[Senate Hearing 108-744]
[From the U.S. Government Publishing Office]



                                                        S. Hrg. 108-744

            STRUCTURAL IMBALANCE OF THE DISTRICT OF COLUMBIA

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

                                HEARING

                                before a

                          SUBCOMMITTEE OF THE

            COMMITTEE ON APPROPRIATIONS UNITED STATES SENATE

                      ONE HUNDRED EIGHTH CONGRESS

                             SECOND SESSION

                               __________

                            SPECIAL HEARING

                     JUNE 22, 2004--WASHINGTON, DC

                               __________

         Printed for the use of the Committee on Appropriations


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                                 senate


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                      COMMITTEE ON APPROPRIATIONS

                     TED STEVENS, Alaska, Chairman
THAD COCHRAN, Mississippi            ROBERT C. BYRD, West Virginia
ARLEN SPECTER, Pennsylvania          DANIEL K. INOUYE, Hawaii
PETE V. DOMENICI, New Mexico         ERNEST F. HOLLINGS, South Carolina
CHRISTOPHER S. BOND, Missouri        PATRICK J. LEAHY, Vermont
MITCH McCONNELL, Kentucky            TOM HARKIN, Iowa
CONRAD BURNS, Montana                BARBARA A. MIKULSKI, Maryland
RICHARD C. SHELBY, Alabama           HARRY REID, Nevada
JUDD GREGG, New Hampshire            HERB KOHL, Wisconsin
ROBERT F. BENNETT, Utah              PATTY MURRAY, Washington
BEN NIGHTHORSE CAMPBELL, Colorado    BYRON L. DORGAN, North Dakota
LARRY CRAIG, Idaho                   DIANNE FEINSTEIN, California
KAY BAILEY HUTCHISON, Texas          RICHARD J. DURBIN, Illinois
MIKE DeWINE, Ohio                    TIM JOHNSON, South Dakota
SAM BROWNBACK, Kansas                MARY L. LANDRIEU, Louisiana
                    James W. Morhard, Staff Director
                 Lisa Sutherland, Deputy Staff Director
              Terence E. Sauvain, Minority Staff Director
                                 ------                                

                Subcommittee on the District of Columbia

                      MIKE DeWINE, Ohio, Chairman
SAM BROWNBACK, Kansas                MARY L. LANDRIEU, Louisiana
KAY BAILEY HUTCHISON, Texas          RICHARD J. DURBIN, Illinois
TED STEVENS, Alaska (ex officio)     ROBERT C. BYRD, West Virginia (ex 
                                         officio)
                           Professional Staff

                             Mary Dietrich
                        Kate Eltrich (Minority)


                            C O N T E N T S

                              ----------                              
                                                                   Page

Opening Statement of Senator Mike DeWine.........................     1
Statement of Hon. Anthony A. Williams, Mayor, District of 
  Columbia.......................................................     2
    Prepared Statement...........................................     3
The Structural Imbalance: What Does it Mean?.....................     4
How is the District Managing the Structural Imbalance?...........     4
Proposed Solutions to the Structural Imbalance...................     5
Statement of Hon. Eleanor Holmes Norton, U.S. Representative from 
  the District of Columbia.......................................     6
    Prepared Statement...........................................     9
Statement of Hon. Tom Davis, U.S. Representative from Virginia...    10
    Prepared Statement...........................................    12
Statement of Senator Mary L. Landrieu............................    16
    Prepared Statement...........................................    16
Statement of Alice M. Rivlin, Senior Fellow and Director, Greater 
  Washington Research Program, The Brookings Institution.........    22
    Prepared Statement...........................................    23
The Brookings Study..............................................    24
The GAO Study....................................................    25
Other Studies....................................................    25
Statement of Patricia A. Dalton, Associate Director, General 
  Accounting Office..............................................    26
    Prepared Statement...........................................    28
District of Columbia: Structural Imbalance and Management Issues.    28
Why GAO Did This Study...........................................    28
What GAO Found...................................................    28
GAO's Methodology for Assessing Structural Imbalance.............    30
The District's Public Service Costs Are the Highest in the Nation    31
The District's Revenue Capacity Is Among the Highest in the 
  Nation, Despite Some Constraints on its Taxing Authority.......    31
The District Faces a Structural Deficit..........................    31
Despite a High Tax Burden, the District's Revenues Are Only 
  Sufficient To Fund an Average Level of Services................    32
Management Problems Result in Unnecessary Spending That 
  Compromises the District's Ability to Provide an Average Level 
  of Public Services.............................................    33
The District Continues to Defer Improvements to Its 
  Infrastructure While Debt Pressures Remain.....................    34
Statement of Hon. Fred Thompson, President, Federal City Council.    35
    Prepared Statement...........................................    37
Statement of Stephen J. Trachtenberg, Chairman of the Board, 
  District of Columbia Chamber of Commerce.......................    38
    Prepared Statement...........................................    39
Statement of Ted Trabue, Greater Washington Board of Trade.......    40
    Prepared Statement...........................................    41
The District Provides State Services without State Income........    42
The Majority of Property in the District Is Not Taxable..........    42
The District is Unable to Tax Income at Its Source...............    42
Additional Committee Questions...................................    46
Questions Submitted to the General Accounting Office.............    46
Questions Submitted by Senator Richard J. Durbin.................    46
Management Challenges............................................    46
Legislative Remedies.............................................    50
Planning and Oversight...........................................    51
Additional Submitted Statements..................................    54
Prepared Statement of Natwar M. Gandhi, Chief Financial Officer, 
  District of Columbia...........................................    54
What is a Structural Deficit?....................................    55
What Harm Is Done by the Structural Imbalance?...................    56
The District's Structural Imbalance Is Quite Large...............    58
With All the Financial Challenges, How Can the District Continue 
  To Have a Balanced Budget?.....................................    58
Can There Be a Fair and Sustainable Financial Relationship 
  Between the District and the Federal Government?...............    58
H.R. 4269, the District of Columbia Fair Federal Compensation Act 
  of 2004........................................................    59
Letter From the League of Women Voters of the National Capital 
  Area...........................................................    63
Prepared Statement of Leonard Sullivan, Jr., President, National 
  Association to Restore Pride in America's Capital (NARPAC, 
  Inc.)..........................................................    63

 
            STRUCTURAL IMBALANCE OF THE DISTRICT OF COLUMBIA

                              ----------                              


                         TUESDAY, JUNE 22, 2004

                               U.S. Senate,
          Subcommittee on the District of Columbia,
                               Committee on Appropriations,
                                                    Washington, DC.
    The subcommittee met at 10:02 a.m., in room SD-138, Dirksen 
Senate Office Building, Hon. Mike DeWine (chairman) presiding.
    Present: Senators DeWine and Landrieu.


               OPENING STATEMENT OF SENATOR MIKE DE WINE


    Senator DeWine. I have a brief opening statement which I am 
going to go ahead and give. This hearing will come to order. 
Today we will hear testimony regarding the District of 
Columbia's long-term structural imbalance. This imbalance 
represents a gap between the District's ability to raise 
revenue at reasonable tax rates and its ability to provide 
services of reasonable quality to its residents.
    I recognize that the structural imbalance is driven by 
expenditure requirements and revenue restrictions which are, 
frankly, mostly beyond the control of the District's 
leadership. Clearly the city's revenue capacity would be larger 
without Federal constraints on its taxing authority such as its 
inability to tax Federal property or the income of 
nonresidents.
    I understand that the city faces a troubling problem in the 
long term. I want to help close the financial gap and help 
ensure the long-term economic health of our Nation's capital 
and the seat of our Federal Government. This is a Federal 
enclave established by the Constitution, and it must live by 
the constraints imposed on it by the Federal Government.
    I believe that the Federal Government must recognize the 
costs it places on the city and the burden it places on the 
city's infrastructure, all the while limiting the ability of 
the city to raise revenue. Indeed, many of the problems facing 
the city result from it being the seat of the Federal 
Government.
    At today's hearing we will begin a bicameral, bipartisan 
discussion about ways to address this structural imbalance. We 
have assembled today a very distinguished group of 
congressional leaders, city leaders, business leaders, to help 
determine ways to eliminate this structural imbalance. We 
certainly look forward to hearing their testimony. This marks 
the first step in what I hope will be a solution to the city's 
financial problems, but we know this will not be easy.
    As chairman of this subcommittee, I intend to work to 
explore and develop ways to avoid a financial catastrophe for 
the District. It is our duty and our responsibility to make 
sure that this city is placed on solid financial ground.
    The ranking member of this subcommittee, Senator Landrieu, 
is testifying right now before another committee and will join 
us shortly.
    As usual, we would request that witnesses limit their 
testimony to 5 minutes for their oral remarks. We do have their 
written testimony in front of us. Copies of all written 
statements will be placed in the record in their entirety.
    I might mention that the Senate is expected to have a 
series of votes at 10:45 and so we will try to complete, and we 
will complete, the first panel to respect the panel's time 
constraints. We will be done by 10:45 so that we do not carry 
anybody over for that.
    Congressman Davis, welcome.
    Mr. Davis. Thank you very much.
    Senator DeWine. Ms. Norton, thank you. You are a frequent 
visitor here and we welcome you back.
    Mayor, thank you very much for being here. Mayor, why do we 
not start with you, and if we could have your testimony first, 
we would appreciate that very much. I understand you have to go 
to a funeral.
    Mayor Williams. Yes. I am sure you understand that.
    Ms. Norton. So do I, Mr. Chairman, as well.

STATEMENT OF HON. ANTHONY A. WILLIAMS, MAYOR, DISTRICT 
            OF COLUMBIA
    Mayor Williams. In light of the fact that we have submitted 
written testimony for the record, I am just going to highlight 
in recognition of the time. Mr. Chairman, I am just going to 
highlight some of the salient points, also acknowledging that 
Congresswoman Norton is going to be taking a perspective on 
this as well as Congressman Davis. I want to take this 
opportunity to acknowledge both of them for their continued 
leadership on this issue, both of them before and through the 
District's fiscal crisis mid-decade, some years ago.
    I want to focus, Mr. Chairman, not on the causes, because I 
think you are aware of the causes, and not on some of the 
general gross impacts in terms of overtaxing our citizens and 
in terms of overly indebting our citizens, but I really want to 
talk about how we are managing it on a day-to-day basis and 
what citizens in our city can see, touch and feel.
    One is the schools. Our public schools on an operating 
basis can certainly operate more efficiently. I think there is 
a substantial record on that. But I think most analysts who 
have looked at this, most observers who have looked at our 
actual schools facilities agree that there is a dramatic need 
for investment in school capital and facilities. In fact, our 
public schools require an additional $135 million a year over 
the next 6 years to fund a basic conservative modernization 
plan. There will also be approximately 10 new charter schools 
per year, which require funding. They have been very successful 
in our city. They deserve funding.
    In transportation, we are facing deferred infrastructure 
needs in bridges, roads and other transportation improvements 
of $240 million per year over the next 6 years. The Metro 
System has a total unfunded needed of $1.4 billion, which will 
need to be shared among partner jurisdictions, and as I 
reported to the Appropriations Committee in our budget hearing, 
in relation to capital funding, the District has a particularly 
onerous burden when it comes to Metro because as the Federal 
Government has pulled back from Metro funding, States have 
stepped up, and we do not have the access to State tax base to 
meet those needs.
    Neighborhood facilities such as fire stations, recreation 
centers, libraries and health clinics, require an additional 
$70 million per year over the next 6 years.
    In information technology, we require an additional $100 
million per year for the next 6 years to re-engineer and 
automate critical business practices, many of them critical to, 
for example, homeland security, which is critical to our role 
as the Nation's capital.
    It has been a driving priority of my administration to 
improve efficiency of our government and reduce expenditures, 
and at the request of this committee we submitted a report in 
May that presented our work being performed across the 
government to enhance efficiency and effectiveness. The GAO 
report, looking at the different causes for an imbalance and 
possible remedies, concluded though that while these 
improvements were necessary, and in some cases overdue, only a 
small part of the solution to the imbalance could be found in 
greater government efficiencies of reducing services in the 
District. In fact, there are several alternative funding 
mechanisms that could be adopted by the Federal Government to 
provide this solution. In my mind, with a lot of experience on 
this issue, both as CFO of the city and now as Mayor, I believe 
the most promising vehicle is the District of Columbia Fair 
Federal Compensation Act of 2004, which was recently introduced 
by Congresswoman Norton along with Congressman Tom Davis, and I 
am happy to say, members of Congress from both Virginia and 
Maryland.
    The bill would provide an $800 million contribution on a 
formula basis, would settle this issue once and for all, put 
the District on its own solid, sound financial footing, and 
allow us to run our affairs, in a way that we have demonstrated 
over the last 10 years that we can, which is in a much 
efficient fiscally prudent manner, in a manner that is 
befitting of our Nation's capital.


                           PREPARED STATEMENT


    I want to again thank you, Mr. Chairman, for this 
opportunity to testify, and I would be happy to answer any 
questions you have.
    [The statement follows:]

             Prepared Statement of Hon. Anthony A. Williams

    Chairman DeWine, Ranking Member Landrieu, and other distinguished 
members of the committee, thank you for the opportunity to testify 
before you today on structural imbalance in the District of Columbia. 
Chairman DeWine, I appreciate your public support for a solution to the 
structural imbalance and your efforts to seek the city's input in the 
most appropriate and helpful solution. Senator Landrieu, I appreciate 
your long-standing efforts to resolve this issue, especially your role 
in requesting the General Accounting Office's expert analysis of the 
issue. I appreciate your attention to this issue, and I think this 
hearing presents an excellent toward achieving a long-term solution to 
the District's fiscal structural imbalance.

              THE STRUCTURAL IMBALANCE: WHAT DOES IT MEAN?

    The District's structural challenges are not new. In some ways, the 
Federal Government has been deliberating the correct balance of Federal 
and local support for the Nation's capital for the last 200 years. An 
example of this ongoing effort is the 1997 Revitalization Act, which 
was one step (and a very helpful step, I may add) in this process 
towards a rational District-Federal fiscal relationship. Several 
reports that have explored this balance before and after the 
Revitalization Act have universally concluded that the District faces 
structural fiscal challenges. The esteemed authors of these studies 
include two former members of the Federal Reserve Board, Alice Rivlin 
and Andrew Brimmer, the McKinsey and Company consulting firm, and the 
U.S. General Accounting Office.
    In its recent report to Congress, the GAO concurred with and re-
emphasized the conclusions of the previous reports: the District has a 
structural imbalance, it is large, and fixing the imbalance is outside 
the control of local officials. The GAO concluded that the District of 
Columbia's structural imbalance is between $470 million and $1.1 
billion per year.
    And what is the source of this imbalance? It stems from various 
sources. Federal restrictions on taxation constrain our revenues below 
that of the States. A population that is younger, poorer, and sicker 
drives our expenditures to be higher than those of the States. Add to 
this the fact that we are the only major city in America that has no 
State to equalize and subsidize funding for our service to the region, 
and you have a ``perfect storm,'' if you will, for undermining the 
solvency of a locality.
    But despite these unique obstacles, this city government must 
function. It must provide services to our residents, welcome our 
visitors, support our businesses, and to balance our budgets. And we 
have been quite successful at doing so: our accomplishments include 7 
consecutive years of balanced budgets, ``A'' ratings from all three 
rating agencies, and over $250 million in cash reserves.

