
process I have ever seen, where law gets delayed, people refuse 
to come on board because they are not sure whether or not in 
the--it may take 4, 5 months, somebody will jump up, for the 
life of me I can't understand why you put a more stringent 
requirement on the 30-day layover period, which you almost 
already have, than on the budget period.
    And I want to know whether you think the District--I want 
to know whether you all think that the District needs--what 
purpose the 30-day layover period now serves, on the one hand, 
and what burdens it adds to the District of Columbia, on the 
other.
    First of all, Mr. Mihm, let me ask you, since you are the 
one that put this thing in your testimony.
    Mayor. Williams. No. Since you're upset, this is joint 
testimony.
    Ms. Norton. If you all want to--if the Council Chair wants 
to take responsibility for that, I would like to hear it. All 
I've heard are complaints from the District about this process.
    Ms. Cropp. Let me join with you in saying that if we can 
eliminate the layover period it would be most welcome. You 
know, from the Council's viewpoint, constantly one of the 
things that we have been criticized about is so much of our 
legislation.
    I would like to present to you a lot of our congressional 
review legislation and just give you the numbers of how much 
legislation we have to keep passing over and over again as 
emergency legislation because we are just waiting for the 
congressional review time period to come by.
    We have to pass emergency legislation because sometimes the 
government just doesn't say you can't function in 60 days, we 
have to make some decisions immediately. And in order to be 
able to make the immediate decisions we have had to pass 
emergency legislation, because that is the only way we could 
get something done right away.
    I would applaud any effort and support any effort that 
would eliminate that need. I think there are enough safeguards 
that if there's something that the District is doing that 
article 1 section 8 would come up, that they are there without 
us having to have the 30-day layover or 60-day layover.
    Ms. Norton. We all understand this to be a holdover period. 
It puts the District on hold. The District--the Congress can 
get up right now and say that a law you passed 20 years ago is 
null and void. So the only question before us is, is it worth 
the wait, again, given the notion of weighing the benefits 
against the costs to a local jurisdiction, not to mention the 
paternalism?
    Let me ask, Mr. Mihm, you have testified that the District 
has, indeed--you put in your appendix many reported 
requirements. You lay them out, the many committees that 
require them. What burden in financial terms, perhaps diversion 
of resources, do these requirements place on the District? Can 
you think of any way to streamline these multiple requirements 
on the District of Columbia?
    Mr. Mihm. In terms of the first part of your question, we 
haven't looked and worked with the District about the financial 
burden that it places on them. We have done similar work, 
though, on multiple reporting requirements placed on Federal 
agencies and can tell you that it sometimes can be quite 
expensive to report on these things.
    One--not to reopen an issue, ma'am, but one of the things 
that reportable events could help do is, if it is done as part 
of a sorting-through of the cumulative burden that is placed on 
the District for reporting, it could offer an opportunity to 
say, OK, these are the things that we are agreeing on and, as 
part of that, here's the things that we are going to eliminate.
    There is--for example, there's a report--there's a 
requirement for the emergency reserve fund use that Congress be 
notified within 30 days. I call that a reportable event. I 
would assume that--you know, pending agreement between Congress 
and the District, that is exactly the type of thing that would 
be rolled into a reportable event system.
    So the cumulative effect, I mean, can be burdensome; and 
the idea of a reportable event would be to try and just let's 
all focus on the vital few so that we really know we are 
focusing on what is important and not just everything.
    Ms. Norton. Well, I very much appreciate that, Mr. Mihm. 
And since you have been working with the District on an ongoing 
basis and have laid these out and have indicated that there 
should be these early warnings, perhaps you can work with the 
District to sort out which of these might be eliminated or 
rolled into others as a part of the Congress' contribution to 
the streamlining of the District government.
    Mr. Mihm. We would be pleased to work with your office on 
that, yes, ma'am.
    Mrs. Morella. I am not going to hold you up, if it is OK 
with Congresswoman Norton. We will be submitting questions to 
you for your response.
    I must say, in reading the legislation that you submitted 
to us, the draft, I was pleased to note that your 3-year period 
for then allowing the District of Columbia to spend its own 
money is as it deems appropriate was very sound, very accurate.
    I also question why we have to wait 6 years in order to get 
rid of the 30-day holdover. So, again, if something can be 
worked out, I think that 30-day period for 6 years is pretty 
lengthy. Maybe that could be in some way accommodated.
    I want to thank you very much for being so patient, being 
here.
    I know, Councilwoman Cropp, you wanted to make a comment.
    Ms. Cropp. Madam Chair, if you could just indulge me for 1 
further second.
    Mrs. Morella. Yes, ma'am.
    Ms. Cropp. When you asked about structural problems that 
the District has, I don't think I can leave this table without 
also talking about the issue of rollover funds.
    In other business, if you have excess dollars at the end of 
your fiscal year, you have the ability to roll them over into 
your next year. We don't have that. It creates--it encourages 
bad behavior. It encourages you to try to spend absolutely 
every penny so that you won't have anything left over.
    I implore the committee to support the idea of the District 
having the ability to roll over excess funds so that we will be 
able to utilize them in the appropriate programs and do it in a 
reasoned and comprehensive approach to it.
    Mrs. Morella. I appreciate your mentioning that. You and I 
in our discussions have commented on it; and I know that 
Congressman Knollenberg is also interested in pursuing that, as 
is Congresswoman Norton. That will be an area we will be 
looking at.
    Again, I want to thank the panel. You have been terrific. 
Thank you for the work that you have done through the years to 
bring us to this point where we really are celebrating and 
planning ahead.
    Dr. Rivlin, thank you. Mayor Williams, thank you. 
Councilwoman Cropp, thank you. I want to thank you, Mr. GAO 
Director Mihm. Thank you. Thank you all.
    Now the second panel. We should have been serving boxed 
lunches, but, unfortunately, the budget didn't provide that. 
The second panel will come forward.
    Our second panel consists of Dr. Natwar Gandhi, the chief 
financial officer of the District of Columbia, about whom we 
have heard so much with regard to responsibility in the future, 
as well as past achievements. Charles Maddox, who is the 
inspector general of the District of Columbia. He comes with a 
great deal of experience. Joshua Wyner, the executive director 
of the DC Appleseed Center, thank you for being here. Renee 
Boicourt, the managing director, Moody's Investors Service. We 
are very pleased to have you and to have Parry Young, the 
director of public finance, Standard & Poors.
    Again, as we did with the first panel, if you would rise 
and raise your right hands for swearing in.
    [Witness sworn.]
    Mrs. Morella. The record will reflect an affirmative 
response.
    Again, we will try to stick with our 5-minute rule and get 
to our questions quickly. Thank you.
    Dr. Gandhi, do you feel overwhelmed with the fact that you 
have been in our discussion so much, so predominantly?

   STATEMENTS OF NATWAR M. GANDHI, CHIEF FINANCIAL OFFICER, 
  DISTRICT OF COLUMBIA; CHARLES C. MADDOX, INSPECTOR GENERAL, 
 DISTRICT OF COLUMBIA; JOSHUA S. WYNER, EXECUTIVE DIRECTOR, DC 
 APPLESEED CENTER; RENEE BOICOURT, MANAGING DIRECTOR, MOODY'S 
 INVESTORS SERVICE; AND PARRY YOUNG, DIRECTOR, PUBLIC FINANCE 
                 DEPARTMENT, STANDARD & POOR'S

    Mr. Gandhi. Thank you, Madam Chair.
    Madam Chair, Ms. Norton, members of the committee, I am 
Natwar M. Gandhi, chief financial officer for the District of 
Columbia. I appreciate the opportunity to appear before you 
today to testify about the outlook for the District's post-
control period.
    I will summarize my prepared statement here and request 
that it will be made a part of the record in its entirety.
    Mrs. Morella. Without objection, it is so ordered.