         HOW IS THE DISTRICT MANAGING THE STRUCTURAL IMBALANCE?

    Now to an outside observer this may seem like a paradox: How can 
the District achieve remarkable financial performance, yet still face a 
structural imbalance? The answer is twofold. First, we have a tax 
structure through which our residents pay some of the highest taxes in 
the Nation; and second, the District is deferring massive investments 
in critical services and infrastructure improvements. What is the 
magnitude of this deferral? Approximately $2.5 billion of 
infrastructure has been deferred, including renovating crumbling 
schools, repairing the sewer overflow, fixing roads, and putting into 
place the needed security systems to keep District residents and 
visitors safe. More specifically, these needs include:
    Schools.--The D.C. Public Schools have prepared a 10-year 
modernization program for all facilities in need of repair, and to 
execute it would cost $250 million per year over the next 6 years. From 
its capital financing sources, the D.C. Government can probably finance 
only $120 million per year. In addition, approximately 10 new charter 
schools are being established every year, and providing funding for 
these schools is proving to be increasingly difficult, especially in 
the current real estate market. While we are pursuing a strong effort 
to co-locate schools and find other efficiencies, these efforts can in 
no way address the full infrastructure needs of our traditional and 
charter schools.
    The consequences of not doing so would be requiring children to 
attend inadequate schools without the necessary classroom space, labs, 
and athletic facilities needed for a quality education.
    Transportation.--In the area of transportation, the District is 
facing major deferred infrastructure needs in bridges, roads, and 
public transportation networks. In the Metro system, aging 
infrastructure and a massive increase in rider needs now requires 
significant rehabilitation and renewal. The District's share of this 
expansion cost is estimated to be, on average $140 million over the 
next 6 years. The District can finance approximately $70 million of 
that amount, but no more.
    In addition, it is important to note that within the Metro system, 
the District's structural imbalance becomes especially meaningful and 
problematic. Within the WMATA system, most partner jurisdictions share 
the cost of WMATA with their parent States. The District, with no 
parent State, bears the entire cost of WMATA itself. This burden is 
compounded by the high charges that WMATA's subsidy mechanism allocates 
to the District. The Federal Government is a primary beneficiary but 
makes no contribution to its operating expenses, resulting in system-
wide disinvestments.
    Beyond Metro, the District's roads and bridges face similar 
deferred investment. If not repaired, the District's deteriorating 
transportation network will begin to have negative effects on our local 
economy, Federal workers, tourism, and other fundamental elements that 
ensure our viability as a city and the Nation's capital.
    Neighborhood Facilities.--The District operates hundreds of 
facilities that serve residents and businesses across the city. 
Unfortunately, inadequate funding has left many such facilities in 
major need of repair. Every year we must consider a long list of fire 
stations, recreation centers, libraries, and health clinics that have 
major needs, but we can provide resources for only the most serious 
needs, and must defer the remainder. These facilities will require an 
additional $70 million per year over the next 6 years to restore to an 
appropriate level of safety and functionality. Without these 
investments, residents and businesses in the District will see a 
continuing decline in the quality of public facilities, and this 
decline will adversely effect the population growth that we are so 
diligently working to bring about.
    Information Technology.--Eight years ago, the District government 
found itself far behind average government operations in the use of 
personal computers, information databases, and Internet technology. 
Rotary telephones were not uncommon, for example, and the District 
Government's Web site consisted of 20 pages.
    Having first stabilized the basic infrastructure and then 
developing data security and access, the District has the platform from 
which it has begun building integrated enterprise applications. In the 
next phase, the District must systematically reengineer and automate 
its mission critical business processes (from procurement, budget, and 
payroll to social services case management and regulatory enforcement). 
Although the development of these enterprise applications has begun, 
the District will require approximately $130 million per year for the 
next 6 years. The District can only finance approximately $30 million 
of this amount, however.
    These systems are essential not only to basic government 
effectiveness, but to providing the information tools that will allow 
us to better track and serve school children, track and solve crime, 
and provide a much more cost efficient government systems in future 
years. Without additional funding, these goals cannot be fully met.
    We have resorted to these harmful measures of deferring 
infrastructure investment because our options for addressing our 
structural imbalance are truly limited: we can either increase taxes or 
reduce expenditures. The District already charges some of the highest 
tax rates in the country. We have resorted to high rates in part 
because of restrictions on our tax base. A vast amount of Federal 
property in the District is not taxable and we cannot tax the income 
earned by the 70 percent of our workforce that lives outside the 
District. The other option for maintaining a balanced budget is to 
decrease our spending on public services. Our efforts to keep down 
public service costs not only limit services to District residents, but 
they hurt tourists, Federal workers, and visitors from your home 
States.
    As we seek solutions to address the structural imbalance and our 
long-standing problems, it is clear that taxing our residents more or 
providing fewer services are not viable alternatives. Though the GAO 
report noted areas where the District can improve management, the 
report is quite clear that the structural deficit would exist under any 
management structure and even if operational efficiencies were improved 
even more. Even so, it has been a driving priority of my administration 
to improve the efficiency of our government. At the request of this 
committee, I submitted a report in February that presented work being 
performed across the government to enhance operational efficiency and 
effectiveness. These efforts cover the spectrum of administrative, 
financial, and service delivery operations. Through these efforts our 
government has made major strides in improving efficiency and 
effectiveness in many areas. As noted, however, these improvements 
provide only a small part of the solution to the structural imbalance, 
and therefore, I believe the District and Congress have no alternative 
but to make a fundamental change to the financing of District 
operations.

             PROPOSED SOLUTIONS TO THE STRUCTURAL IMBALANCE

    As the GAO considered solutions for the structural imbalance, it 
identified options of changing Federal policy to expand the District's 
tax base or providing additional financial support. There are several 
alternative funding mechanisms that could be adopted by the Federal 
Government to provide this support. In my report to this committee I 
highlighted one very promising vehicle and I would like to emphasize 
this same legislation here today, the ``District of Columbia Fair 
Federal Compensation Act of 2004'' which was recently introduced by 
Representative Eleanor Holmes Norton. This bill would provide the 
District with a dedicated Federal contribution of $800 million a year, 
which is indexed to inflation and may only be used to fund 
infrastructure investments.
    This approach to redressing the District's structural imbalance 
provides what appears to be the best solution because it provides 
relief to the areas we need it most, it addresses the root of the 
structural imbalance problem, and it would allow the Federal Government 
to invest in infrastructure that benefits the Federal Government itself 
and the entire Washington metropolitan area, not just the District of 
Columbia. The Congresswoman is also to be commended for the broad 
regional and bi-partisan support she has garnered for her bill. The 
bill also has support from a broad spectrum of community leaders, 
including Our Nation's Capital, the business community, labor groups, 
environmentalists and health care advocates.
    This bill is not the only viable approach, however. A second 
approach would be for the Federal Government to recognize that its 
charter and presence restrict the District's taxing authority and 
impose additional costs on the District. To offset these restrictions 
and costs, the Federal Government could reinstitute a formula-driven 
Federal payment. This Federal payment could be indexed to the taxation 
restrictions imposed by the Federal Government such as a payment in 
lieu of taxes for Federal property in the District or a payment in lieu 
of non-resident taxation authority that is linked to income earned in 
the District by non-residents.
    A final approach could be for the Federal Government to recognize 
the extraordinary financial burdens placed on the District as a 
locality without a parent State. The District must incur infrastructure 
and operating costs for a wide range of programs that would normally be 
undertaken by or underwritten in whole or part by the State. Included 
are such activities as income tax administration, Department of Motor 
Vehicles, Alcohol Beverage Control, State University (University of the 
District of Columbia), regulatory commissions (public utilities, 
securities, insurance), and mental health facilities. Under this 
approach, the Federal Government could either assume responsibility for 
the operation of State type functions, as it has with the incarceration 
of felons, or reimburse the District for the operation of such 
functions.
    Given the importance of this issue to the District and the Federal 
Government, I encourage you to move legislation that provides a 
structural imbalance solution quickly and urgently. Your public support 
for this issue is paramount for our upcoming efforts to request funding 
for the imbalance in the President's budget.
    There was a time when you and your colleagues may have been 
reluctant to move forward on a structural imbalance solution because of 
a belief that the District was incapable of running itself. This 
premise is no longer valid. At a minimum, the District of Columbia 
merits the fundamental financial foundation that every other city's 
enjoy. In my view, the District of Columbia is the crown jewel of the 
Nation and our resources and financial standing should reflect the 
District's status as the Nation's capital.
    Chairman DeWine, members of the committee, this concludes my 
remarks. Thank you for the opportunity to testify before you today. I 
look forward to answering any questions you may have.

    Senator DeWine. Mayor, we will have some questions in a 
minute.
    Delegate Eleanor Holmes Norton is certainly no stranger to 
this subcommittee. She is here many times, and we appreciate 
always her comments, and we have worked with her on many 
issues, and we welcome her back. Thank you.

STATEMENT OF HON. ELEANOR HOLMES NORTON, U.S. 
            REPRESENTATIVE FROM THE DISTRICT OF 
            COLUMBIA
    Ms. Norton. Thank you very much, Mr. Chairman. I am pleased 
to see that my chairman is here, Tom Davis, with whom I work so 
closely on every issue facing the District. I thank him for 
that.
    In the House we are very grateful to you, Mr. Chairman, for 
focusing the Senate on this matter, and to Ranking Member 
Landrieu for the time and the attention you have given to the 
details of the District economy, and of our finances. May I 
also say how much we respect the way you have respected home 
rule and self government.
    Let me quickly try to make a few points that may not 
otherwise be made. I want to speak to you as a member of 
Congress who was here and saw the District go down, and to say 
to you that Congress did not capture the decline and fall of 
the District of Columbia until it crashed. It did not see it 
coming. The reason was not that they did not do extraordinary 
oversight. The hearings were amazing. The reason was the lack 
of transparency. There was very diligent and detailed oversight 
in both the House and the Senate, very tough, but there was no 
look at what you are doing here today, Mr. Chairman. There was 
no look at the long term.
    Of course, it was easy to do what the States are doing 
today, to kind of pave over things, so that some of it was not 
seen as a crisis. I am particularly grateful that Ranking 
Member Landrieu joined with former D.C. Subcommittee Chair 
Connie Morella and me to produce what is regarded as a 
definitive document, the bipartisan 2003 GAO report. And my 
bill is based on that report.
    I had a front seat at seeing the District go up and come 
down. And my only concern is that we not see that the District 
has 7 years of balanced budgets, see that somehow it is 
balancing its budget and do what was done for decades before it 
went down, because the reason the District is balancing its 
budget is that high taxes and high debt are in fact paying for 
the structural deficit, and the GAO report tells us that cannot 
go on much longer.
    I do want to say to Mayor Williams and to our Council, that 
the progress the District has made is indisputable. Congress 
has complimented the city a lot on it. I think the city is 
right to say we need some help, and not only your very good 
words. Mayor Williams deserves very special credit because he 
served in two critical positions necessary for the 
resuscitation of the District, both as CFO and did such an 
outstanding job there the people actually did what you perhaps 
do not expect people to do, name the CFO as their Mayor.
    But, Mr. Chairman, this could happen again, and when it 
happens again it will not happen suddenly. I will not be put in 
the position I was put in, where the District went down, 
investment bonds degraded, the District did not know quite what 
to do, was not a word from the District, and I had to go to the 
House, because if I did not do it, somebody else surely would 
do it, and say we need a control board. I had to do it because 
the District could not borrow money.
    The homework has been done on my bill. It has been done 
three times. It was done by the Federal City Council. The 
Federal City Council is dominated by regional businesses. The 
McKinsey report that they commissioned found a structural 
deficit. At that point I asked the Bush Administration if they 
would see us so that we could get some help from them. They 
asked, well, have you not commissioned a GAO report? Meanwhile, 
the Brookings Institution, led by Alice Rivlin, the national 
expert on our economy, founding director of CBO, OMB director, 
found the same thing in its own report.
    Finally the GAO report came out and my bill is based on its 
findings. It settled the basis question. There are three 
questions. How much? What is the responsibility? What are the 
options? They say between $470 million and $1.4 billion. Who is 
responsible? Unequivocally, they say generated by the Federal 
Government alone. No matter what the District of Columbia did, 
it could not overcome this Federal deficit. You know what I am 
talking about, services to the Federal Government, use of our 
most valuable land, continued payment for State functions. 
Third question they answered, what are your options? They say 
your options are not raising taxes. You have got the highest 
taxes of the United States because of the structural deficit. 
That is how you pay for it. Your options are not to cut 
services. You need to do just the opposite, to improve 
services. That is what the city is doing now. Having taken that 
off the table, they say in the report, the Federal Government 
would step up to the table in whatever way it decides to do so, 
enter the Fair Federal Contribution Act.
    It is significant that every member of this region is 
signed on to the Act. It was done in total collaboration with 
the city. You have limited approaches. You could go at what the 
Congress already has done, State functions. I do need to inform 
you, since they took some State functions, well, why did that 
not do it? First of all, they left us with the majority of the 
State functions, the majority of the cost. The most important 
thing that Congress did when it passed the Revitalization Act, 
was to take the $5 billion pension liability. It only took two 
State functions. That amounts to $377 million, and at its 
minimum that is not what the GAO says that the structural 
payment costs us.
    I think it would be a mistake to cobble together State 
functions and little by little pass them. This is why I think 
so. If we are to reduce the high taxes of District residents, 
if we are to have any hope of reducing this debt, we need to 
get at least enough money from the Federal Government so that 
the bond markets understand that something important has 
happened, and therefore, the conservative bill I put in, not 
$1.1 billion, not $470 million, but $800 million, would go up, 
would go up every year by the CPI as the Federal payment did 
not, so that by the time the Federal payment that we used to 
have went out of existence--was not worth much anyway, which is 
one reason the District gave it up--we have finally aligned our 
bill in a way I think the Congress would want.
    We say that this is to cover structural deficit. The funds 
would only be used for the structural deficit. Mayor Williams, 
as much as he needs money simply for various operating matters, 
could not use this money in this way. It could be used only for 
infrastructure and other structural matters, service on the 
debt to bring down the debt, bridges, tunnels. Ultimately the 
high taxes in the district would go down. The bond rating would 
go up. We would spend less money for interest. The most 
important reason for doing it all at once is in fact to get a 
hold of the District's ratings. We have the kind of rating they 
have in Virginia, where they do not have to pay millions and 
millions of dollars out in interest.