    Mr. Gandhi. In my summary, I want to focus on the key 
contributing factors in the financial turnaround of the 
District of Columbia that we have seen over the last 5 years. I 
will speak in terms of ``factors'' rather than any particular 
organizational arrangement for two reasons. First, I believe, 
these factors are essential, and, if they are present, a number 
of organizational arrangements could be effective; and, second, 
the organization of the District government in the post-control 
period is properly a matter for the elected leaders of the 
District and the Congress.
    Having said that, I will also tell you that it is my 
opinion that the District would best be served by an 
independent CFO who is still an integral part of the District 
government, consistent with home rule. What factors make any 
CFO independent? I mean that the CFO as well as the CFO cluster 
and its work in all aspects of financial review and analysis 
are separate and insulated from the every day political 
environment. In this regard I believe I'm in agreement with the 
Mayor, the Council and the Authority. They have expressed 
similar opinions about the need for the CFO to render financial 
judgments and share information without prior approval of the 
other District officials. Among others, the District's business 
community and the New York financial markets are sensitive to 
these issues as well.
    This kind of independence can be implemented by making the 
CFO a scorekeeper, so to speak, for financial purposes rather 
than a gatekeeper, a role that is currently played by the 
Authority. The CFO would be the transparent developer and 
certifier of financial data, such as revenue estimates, fiscal 
or contractual impact statements and the budget costing and 
budget monitoring. The CFO, in part, would become a city 
version of the Congressional Budget Office with respect to 
assessing revenues and reviewing the costs of legislation. This 
would allow elected leaders to focus on the direction of the 
government knowing that the financial picture was portrayed by 
a nonpartisan, independent entity with no vested interest in 
the policy outcomes.
    It is also important to remember what independence is not. 
I believe the CFO should not be independent from the District 
government in the same sense that the Authority is currently 
independent. After all, it is one government under home rule. 
With that in mind, we have already begun the process of 
reintegrating the CFO cluster into District government.
    For example, we are working with the chief technology 
officer on information technology decisions; we participate 
directly in executive meetings, and in almost all cases, we act 
in parallel with other components of the District government on 
issues like pay and personnel policy. We are also working very 
closely with the City administrator on restructuring the 
District's system of accounts and the introduction of 
performance-based budgeting.
    Overall, the CFO is a resource for both the executive and 
legislative branches of the city government, the Congress, and 
other stakeholders, such as bond investors. We work with 
everyone as an equal opportunity sharer of information and 
analysis, and I believe this positive role can best be 
maintained by the sort of independence that I have described 
here today. But retaining that independence requires a positive 
action by the Congress and the District by the end of the 
control period, because with that event, the prior law will 
come back into effect.
    I would be pleased to answer any questions you and Ms. 
Norton may have. Thank you.
    [The prepared statement of Mr. Gandhi follows:]
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    Mrs. Morella. Thank you, Dr. Gandhi.
    And I'm pleased now to recognize our inspector general for 
the District of Columbia, Director Maddox.
    Mr. Maddox. Good afternoon, Chairwoman Morella, Chairman 
Voinovich and councilwoman--Committee woman Norton.
    I appreciate the opportunity to share my views on the 
position of the Office of the Inspector General [OIG], in its 
respective role in the District once the Control Board is 
suspended on September 30, 2001. My testimony today will point 
out that the D.C. Office of the Inspector General has become a 
key component of the District governance for two primary 
reasons.
    First, during the Control Board period we have been 
provided with the critical resources necessary to address a 
wide range of fiscal and managerial deficiencies that affect 
the city.
    Second, we strive to be an independent organization that is 
guided by strict adherence to principles of objectivity as 
clearly established by generally accepted auditing inspections 
and investigative standards.
    The recommendations that I will urge this committee and 
others to consider today relate directly to these two 
imperatives. I will share with you my perspective about what I 
think our organizational long-term strategic vision should be 
for helping to mitigate risk in critical areas. A description 
of actions already under way to mitigate risk is included in 
the longer version of this testimony for the record. I also 
will suggest legislative changes that I believe will enhance 
and clarify our authority and independence.
    As the Office of Inspector General evolves, my vision for 
helping to foster accountability and the integrity of the 
District government rests on a commitment to strategically 
focus our limited resources. Accordingly, I believe strongly 
that the Office of Inspector General's oversight of District 
affairs does not and should not include the policymaking 
authority and managerial role that has been exercised by the 
Control Board. Instead, I believe the effectiveness of the OIG 
is tied to our ability to be perceived as and utilized as a 
source of independent, objective analysis that can be 
considered by all stakeholders. Therefore, I would like to 
share several ideas which comport with the unique and specific 
functions of our office as we move forward.
    In the area of procurement, the OIG should develop a long-
range plan to cover procurement and contract administration. 
Specifically, we should conduct audits which accomplish the 
following: identify systemic problems and the potential for 
monetary and management benefits, focus on single audits and 
determine whether the cost of contracts is being properly 
estimated and negotiated. We plan to create a pilot program for 
the establishment of an Office of Inspector General resident 
audit sites at various agencies. Our resident auditors will 
provide an independent audit function to ensure that 
appropriated funds are properly controlled and accounted for 
and provide continual feedback on efficiency and effectiveness.
    Based on our early analysis by choosing five or six of the 
agencies with the largest budgets and most complex operations, 
the OIG could cover approximately 50 percent of the District's 
operating budget. We plan to intensify our inspections of 
selected agencies in accordance with the standards for eternal 
control recently promulgated by the General Accounting Office 
for Federal agencies. Again, we will concentrate on agencies 
which deliver key services to the city and which have the 
greatest fiscal impact on their budget.
    We believe that it is necessary to create a contractor 
integrity group comprised of representatives from the Office of 
the Inspector General, the Office of Contracting and 
Procurement, the FBI, U.S. Attorney's Office and the Office of 
Corporation Counsel, which would conduct background and 
prequalification checks of contractors seeking to do business 
with the District.
    It is important to note today that the Federal legislation 
that created the Control Board also had a significant impact on 
the role of the Inspector General's Office to enable the IG to 
assist the Control Board in addressing budget deficits and 
management deficiencies in the District government.
    Section 303 of Public Law 104-8, the D.C. Financial 
Responsibility and Management Assistance Act of 1995 provided 
the IG with duties crucial to determining the District's fiscal 
stability. Among those duties are contracting authority, to 
audit the complete financial statement of the District's 
government each year and development of an annual plan for 
audits by the IG to be conducted in consultation with the 
Authority, the Mayor and the Council.
    These two responsibilities provided us with a unique 
perspective of the District's fiscal health. For this reason, 
section 209 of Public Law 104-8 places a duty on the IG to 
provide warnings concerning the emergence of certain fiscal 
weaknesses, such as the failure to make timely payroll or 
pension payments that could trigger the initiation of a control 
period. I can assure this body that my office will remain 
watchful of these conditions which are set forth in Federal law 
very specifically and report on them accordingly.
    I also would like to note that the City Council has amended 
the IG statute several times since the Federal legislation was 
passed in 1995. On each occasion these amendments have 
strengthened our authorities and clarified our mission.
    Again, I would like to commend--recommend a number of 
additional legislative changes that I believe will assist my 
office in addressing risk to the District in the post-Control 
Board years. These recommendations are summarized in attachment 
A and are set forth in detail in the longer version of my 
statement.
    With the exception of two proposals regarding the Federal 
Ethics in Government Act and the Federal false statement 
statute, all of my legislative proposals can be addressed by 
making changes in the DC Code. I have had preliminary 
discussions with the Mayor and with Chairwoman Cropp, and I am 
pleased to say that I believe they are supportive of these 
recommendations. In the coming weeks, I plan to submit these 
proposals directly to the Mayor and to Chairwoman Cropp for 
their review and legislative action.
    Again, thank you for the opportunity to share my views 
today. I look forward to working with the committee and with 
others as
we do all we can to ensure the fiscal health of the District in 
years to come. I will be pleased to respond to any of your 
questions at this time.