                           PREPARED STATEMENT

    I hope that the Senate will ultimately see fit to join me 
in my bill, the Fair Federal Contribution Act, and again, I 
appreciate your work for us, Mr. Chairman.
    [The statement follows:]

            Prepared Statement of Hon. Eleanor Holmes Norton

    We greatly appreciate your initiative, Mr. Chairman, in initiating 
this hearing on the most serious financial problem facing the District. 
We are grateful as well for the continuing and beneficial attention of 
Ranking Member Mary Landrieu, and I want to express my great 
appreciation not only for the many ways that both of you have assisted 
the District but also for the principled way you have observed the Home 
Rule Act and respected the right of District of Columbia to self 
government.
    H.R. 4269 (District of Columbia Fair Federal Compensation Act of 
2004) ranks as one of the most important bills that I have introduced 
during my seven terms in Congress. The original co-sponsors are all 
regional House members who know the District best: Government Reform 
Committee Chair Tom Davis (R-VA), Appropriations Subcommittee Chair 
Frank Wolf (R-VA), Democratic Whip Steny Hoyer (D-MD), Congressional 
Black Caucus Chair Elijah Cummings (D-MD), and Representatives Jim 
Moran (D-VA), Albert Wynn (D-MD), and Chris Van Hollen (D-MD). I am 
deeply grateful for their support.
    Without this bill, the long-term viability of the District of 
Columbia is again at risk. This risk arises from a structural imbalance 
caused by expenditures rising faster than revenues. Notwithstanding 
this dangerous situation, the District is able to balance its budget 
every year and avoid operating deficits by maintaining tax rates and 
debt that are among the highest in the Nation. District of Columbia 
Chief Financial Officer Natwar M. Gandhi has issued forecasts that show 
that in the out years, the structural deficit will overtake the city's 
diminished and inadequate tax base, not because of overspending by the 
D.C. government but because of the cost of Federal requirements and 
statutes imposed on the District.
    H.R. 4269 is different from structural imbalance bills I have 
introduced in the past. This bill has as its predicate a May 2003 
Government Accounting Office (GAO) report, which made three major 
findings--the first concerning the size of the imbalance, the second 
concerning its Federal origin, and the third regarding the 
unavailability of options internal to the D.C. government.
    First, the GAO confirmed that the District has a structural 
imbalance which it found is between $470,000,000 and $1,100,000,000 
annually, the first determination that is based on a precise 
methodology for valuing, documenting and calculating the imbalance. The 
congressional report confirms two prior privately commissioned reports 
that arrived at similar conclusions, a 2002 McKenzie study commissioned 
by the Federal City Council (an organization of regional and local 
business leaders) and a Brookings Institution study under the 
leadership of former Congressional Budget Office Director, Alice 
Rivlin, who also served as a chair of the former D.C. Control Board 
(Financial Management and Assistance Authority).
    The GAO's second finding was that the District of Columbia's 
structural imbalance is caused by Federal mandates and is therefore 
beyond the reach of D.C. government officials and taxpayers. The 
Federal Government retains 42 percent of real property, the most 
valuable in the city, for its own use; requires the city alone to 
provide costly State services, such as special education, although the 
District is not a State and lacks a broad State tax base; requires the 
District to provide services to more than 200,000 Federal employees, 
who earn 66 percent of the income produced here; and prohibits taxation 
of Federal workers to help pay for these services. These costs to the 
city trace directly to the Federal Government and only the Federal 
Government.
    The GAO's third finding is that the only two options available to 
the District government are raising taxes and cutting services, each of 
which the GAO said it could not recommend. Rather, the options are to 
``change Federal procedures and expand the District's tax base or 
provide additional financial support and a greater role by the Federal 
Government to help the District maintain fiscal balance,'' according to 
the GAO.
    Our bill is based on these three GAO findings. The bill offsets 
part, though not all, of the annual structural imbalance, by providing 
for an annual Federal contribution of $800 million. These funds are to 
be deposited into a D.C. Infrastructure Support Fund that cannot be 
used for operating expenses but only for the specifically stated 
infrastructure purposes.
    The bill removes some of the harm to the District's investment bond 
rating and the resulting high interest payments by requiring that 
Federal contribution funds go only to the District Infrastructure Fund 
to be used exclusively for infrastructure and for debt service, most of 
which is debt from infrastructure costs. The focus on infrastructure is 
deliberate because such infrastructure costs are State costs and 
because much of the District's infrastructure is used by the entire 
region, where 80 percent of the vehicles originate and includes Metro, 
used overwhelmingly by regional residents. Regional complaints about 
the District's roads, bridges and tunnels are justified, but there is 
no reasonable hope of repair and maintenance if the District's 
taxpayer-raised budget is the only source. The focus on debt service is 
calculated to reduce the District's debt, the highest per capita in the 
country. With some relief from the structural imbalance through a 
Federal contribution, the District will gradually be able not only to 
reduce its debt but also to lower the high tax rates that the imbalance 
forces on D.C. residents and businesses. This bill also takes into 
account past Federal contribution failures. H.R. 4269 does not allow 
the contribution to wither away by a failure to increase gradually with 
inflation but provides for annual increases tied to the Consumer Price 
Index.
    In 1995 Congress began to come to grips with the reality that a 
city whose structure assumes it is a State although it lacks a broad 
tax base can no longer be responsible for the full set of costs 
shouldered by States. Congress relieved the District of the costs of 
some but not all State functions and left the unique Federal structural 
impediments described in the GAO report. The District has made 
remarkable progress by maintaining balanced budgets and surpluses every 
year despite adverse national economic conditions and by improving city 
services. It would be tragic for Congress to allow this progress to be 
retracted because of uncompensated Federal burdens. This bill allows 
the District to avoid great risks and to continue to build fiscal 
strength.

    Senator DeWine. Thank you very much.
    Congressman Tom Davis has really been a leader in 
initiating reform for the District of Columbia.
    Mr. Chairman, we thank you for being with us and we look 
forward to your testimony.

STATEMENT OF HON. TOM DAVIS, U.S. REPRESENTATIVE FROM 
            VIRGINIA
    Mr. Davis. Thank you for the opportunity to testify, Mr. 
Chairman, before your subcommittee today on the financial 
challenges facing the District of Columbia.
    Ever since the D.C. Home Rule Act was signed into law in 
1973, the District Government and the Congress have been unique 
partners with one of the most challenging aspects of the 
relationship being the role the Federal Government has set 
forth in Article I, Section 8, Clause 17 of the Constitution.
    The District has the characteristics of both a city and a 
State. Congress quite frankly has never come to terms with how 
to treat the Nation's capital. The Founding Fathers created a 
Federal enclave to house the Federal Government, never 
envisioning the Nation's capital to grow to become one of the 
largest and most prosperous cities in the country.
    This unique dynamic has caused Congress to continually 
reevaluate its relationship with the District, from 
establishing an appointed D.C. Council in 1967, the creation of 
an elected mayor and council in 1973, to the creation of a D.C. 
Financial Responsibility and Management Assistance Authority in 
1995, and the passage of the Revitalization and Self-Government 
Improvement Act of 1997.
    The Revitalization Act fundamentally transformed the 
relationship between the District and the Federal Government by 
transferring many of the State-like responsibilities placed on 
the District Government to the Federal Government. Through that 
legislation the Federal Government assumed responsibility for 
the District's pension system, criminal justice system and 
court system, all of which are considered State 
responsibilities that the Nation's capital, as a city, should 
not be expected to bear.
    The transfer of financial responsibility in the 
Revitalization Act relieved the city of its most pressing 
exploding liabilities, but unfortunately, we were unable to 
capture all of the State-like functions imposed on the District 
in the 1997 legislation. We think it is time to finish the job. 
By cosponsoring Mrs. Norton's legislation, I want to make clear 
my commitment to help her in leading that effort.
    We are here today to discuss how to best finish what was 
started in 1997. Our message at that time was the Federal 
Government is, in effect, ``the State'' for the District of 
Columbia. Starting from this same premise would serve us well 
in considering any future reforms to the financial structure of 
the city.
    One viable option would be the approach laid out in Mrs. 
Norton's legislation, which I cosponsored. Her legislation 
would authorize the creation of a narrowly-defined 
infrastructure fund that would direct Federal funds to where 
they are needed most, to roads, schools and information 
technology. The simplicity of this approach would provide much 
needed transparency by enabling the GAO to, at our request, 
scrutinize the administration of funds to ensure that the money 
is being spent effectively and properly.
    While Ms. Norton's legislation has helped to focus 
discussion in Congress on how to best address the structural 
imbalance in the city, the Federal payment it authorizes is 
based on a ballpark estimate rather than hard numbers. 
Fortunately, however, the District, at your request, Senator, 
has come up with the informational foundation necessary to 
assist Congress in determining the amount of Federal investment 
to be required to cover the city's infrastructure investment 
needs.
    The unfortunate reality of the District's current financial 
situation is that it forces the city to delay the type of 
infrastructure improvements that can only be delayed for so 
long. Road, schools, government office buildings are showing 
signs of serious disrepair. The city has been unable to make 
the type of IT investments that yield real financial and 
citizen service returns. With the exception of the city's tax 
office, the IT investment revolution that has occurred in local 
governments across the country has bypassed the District of 
Columbia and the city is missing out on the benefits of such an 
investment.
    Given the financial situation that existed in the early 
1990's in the District, some members may be skeptical about 
providing additional Federal assistance to the District, but 
let us be clear, with the help of the Control Board and the 
Revitalization Act, the District, under the leadership of Mayor 
Williams, has taken care of its financial house. It has 
balanced its balance now for 7 consecutive years. They have 
done a better job than we have in the Congress. They have done 
it without tricks or gimmicks, and it has a cash reserve that 
is the envy of most municipalities in the country. Whether it 
is Cleveland or New Orleans or Baltimore or Richmond, cities 
across the country generally get extra help from the States in 
funding formulas for schools, welfare and the like, and much of 
the city's tax base also in the city cannot be used because it 
is Federal property.
    So to drive home the need for a Federal investment, we are 
not here discussing some random city, this is the Nation's 
capital. This is the gateway to the free world, and maintaining 
it, growing it and modernizing it is a national responsibility.
    If we were making a decision not to provide financial 
assistance, local officials will continue to do what they are 
doing, balancing the budget and borrowing responsible, but 
understand, they are doing this under extremely small margins 
if we decide not to partner with the local government and 
maintaining the infrastructure, the impact will be visible. It 
will not just be visible to the public school student that is 
stuck in a dilapidated building, but to the hundreds of 
thousands of Americans who visit here each year and foreigners 
who visit the Nation's capital each year.

                           PREPARED STATEMENT

    In closing I want to commend your dedication to working 
with the city to finish the job we started in 1997, and look 
forward to working with you.
    [The statement follows:]

                  Prepared Statement of Hon. Tom Davis

    Mr. Chairman, thank you for the opportunity to testify before the 
subcommittee today on the financial challenges facing the District of 
Columbia. Ever since the D.C. Home Rule Act was signed into law in 
1973, the District government and the Congress have been unique 
partners, with one of the most challenging aspects of the relationship 
being the role of the Federal Government as set forth in article 1, 
section 8, clause 17 of the United States Constitution.
    The District of Columbia has the characteristics of both a city and 
a State. Congress, quite frankly, has never come to terms with how to 
treat the Nation's Capital. The Founding Fathers created a Federal 
enclave to house the Federal Government, not envisioning the Nation's 
Capital to grow to become one of the largest and most prosperous cities 
in the country.
    This unique dynamic has caused Congress to continually re-evaluate 
its relationship with the District, from establishing an appointed D.C. 
Council in 1967 and the creation of an elected Mayor and Council in 
1973, to the creation of a D.C. Financial Responsibility and Management 
Assistance Authority in 1995 and the passage of the National Capital 
Revitalization and Self-Government Improvement Act of 1997.
    The Revitalization Act of 1997 fundamentally transformed the 
relationship between the District and the Federal Government by 
transferring many of the State-like responsibilities placed on the 
District government to the Federal Government. Through that 
legislation, the Federal Government assumed responsibility for the 
District's pension system, criminal justice system and court system, 
all of which are considered State responsibilities that the Nation's 
Capital, as a city, should not be expected to bear.
    The transfer of financial responsibility in the Revitalization Act 
relieved the District of its most pressing, exploding liabilities. But 
unfortunately we were unable to capture all of the State-like functions 
imposed on the District in the 1997 legislation. It is now time to 
finish the job. By cosponsoring Congresswoman Norton's legislation, I 
wanted to make clear my commitment to help lead that effort.
    We are here today to discuss how best to finish what was started in 
1997. Our message at that time was that the Federal Government is, in 
effect, the ``State'' for the District of Columbia. Starting from this 
same premise would serve us well in considering any future reforms to 
the financial structure of the District.
    One viable option would be the approach laid out in Ms. Norton's 
legislation, which I cosponsored. Her legislation would authorize the 
creation of a narrowly defined infrastructure fund that would direct 
Federal funds to where they're needed most--to roads, schools and 
information technology. The simplicity of this approach would provide 
much needed transparency by enabling GAO to, at our request, scrutinize 
the administration of funds to ensure that the money is being spent 
effectively and properly.
    While Ms. Norton's legislation has helped to focus discussion in 
Congress on how best to address the structural imbalance in the 
District, the Federal payment it authorizes is based on ballpark 
estimates rather than hard numbers. Fortunately, however, the District, 
at Chairman DeWine's request, has come up with the informational 
foundation necessary to assist the Congress in determining the amount 
of Federal investment be required to cover the District's 
infrastructure investment needs.
    The unfortunate reality of the District's current fiscal situation 
is that it forces the city to delay the type of infrastructure 
improvements that can only be delayed so long. Roads, schools and 
government office buildings are showing signs of serious disrepair. The 
city has been unable to make the type of IT investments that yield real 
financial and citizen-service returns. With the exception of the 
District's Tax Office, the IT investment revolution that's occurred in 
local governments across the country has bypassed the District of 
Columbia, and the city is missing out on the benefits of such an 
investment.
    Given the financial situation that existed in the early 1990's in 
the District, some members may be skeptical about providing additional 
Federal assistance to the District. But let me be clear: with the help 
of the Control Board and the Revitalization Act, the District has taken 
care of its financial house. It has balanced its budget for 7 
consecutive years, without tricks or gimmicks, and it has a cash 
reserve that is the envy of every municipality in the Nation.
    To further drive home the need for a Federal investment, we are not 
here discussing some random city. The District of Columbia is the 
Nation's Capital, and maintaining it, growing it and modernizing it--
these are national responsibilities.
    If Congress makes the policy decision not to provide financial 
assistance to the District, I am confident local officials will 
continue doing what they're doing: balancing the budget and borrowing 
responsibly. But understand that they're doing this with extremely 
small margins. If we decide not to partner with the local government in 
maintaining the infrastructure of the Nation's Capital, the impact will 
be visible. It won't just be visible to the public school student stuck 
in a dilapidated building, but to the hundreds of thousands Americans 
who visit here each year and expect a vibrant, safe and beautiful 
Nation's Capital.
    In closing, Mr. Chairman, I would like to commend your dedication 
to working with the District to finish the job we started in 1997. I 
look forward to working with you, Congresswoman Norton, and the Mayor 
on a collaborative approach to solving this issue.

    Senator DeWine. Chairman Davis, Ms. Norton, let me first 
congratulate both of you for moving forward on this 
legislation. It is clear that we face a crisis. It is a long-
term crisis, and we must move. So I thank you for your 
leadership.
    Let me ask you both, and start with Chairman Davis, and you 
have touched on this a little bit, but I wonder if you could 
get into a little more detail about how you came up with the 
$800 million figure.
    Second, talk to me a little bit, Mr. Chairman, about the 
politics of this. Money is fungible. There are a lot of 
different ways. I know that you had to think about how you were 
going to approach this. You said very eloquently and very 
correctly that the best way to look at this is to look at what 
the real problem is, and that is that no one is acting as a 
State for the District of Columbia, and so the Federal 
Government really has to act as the State. We know that there 
are many pieces of legislation we could go back into, and 
basically put the Federal Government in the role of as the 
State, and that would be one way of changing formulas in 
legislation. That would be one way, or we could all sit here 
and think of four, five different ways.
    Mr. Davis. Let me address the politics.
    Senator DeWine. You came up with this way, and it sounds 
like a good way to me, but how did you come up with it, I 
guess?
    Mr. Davis. Let me have Ms. Norton address the $800 million. 
She can talk to you a little bit. Let me talk to you about the 
politics of this. First of all, instead of putting this money 
into the government slop bucket, which is what Congress would 
consider a city budget where the politicians can spend the 
money freely on their pet programs, and this happens not just 
in the city, in fairness. It happens here and everywhere else 
in the country.
    We are putting this in an infrastructure fund where you 
will be able to measure the results, you will be able to see 
the results in new schools, in new roads, maybe perhaps a new 
water system, those kind of issues that everybody considers 
important and that need to be done, and that because of the 
District's low margins and in the past perhaps some failed 
leadership, money was not put into those funds.
    That is politically viable. Getting it to the local 
politicians to spend is probably not going to be viable up here 
on Capitol Hill. But remember the infrastructure of this city 
is visible to all Americans, as in the Nation's capital, 
visiting a country. So we think the approach by putting it in 
the infrastructure, which is badly--indeed, it is important.
    Secondly, let me just say the school system has been the 
hardest nut to crack of all of the city's problems. It is a 
failed school system by almost any standard, with the average 
school building being over 50 years of age, and that is an 
investment in the youth of this city. It is starting to turn 
around, but it is just a long haul, and that is a very needed 
investment.
    I would just say prior to the closing of the Lorton Prison, 
there were literally high schools in this city that were 
sending more kids to Lorton as alumni than they were to 
college. That is starting to turn around a little bit, but that 
infrastructure is important for the safety of the city and for 
the future of this city as well, so that is why we put it into 
infrastructure.
    Eleanor, I think can address the $800 million.
    Ms. Norton. Just very quickly. I know Chairman Davis wants 
to work with me on the figure. He indicated that when he signed 
onto the bill. It is true it is not a scientifically based 
figure. The Federal payment never was, and there may be a more 
scientific way to go at it, and I would be very open to working 
on that.
    On fungibility, that is a very important point, Mr. 
Chairman. All money is fungible. I hate to use that word that 
perhaps is discredited now, the Congress lockbox, but this is a 
lockbox I think would work, because the District of Columbia 
has to come here before the Appropriations Committee every 
single year, and in fact, this money will be looked at every 
single year. The bill is very explicit about where the money 
can go.
    We have transparency now. We have a CFO. We have a Council 
that operates in the same way. I do not think this could be 
hidden. Let me say the $800 million just to show you that this 
is not an elaborate figure.
    When we gave up the Federal payment, it was almost $700 
million. I think it is rather conservative almost 10 years 
later to start with $800 million and not with some larger 
figure, particularly given the GAO report. And finally, as a 
perfect example of what the Mayor was talking about, remember 
some of this money would go for capital costs and debt to 
capital costs, which would mean some capital costs in the 
schools.
    What the District had to do--I guess it was a couple of 
years ago--is simply stop building schools. The Mayor had 
proceeded to build schools, but all the money had to be moved 
out of that because of the state of the economy, and they are 
lucky to even repair schools now, much less build them.
    Thank you very much.
    Senator DeWine. I have been given a capital cities 
comparative analysis, and I am sure that someone could attack 
the figures here and say we are comparing apples to oranges, 
but it is of interest. And percentage of total city budget from 
the national government, comparing some of the major capital 
cities in the world, London is 83 percent. Brasilia is 72 
percent, Caracas 66 percent, Mexico City 39 percent, and then 
Washington, DC is 10 percent.
    You all have a yellow sheet in front of you. It is of some 
interest.
    Congressman Davis, tell us a little bit what a benefit 
payment like this would mean to the region.
    Mr. Davis. To the region it would be significant. First of 
all, transportation, anybody who tries to get into the city on 
a non-crisis day without an accident, it is an ordeal. This 
could help the transportation infrastructure and therefore the 
efficiency of Government considerably. Moving people back and 
forth and sitting in cars is not a very effective utilization 
of some of the most highly trained and important people in the 
Government. Building a telecommunication system, right now, if 
you have ever tried to use a cell phone around here, all of 
these issues I think go to the efficiency of Government, which 
is really congressional oversight.
    My theory has always been a lot of the city stuff they can 
deal with issues that affect the citizens of the city, but when 
it comes to the operation of Government, we have a decided 
responsibility to step in. A water system that works--and we 
have seen recently where the system is deteriorating again 
through lack of investment through the years. We talked about 
the school system prior to this.
    But we have an infrastructure in this city that your 
statistics show it well. The city has been so stretched just to 
make its payments, just to get kids to school, get them on the 
buses and run the basic operations of government, that the 
overall maintenance of the infrastructure has suffered. It is 
going to catchup with us very, very quickly because there is no 
visible means for the city to step forward and do much else 
given its other obligation.
    I just note one other thing. The city is short-changed in a 
number of the funding formulas, that if this were a city in any 
other State, the State formulas would make up for it. The 
Medicaid payments alone, I think the city, through an error 
that everybody acknowledges, is losing something like $17 
million a year.
    Senator DeWine. If I could just follow up, that was my 
point originally, that if you were trying to fix this, one way 
you could possibly fix it is to go into those different 
formulas, but maybe politically this is an easier way of doing 
it. That is what I was mentioning.
    Ms. Norton. Mr. Chairman, I just want to give you one 
example in response to your question and to Chairman Davis's 
explanation. Metro payment, we have the highest metro payment 
in the region. Of course this is the part of the region that is 
least able. Appreciate that this committee gave us $3 million 
toward that. Our Metro payment is $160 million. In Virginia I 
believe half of that is paid by the State. In Maryland all of 
it is paid by the State. So there is recognition that even our 
two neighbors, one of the richest counties in the United 
States, should not be paying for Metro payment by themselves, 
and yet the District is paying the entire payment of about $160 
million--the Mayor can correct me if I am wrong--all by itself, 
and it is one of the most urgent ways in which the 
infrastructure payment would be paid.
    Senator DeWine. My time is up. I am going to turn to 
Senator Landrieu for any statement she has to make and for any 
questions.

                 STATEMENT OF SENATOR MARY L. LANDRIEU

    Senator Landrieu. Thank you, Mr. Chairman, and I will 
submit my full statement to the record, because as you know, I 
am extremely interested in finding a solution along with you 
and the members of our committee and the leadership of the 
city, and I really appreciate this leadership team's dogged 
determination to continue to pursue a remedy, because it is 
clear that we need, Mr. Chairman, to find a solution to what is 
now documented as a real structural imbalance. In other words, 
the GAO study that was completed, following several other 
studies in recent years that have continued to raise this 
issue, have gotten us to a point where I think it is clear to 
most that no matter how efficient the District is, no matter 
how competent the leadership of the city is--and I think we 
have very competent leadership--that there is still a 
difference between the capacity of the ability to raise taxes, 
which are some of the highest in the Nation. This is a city 
that is taxed one of the highest in the Nation, property tax, 
income tax, sales tax, fees and services. There is not a lot 
more taxing capacity out there. As the Mayor and the City 
Council and others, and the Congresswoman of course, have made 
efficiencies greater, what we are finding is there is still a 
structural imbalance.
    Part of it, Mr. Chairman, is driven by the fact that the 
city is here, living, co-existing in a way with the Federal 
Government, which by its very nature drives up salaries, drives 
up--which is good. I mean we do not want to pay people little 
in the Federal Government so our salaries are fairly high with 
a fairly generous, or adequate to generous benefit structure. 
So it sort of drives the city of Washington to have to compete 
with those kind of salary structures in the metropolitan area, 
and as a result there is a real shortfall.

                           PREPARED STATEMENT

    So whether we do a direct payment and how much that payment 
is, or whether there is another way that we can try to solve 
this structural gap, I am looking forward, Mr. Chairman, to 
working with you to explore the options that are before us for 
the benefits of the residents and the benefit of all of the 
citizens of our great country who look to this place as their 
special place as well.
    I will submit the rest of my statement for the record.
    [The statement follows:]

             Prepared Statement of Senator Mary L. Landrieu

    The Senate Appropriations Subcommittee on the District of Columbia 
meets today to discuss an elusive problem in the financial system of 
the District. For many years discussion of an imbalance in the 
structure of the city's finances circulated on the edges of political 
and legislative work in Congress and the District. Recently, a clear 
focus on identifying the problem and recommending solutions has 
developed, particularly due to the leadership of many represented here 
today.
    The elected leadership of the District, business leaders, and 
outside experts have all come to focus on the unique challenge faced by 
the city to provide services and maintain financial stability. We have 
learned that the unique structure of the District does not allow for 
the revenues and expenditures to meet under the current circumstances. 
The resulting financial structural imbalance is the subject of our 
hearing today and I expect to discuss many ideas. I hope that with the 
commitment of my chairman, Senator DeWine, this subcommittee will 
contribute to action to address the imbalance.
    The General Accounting Office (GAO) released a definitive report on 
the financial structural imbalance in the District of Columbia in June, 
2003. GAO defined the imbalance as an inability to provide a 
representative array of public services by taxing at representative 
rates. The District is the only municipality in the country that must 
exercise responsibilities of a city, county, State, and school 
district. The District has the ability to tax all these levels of 
government, but the tax base is not sufficient to pay for the services 
it must provide.
    The GAO found that the District's tax burden is among the highest 
of all other city/county systems in the country, between 33 percent and 
18 percent higher than that of another locality. The high burden only 
yields revenue to support an average level of services. However, a 
solely urban area with a high concentration of poverty has a higher 
cost of delivering services. The same is true in my home city of New 
Orleans, however there are suburban and rural areas surrounding which 
contribute to evening out of the tax base.
    The District has been criticized for having a much higher level of 
spending per capita, but without a similarly high level of service 
delivery. In fiscal year 2000 the District spends $9,298 per capita 
compared to a national average of $5,236. Many complain that it is due 
to management inefficiency that the city spends more than any other but 
still has average or below average services. The GAO study was able to 
put a more fine point on what has been the source of much deriding of 
the District--the high cost of delivering services in the city means 
that high spending will only achieve average services.
    The imbalance cannot be closed only by delivering services more 
efficiently. The tax base in the District is just too small to sustain 
the level of services necessary for a typical city. Therefore, leaders 
in the District and in Congress must think creatively about how best to 
approach a gap which will not close itself. This committee has a 
responsibility to examine the challenges faces the District and 
contribute, however appropriate, to a resolution. As the State-like 
entity for the city, we must ensure the city's continued financial 
stability, and step in if necessary to address pressure.
    In a May 5, 2004 report to the committee from the Mayor, three 
models were proposed to address the structural imbalance. The city has 
endorsed H.R. 4269, the Fair Federal Compensation Act, introduced by 
Congresswoman Eleanor Holmes Norton and Representative Tom Davis, here 
with us today. H.R. 4269 would create an $800 million annual payment to 
the District for infrastructure investments. A second option is an 
unrestricted Federal payment to this city like the payment prior to 
1997. The third option offered is for Congress to assume additional 
State-like functions with the Federal Government assuming program 
responsibility or reimbursing the city for operations.
    I would like to offer an additional option to consider by the 
panelists, an approach which may be more feasible in the current fiscal 
outlook of the Federal and local budgets. If the Federal Government 
were to provide approximately one-third of the funds needed to meet the 
gap. The Congress may be more compelled to partner with the District 
with new funds if the city were to commit to one-third of new funding 
derived from management savings. Finally, the city and Congress could 
partner to increase Federal grants and formula funds to the District by 
one-third, such as the Medicaid match rate.
    I would appreciate hearing from the witnesses today if an option 
such as the one I've described could be feasible. I would be interested 
to hear if there are concerns over the reliability of such funds on an 
annual basis. I believe this is the right time to revisit the current 
relationship between the District and Congress. The last major piece of 
legislation which affected that relationship was the National Capital 
Revitalization and Self-Government Improvement Act.
    In 1997 the Congress and the District government struck a ``new 
deal'' on the share of services which would be paid for by the Federal 
Government. The annual Federal payment to the District was phased out 
in lieu of Federal oversight of the criminal justice functions and the 
responsibility for most public pensions. By doing so, the Congress also 
took oversight responsibility in addition to funding, of the criminal 
justice agencies in the District--the D.C. Courts and the Court 
Services and Offender Supervision Agency. Within these entities are the 
functions for representation of defendants, to incarceration and 
rehabilitation to supervision of offenders throughout the justice 
process. The District government works with these entities, but their 
funding and operations are solely overseen by Congress and this 
committee in particular.
    Although this ``new deal'' relieved the city from the 
responsibility of two major functions typically done by States, there 
are still other functions which States, like my home of Louisiana, 
operate with State tax revenues. The functions which immediately come 
to mind are State education and transportation. In Louisiana, the State 
has its own board of education to oversee implementation of both 
Federal and State education standards in all of the elementary and 
secondary school districts, as well as the accompanying funding. In 
addition, the State oversees and funds operation of State colleges and 
universities. The Congress provides limited funding and even more 
limited oversight to the public education system in the District.
    As a contribution to the State function of ``university'', Congress 
provides annual funding to the Tuition Assistance Grant Program. The 
TAG program has been funded at $17 million annually the last 4 years; 
however the cost of providing grants to every high school graduate in 
the District to attend a public or private school outside of the city 
is rising. The goal of this program was to make up the difference 
between in-State and out-of-State tuition for D.C. students to attend 
State universities elsewhere in the United States. It has been 
extraordinarily successful and is seen as a benefit to residents who 
would be paying high tuition because they maintained their residence in 
the District.
    In order for the Congress to continue fully funding this program, I 
believe it will need to be considered as part of any restructuring of 
the financial relationship between the District and Congress. Post-
secondary education is typically a State function. If Congress is to 
provide full funding, it may follow that Congress would want full 
oversight of the operation of a program which is currently local in 
nature.
    I would like to explore with the panel the appropriate relationship 
between the District and Congress in providing oversight of Federal 
funds. If the amount of funds should represent the level of oversight, 
ours would be limited in the special appropriations provided to the 
District. The $3 million provided in fiscal year 2004 by this 
subcommittee to subsidize the Metro operating payment is minuscule 
compared to the over $260 million the District of Columbia must pay 
each year to Metro. Yet, this $3 million was highly symbolic in 
recognizing that the Federal Government has a role and responsibility 
in these funds. In a time of constrained Federal and local spending and 
rising deficits, a prudent course would be to maximize every dollar.
    I look forward to reviewing the current options for addressing the 
imbalance. I hope that this committee will partner with not only the 
leadership of the District and the House of Representatives, but also 
with the business and trade community in the city, and experts from all 
fields and pool our resources to make the capital city all that we know 
it can be.