    Mrs. Morella. Thank you very much, Mr. Maddox.
    [The prepared statement of Mr. Maddox follows:]
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    Mrs. Morella. I'm pleased now to recognize Joshua Wyner who 
is the executive director of the DC Appleseed Center. Thank 
you, Mr. Wyner.
    Mr. Wyner. Thank you, Madam Chairman.
    The DC Appleseed Center, as you may know, is an 
independent, nonprofit organization that performs research and 
analysis on DC issues and also advocates for DC government 
reform. Earlier this week, after 8 months of study, DC 
Appleseed released a report about the chief financial officer 
and financial management in the District of Columbia, and I 
appreciate the opportunity to say a few words here today about 
our findings and recommendations.
    The DC Appleseed report was researched and written by a 
team of volunteer professionals who are quite knowledgeable 
about financial management in general and the District's 
finances in particular. Among the volunteers you may be 
familiar with are Ed DeSeve, former Controller of the U.S. 
Office of Management and Budget; Bert Edwards, former CFO of 
the State Department and the first external auditor for the 
District after home rule in the mid-70's; and Michael Rogers, 
former city administrator for the District of Columbia.
    I would like to say a few words about the context here. 
There were many reasons for the District's financial collapse 
in the early to mid-1990's; and DC Appleseed strongly agrees 
with Congresswoman Norton and Control Board Chair Rivlin that 
much of it had to do with the structural impediments to raising 
revenue, and we applaud the efforts to address those issues, 
and we have addressed them in prior reports as well.
    Another reason, however, was the structure of financial 
management under the original Home Rule Act. In the 20 years 
before the Control Board was created, the Mayor of the District 
of Columbia had sole responsibility under the Home Rule Act for 
financial management. That meant that the Mayor had complete 
control over the personnel who fulfilled financial management 
functions. They served at the pleasure of the Mayor.
    The poor financial management practices that existed under 
Mayoral control contributed to the District's financial 
collapse; there is little doubt about that. Over the past 6 
years, with an independent CFO in, the District financial 
management has improved.
    I agree with GAO that challenges remain; our research 
revealed that. But it's clear to us that with the Control Board 
going out of place, the challenge is how do we devise a 
structure for future financial management that builds on the 
progress made over the last 6 years, but also does so in a 
manner consistent with a return to home rule government.
    Our report addresses this question in three general areas. 
First, what should be the particular responsibilities of the 
CFO? Second, how should the CFO's independence be guaranteed? 
And finally how extensive should the CFO's control be over 
financial personnel in the District's agencies? Let me start 
with the CFO's responsibilities.
    We are in agreement with the Council legislation on the 
particular responsibilities of the CFO, by and large. The CFO 
ought to estimate revenue, prepare the annual budget, working 
with the Mayor, perform the Treasurer and Controller functions 
of the system, assess and collect taxes, maintain financial 
systems. The bottom line here is that an independent CFO, we 
believe, is the government official most likely to maintain 
professional financial operations and least likely to be unduly 
influenced to take actions inconsistent with sound financial 
management principles.
    DC Appleseed also recommends that the CFO play a role in 
certifying fiscal impact statements, and I know, Congresswoman 
Morella, that this was one of the areas that you expressed 
concern about. We do believe that for Council-enacted 
legislation, the CFO ought to certify the consistency of that 
legislation with the budget and financial plan of the District 
before it's signed by the Mayor, and we will make those views 
clear to the Council in the hearing the third week of June.
    The second area that I'd like to cover is financial 
personnel. Again here, we believe the CFO should have direct 
responsibility for the financial personnel that work in 
agencies. We believe that some of that ought to be delegated to 
the agency directors, and we think that's exactly what's done 
in the Council legislation. So we're supportive of that.
    The important principle here--it's embedded in both DC 
Appleseed's report and the Council legislation--is that agency 
financial personnel have to have adequate incentives not only 
to maintain sound financial management--and the Mayor alluded 
to this earlier--but also to provide agency directors with the 
information and services they need to implement programs. Those 
are the issues that we are trying to balance in our set of 
recommendations there, and we believe the Council effectively 
does in its legislation.
    Finally, DC Appleseed strongly supports continuing 
independence for the CFO after the Control Board becomes 
dormant. To enable this to happen, DC Appleseed recommends that 
the Mayor have the authority to appoint the CFO to a fixed, 
renewable 4-year term. We decided it ought to be coterminous. 
The 6-month stagger in the legislation introduced by the 
Council seems to us reasonable, as well, although there are 
arguments for having a staggered term.
    Our belief is that a 4-year term makes sense, rather than a 
5- or 6-year term so that it's happenstance as to whether the 
Mayor gets to appoint the CFO or not. Our view is that you 
should have at least the length of the term be similar, and we 
err on the side of coterminous with the Mayor's, but we would 
understand a 1-year stagger and certainly it is not something 
we would oppose.
    We think the Mayor should have the authority to remove the 
CFO for cause, subject not to two-thirds confirmation by the 
Council--we think that would overly politicize matters--but 
rather to a 10-day period within which the Council may prevent 
the removal.
    And then the final indication of independence is not 
whether you can hire and fire somebody, but whether you can 
affect their ability to procure supplies, to hire their own 
personnel and to budget. We believe that the CFO ought to 
retain separate and independent procurement personnel and legal 
council authority. Legal council is not addressed in the 
Council's bill, and again we will make our views clear when the 
Council holds its hearing on that. And we believe that the 
budget authority for the CFO ought to be somewhat different 
than it is for other agencies, as indicated in our report.
    Finally, let me just say a thing or two about one other 
section of the DC Appleseed report that's really supportive of 
a number of things that were said earlier. During our research, 
an issue that kept coming up with everybody we spoke with and 
in looking at other jurisdictions is that the timing of the 
congressional appropriations process makes it unduly difficult 
and uniquely difficult for the District to estimate revenue 
accurately, to prepare its budget thoughtfully and to establish 
government programs in a timely manner. With the District's 
improved financial condition and a well-functioning CFO in 
place, Congress may want to consider providing the District 
greater budget autonomy.
    And certainly Congresswoman Norton is working on a bill; we 
will wait to comment further on that until we have a copy of 
that.
    Overall, our recommendations seek to establish financial 
operations for the District that are independent, professional, 
transparent and responsive to the policy and program goals of 
locally elected leaders. We'll continue to be available to 
support the work of this committee and the District's elected 
leaders as the structure for the District's future financial 
operations is devised.
    I appreciate the opportunity to appear before you today, 
and would be happy to answer questions later on.
    Mrs. Morella. I appreciate you appearing before us and your 
succinct testimony.
    [The prepared statement of Mr. Wyner follows:]
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    Mrs. Morella. I'm now pleased to recognize Renee Boicourt, 
Managing Director of Moody's Investors Service. Thank you for 
being with us.
    Ms. Boicourt. Thank you.
    Madam Chairman, Congresswoman Norton, thank you for the 
opportunity to speak today. I am Renee Boicourt, managing 
director of Moody's Investors Service, and I'm pleased to join 
you here today to discuss the views of our firm on the credit 
condition of the District of Columbia. As you know, Moody's is 
a leading global credit rating research and analysis firm which 
publishes credit opinions, research and ratings on fixed income 
securities throughout the world.
    As the Authority prepares to wind down its operations, we 
look back at the accomplishments over the last 6 years and 
ahead to the challenges the District faces in the future. We 
will focus our comments on issues that play a prominent role in 
the rating, both its history and its future. As requested by 
the subcommittees, our testimony will consider the purposes set 
out in the District of Columbia Financial Responsibility and 
Management Assistance Act of 1995, the financial management 
improvements made by the District government and the role of 
oversight mechanisms during the post-control period.
    As we testify here today, it's clear that the credit 
condition of the District is very different from what it was 6 
years ago. In 1995, we had just lowered the District's rating 
to noninvestment grade or junk status. The District had posted 
years of either deficit or barely balanced operations and had 
relied on the Federal Government for the cash to barely supply 
the necessary services.
    Today, in contrast, Moody's rates the District's general 
obligation bonds Baa1, four rating levels higher than in 1995. 
The accumulated deficit has been eliminated without the need 
for deficit funding bonds, and the District has balanced its 
budget for 4 years. In summary, we can say that many, although 
not all, of the goals of the 1995 legislation have been 
realized.
    First, let me focus on the financial arena. We see 
substantial progress in this aspect of the 1995 legislative 
goals. Budget deficits, once a chronic feature, have been 
absent since 1997 and cash reserves are more than adequate. 
Largely because of this turnaround, the District's access to 
the capital markets is solid. While the District was never 
completely denied market access, costly credit support from 
commercial bank facilities was necessary to market some of the 
District's offerings. Now, the relatively strong Baa1 rating 
produces wide market interest in the District's bonds.
    Another goal of the 1995 legislation was the role between 
the District and the Federal Government with respect to service 
responsibilities and revenues, and here again, we see 
significant positive results. The 1997 Revitalization Act did 
much to refine the District's relationship to the Federal 
Government, such that it could balance its budget on a 
recurring basis. By taking action such as removing the unfunded 
pension liability from the District's balance sheet and 
removing funding responsibility for certain services such as 
courts, the 1997 legislation did much to improve the District's 
structural budget balance position.
    Among the key goals of the 1995 legislation was to ensure 
the economic vitality of the District. Today, the District 
economy is clearly much stronger than in 1995, and you can see 
that in a number of indicators, including employment, personal 
income, the real estate market and the construction industry. 
Moreover, District forecasters are actually expecting a modest 
increase in population by 2004, a very significant milestone if 
borne out.
    Although the District economy has shown improvement, 
continued economic progress will be closely linked to improving 
the quality and efficiency of service delivery as others have 
addressed today. The District continues to pursue the goal of 
improving the quality and efficiency of public services, and 
this option has been made possible by its recent financial 
stability.
    Before the District could put its primary focus on this 
goal, it needed first to establish a baseline degree of 
financial control and accountability. With that foundation now 
reasonably well established, service delivery objectives have 
moved to the forefront of the District's agenda. Performance 
measures were developed quickly and early in the Clinton 
administration and resulted in a number of short-term projects, 
measured.
    But in some service areas, limited management information 
on agency performance has made it extremely difficult to set 
goals and measure progress. Increasing the degree of management 
accountability, a building block toward improving services, has 
been a central target in these last few years with some 
success, but again, the inadequacy of the information systems, 
including accounting, procurement and personnel is a major 
obstacle. These limitations have been thoroughly reported on by 
the USGAO. The District's plans to continue to invest in 
management information systems will be key to continued credit 
improvement.
    Over the past 6 years, the District has made improvements 
in all of the dimensions that drive the bond rating, debt level 
and structure, finance, economic growth and administrative 
issues. However, the financial dimension has been the most 
dramatic, and our written testimony details the progress in 
this area, and I invite you to read that in full.
    In brief summary, we see budgets balanced, cash liquidity 
restored, chronic overspending patterns reversed and realistic 
revenue projections established, and these have been key to our 
ratings upgrades.
    Let me turn now to our thoughts regarding the post-Control 
Board era. In many ways, the District is in a similar position 
to that other formerly distressed cities found themselves in at 
this stage of financial recovery. Having emerged from a cash 
crisis, established financial control and accountability, and 
posted a multiyear record of successful budget results, the 
District is now deeply engaged in the challenge of improving 
services and ultimately the economic prospects of its citizens. 
However, a difference in the pattern of the District's 
financial recovery which others have noted today is the absence 
of long-term deficit funding bonds and a corresponding slow 
phaseout of Control Board oversight. In other cities, we've 
seen a slow phaseout, and during that period, for the most 
part, the role of the control boards has been focused on 
commentary, analysis and monitoring.
    Under the District's recovery legislation, which was 
modeled, in part, after the laws in those cities the absence of 
deficit funding bonds means that a slow phaseout of the Control 
Board's oversight role is not provided for. On the other hand, 
the role of Congress in the District's budget process is 
unique, and oversight from bodies such as the U.S. General 
Accounting Office is not found in other cities.
    In Moody's view, certain activities have been important to 
the continuing financial and economic recovery as they have 
exited financial control periods, and those will be important 
here. They include multiyear financial planning along the lines 
of the District financial plan; multiyear fiscal analysis of 
proposed legislative actions, what people today have been 
referring to as ``fiscal impact analysis''; frequent and prompt 
reporting regarding actual expenditure and revenue performance 
throughout the fiscal year; and a thorough public vetting of 
revenue and spending forecasts. These activities have created 
the capacity incentive for the financial policymakers in 
various cities to enact sound budgets and financial plans and 
to take the necessary steps to keep financial operations on 
balance when unexpected hurdles emerge.
    In summary, Moody's sees tremendous improvement in the 
District's credit condition as evidenced by the upgrades from 
junk status to Baa1, but we also see significant challenges. A 
number of the goals of the 1995 act have been achieved; others 
are moving forward on the building blocks of improved financial 
control and accountability.
    Thank you for giving us an opportunity to share our views 
regarding the credit condition of the District at this 
important time. We'd be happy to field questions.
    Mrs. Morella. Thank you Ms. Boicourt. We appreciate your 
being here for this hearing.
    [The prepared statement of Ms. Boincourt follows:]
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    Mrs. Morella. I'm pleased to recognize Parry Young.
    Mr. Young. Thank you.
    Mrs. Morella. Public finance, Standard & Poor's.
    Mr. Young. Madam Chairwoman, and members of the 
subcommittee, thank you for inviting Standard & Poor's to 
participate in today's hearing. My name is Parry Young. I am a 
director in Standard & Poor's Public Finance Department and 
have been a lead analyst on the District of Columbia's credit 
rating for more than 10 years. Standard & Poor's provides 
independent financial information, analytical services and 
credit ratings to the world's financial markets. We are a 
division of the McGraw-Hill Companies. I would like to 
summarize the written testimony which has been submitted.
    Standard & Poor's long-term issue credit ratings cover a 
range from AAA, highest, to D, lowest and includes default. The 
District's general obligation or G.O. bonds were initially 
assigned a single A rating in 1984, signifying S&P's opinion 
that the District had a strong capacity to meet its 
obligations. Today, the District's bonds are rated BBB-plus, 
which is just below the single A category and is defined as 
adequate capacity to meet obligations.
    I would like to use the rest of my time to summarize the 
key rating actions and factors for the District from the 
initial rating in 1984 to today.
    The 1984 single A rating of the District bond was based on 
a number of factors, including the District's special economic 
and financial relations with the Federal Government, such as 
access to the Treasury advances to meet operating expenses and 
debt service. Three years of strong revenue growth followed 
along with a reduction in accumulated deficit, and in fiscal 
1998 the District reported a $14 million deficit caused largely 
by increasing human services expenditures.
    Over the next few years, actual and projected budgetary 
stress caused by a structural imbalance of revenues and 
expenditures, which continued and culminated in a lowering of 
the District's rating to single A-minus in 1990. A plus or a 
minus sign in the rating denotes relative position within the 
category.
    The District sold G.O. bonds in 1991 to eliminate its 
accumulated deficit. However, the District's finances continued 
to be under stress, which was exacerbated by growing 
expenditures and sluggish economic indicators. In February 
1995, S&P lowered the district's rating to BBB-minus after the 
reporting of a much-larger-than-anticipated deficit for fiscal 
1994.
    In April 1995, Standard & Poor's again lowered the rating 
of the District's G.O. bonds to single B, due primarily to 
weakening of the District's ability to requisition advances 
from the U.S. Treasury under the provisions of the newly 
enacted Control Board Act. While the act initially had an 
adverse effect on the District's rating, it contained the 
potential to be a positive force for the District's 
creditworthiness, which we have seen.