    Senator DeWine. Let me just make one additional comment. I 
certainly want to agree with the comments made by all three of 
you and the comment made by Congressman Davis that this is the 
Nation's capital, and we do have an obligation from a security 
point of view, and in just from the point of view of the people 
who come here and the people who live here, to deal with some 
of the basic things. You turn on your water, your water ought 
to be so you can drink it. Kids go to school, they ought to be 
decent schools. This is a target area for terrorists. We have 
to worry about this. We have to deal with the basic things of 
governance. Because this is the Nation's capital, some of the 
things that we are doing cost more. There are security issues 
that exist here that simply do not exist in every other city in 
the country or most other cities in the country, and these are 
just costs.
    The Federal Government, frankly, has made it very difficult 
for the District of Columbia to exist, and we just have to 
recognize that, in what we are doing just in working. I think 
the District Mayor is doing a good job, but we just have to 
give you some more assistance.
    How we do it can be debated, and whether it is this bill, 
which I find to be a good bill and a very, very, very rational 
approach, or whether if other people find that it needs to be a 
different way, I am open to that too, but we need to do 
something and we need to move forward.
    Mayor.
    Mayor Williams. If I could say something, Mr. Chairman, 
Chairman Davis mentioned this and Congresswoman Norton as well. 
The transportation infrastructure is of concern to the national 
government because we are the Nation's capital, as you 
mentioned, and because a huge part of your workforce is using 
this infrastructure. I think we have some 470,000 people come 
in here on a daily basis. I think we are the second or third 
largest in the country. This also has homeland security 
implications because as Congressman Davis has mentioned, you 
try to drive around in the morning or parts in the evening, and 
you are not driving, you are crawling. On top of this 
situation, we close Pennsylvania Avenue and we close E Street. 
We really have not done anything to address that, and that 
further intensified the congestion, and I think we have a real 
problem. We need to address it.
    That is all I can say.
    Senator Landrieu. I just want to make----
    Senator DeWine. Senator Landrieu.
    Senator Landrieu. Thank you, Mr. Chairman. Just two 
comments on something you said, and what the Mayor has just 
said prompted me to. In addition, I think our strongest 
argument for coming up with some remedy, some significant 
remedy is that this city is the number one target for 
terrorists, and as the Commission has finished its work and 
moved to its work, we understand more of the details of what 
the original 9/11 thought was. We understand that not all 10 
planes were headed to the District, but the District of 
Columbia was one of the No. 1 targets, along with several 
others around the Nation. So for the 500-plus residents that 
live in the District, I think the Nation has a special 
obligation towards their protection, and it needs to be on a 
fairly consistent and sustainable and pretty substantial basis.
    So besides the Metro, which I think is also a very pressing 
and compelling argument, Mr. Chairman, because without a good 
transportation system the whole region is negatively affected 
and it is to the whole region's benefit, in addition to the 
residents that live here and the workers that work here, and 
those of us that are in and out temporarily representing our 
cities and our States here in Congress, having a--to lay the 
argument on top of what we have already laid down on the 
terrorism front.
    The other point that I want to make, Mr. Mayor, and ask you 
and maybe the Congresswoman, if she wanted to make just a brief 
statement, about our ability to attract new residents to the 
city and what one or two strategies, without going into too 
much specific detail, but, Mr. Mayor, we have talked about this 
before. I think you have a couple of different strategies to 
attract new residents, therefore expanding the tax base. If you 
cannot tax the people that live here more, one other way to get 
more taxes is to attract more people to the city that could pay 
taxes. So it is a several-pronged approach. And what do you 
think maybe one or two of your most promising strategies would 
be for bringing people to the District? And Congresswoman or 
Congressman Davis, you might want to comment as well.
    Mayor Williams. Senator, I have always believed that it is 
the three publics that draw people back to your city and expand 
your tax base in that way. One of the three publics is Public 
Works, and we have talked about transportation. I am going to 
be less likely to live in a city if I cannot get around. With 
the kind of infrastructure investment we are talking about, the 
city could invest, for example, in light rail. When we are 
investing in light rail we are minimizing to the extent 
feasible, investment in heavy rail. Heavy rail could cost you 
$300 million a mile as opposed to light rail, which costs you 
substantially less. You also get the economic impact of light 
rail along that corridor. That is just one example.
    Congressman Davis and Congresswoman Norton were mentioning 
technology. Technology has direct impact on policing and public 
safety because there are a number of different tools you can 
use in technology to improve your public safety presence in the 
neighborhoods. One that is being used around the country, for 
example, and there is some debate about this, but it has had 
substantial effects, for example, in cities like Chicago, in 
commercial areas, is the very judicious use of cameras and 
surveillance systems. This has had a significant reduction in 
crime in some of those areas. That is an example of a 
technology investment.
    And last, and this is the hardest nut to crack, is in our 
public schools. The situation we are facing in our schools is 
actually that the overall number of children in the quote, 
unquote, public school system, is not diminishing, it is 
actually growing. Now, the distribution between the regular 
public schools and the charter schools is shifting. So we need 
to, between the regular public schools and the charter schools, 
see that these kids have the best facilities, and this kind of 
infrastructure investment that we are talking about here would 
allow our city to invest in a modernization plan that allowed 
our school facilities to improve as, hopefully--and I believe 
this will happen with the charter school movement and other 
efforts--our instructional program improves, and that is 
definitely the most important thing you can do to recruit and 
retain new residents.
    Ms. Norton. I would like to say one thing in response to 
this. Alice Rivlin, when she left the Control Board, said that 
the District, in order to remain viable, has got to have 
100,000 new residents, and I think the Mayor has adopted that 
as a goal as well. She did not mean that you had to get that 
overnight because she is too smart to mean that. In fact, it is 
a very long-term goal.
    When I was a kid growing up in this town, instead of almost 
600,000, there were over 800,000 people, and you can imagine 
what it is going to take to get back the population. There are 
two strategies in place now. Give the Mayor and the City 
Council credit for the first one. The reputation of the 
District of Columbia had changed. There was a time when a lot 
of folks did not want to live here. They did not know a lot 
about this. But now the District itself looks like a better 
place to live because of our local elected officials.
    The only other strategy we have in place, and it is one 
that has worked, is something that this body, as well as the 
House--in fact, the Senate was where I worked most closely, was 
the $5,000 home buyer credit. The $5,000 home buyer credit 
has--and studies have been done to show this--has the effect 
of, No. 1, keeping renters who were the most inclined to move 
out here because they buy, goes way up the income line, it goes 
considerably up; and secondly, drawing new people to the 
District of Columbia. By the way, that has passed the House as 
a part of a larger bill, now passed the Senate as part of a 
larger bill. It will be retroactive, and it has been a very 
important stabilizing force in the District of Columbia.
    Mr. Davis. If I could just take a second. The business 
base, obviously, is going to be critical because the old adage, 
as somebody who chaired the County Board in Fairfax, as a 
equivalent function there, the adage was, when residents move 
in it costs you money. Businesses come in, you make money on 
your businesses. The reason residents cost you is because it 
costs money to educate their kids, a lot, and the city pays 
more per student I think than Fairfax does. But the business 
base has really expanded here, and with the leadership of the 
Mayor, it has really helped. You look at downtown today 
compared to where it was, the MCI Center, the new Convention 
Center, the businesses and the cranes going up down there, and 
they are looking at other parts of the city too, and they are 
going to continue to look for us for help on the waterfront 
areas, around the Navy Yard, upper New York Avenue.
    I look ahead at the possibilities for expansion, the 
business base in this city, and I think it is significant. We 
do not consider it a zero sum game where they are taking from 
the suburbs either. I think we have come to understand that we 
are all in this together. But there is room there, and the city 
has now produced an economic climate that I think makes it 
economic for businesses to come.
    Ms. Norton. The bill you have passed also has business tax 
credits which have been very instrumental. And, Mr. Chairman, 
the bill that you sponsored, I cosponsored and was sponsored 
and cosponsored in this Senate, has been very important. If you 
had a couple of kids and they were getting to be college old, 
this was the time to get out of Dodge and go to Maryland, 
Virginia. And the College Access Act now encourages people all 
over the District, it does the same thing.
    Senator DeWine. It is very important, absolutely.
    Well, we thank you very much. You have been very, very 
helpful, and we look forward to working with you on your 
legislation.
    Thank you very much.
    Mayor Williams. Thank you too.
    Senator DeWine. Let me invite our second panel to come up, 
and I will introduce you as you come up. Senator Fred Thompson 
is President of the Federal City Council, a business supported 
nonprofit, nonpartisan organization that works for the 
improvement of our Nation's capital. From November 1994 until 
January 2003, Senator Thompson, of course, served the people of 
Tennessee in this body, where he chaired the Committee on 
Government Affairs. His impressive career includes positions of 
counsel to the Senate Watergate Committee, the Senate Foreign 
Relations Committee and the Senate Intelligence Committee.
    Dr. Alice Rivlin is a Senior Fellow in Economic Studies at 
the Brookings Institution, and Director of the Brookings 
Greater Washington Research Program. She is also a visiting 
professor in the Public Policy Institute at Georgetown 
University. She was Chair of the District of Columbia Financial 
Management Assistance Authority from 1998 to 2001. She also 
chaired the Commission on the Finances of the District of 
Columbia from 1989 to 1990.
    Ms. Patricia Dalton is a Director for Strategic Issues at 
the General Accounting Office. In this position she directs 
GAO's work related to Government management issues, 
particularly performance management and the Government 
Performance and Results Act, the organization, structure and 
design, inter-government relations and tools of Government.
    Mr. Stephen Joel Trachtenberg has served as President of 
George Washington University since August 1988. He currently 
chairs the D.C. Chamber of Commerce Board of Directors and the 
Atlantic Ten Conference Presidents Council. He has been 
appointed by the Mayor to serve on the District of Columbia Tax 
Revision Commission, as well as the District of Columbia 
Committee to Promote Washington.
    Mr. Ted Trabue is the Staff Director for Government 
Relations for the Greater Washington Board of Trade. He also 
serves as Pepco's Regional Vice President for the District of 
Columbia. A veteran of District Government and politics, he 
served as legislative analyst in the Office of the Mayor before 
being named Chief of Staff in the office of Council Member 
Linda Cropp.
    We welcome all of you very much. Thank you for being here. 
Dr. Rivlin, we will start with you. Let me just indicate to you 
the last word we get from the floor, as we are going to have a 
vote in about 10 minutes, and we will just go as long as we 
can, and when we get a vote, I will just tell you all to stop 
and we will take off. Now the word is 10:15. Maybe we will make 
it through the testimony at least.
    Dr. Rivlin, thank you very much.

STATEMENT OF ALICE M. RIVLIN, SENIOR FELLOW AND 
            DIRECTOR, GREATER WASHINGTON RESEARCH 
            PROGRAM, THE BROOKINGS INSTITUTION
    Ms. Rivlin. Thank you, Mr. Chairman. I am delighted to be 
here, Mr. Chairman, and Senator Landrieu. I am delighted that 
this subcommittee is holding a hearing on the District's 
structural imbalance.
    I have been concerned for a very long time about this 
fundamental threat to the viability of the District. I think 
this is the first congressional hearing to explicitly address 
the structural imbalance, and I hope that this hearing is the 
beginning of a very serious debate in both chambers on the 
District's fiscal future and what the Congress can do about it.
    What is a structural imbalance? As Mrs. Norton said 
earlier, it is different from the fiscal crisis that we had in 
the 1990's, which had various causes, including mismanagement 
of the government. But those critical problems are behind us. 
The District has balanced its budget for 7 years. It has cash 
in the till. It has a respectable bond rating and a far better 
managed government than it did a few years ago.
    Now we need to face up to the fact that the status of the 
District as the Nation's capital, and the responsibilities it 
must undertake, combined with the narrowness of its tax base 
and the fact that it does not have a State to help it, creates 
a problem. The problem, as has been documented by the GAO, is 
that the District simply does not have the tax base to provide 
even average services at average tax rates that prevail in 
States with their cities combined.
    Two years ago now I co-authored a Brookings report that 
stressed all of these points, the special status of the capital 
city with its multiple responsibilities and the narrowing of 
the tax base in several ways, but particularly because of 
Congress prohibiting the taxation of nonresident income. The 
fact that central cities have high costs, but normally get 
State help, in the absence of a State means that the higher 
cost in the District cannot be spread over suburbs and 
industrial areas as they are in other States. And third, the 
legacy of the neglected infrastructure which imposes serious 
costs and makes it harder to deliver good services, especially 
education.
    A more definitive analysis has been done by the GAO, an 
ingenious and in my opinion, well-executed study that estimate 
the range of the structural deficit at between about a half a 
billion and a billion dollars. It was followed by a study that 
I got a look at the other day by the American Economics Group, 
a consulting firm, applied a different methodology but came to 
approximately the same conclusion, a structural deficit at the 
high end of the GAO range. The city has recently done a report 
to this committee with some newer numbers and some 
documentation of the improved management, but basically the 
same story.
    It seems to me that the basic facts are clear. Studies with 
different methodologies have come to the same conclusion and 
now we need to ask what to do about it. One option would be to 
revive the Federal payment, and if we go this route, I think it 
should be a permanent appropriation indexed to some indicator 
of the price or cost of producing services over time.
    But another very attractive option I believe is embodied in 
Mrs. Norton's bill, the Fair Federal Compensation Act, that 
would create an annual Federal contribution of $800 million to 
an infrastructure fund with allowable uses including 
construction, renovation, maintenance and debt service, 
especially for transportation and education, which clearly 
benefit the region as a whole.

                           PREPARED STATEMENT

    I think this is the right moment to act on this kind of a 
bill. The District has survived its financial crisis, improved 
its management, and now we need to move on to the fundamental 
problem. Congress has the power to ensure that the District has 
the fiscal resources to provide the quality of public services 
that the Nation's capital ought to provide, and I believe ought 
to do so.
    Thank you.
    [The statement follows:]

                 Prepared Statement of Alice M. Rivlin

    Mr. Chairman and members of the committee, I am very pleased that 
the subcommittee has focused this hearing on the structural imbalance 
in the District of Columbia budget. I have been deeply concerned about 
this subject for a long time and am pleased to be invited to contribute 
to the subcommittee's deliberations.
    We all want the Nation's capital to be a city that Americans can 
take pride in--a city that is a safe and attractive place to live and 
work and visit. That means a city that provides good quality services, 
including effective education, public safety, transportation, 
recreation and social services. Yet the special status of the District 
of Columbia creates a fundamental fiscal imbalance that prevents the 
city from being the great capital city we all want it to be. The 
District has the responsibility to provide both State and local 
services to residents, commuters and visitors, and has special duties 
associated with being the capital city. These responsibilities, 
combined with severe restrictions on the city's tax base, make it 
impossible for the District to finance the quality of services needed 
to fulfill the vision of a great capital city.
    The problem of structural imbalance in the District is not a new 
discovery. Personally, I first focused on the problem in 1990 when I 
chaired the Commission on Budget and Financial Priorities of the 
District of Columbia. Our report detailed ways the District could 
improve the efficiency of its government and modernize its 
infrastructure. It also stressed the fundamental imbalance between its 
broad responsibilities and its limited tax base.