    The Control Board Act and the 1997 National Capital 
Revitalization Act, along with strengthening economic factors, 
were significant factors in the District's improved financial 
and administrative position. The Control Board provided 
managerial oversight while under the Revitalization Act had the 
Federal Government assumed the District's unfunded pension 
liability and the cost of certain District operations.
    By fiscal 1998, the District had entirely eliminated its 
accumulated deficit, and in April 1999, Standard & Poor's 
raised the District's rating from BB to an investment grade 
rating of BBB which has been raised to BBB-plus in February of 
this year, due to the District's improved financial operations, 
enhanced debt position and the expectation of continued 
strengthening of its credit fundamentals.
    The current rating reflects the assumption that the 
District's overall credit quality would maintain its positive 
momentum and included the expectation of the imminent phaseout 
of the Control Board at the end of 2001. We believe that the 
rating is not likely to change over the medium to longer term. 
The direction of any further rating action depends on the 
District's ability to demonstrate that it is adequately 
balancing its social and capital costs with available resources 
and that financial and management controls and improvements 
have been institutionalized.
    This concludes my statement. Thank you for inviting us 
here. I would be very happy to answer any questions.
    [The prepared statement of Mr. Young follows:]
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    Mrs. Morella. I want to thank you all.
    I think I will start off with the two rating agencies, 
asking you, what challenges do you see facing the District 
government that will impact credit evaluation? What are the key 
factors that the District has to address in order to receive 
upgrades in its credit ratings? And if you would also comment, 
what actions, including the establishment of oversight 
mechanisms, do you recommend should be put in place during the 
post-Control Board period?
    Let me start off with you then, Ms. Boicourt.
    Ms. Boicourt. Thank you. Let me address your--I think your 
second question first, which is what will it take for the 
rating to continue to improve.
    We see the District as having substantial momentum in its 
improvement. In our view, we think the rating can go higher if 
the District meets the goals that it itself has laid out, 
continuing to improve reserves toward--they have a self-imposed 
7 percent goal, continuing to post balanced budgets; we would 
add to that, from our point of view, continuing reporting at 
the frequency, and ideally of an improved quality, as 
information technology systems continue to improve, with the 
investments that they have planned
    We do see substantial challenges toward that improvement, 
principally in the short term in the form of information 
systems and technology. This is not unique to District of 
Columbia. We find this in many cities, that the ability to 
produce the information one needs to manage toward an improved 
financial result is often a very important obstacle.
    In the longer term, in terms of higher ratings beyond the A 
range into the AA range, it's--we do see the structural budget 
balance issues as becoming more germane when you enter the AA 
range. It's not an accident that AA-rated cities have a much 
more favorable balance between the service responsibility and 
demographics of the population on the one hand and the 
resources in the form of their economy and their tax authority 
on the other. That's not to say this is an impossible goal for 
the District, but it's one where the challenge has become more 
serious.
    Your third question, I believe had to do with our 
recommendations regarding the post-control era, if you will. We 
really don't see it as our role to make policy recommendations, 
particularly those that go to kind of fundamental governance 
issues. We see a lot of different models of governance across 
the country from city to city, State to State, widely varying 
models. Rather, I think our focus is on process, and financial 
process in particular, and I think our emphasis is on 
information, the transparency of information, the quality of 
information, the frequency of information.
    The thing that I think bothers us the most, and Wall Street 
in general, is radio silence. I mean, I think that investors 
are very comforted by lots of good, frequent information. 
That's why you see so much attention by the analysts in general 
on quarterly reporting of corporations.
    It's no different with municipalities. So our--I think our 
interest is--it echoes a little bit what Nat Gandhi said about, 
I think he said, activities rather than organization. I think 
that's factors rather than organizational form, and I think 
that's true of our point of view that we're very interested in 
outcome and in information, and that we see by rating cities 
across the country that can be accomplished in many different 
forms of governance.
    Mrs. Morella. Very good answer.
    Let's hear from Mr. Young before my time is up.
    Mr. Young. Well, as far as the first part of your question, 
the challenges facing the District going forward, we feel that 
the District is still assimilating the certain factors of the 
Revitalization Act and the Tax Parity Act. There are a lot of 
things going on that still have to flow through the system. So 
over the near term--and also the change of the Control Board 
going away. So over the near term, we will be looking at what, 
how the District manages all these events, along with any 
changes that may occur in the economy, and as far as what they 
might do in the same vein.
    As Renee said, we really don't see it as our role to 
recommend what political jurisdiction should do, but there are 
things that we have pointed out in the past that can help to 
improve creditworthiness, such as increasing reserves, 
improving financial management and those types of things. But 
that's about it.
    Mrs. Morella. Thank you.
    I now recognize Ms. Norton for her questioning.
    Ms. Norton. Thank you very much, Mrs. Morella. I want to 
turn, as well, to the two bond advisers, bond representatives.
    All the testimony we have received today has been most 
important for the committee. We've listened to it closely. It 
seems to me you learn something from each and every one of 
those who has testified. It's very valuable to hear from the 
District, for example, who lives with this stuff every day. But 
in a real sense, your testimony is probably the most important 
because you're the most independent, because all of you are 
structurally required to be objective and because, in a very 
real sense, your testimony matters most to the implications for 
everything that the District does.
    You have each offered a critique of what the District does. 
What is probably most noteworthy is how encouraging your 
testimony has been about the District's financial condition.
    I'd like to ask you, because our concern is less with today 
than what will happen tomorrow, particularly given the 
surpluses the District had been running today, are there any 
early warning signs that the District's bond rate will decline; 
and looking at it from the other end, how much does it cost the 
District that, for reasons you have said are partly 
structural--they are operational reasons as well--how much does 
it cost the District to have a, is it a BBB-plus rating rather 
than the A rating that it had in 1984?
    First, do you see any early warning signs that the rating 
will decline, or is it on an upward movement as far as you can 
see, whenever that will occur, and that of course we can't 
know.
    Ms. Boicourt. Sure. At the moment, as I said before, we see 
some positive momentum that if it's sustained in the post-
Control Board era, whatever form that takes, offers the 
potential for the rating to rise again. The sorts of early 
warning indicators that we watch are both economic and 
financial. It's one of the reasons that the interim reporting 
on actual revenues and expenditures is so key to us.
    Throughout the last couple of years there's been what we 
have viewed as a very valuable process of surfacing potential 
budget risks and then managing those down. We expect to 
continue to see that and continued practices along those lines 
would be important to us. If we saw an early warning in the 
form of surfacing budget problems that were too big to manage 
down, that might slow down some of this momentum.
    I would say the other financial management sort of early 
warning signals that we watch have to do with cash condition. 
We are very interested in cash condition, and the District 
reports to us on a frequent basis. On the economy side, the 
District has been doing better than many parts of the country 
in terms of the immediate business cycle softening that we're 
seeing in other regions.
    Ms. Norton. Why is that?
    Ms. Boicourt. I think that this part of the country, in 
general, is doing better. In addition, there's a fair amount of 
momentum in commercial activity and development-oriented 
projects that are getting traction in the District. But 
nevertheless we do still see some downside risks there, and 
that's something we're watching quite carefully. And we're very 
interested in just the fundamental trends of job growth, of 
property values, when we can get data on population. It's hard 
to wait 10 years for good data, but we do try to watch what we 
can.
    So those are the kinds of warning signals we look at, both 
economic and fiscal.
    Ms. Norton. Mr. Young.
    Mr. Young. From our standpoint, we have a stable outlook on 
the District's rating, which means we expect that the 
District's rating will remain the same over an intermediate 
term. If we thought there was, that it was going to go down, we 
would have a negative outlook on it, and positive, if it were 
going to go up; but right now we think that the District's 
rating will remain the same.
    And as far as looking for early warning signals, we use 
many of the same sources that Renee mentioned, plus the 
District also is very good at calling us when there is a 
potential problem or the appearance of a problem that could 
affect credit quality. Also their Web site helps. The 
improvements in financial management every day should make more 
and better information available to everyone.
    Ms. Norton. My time is up, Madam Chairman.
    Mrs. Morella. Thank you. Picking up on our line of 
questioning, I would go to Inspector General. You have come up 
with a list of very laudatory recommendations, pilot programs, 
auditing system that you will be putting into effect. Do they 
link up with what you have heard--have they linked up to what 
you--with what they have noted as being important to the future 
direction with regard to bond rating and all?
    Mr. Maddox. Yes, Madam Chairman, they do; and in addition 
to that, let me just add some of the policies and procedures 
that we've put in place.
    As you may know, from the beginning we instituted reports 
like MARs and MIRs, MARs being management alert reports and 
MIRs being management implication reports, and fraud reports. 
The first two are very important because in the process of our 
inspecting or auditing an agency, if we find systemic problems 
that relate to these deficiencies, we alert the agency right 
then and there to make those corrections; and that's a part of 
our final report when we do a final draft.
    In those instances where we issue the management 
implication reports, when we find systemic problems that are 
common probably across the District line, we alert the entire 
city, the Council, in the past, the Control Board and this--the 
Hill, as well, as to our recommendations and the systemic 
problems that we've found in one agency without naming that 
agency for them to correct.
    The CAFR process, we examine the management letter that 
comes after the dependency of the CAFR process and we monitor 
those deficiencies to make sure that the recommendations are 
carried out, and if they are not carried out, we bring that to 
the attention of the appropriate officials.
    One of the things that I alluded to in my statement, or one 
of the things in the future that I think will be beneficial, is 
putting audit--deputy auditors in different key departments 
which control the greater part of the budget and have a better 
impact on the financial situation. I think that a continuous 
auditing process in place will alert the appropriate officials 
of these triggers that may bring in a control period.
    Mrs. Morella. Do you need to get legislative authority from 
the Council, or whatever authority, to come up with these 
projects you talk about: We should develop a long-range plan 
procurement and contract administration, the resident auditors, 
more inspection? Do you need further authority, or do you 
automatically have the authority to do that, sir?
    Mr. Maddox. That, I believe, I can do on my own. Of course, 
that will require probably additional resources, which I have 
not analyzed what that would be, but deploying my resources and 
my auditors in areas that significant, I can use my discretion 
on that, and I don't need the additional legislation to do 
that.
    Mrs. Morella. I have to get to the chief financial officer.
    Dr. Gandhi, a lot has been discussed about your role and, 
of course, we all feel the Mayor and the Council and the 
Control Board recommending the establishment of an independent 
CFO--one of the points that I brought out in my opening 
statement and I wanted to ask about is the specific provisions 
of the proposal to ask you, first of all, will they ensure 
sufficient financial oversight and your independence? For 
instance, should the agency CFOs be hired and fired by you, and 
what provisions of the current Control Board Act should be 
retained to ensure that your independent nature is maintained 
and why?
    Mr. Gandhi. The overall comment that I would like to make 
is that I'm in complete correspondence with the Mayor, the 
Council and the Authority in their statement that CFO should be 
independent, but should be part of the District government and 
the home rule.
    Second, as to what organizational structure it should take, 
I would simply leave that to the elected leaders of the 
District and the Congress.
    Third is that, overall, the CFO role, as it was developed 
in the law or authorities, the Control Act, I think it has 
worked extremely well in terms of improving cities' financial 
fortunes. I think CFO should not be viewed merely in terms of 
the District CFO, but also should be viewed in terms of the 
entire cluster, meaning the agencies' CFOs as well.
    My guidance to the agency CFOs on a regular basis is that 
we have to work with the agency directors. There's no way 
around that. The primary reason is that, without their help, 
the agency directors will not be able to achieve their goals 
and the objectives as specified by the Mayor.
    The financial cluster and CFO should not be adversaries 
with the agency directors. They have to work in congruence. But 
at the same time, the most important view, most important 
responsibility that I envision for the CFO and members of the 
CFO cluster is to maintain the District's financial viability. 
That is an absolute must, and whatever it takes to do that we 
will do it.
    Mrs. Morella. My time has expired, but it appears as though 
you're leaving it to the Mayor and the Council to make some of 
those little decisions with regard to how it will be employed. 
I will be interested also to submit some questions to you with 
regard to that proposed legislation.
    Congresswoman Norton.
    Ms. Norton. Thank you, Mrs. Morella. I would like to ask 
Mr. Gandhi and our two investment bond leaders, why do the 
District's expenditures continue to rise faster than revenue, 
given these extraordinary surpluses and the fact that the 
District apparently has come back faster than other cities that 
were in financial difficulty?
    Mr. Gandhi.
    Mr. Gandhi. Yes, I think the point we want to keep in mind 
here is that--that it is not that the expenditures rise faster 
than the revenue, which they do. The most important fact that 
you yourself pointed out is that there is a constraint on a 
revenue basis, and that----
    Ms. Norton. So it's not cost of government that is doing 
it, in other words?
    Mr. Gandhi. No. I think the District will never let its 
expenditures rise more than its revenue for balanced budget 
purposes, because nobody wants the Control Board here again. If 
that would mean that we had to stall all the services, I think 
the District would do that. We are committed to making sure 
that there are balanced budgets, that there is a financial 
viability, that our friends on Wall Street are not concerned 
about that particular aspect.
    But is that good government? I think a fundamental problem 
as you yourself pointed out, Ms. Norton, is that revenue basis 
constraint; and second is that when the economy is good out 
there, we do well. There is no question about that. In our last 
4 or 5 years, the economy has done extremely well. It is an 
unprecedented level of prosperity that we had and we enjoyed 
it.
    But just imagine for a moment, heaven forbid, that there is 
a recession out there, a sustained slowdown; that will be a 
serious problem for the District, given the kind of limited tax 
base that we have.
    Ms. Norton. So given the sources of revenue and the 
constraints on the sources of revenue, constraints that are 
beyond the District's control----
    Mr. Gandhi. Absolutely.
    Ms. Norton [continuing]. No one can forecast, if there were 
serious recession, the District would have at its hands the 
ability to control its own expenditures. Yes?
    Could I ask you both to comment on that it? Why you think 
it----
    Ms. Boicourt. Yes, I think inherent in your question is the 
notion of there being some fundamental expenditure trend that 
is on autopilot, that is inexorable; and of course, over the 
last few years, we've seen that's not the case, to some degree. 
To a large degree, that's a managed number, and the District in 
the last couple of years has managed it to a level that it has 
been able to eliminate the accumulated deficit and produce an 
accumulated surplus.
    Ms. Norton. Well, there are expenditures that are on 
automatic pilot. My question does not imply that--as the CFO 
says, that things can't be cut. At the same time, I would not 
agree with you that there are not some expenditures that this 
government has that are not on automatic pilot.
    Ms. Boicourt. And I would agree with you. Demographically 
driven expenditures to a large degree, in the face of both a 
policy desire and in many cases mandates to serve a population, 
are on autopilot, but there is----
    Ms. Norton. We've taken the District's Medicaid off of the 
terrible formula it had, but it can't get that Medicaid money 
if it can't come up with its match.
    Ms. Boicourt. And it still has an autopilot. It is just an 
autopilot on a more favorable formula than it was on before. So 
I think we agree with you that there is a component of the 
District's expenditures that are on autopilot.
    On the revenue side, the District does have less revenue 
authority than many cities, and it does not have the ability to 
tax its commuters. Many of the highly rated cities in the West 
have the power to annex their growth boundary, and so they pick 
up that tax base. They also pick up that service 
responsibility, but they have a better structural balance.
    To answer your question of how can it be that there's this 
imbalance yet there's all this money in the bank, I think the 
money in the bank was a deliberate target, aided by deliberate 
spending management and a good economy.