                          THE BROOKINGS STUDY

    A dozen years later, in 2002, Carol O'Cleireacain and I worked 
together at the Brookings Institution to produce A Sound Fiscal Footing 
for the Nation's Capital: A Federal Responsibility. The study discussed 
three reasons for the District's fiscal imbalance and suggested various 
ways that increased Federal assistance to the District could fill the 
gap.
    The first reason for imbalance grows out of the District's status 
as the Nation's capital. The Federal Government is the city's largest 
employer and generates, directly and indirectly, much of its economic 
activity. However, the city's major industry--as well as much of the 
activity it attracts--does not pay taxes, imposes costs on the city, 
and severely restricts the city's tax base. Federal and other exempt 
buildings require police, fire, emergency, and other services. Workers 
who commute to Federal and other tax-exempt buildings cause traffic 
congestion and wear out the city's infrastructure. During business 
hours about 70 percent of the vehicles on downtown streets come from 
outside the city. The visitors and tourists that flock to the capital 
also impose exceptional costs, including policing, emergency services, 
crowd control, and clean-up after parades, mass demonstrations, and 
major public events.
    At the same time, the presence of the Federal Government restricts 
the District's tax base enormously. Fully 42 percent of the real and 
business property base is exempt from taxation, with the Federal 
Government alone accounting for 28 percent of the exemption. Sales and 
excise tax exemptions for diplomatic and military personnel also reduce 
the District's revenue, as does the inability of the District to tax 
the ``commercial'' activities of the Federal Government. But by far the 
most costly restriction the Federal Government imposes on the District 
is the prohibition against District taxation of income earned by non-
residents. Non-residents--mostly commuters living in the Maryland and 
Virginia suburbs and working in the District--account for more than 
two-thirds of the income earned in the District. If the District were 
able to tax commuter incomes at its current rates, we estimated that it 
could raise almost $1.4 billion in additional revenue annually. It 
would be able to spend substantially more to improve schools and other 
services and significantly reduce its tax rates at the same time. The 
Federal prohibition effectively transfers the bulk of the District's 
income tax base to the treasuries of Maryland and Virginia, leaving the 
District taxpayers with a commensurately higher burden.
    The second argument for Federal assistance to the District follows 
from the fact that it is the only city in the Nation without a State. 
In the absence of a State, the District must provide public services 
normally provided by both State and local government. In recognition of 
this burden, Congress has authorized the District to levy ``State-
like'' personal and business taxes, such as an income tax, not usually 
imposed by cities. However, States may tax all income generated within 
their borders, whether or not it is earned by residents. The District 
may tax only the one-third of that income that is earned by its 
residents (plus the comparatively tiny amount earned by District 
residents in Maryland and Virginia).
    Moreover, State governments are able to collect revenue from 
diverse tax bases that include suburbs and industrial areas and 
redistribute those resources to local jurisdictions to equalize public 
services among localities of differing income and wealth. Central 
cities, which carry the heavy burden of costs associated with the 
concentration of inner city poverty, normally benefit from this 
redistribution. The Baltimore City school system, for example, gets 
more than half its budget from the State of Maryland. The District, 
however, has to carry these costs without State aid.
    In the District of Columbia Revitalization Act of 1997 the Congress 
recognized the District's burden of State-like responsibilities and 
transferred some of them to the Federal Government. It relieved the 
District of fiscal responsibility for custody of convicted felons and 
the cost of the local court system. It increased the Federal matching 
rate on Medicaid and transferred to the Federal Government the 
District's pension liability, created when the Federal Government ran 
the District's pension system, along with the corresponding assets of 
the system. However, other functions usually performed by States, such 
as higher education and mental health, remained the responsibility of 
the District. Moreover, the same Act phased out the Federal payment, by 
means of which, the Federal Government over the years had provided the 
District with compensation for its unusual fiscal burdens.
    The third argument for Federal assistance to the District relates 
to the neglected state of the District's infrastructure and the high 
operating costs it imposes on the city. One result of the city's long 
history of fiscal stress is a legacy of aged and under-maintained 
school buildings, health facilities, and police stations; out-of-date 
and inadequate computer systems; and an aging sewer system that 
contributes to water pollution. I have recently been working with the 
District to improve its facilities planning and capital budget--a 
project that has made me acutely aware of urgent needs in the District 
for modernizing and improving schools and other buildings and 
infrastructure. In combination, these three fiscal problems seemed to 
us to constitute a strong case for Federal assistance to compensate the 
District for the fiscal limitations that prevent it from providing the 
quality of service a great capital city should provide. Various options 
were suggested in our paper.

                             THE GAO STUDY

    More recently the General Accounting Office (GAO), at the request 
of the Congress, focussed its considerable analytical resources on the 
District's fiscal imbalance. GAO attempted to provide an answer to the 
question: Does the District have a ``structural deficit'' that 
undermines its ability to provide adequate services at reasonable tax 
rates and, if so, how big is it? The GAO defined structural balance as 
a situation in which the District would be able to deliver an average 
level of public services with average tax rates. By ``average'' they 
meant the average of the 50 States, including their local governments.
    Comparing the District to the average of the States is a tricky 
proposition and GAO had to make this comparison with great care. The 
District is a unique jurisdiction, not comparable to any State. Quite a 
few States are primarily rural and have no large cities at all. Even 
those with big cities also contain suburbs, small and medium-sized 
towns and rural areas. No State is entirely urban, as the District is, 
and none is entirely composed of the central city of a large 
metropolitan area. Central cities face a higher level of costs due to 
higher rents and wages and the expenses of dealing with high 
concentrations of poor people, and must deliver a different range of 
services than States do (even when their local jurisdictions are 
included).
    The GAO study reflects a thorough, sophisticated and ingenious 
effort to overcome these objections and produce useful comparisons. Not 
surprisingly, the GAO found that the District's per capita tax capacity 
(measured a couple of alternative ways) was higher than that of the 
average State; in fact, higher than any State. The difference reflects 
the higher incomes, sales and property values of a city, compared with 
States that include small towns and rural areas. However, GAO also 
found that the costs of delivering services in the District were higher 
than any State's, and were even higher when the set of services being 
measured were those associated with urban areas, instead of the average 
of State and local services. The higher costs are associated with 
wages, rents and concentration of poverty. Since the cost difference 
was bigger than the tax capacity difference, the GAO concluded that the 
District faced a structural imbalance: it could not deliver average 
services at average tax rates. GAO estimated the District's structural 
deficit at somewhere between $470 million and $1.1 billion a year, 
depending on specific assumptions. It made clear that the prohibition 
against taxing non-resident income is a major contributor to the 
District's structural problem.
    The GAO also examined some of the District's management challenges 
and made helpful suggestions about enhancing efficiency--for example, 
by improving the process of seeking reimbursement of Medicaid 
expenditures and tightening the financial management of the school 
system. While greater efficiency would improve the level of District 
services, the GAO points out that ``management improvements will not 
offset the underlying structural imbalance because it is caused by 
factors beyond the direct control of District officials.'' (p.15).

                             OTHER STUDIES

    I recently had a look at the draft of another study, prepared by 
the American Economics Group, Inc. in connect with a legal challenge to 
the congressional prohibition of non-resident income taxation by the 
District. This study uses different methodology than the GAO (including 
estimates of the uncompensated costs that commuters impose on the 
District), but comes to similar conclusions. The study estimates the 
District's structural imbalance at $1.2 billion--just over the high end 
of the GAO range.
    On May 5, 2004, the Mayor submitted a report requested by this 
subcommittee, Issues and Approaches for Addressing the District of 
Columbia Structural Imbalance Between Public Service Needs and Public 
Financing Resources. The report updates the estimates of where workers 
live and work and the flows of income across jurisdictional lines. It 
documents management progress made by the District and some of the 
reasons why the cost of providing services in the District remains 
high.

                               CONCLUSION

    The facts are no longer in dispute. Well-documented studies, using 
different methodologies have concluded that the District faces a 
serious structural budget imbalance. The question is what to do about 
the problem. Perhaps the most straightforward option would be to 
restore the Federal payment in the form of an annual operating subsidy 
to the District government. To have maximum effect in improving 
District services, the Federal payment should be a permanent 
appropriation whose amount reflected increases in the cost of providing 
service.
    A second option would be to restrict the Federal contribution to 
facilities and other needed infrastructure, so that the Congress could 
see clear physical evidence of the progress resulting from the Federal 
contribution. D.C. Delegate Eleanor Holmes Norton and an impressive 
list of co-sponsors from the surrounding region introduced the Fair 
Federal Compensation Act of 2004 in this session of Congress. The Act 
would establish an annual Federal payment to a dedicated infrastructure 
fund, which the District could use to improve transportation and 
information technology, pay for debt service, and finance building 
maintenance and capital improvement in the public schools, including 
charter schools. Given the District's severe infrastructure deficit and 
congressional desire for visible physical improvements this approach to 
the District's fiscal imbalance has a great deal of appeal.
    Great nations take pride in great capital cities--and support them. 
Paris, London, Rome, and Tokyo each epitomize their countries, and each 
of their nations invests substantial resources in their wellbeing. 
Washington should enjoy the same prominence and support, but its 
peculiar status and treatment by the Federal Government undermines 
rather than enhancing its ability to provide high quality services and 
infrastructure. The Federal Government severely limits the District's 
revenue raising capacity, especially by prohibiting it from taxing non-
resident income. To put the Nation's capital on a sound fiscal footing, 
the Federal Government should provide the District with financial 
compensation for the structural imbalance that it creates. Otherwise, 
despite a high tax burden on District residents, local officials will 
continue to be unable to provide adequate services for residents and 
visitors or finance and maintain the modern, efficient public 
infrastructure that a great capital city ought to have.
    Thank you, Mr. Chairman and members of the subcommittee.

    Senator DeWine. Thank you very much.
    Ms. Dalton.

STATEMENT OF PATRICIA A. DALTON, ASSOCIATE DIRECTOR, 
            GENERAL ACCOUNTING OFFICE
    Ms. Dalton. Thank you, Mr. Chairman, Senator Landrieu. I am 
pleased to be here today to discuss the report that we issued 
last year on the District's structural imbalance and other 
management issues. Today I would like to briefly discuss the 
methodology and analysis that led to our conclusion that the 
District, in fact, faces a structural imbalance. I will also 
discuss the District's management challenges, including 
infrastructure and debt issues.
    The structural imbalance is not determined by simply 
projecting existing spending and taxation choices. This type of 
longitudinal analysis determines whether or not there is a 
current services imbalance. It looks at the government in 
isolation. In contrast, determining structural imbalance 
requires looking at the underlying cost drivers and revenue 
capacity of a government. We used a representative services 
definition of structural imbalance. It answers the question: If 
a jurisdiction were to provide a representative basket of 
public services with average efficiency, would it be able to 
generate sufficient revenues from its own taxable resources and 
Federal grants to fund those services at a representative tax 
burden? It looks at a government relative to other governments.
    Specifically to assess structural imbalance, we benchmarked 
the District to the average level of services, resource 
capacity, and tax burdens for the District and all 50 State 
fiscal systems. State fiscal systems we defined by combining 
the State and all of its local government units.
    Our quantitative analysis shows that the District's cost of 
delivering an average level of services per capita is the 
highest in the Nation due to factors such as high poverty, 
crime, high cost of living, and high wages in the District of 
Columbia. The District's total revenue capacity, on the other 
hand, which is defined as its own source revenue as well as 
Federal grants, is higher than all State fiscal systems. 
However, it is not enough to offset the higher cost that the 
District incurs. Our analysis did take into account the 
constraints that the District faces on its revenue-raising 
capacity.
    There is a certain amount of imprecision in economic 
modeling, which is the technique that we were using. Therefore, 
we performed various sensitivity analyses. The consistency of 
our results over alternative assumptions led us to conclude 
that the District does, in fact, face a structural imbalance 
ranging from our lowest and most conservative estimate of $470 
million annually to over $1.1 billion, and this is relative to 
other State fiscal systems.
    To cope with the high cost conditions, the District uses 
its high revenue capacity to a greater extent than almost every 
other State fiscal system. Despite the high tax burden and 
large grant funding, our analysis showed the District can only 
provide an average level of services if it was providing them 
at average efficiency. Our analysis assumes that services are 
delivered at an average efficiency. We cannot really quantify 
what that efficiency is or inefficiency. However, for years, as 
you are well aware, GAO and other organizations have reported 
on significant management problems of the District, such as 
inadequate financial management, billing systems, and internal 
controls. These management inefficiencies waste scarce 
resources and hinder the District's ability to get its full 
share of Federal funding in programs such as Medicaid.
    Clearly, progress has been made in correcting these 
management inefficiencies, but clearly, more needs to be done. 
To the extent that services are not provided with average 
efficiency, the District may actually be providing below-
average service levels. It is important to note that addressing 
the management problems will only help address current budget 
shortfalls or allow the District to actually provide an average 
level of services. It is not going to offset the structural 
imbalance.
    In addition, our work found that the District has often 
chosen to hold down its already high levels of debt, the 
highest per capita in the Nation, by deferring capital 
improvements. These are clearly symptoms of structural 
imbalance.
    We did not in our report make specific recommendations to 
address the structural imbalance, but we did discuss various 
options. The situation presents difficult policy decisions for 
both the District and the Congress. However, if Congress 
decides to provide the District with additional Federal 
assistance to address this imbalance, the District must achieve 
basic management practices and accountability standards and 
provide assurances to the Congress that Federal dollars would 
be spent effectively and efficiently.

                           PREPARED STATEMENT

    For example, the District needs to follow sound capital 
planning and management principles and related practices such 
as those that we have outlined in an executive guide on capital 
decision-making.
    Mr. Chairman, this concludes my remarks, and I will be 
happy to answer any questions.
    [The statement follows:]

                Prepared Statement of Patricia A. Dalton

    DISTRICT OF COLUMBIA: STRUCTURAL IMBALANCE AND MANAGEMENT ISSUES
                         WHY GAO DID THIS STUDY

    District of Columbia officials have reported both a current 
services budget gap and a more permanent structural imbalance between 
costs and revenue-raising capacity. They maintain that the structural 
imbalance largely stems from the Federal Government's presence and 
restrictions on the District's tax base. Accordingly, at various times 
District officials have asked the Congress for additional funds and 
other measures to enhance revenues. In that context, the subcommittee 
has asked GAO to discuss its May 2003 report, District of Columbia: 
Structural Imbalance and Management Issues (GAO-03-666). This testimony 
addresses the key findings and concluding observations of the May 2003 
report. Specifically, this testimony discusses: (1) whether, or to what 
extent, the District faces a structural imbalance between its revenue 
capacity and the cost of providing residents with average levels of 
public services by using a representative services approach; (2) any 
significant constraints on the District's revenue capacity; (3) cost 
conditions and management problems in key program areas; and (4) the 
effects of the District's fiscal situation on its ability to fund 
infrastructure projects and repay related debt.