    Ms. Norton. Yes.
    Mr. Young.
    Mr. Young. Getting to the issue of structural balance, the 
District was established with certain responsibilities and 
certain resources. And for the last 25 years it's been 
attempting to get those two factors into balance. The 
Revitalization Act was a step to lower the cost base of the 
District to help bring balance, but whether the District has 
achieved true structural balance remains to be seen. The 
revenue that we've talked about, the revenue sources are fixed, 
and property taxes and sales taxes and income taxes are 
probably at their limits for economic reasons. And some of the 
expenses are on autopilot.
    As Dr. Gandhi said, the strong economy has helped to--the 
Control Board has had the wind at its back for the last 4 or 5 
years. So that's why the years going forward may not be quite 
as easy and something may have to be done to increase the 
revenue sources of the District or something about 
expenditures.
    Mr. Gandhi. May I add one point, Ms. Norton?
    The kind of arrangement that we just heard about, one 
additional factor that we ought to think about in the District 
is that we are accounting for expenditures which are generally 
State-like expenditures, about half a billion dollars or so. In 
any other jurisdiction, expenditures----
    Ms. Norton. You say that in spite of the fact that the 
Federal Government took over many costly State functions, the 
District still carries half a billion dollars----
    Mr. Gandhi. Yes, ma'am.
    Ms. Norton [continuing]. In State functions?
    Mr. Gandhi. And I'll give you an example. DCRA, for 
example, or the Office of Tax and Revenue or the University of 
District of Columbia; in any other jurisdiction, these are 
State-like expenditures. Now, this is the arrangement that we 
have, and in addition to this autopilot expenditure that we 
have, like Medicaid, you know we had to take care of these 
expenditures. There is no way around that.
    Ms. Norton. Thank you, Madam Chairman.
    Mrs. Morella. Thank you.
    I'm going to just ask maybe one last question, to all of 
you but particularly to--we've already taken care of our rating 
agencies--but particularly to the inspector general and the DC 
Appleseed Center and our CFO.
    For the record, I still have the question about whether or 
not you would suggest or advise that we do need to have some 
kind of an audit advisory committee board, whatever you want to 
call it. We heard from the first panel the response that if you 
have some experienced people working for the CFO and working 
for the Council, that is adequate. I'm just wondering about 
whether or not--how does one involve the financial experts in 
being there for the revenue audits and for the other expertise 
that would be needed? And maybe it isn't necessary, but it just 
seems to me that this would be something that would be 
desirable, and perhaps you have some comments.
    And also Dr. Gandhi, I would, and I don't know whether you 
will have a chance now, but I would, for the record, like to 
know how you respond to that legislation in terms of, like, the 
fiscal notes, remember. You know there was a comment made in 
the first panel, and I don't think it was completely responded 
to in terms of, would the CFO prepare fiscal notes for Council 
legislation for the term and for--as I say, the external review 
and for the term of office, right.
    Mr. Gandhi. Right. First, the fiscal impact statement: 
Currently the Control Board requires that we need to get a 
fiscal impact statement for every legislation that goes to the 
Council, and we do that. I think it is prudent for any 
legislative body to assess what are the costs--not just costs 
in this year, but multiyear costing of a given legislation--and 
that will give them and the Mayor a proper chance to evaluate 
the legislation.
    The legislation may be good in itself. The question is, it 
has to be weighed in terms of its financial imperatives, 
financial costs.
    On the question of the advisory bodies, I entirely agree 
with you. We have recognized that need. You know, ever since I 
was the head of the Office of Tax and Revenue, I had an 
advisory committee there. As soon as I became the chief 
financial officer, particularly related to the revenue 
estimation, we have a technical advisory panel of experts who 
know the District economy--people from the CBO, people from the 
OMB, people from the Federal Reserve--and they come to us every 
3 months or so, and we talk about revenue exemptions--you know, 
are we doing the right way, are these the right exemptions, 
what do you know.
    We talk with--on that panel we have people from Virginia 
and Maryland, so we know--and then the counties also. And so we 
want to be properly informed as to how we do our job. So I 
really don't see any problem on taking technical experts' 
advice, not that they have to agree with us, but I would like 
to listen to what they have to say.
    On the audit committee which is--which has basic overview--
oversight on the CAFR process the inspector general has run, 
and any other--any large operation would have an audit 
committee consisting of a few directors who would overview the 
annual report and its audit. Again, I see no problem there; and 
in any case, I keep the members of the audit committee 
otherwise informed as to how the audit is going. After all, 
they constitute from the Council, the Mayor's office, the 
Control Board, people from the Hill and General Accounting 
Office.
    So we are doing it on our own. The question is, how do you 
formalize that, and whether that constitutes--in some way, it 
can overshadow Control Board.
    Mrs. Morella. Don't use that word.
    Mr. Gandhi. I'm sorry.
    And I would say, I would leave that to the decisionmakers, 
whether they want to formalize something like that or not. But 
I see nothing wrong in getting advice from technical people, 
because I would like to learn. We would like to do a process 
that is better.
    Mrs. Morella. Mr. Maddox, with regard to----
    Mr. Maddox. Yes, Madam Chair.
    Fundamentally, I would agree with the concept, I think we 
need to--first, we're talking about two different things. The 
CAFR oversight committee which requires the--first of all, the 
inspector general to pick independently the auditor to do the 
audit of the city's financial statement. My role as the IG is 
to independently select, competitively, that process.
    We have from the beginning placed representatives from my 
office, Dr. Gandhi's office, CFO, from the Mayor's office, from 
the Council as representatives, and GAO has also sat on that 
committee; and we meet or have met every other week to discuss 
the process of the CAFR and the end goal of having it completed 
by the statutory date of February 1. That has worked. It has 
worked successfully in the past.
    Now, whether or not you want to modify that committee and 
put in the so-called ``audit committee,'' I really don't have 
any problems with that fundamentally, as long as the 
independence and the function of the committee as it has worked 
in the past 3 years is not compromised.
    Now, they do different things. The CAFR committee for the 
oversight of the workings of the CAFR, to make sure that the 
auditor is getting the information that he or she needs from 
the agency, is making sure the agencies don't have a problem 
with the reasonableness of the request. I'm sort of a broker; 
I'm a referee in that sense. Everyone is informed. If there are 
critical areas or hiccups that happen along the way, everyone 
is informed. That's what has happened in the past.
    Now, if there are experts that the government or the city 
feels as a security blanket they need to be a part of this 
process, then it could either be folded under the umbrella of 
the existing CAFR committee with the caveat that the 
independence with which I work is not compromised; and the--as 
an advisoree to the committee, the CAFR committee, and to the 
Congress and to the city, as long as that process is 
facilitated, I have no problem with that.
    Now, it could also work as a separate committee where they 
can do their thing separately, and the IG could have a role as 
an observer. Whatever process works, I'm in favor of, but the 
main thing is, I would be troubled, and I would respectfully 
suggest that nothing is adopted that would hinder the 
independence of the IG to supervise the CAFR process.
    Mr. Gandhi. If I may supplement a comment that I made, it's 
well and good to get technical advise. That is to say, I 
welcome all that; but I think the most important point, which I 
have already pointed out, is to build a professional technical 
staff within the Office of Chief Financial Officer.
    A good example is the Congressional Budget Office. You 
know, we have a technical professional staff there. Nobody 
talks about giving them that advice even though they have 
established themselves as a very well-respected staff. I think 
we can do the same thing with the chief financial officer, 
build that staff so that people can come and go, the chief 
financial officer can come and go, but the staff will remain 
there and would have achieved such a level of technical 
expertise and respect so that anytime they put out a number, 
they put out information, people know it is transparent, it is 
expert, it's reliable, it is dependable and you can count on 
it.
    Mrs. Morella. We're trying very hard to get OMB and CBO to 
have the same number so there could be some progress.
    I defer to Congresswoman Norton for questioning.
    Ms. Norton. Thank you, Mrs. Morella.
    What you just said, I must say, I found very informative 
because it is true that CBO, unlike the OMB, has built up the 
kind of reputation you're speaking of; and much of it does have 
to do with the staff who was there. Because sometimes Democrats 
have appointed the CBO, the Director of the CBO, and sometimes 
Republicans have and yet the reputation has not suffered. So 
the notion that there can be no substitute for taking our 
current CFO and building it into a strong, independent office 
is a point I take after hearing from you.
    I think the Chair's concern about getting the proper 
technical advice is a concern well taken. I hear you saying 
that you--almost that it would be a matter of incompetence not 
to get technical advice from people in the private sector, in 
the public sector and in the region. If the city does, perhaps 
there should be something more formal in D.C. law that says 
that there should be some technical advice that the CFO, or the 
IG, always makes available to himself, and he is required to 
make such advice available to himself.
    The one thing I have not heard anyone overcome is the 
notion put forward in testimony presented by the prior panel 
that if there were a difference between the panel and the 
independent office with responsibility, there would be nobody 
who could, in fact, sort out that difference. I'd be very 
concerned with a Congress who keeps telling the District, 
streamline the government, don't have redundant layers, to have 
a layer that also could be adversarial and present more 
problems than it would solve, when you could simply have a 
group of people of the kind that you already have to do the 
same job.
    I have one last question, and that's for Mr. Wyner.
    You have testified that counsel review of contracts in 
excess of $1 million should be eliminated. And this is 
something the Congress should be interested in because this 
constraint was added by the Congress before there was a Control 
Board, as I recall. Would you speak to your advice concerning 
the notion of eliminating that provision?
    Mr. Wyner. Yes. Our research, we interviewed 15 to 20 
groups or individuals who were quite familiar with the 
District's finances. And an issue that kept coming up was that 
the Council's review of contracts at $1 million, which is a lot 
of contracts in today's dollars, in today's economy, really 
doesn't add a tremendous amount of value; that the Council does 
not have the expertise on staff--and this goes back to an issue 
that was raised by Dr. Rivlin earlier--which is that the 
Council does need to beef up its budget and financial staff, a 
point that we've made previously, and second, that it slows 
down the process of procurement.
    And so if you don't get much benefit and you have 
substantial costs, it's something that you need to look at. 
That's not to say that we don't think contracts should be 
examined before they're executed.
    We believe that the CFO, the current responsibility of the 
CFO to certify the availability of funds before contracts are 
executed should continue. We believe that the chief procurement 
officer should continue to certify that the proper contracting 
procedure has been gone through and, indeed, that the Council, 
when they think there's something amiss, should hold hearings 
and should, during the budget process, try to uncover any 
problems that may exist.
    The inspector general officer can look into those things. 
It's the required review of every contract over $1 million that 
strikes us as an unnecessary layer of bureaucracy.
    Ms. Norton. As far as I know, there is no other 
jurisdiction that requires a legislative body to look at 
contracts in this way.
    Mr. Wyner. We looked at a number of other jurisdictions, 
and I think there are a few. But obviously it's less common in 
the jurisdictions that we looked at for legislatures to review 
individual contracts.
    Ms. Norton. On early warnings, or should I say ``late 
warnings'' in that regard, this is something that has come to 
my attention. First of all, let me say that it obviously has 
the potential to become terribly political. I don't know that 
it has. I haven't heard those complaints, but if you keep 
putting million dollar contracts in front of people who are 
political animals and say, tell us what to do, at some point 
they're going to tell you what to do.
    The problems I have seen in it have been when they have 
arisen, and I don't know anything about the day-to-day 
problems, not being a member of the City Council, but I can 
tell you about the Y2K problem and I can tell you happened to 
highway money. I had to get a waiver, something that is almost 
never done, in order for D.C. to qualify for highway funds. And 
the Congress put on a whole bunch of constraints about highway 
funds as a result of that. And come to find out that after all 
those constraints were put on, the great problem of the million 
dollar over. So Maryland and Virginia get their contracting out 
on the street within 60 to 90 days.
    I met with some business people from the area recently, and 
they told me that it still takes the District as much as a year 
to get contracts, the season is over. Y2K almost didn't happen 
because the Congress--the Council was just doing what we told 
them to do, hold it for 45 days, and if nobody says anything, 
fine.
    Well, they weren't saying anything for the most part. But 
if you hold a contract and the Y2K clock is running for 45 
days, then that clock really does not wait for anyone.
    So I do believe that we need to look at that, given that 
provision, since we impose that on the District for good 
reason. By the way, that is something that I totally agreed 
with, when the contracting power was--had constraints on it. 
Only the Mayor had it; there was no Control Board. I totally 
agreed with it; that was a fail-safe that was necessary.
    Now you have described a whole set of constraints that are 
there, and this is the kind of thing that I think we ought to 
look at, government ought to look at itself continually to say 
things like, is the constraint that we put in 5 years ago for a 
purpose still needed, or is it doing more harm than good. I 
haven't heard value added here, and I think that's something 
that the Congress itself should look at.
    Thank you very much, Madam Chair, I have no further 
questions.
    Mrs. Morella. Thank you, Congresswoman Norton.
    I didn't ask you anything, Mr. Wyner, but may I just have 
for the record your response to the Council's legislative 
draft?
    Mr. Wyner. We think that it's strong. In broad-brush 
strokes, we think it covers most of the areas that need to be 
covered. We think there are several improvements that need to 
be made.
    As mentioned, we think that the Council should not review 
contracts. We believe that fiscal impact statements should be 
reviewed by the CFO before being signed by the Mayor. We think 
that the two-thirds requirement in the Council again is overly 
political. And probably--I mean, if you imagine a scenario 
where the Mayor has decided to remove a CFO for cause, and we 
believe the standard should not be what's in the D.C. municipal 
regulations now, but cause with real teeth, and then it has to 
go before the Council and two-thirds of them have to say, 
well----
    Mrs. Morella. Let me interrupt. In fact, it even says 
``two-thirds of those present and voting.'' I mean, I could 
imagine that you have someone who might be there who does not 
vote and you might have one person who shows up. I mean--go on.
    Mr. Wyner. It just strikes us that is a recipe for 
politicizing this.
    And then, finally, we actually think in other respects the 
CFO needs greater independence for legal counsel, for setting 
the salary for agency CFOs, at least over the next 2 years, for 
procurement and personnel to transition back to centralize the 
systems. But we think those are relatively small changes.
    They're important, but if you look at most of the 
provisions, in 90 percent of the cases we're in agreement with 
the Council, and we're pleased that they've stepped forward and 
taken a role in this. And we think that they've gotten it right 
in most respects.
    Mrs. Morella. I want to thank all of you for your patience 
in waiting. I know everybody is probably very hungry, but we 
have gotten a lot of nourishment from your offerings today. 
Thank you for your commitment to the fiscal and financial and 
social well-being of the District of Columbia. Dr. Gandhi, Mr. 
Maddox, Mr. Wyner, Ms. Boicourt and Mr. Young, we very much 
appreciate your testimony. We may be asking you questions.
    So as I adjourn the joint subcommittee's hearing, let me 
just acknowledge staff: Senator Voinovich's staff, Andrew 
Richardson, Mason Alinger, Julie Vincent; Delegate Norton's 
staff, Jon Bouker, Cheryl Williams; Senator Durbin's staff, 
Marianne Upton; Congressman Davis' staff, Howard Dennis, 
Melissa Wojciak, Victoria Proctor; my staff, Russell Smith, 
staff director, Matthew Batt, Robert White, Heea Vazirani-
Fales, Jean Gosa, and Andrea Abrams. We gave you the whole 
list. So I want to thank all of you again and look forward to 
working with you.
    So the subcommittee is now adjourned.
    [Whereupon, at 2:23 p.m., the joint subcommittees were 
adjourned.]

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