                             WHAT GAO FOUND

    GAO used a multifaceted approach to measure structural imbalance, 
which involves comparing a fiscal system's ability to fund an average 
level of public services with revenues that it could raise with an 
average level of taxation, plus the Federal aid it receives. This 
approach compared the District's circumstances to a benchmark based on 
the average spending and tax policies of the 50 State fiscal systems 
(each State and its local governments). GAO also reviewed key programs 
as well as infrastructure and outstanding debt. GAO found:
  --The cost of delivering an average level of services per capita in 
        the District far exceeds that of the average State fiscal 
        system due to factors such as high poverty, crime, and a high 
        cost of living.
  --The District's per capita total revenue capacity is higher than all 
        State fiscal systems but not to the same extent that its costs 
        are higher. In addition, its revenue capacity would be larger 
        without constraints on its taxing authority, such as its 
        inability to tax Federal property or the income of 
        nonresidents.
  --The District faces a substantial structural deficit in that the 
        cost of providing an average level of public services exceeds 
        the amount of revenue it could raise by applying average tax 
        rates. Data limitations and uncertainties surrounding key 
        assumptions in our analysis made it difficult to determine the 
        exact size of the District's structural deficit, though it 
        likely exceeds $470 million annually. Consequently, even though 
        the District's tax burden is among the highest in the Nation, 
        the resulting revenues plus Federal grants are only sufficient 
        to fund an average level of public services, if those services 
        were delivered with average efficiency.
  --The District's significant, long-standing management problems in 
        key programs waste resources and make it difficult to provide 
        even an average level of services. Examples include inadequate 
        financial management, billing systems, and internal controls, 
        resulting in tens of millions of dollars being wasted, and 
        hindering its ability to receive Federal funding. Addressing 
        management problems would not offset the District's underlying 
        structural imbalance because this imbalance is determined by 
        factors beyond the District's direct control. Addressing these 
        management problems would help offset its current budget gap or 
        increase service levels.
  --The District continues to defer major infrastructure projects and 
        capital investment because of its structural imbalance and its 
        high debt level.
    If this imbalance is to be addressed in the near term, it is a 
policy issue for the Congress to determine if it should change Federal 
policies to expand the District's tax base or provide additional 
support. However, given the existence of structural imbalances in other 
jurisdictions and the District's significant management problems and 
the Federal Government's own fiscal challenges, Federal policymakers 
face difficult choices regarding what changes, if any, they should make 
in their financial relationship with the District. If the District were 
to receive additional Federal support to compensate for its structural 
imbalance and enhance its ability to fund capital investments, it is 
important that the District follow sound practices to avoid the costly 
management inefficiencies it has experienced in the past. These 
practices include evaluating and selecting capital assets using an 
investment approach, integrating organizational goals into the capital 
decision-making process, and providing transparency and accountability 
over the use of Federal funds.
    Mr. Chairman and members of the subcommittee, I am pleased to be 
here today to discuss our report, District of Columbia: Structural 
Imbalance and Management Issues.\1\ Though our report was released a 
year ago, its focus on fundamental aspects of the District's financial 
structure continues to be relevant. In recent years, District of 
Columbia (District) officials have reported that a continuation of the 
District's current spending and taxing policies would result in ongoing 
current services budget imbalances. While District officials have 
demonstrated their resolve to maintain fiscal discipline by taking the 
steps needed to balance their budgets for fiscal years 2004 and 2005, 
those officials claim that the District faces a more permanent 
structural imbalance between its revenue-raising capacity and the cost 
of meeting its public service responsibilities that are the result of 
many factors, several stemming from the Federal Government's presence 
in the District and the restrictions on the District's tax base.
---------------------------------------------------------------------------
    \1\ U.S. General Accounting Office, District of Columbia: 
Structural Imbalance and Management Issues, GAO-03-666 (Washington, 
D.C.: May 2003).
---------------------------------------------------------------------------
    Although there is no uniform definition of structural imbalance, 
there are two concepts that can be used to measure it--current services 
and representative services imbalances. A current services imbalance 
answers the question: If a jurisdiction were to maintain its current 
level of services into the future, would it be able to raise the 
revenues necessary to maintain that level of service under its current 
taxing policies? This type of longitudinal analysis compares a 
jurisdiction's projected fiscal position with its current position and 
is independent of other similarly situated jurisdictions. In contrast, 
a representative services imbalance answers the question: If a 
jurisdiction were to provide a representative basket of public services 
with average efficiency, would it be able to generate sufficient 
revenues from its own taxable resources and Federal grants to fund the 
representative basket of services if its resources were taxed at 
representative rates? This type of analysis uses a basket of services 
and tax structure typical of other jurisdictions with similar public 
service responsibilities as a benchmark against which to compare 
imbalances between the cost of public services and revenue-raising 
capacity. The approach attempts to compare differences in 
jurisdictions' fiscal positions under a common set of policies 
regarding levels of services and taxation. The District has reported 
both a current services and a more permanent structural imbalance 
between its costs and revenue-raising capacity.
    My statement today will discuss (1) whether, and to what extent, 
the District faces a structural imbalance between its revenue capacity 
and the cost of providing residents and visitors with average levels of 
public services by using a representative services approach; (2) any 
significant constraints on the District's revenue capacity; (3) cost 
conditions and management problems in key program areas; and (4) the 
effects of the District's fiscal situation on its ability to fund 
infrastructure projects and repay related debt.\2\ We performed our 
work assessing the structural imbalance and management issues from 
August 2002 through May 2003 in accordance with generally accepted 
government auditing standards, and in June 2004 we obtained updated 
budget information.
---------------------------------------------------------------------------
    \2\ Prior to our May 2003 report, we issued a preliminary report on 
these issues in September 2002. See U.S. General Accounting Office, 
District of Columbia: Fiscal Structural Balance Issues, GAO-02-1001 
(Washington, D.C.: September 2002).
---------------------------------------------------------------------------
          GAO'S METHODOLOGY FOR ASSESSING STRUCTURAL IMBALANCE

    We used a representative services analysis to conduct our work on 
whether and to what extent the District has a structural imbalance. 
This approach allows us to compare the District's fiscal circumstances 
against a benchmark based on services and taxation that is typical of 
jurisdictions with similar fiscal responsibilities, which is different 
from a current services approach, which would be based on the 
District's historical spending and tax choices.
    When analyzing a representative service imbalance, the choice of a 
benchmark for a representative level of public services and taxation is 
a critical decision. In fact, the appropriate level of services and 
taxation is a matter of perennial debate in every jurisdiction in the 
Nation. For this reason, we used as a benchmark national average levels 
of spending and taxation because they are independent of individual 
jurisdictions' particular preferences, policy choices, and efficiency 
of service provision. National averages provide benchmarks that are 
``representative'' of the level of services that a typical State fiscal 
system (the collections of a State, counties, cities, and a myriad of 
special purpose district governments) employs. A fiscal system is said 
to have a structural imbalance if it is unable to finance an average 
(or representative) level of services by taxing its funding capacity at 
average (or representative) rates. Because we defined structural 
imbalance in terms of comparisons to national averages, for any given 
time period a significant proportion of all fiscal systems will have 
structural deficits.
    Determining empirically whether the District has a structural 
imbalance is a complex task that involves making judgments about: (1) 
the appropriate set of governments to use when developing benchmarks 
for the District's spending and revenue capacity; (2) the influence 
that various workload and cost factors, such as the number of school 
age children and number of vehicle miles traveled, have on the cost of 
public services; and (3) the best way to measure revenue capacity.
    Using economic modeling, we were unable to provide a single, 
precise point estimate of structural imbalance, but provided a range 
instead. Given the lack of professional consensus and a limited 
empirical basis for many of the decisions underlying our methodology, 
which was vetted with key experts, we performed several sensitivity 
analyses to show how our estimates changed as we varied key 
assumptions. In addition, the precision of our estimates is adversely 
affected by data limitations for various cost and tax bases. 
Nevertheless, we believe that the consistency of our basic result over 
a broad range of alternative assumptions and approaches provides 
sufficient support for the conclusions offered in this report. 
Moreover, we supplemented our quantitative analysis with a programmatic 
review of the District's three highest cost program areas to provide 
additional insights into the level of services, costs, management, and 
financing.
    For our cost analysis, we computed two separate sets of benchmarks: 
one based on a ``State'' services basket, the mix of services typically 
provided by State fiscal systems (each State and all of its local 
governments), and a second based on an ``urban'' services basket, the 
mix of services that are typically provided by governments in more 
densely populated areas. The scope of services included is the same for 
both baskets; what differs is the proportion of total spending that is 
allocated to each service. For example, the ``urban'' basket of 
services gives greater weight to public safety functions and less 
weight to higher education than does the State basket of services.
    To estimate total revenue capacity of each State fiscal system, we 
combined estimates for the two principal sources from which those 
systems finance their expenditures: (1) revenues that could be raised 
from each system's own economic base (own-source revenue), and (2) the 
Federal grants that each system would receive if it provided an average 
basket of services. Two basic methodologies have been employed to 
estimate the own-source revenue capacity of States: (1) the total 
taxable resources (TTR), which uses income to measure the ability of 
governments to fund public services; and (2) the representative tax 
system (RTS), which measures the amount of revenue that could be raised 
in each State if an average set of tax rates were applied to a 
specified set of statutory tax bases ``typically'' used to fund public 
services. Because experts disagree as to which approach is superior, we 
computed separate results using both methodologies.
    We estimated the size of the District's structural imbalance as the 
difference between its cost of providing an average level of services 
and its total revenue capacity--the amount of revenue the District 
would have (including Federal grants) if it applied average tax rates 
to its taxable resources.

   THE DISTRICT'S PUBLIC SERVICE COSTS ARE THE HIGHEST IN THE NATION

    Using other State fiscal systems as a benchmark, our analysis 
indicated that the cost of delivering an average level of services per 
capita in the District exceeds that of the average State fiscal system 
by approximately 75 percent (or a total of $2.3 billion more annually 
than if it faced average costs circumstances) and is over a third more 
than the second highest-cost State system, New York. If State fiscal 
systems were to provide a basket of services typically provided in more 
densely populated urban areas, we estimated that the District would 
have to spend over 85 percent more (or a total of $2.6 billion more 
annually) than average to fund an average level of services.
    The District faces high-cost circumstances, largely beyond its 
control, in key program areas including Medicaid, elementary and 
secondary education, and police and fire services that increase the 
fiscal burdens on the District's budget. For example, regarding 
Medicaid, we estimated that high-cost circumstances, such as its large 
low-income population, would require the District to spend well over 
twice the national average per capita. Consequently, to provide an 
average level of services the District would have to spend a total of 
$437 million more than if it faced average cost circumstances. 
Similarly, we estimated that the District's per capita cost of 
elementary and secondary education is 18 percent above the average 
State fiscal system due to circumstances such as a disproportionately 
high percentage of low-income children. As a result, to provide an 
average level of services the District would have to spend a total of 
about $136 million more than if it faced average cost circumstances. 
Likewise, for police and fire services, the District's per capita costs 
of providing an average level of services are well over twice the 
national average due to circumstances such as its relatively young 
population, especially high crime rates, and its dense living 
conditions. As a result, to provide an average level of services the 
District would have to spend about $480 million more than if it faced 
average cost circumstances. Further, our cost estimates do not 
explicitly account for the various public safety demands and costs 
associated with the Federal Government's presence.

  THE DISTRICT'S REVENUE CAPACITY IS AMONG THE HIGHEST IN THE NATION, 
            DESPITE SOME CONSTRAINTS ON ITS TAXING AUTHORITY

    Our analysis indicated that the District's per capita total revenue 
and own-source revenue capacities are higher than those of all but a 
few State fiscal systems. Its capacity is high even though the District 
faces some significant constraints on its taxing authority, such as the 
inability to tax Federal property or the income of nonresidents who 
work in the District.
    The two estimation approaches we used to measure the District's 
revenue capacity yielded the same basic result: The District's own-
source revenue capacity per capita ranked among the top five when 
compared to those of the 50 State fiscal systems. This high own-source 
revenue capacity, combined with the fact that its per capita Federal 
grant funding is over two and one-half times the national average, 
gives it a higher total revenue capacity than any other State fiscal 
system. Depending on which estimation approach we used, the District's 
total revenue capacity ranged from 47 percent above the national 
average (based on a conservative version of the RTS approach) to 60 
percent above (based on the TTR approach).

                THE DISTRICT FACES A STRUCTURAL DEFICIT

    We concluded that the District does have a substantial structural 
deficit in the sense that the cost of providing an average level of 
public services exceeds the amount of revenue it could raise by 
applying average tax rates, although considerable uncertainty exists 
regarding its exact size. We obtained our lowest deficit estimate of 
about $470 million per year by combining the lowest estimate of the 
District's costs (the one based on the State basket of services) with 
the highest estimate of the District's total revenue capacity (TTR). In 
contrast, we obtained the highest deficit estimate of over $1.1 billion 
per year by combining the highest estimate of the District's costs (the 
one based on the urban basket of services) with the lowest estimate of 
the District's total revenue capacity (RTS). Among the contributing 
factors to the structural imbalance are high-cost conditions largely 
beyond the District's control, such as high poverty rates, large 
concentrations of low-income children and the elderly, and high crime 
rates. Figure 1 shows how the District's structural deficit per capita 
compares to the State fiscal systems with the largest structural 
deficits. 



DESPITE A HIGH TAX BURDEN, THE DISTRICT'S REVENUES ARE ONLY SUFFICIENT 
                  TO FUND AN AVERAGE LEVEL OF SERVICES

    In addition to having high revenue capacity, the District also 
imposes above average tax rates; however, high taxes are only 
sufficient to fund an average level of services. Figure 2 shows the 
District's tax burden and cost-adjusted spending. Because of its high 
tax rates, actual revenues collected by the District exceeded our lower 
estimate of its own-source revenue capacity at an average tax burden by 
33 percent and exceeded our higher estimate of that capacity by 18 
percent (see the first two bars of fig. 2). However, the District's 
actual fiscal year 2000 spending was only equal to the cost of an 
average level of public services, based on the basket of services 
provided by the average State fiscal system. Using the basket of 
services typically provided by urban governments as a benchmark, the 
District's spending is 5 percent below that needed to fund an average 
level of services (see the last two bars of fig. 2). Our estimates of 
the cost of delivering an average level of services presume that they 
are provided with average efficiency. To the extent that the District 
does not deliver services with average efficiency, its actual level of 
services may be below average. 



MANAGEMENT PROBLEMS RESULT IN UNNECESSARY SPENDING THAT COMPROMISES THE 
   DISTRICT'S ABILITY TO PROVIDE AN AVERAGE LEVEL OF PUBLIC SERVICES

    The District's long-standing management problems waste resources 
that it cannot afford to lose and draw resources away from providing 
even an average level of services. In three key program areas 
(Medicaid, elementary and secondary education, and police and fire 
services), our original report identified significant management 
problems, such as inadequate financial management, billing systems, and 
internal controls. While the District has taken some actions to correct 
management inefficiencies, more improvements are needed. In the case of 
Medicaid, in fiscal year 2001 the District wrote off over $78 million 
for several years worth of unreimbursed claims for Federal Medicaid 
matching funds. The District was not able to claim this reimbursement 
because of late submission of reimbursement requests, incomplete 
documentation, inadequate computerized billing systems, providing 
services to individuals not eligible for Medicaid at the time of 
delivery, and billing for services not allowable under Medicaid. The 
independent auditor of the District's financial statements continued to 
report Medicaid accounting and claims processing as a material weakness 
in fiscal year 2003. The extent of these management problems suggests 
that the District continues to bear more of the burden of Medicaid 
costs than necessary.
    In the case of education, in the recent past District public school 
officials were not able to track either the total number of employees 
or whether particular positions were still available or had been 
filled. For example, in March 2003, District officials announced that 
the school system had hired 640 more employees than its budget 
authorized, resulting in the District exceeding its personnel budget by 
a projected amount of $31.5 million over the entire fiscal year. In 
another example, the District's lack of internal control for 
procurement practices in its public school system resulted in $10 
million in unauthorized purchases. While our cost analysis shows that 
the District is spending an amount that could provide an average level 
of services, the extent of these management problems suggests that the 
District provides less than the national average of education services.
    In the case of police and fire services, the District historically 
has not adequately tracked the costs it incurs to support the Federal 
presence, in areas such as providing protection to Federal officials 
and key dignitaries and dealing with an array of special events and 
demonstrations. This hinders its ability to make a case for additional 
Federal reimbursement, requiring it to spend more of its own resources 
to support the Federal presence.

  THE DISTRICT CONTINUES TO DEFER IMPROVEMENTS TO ITS INFRASTRUCTURE 
                      WHILE DEBT PRESSURES REMAIN

    Although the District is making some attempts to address its 
backlog of infrastructure needs, it has nonetheless continued to defer 
significant amounts of infrastructure projects because of constraints 
in its operating budget. Most of the District's infrastructure and 
capital improvement projects are financed by using general obligation 
bonds. The interest and principal payments (debt service) on those 
bonds are paid from the District's operating budget. Although the 
District is not close to its legal debt limit, it cannot accommodate 
additional debt without cutting services or raising taxes that are 
already higher than those of other jurisdictions. Contributing to the 
District's difficulties is its legacy of deteriorated infrastructure 
and its 40 percent share of funding the metropolitan area's costly mass 
transit system. However, the District is attempting to address its 
backlog of infrastructure needs through increased capital expenditures 
(estimated at roughly $371 million in fiscal year 2003). Nevertheless, 
the reality is that the District continues to defer major 
infrastructure and capital investment in part because of its structural 
imbalance.
    From 1995 to 2002, the District's outstanding general obligation 
debt changed little, totaling slightly over $2.67 billion as of 
September 30, 2002, and debt per capita has remained fairly constant. 
The District's total outstanding general obligation debt as of 
September 30, 2003, was $3.25 billion. As a percentage of local general 
fund revenues, debt service costs, which were 7.5 percent of revenue 
for fiscal year 2003, are expected to climb to approximately 10 percent 
by 2006. The District's projections assume that debt service costs will 
increase at a higher rate than local revenues. Furthermore, when 
compared to combined State and local debt across the 50 States, the 
District's debt, both per capita and as a percentage of own-source 
revenue, ranks among the highest in the Nation. Despite the challenges 
it faces, the District has been successful in having its bond rating 
upgraded by all the major rating agencies in part due to the improving 
economy and improved financial management.

                        CONCLUDING OBSERVATIONS

    Due to a combination of its substantial structural deficit and 
significant management problems, the District is likely providing a 
below-average level of services even though its tax burden is among the 
highest in the Nation. By addressing its management problems, in the 
long term the District could reduce future budget shortfalls. However, 
management improvements will not offset the underlying structural 
imbalance because it is caused by factors beyond the direct control of 
District officials. As a consequence, District officials may face more 
difficult policy choices than most other jurisdictions in addressing a 
budget gap between spending and revenues based on current policies. 
Since the District may not be providing an average level of services, 
it would also be difficult to cut services further and the tax burden 
it imposes is among the highest in the Nation. An alternative option to 
raising taxes or cutting services would be for District officials to 
continue deferring improvements to its capital infrastructure. This 
strategy also is not viable in the long run in that deteriorating 
infrastructure would of necessity lead to further reductions in the 
levels and types of services provided and ultimately would necessitate 
either higher taxes or cuts in services.
    Although it would be difficult, District officials could address a 
budget gap by taking actions such as cutting spending, raising taxes, 
and improving management inefficiencies. However, a structural 
imbalance is beyond the direct control of local officials. Without 
changes in the underlying factors driving expenses and revenue 
capacity, the structural imbalance will remain. If this imbalance is to 
be addressed, in the near term it may be necessary to change Federal 
policies to expand the District's tax base or to provide additional 
financial support. However, given the existence of structural 
imbalances in other jurisdictions and the District's significant 
management problems, Federal policymakers face difficult choices 
regarding what changes, if any, they should make in their financial 
relationship with the District. Further, another consideration for the 
Congress is that the Federal Government faces its own long-term fiscal 
challenges with the prospect of large, persistent deficits. 
Nevertheless, by virtue of the District being the Nation's capital, 
justification may exist for a greater role by the Federal Government to 
help the District maintain fiscal balance. At the same time, the 
District must achieve basic management performance and accountability 
standards to ensure an efficient use of any resources.
    Accordingly, if the District were to receive additional Federal 
assistance to compensate for its structural imbalance and enhance its 
ability to fund capital investments--as is proposed in the District of 
Columbia Fair Federal Compensation Act of 2004 (H.R. 4269)--it is 
important that the District follow sound practices in order to avoid 
the costly management inefficiencies it has experienced in the past. 
The Congress needs assurance that any Federal assistance to the 
District would be spent effectively and efficiently. It is critical to 
have clear, transparent reporting and accountability mechanisms in 
place to ensure the proper use of Federal funds. Also, the Congress 
might want to consider incentives to encourage the effective 
utilization of any Federal funds.
    Specifically, we have issued detailed guidance--based on best 
practices of public and private entities--for the planning, budgeting, 
acquisition, and management of capital assets, including infrastructure 
projects and technology upgrades.\3\ Key elements of this guidance are 
to closely link any planned capital investments to a government or 
agency's strategic goals and objectives, ensure that effective 
information systems are in place to support sound decision making and 
management, and for city leaders to clearly communicate their vision 
and goals to project managers. In addition, our past work has shown 
that it is useful to make capital decisions based on the following five 
basic principles and to follow related practices.
---------------------------------------------------------------------------
    \3\ U.S. General Accounting Office, Executive Guide: Leading 
Practices in Capital Decision-Making GAO/AIMD-99-32 (Washington, D.C.: 
December 1998).
---------------------------------------------------------------------------
  --Integrate organizational goals into the capital decision-making 
        process, such as conducting comprehensive assessments of needs 
        in relation to the current inventory of assets, and evaluating 
        alternative approaches to meeting needs.
  --Evaluate and select capital assets using an investment approach, 
        meaning that a clear project approval framework should be 
        established, projects should be ranked based on established 
        criteria, and long-term capital plans should be developed.
  --Balance budgetary control and managerial flexibility when funding 
        capital projects, which entails budgeting for the projects in 
        segments and considering full, upfront funding.
  --Use project management techniques to optimize project success, such 
        as monitoring project performance, establishing incentives for 
        accountability, and using cross-functional teams to manage the 
        projects.
  --Evaluate results to make sure goals and objectives are being met 
        and incorporate lessons learned into the decision-making 
        process, including occasional reappraisals of decision-making 
        and management processes.
    We have not examined the District's capital planning and management 
functions. District officials may already be following these principles 
and practices. Nevertheless, all of them are important to consider in 
order to maximize investment.
    Mr. Chairman, this concludes my prepared statement. I would be 
pleased to answer any questions you or the other members of the 
subcommittee may have at this time.

    Senator DeWine. Thank you very much.
    Senator Thompson.

STATEMENT OF HON. FRED THOMPSON, PRESIDENT, FEDERAL 
            CITY COUNCIL
    Senator Thompson. Thank you, Mr. Chairman, Senator 
Landrieu. I am here today in my capacity as President of the 
Federal City Council. The Council is a business-supported, 
nonprofit, non-partisan organization that works for the 
improvement of the Nation's capital. It is composed of and is 
financed by 200 of Washington's top business, professional, 
educational, and civic leaders.
    I want to commend you, Mr. Chairman, for your willingness 
to focus attention on the long-term structural imbalance 
confronting the District. This is an issue that has greatly 
concerned the Federal City Council for many years. As far back 
as a decade ago, the Council engaged McKinsey and Company to 
look at the various problems, including the one we are talking 
about today. We have had, as a matter of fact, three 
interesting analyses for us: the McKinsey and Company study 
that we commissioned, most recently the Rivlin study, and, of 
course, the GAO study. They have come to the same conclusion; 
that is, there is indeed a structural imbalance, and as a 
result, the District cannot provide its citizens with an 
average level of public services with the revenue it could 
raise by applying average tax rates.
    Mr. Chairman, it is obvious from listening to both your 
opening comments and Senator Landrieu's comments that you 
understand this, and there is no reason for me to belabor it. 
It seems to me, though, that a couple of things in the GAO 
report are worth highlighting and pointing out: that the 
deficit exceeds at a minimum $470 million; that raising taxes, 
cutting spending, and even solving all of the managerial 
problems is insufficient to offset this structural deficit 
because they have to do with factors that are basically out of 
the control of the people that run the city.
    If all of the inefficiencies were taken out, it would still 
require a substantially above average tax burden for just an 
average level of services. Therefore, I think that it bears 
focusing in on the most significant result of all this, and 
that is the deferral of infrastructure and capital investment 
throughout the city. As you know, it is financed by general 
obligation bonds and debt service from the operating budget, 
and it results in the disrepair of the streets and schools, 
which my understanding is they average about 60 years of age. 
And to quote from the GAO report, it says the results are badly 
deteriorated schools, health facilities, police stations, and 
sewer systems, and it points out that no peer governments that 
they have looked at--and they have looked at this thing, as you 
can see, from eight ways to Sunday, a very impressive report--
no peer governments they have looked at had the same fiscal 
responsibilities and the same geographic and demographic 
characteristics as Washington, DC. Actually, spending with 
regard to these comparables is below average. And with the 
inefficiencies and structural deficit, it is also below average 
spending.
    I think that all of the hardship caused by this has been 
pointed out, but there is another point, Mr. Chairman, that I 
think is very important to this issue, and it has to do with 
something that is intangible. This is the Nation's capital. We 
are the biggest salesmen in the world of the idea of liberty, 
freedom, and economic--we are for a market economy. We are 
taking responsibility for the things we have responsibility 
for, for prosperity, and we hold this out. And it is for our 
citizens who come to this city that we need to have a face in 
the Nation's capital that is consistent with these ideals that 
we have, whether it be with our folks who bring their kids in 
in the summertime or visitors that we had, for instance, for 
President Reagan's funeral coming from all over the world, we 
need to have a face that is consistent with that. And that is 
not consistent with dilapidated infrastructure and streets and 
the other difficulties, especially in light of the fact that a 
lot of these problems, as has been pointed out today, have to 
do with the Federal Government, caused by the Federal 
Government. The District obviously has some great benefits by 
the Government being here also, but these are things that have 
costs that there is no way out of. We must take the 
responsibility. This really would be an investment. Every time 
we want to engage in spending, you know, we always call it 
investment. But it is usually just spending. But this really is 
investment, an investment not only for the District but for our 
Nation, where, of all places, we need the proper capital 
investment and infrastructure to take place.

                           PREPARED STATEMENT

    So the Federal City Council is pleased with the progress 
the District is making. It is concerned with regard to the 
structural deficit we are talking about here today. We are 
delighted that we have this legislation as a starting point.
    Thank you very much.
    [The statement follows:]

                Prepared Statement of Hon. Fred Thompson

    Good morning, Senator DeWine, Senator Landrieu, and members of the 
subcommittee. My name is Fred Thompson and I am appearing before you 
today in my capacity as President of the Federal City Council. As you 
may know, the Council is a business-supported, nonprofit, nonpartisan 
organization that works for the improvement of the Nation's capital. 
Established in 1954, the Council is composed of and financed by 200 of 
the Washington area's top business, professional, educational, and 
civic leaders.
    Mr. Chairman, I want to begin by commending you for your 
willingness to focus attention on the long-term structural imbalance 
confronting the District of Columbia. As Mayor Williams and 
Congresswoman Norton can attest, this is an issue that has greatly 
concerned the Federal City Council for many years. Nearly a decade ago, 
the Council engaged McKinsey & Company to look at the macro economic 
and demographic forces that were then exacerbating the city's financial 
difficulties. In 2002, we again retained McKinsey to assess the 
District's financial condition. The second McKinsey study concluded 
that notwithstanding the city's extraordinary economic turnaround since 
the late 1990's, unless major changes were undertaken, the District was 
facing a structural fiscal imbalance of at least $500 million. McKinsey 
went on to say that this imbalance could not be fixed simply by belt 
tightening or improved management efficiency.
    McKinsey's basic conclusions have since been reaffirmed by two 
additional independent studies, one carried out by Alice Rivlin and her 
colleagues at the Brookings Institution and a second undertaken by the 
General Accounting Office (GAO), at the behest of this subcommittee.
    Particularly in view of its scope and comprehensiveness, we think 
the GAO's findings and conclusions are especially important. In its 
2003 study entitled District of Columbia Structural Imbalance and 
Management Issues, the GAO found that the District's cost of delivering 
an average level of municipal services far exceeded that of the average 
State due to factors such as concentrated poverty, crime, and a high 
cost of living. The District's capacity to raise revenue is constrained 
by limitations on its taxing authority, such as the prohibition on 
taxing either Federal property or the income of nonresidents. Moreover, 
while the GAO stated that the District has significant--and widely 
noted--management problems, it went on to say that ``addressing 
management problems would not offset the District's underlying 
structural imbalance because this imbalance is determined by factors 
beyond the District's direct control.''
    As you are aware, the upshot of this structural imbalance is that 
the District cannot provide its citizens with an average level of 
public services with the revenue it could raise by applying average tax 
rates. This has led the District to set very high tax rates on both its 
residents and businesses, which clearly is not what the city should be 
doing if it wants to attract new residents and encourage businesses to 
relocate here.
    Even when there has been a political consensus in favor of lowering 
tax rates--which we believe is the case today--it is very difficult for 
the District to do so given the array of services it must provide and 
the limitations on its revenue raising ability.
    Apart from having to maintain very high tax rates, one of the other 
consequences of the structural imbalance is that the District continues 
to defer spending on major infrastructure projects. Because of its 
unique status as a government with city, county, and State 
responsibilities, the District must respond to a far more extensive set 
of capital improvement needs than other major American cities. A 
partial list of its capital responsibilities includes elementary and 
secondary schools; a university; roads and bridges; mass transit; water 
and sewer lines; regional wastewater treatment; solid waste disposal; a 
jail; a mental hospital; nursing homes and shelters for the homeless; 
fire, police, and court buildings; administrative offices; and parks 
and recreation facilities.
    On three occasions over the past 25 years, the Federal City Council 
has convened task forces to address issues related to the District's 
infrastructure spending. In part as a result of the Council's 1980 
study, the District significantly expanded capital spending during the 
1980's. Notwithstanding the increase in capital spending, the Council's 
1988 study (updated in 1992) noted that the city was still spending 
significantly less on infrastructure projects than was necessary to 
bring its physical assets into a state of good repair. That continued 
to be the case in the 1990's and is still true today.
    The city has estimated that the cumulative value of its 
infrastructure deferral is in the billions of dollars. Whatever the 
final number, it is clear that the cost of renovating or replacing 
antiquated schools (average age over 60 years), fixing the city's roads 
and bridges, replacing subway cars and facilities that are reaching 
their replacement age, adding to the capacity of the Metrorail system, 
and dealing with the problem of combined sewer overflows will be 
enormous.
    In that connection, we were very pleased to see that all of the 
members of the House from the Washington metropolitan area have signed 
on as original co-sponsors of H.R. 4269, the proposed legislation that 
would provide an annual Federal infrastructure contribution to the 
District. We think it is particularly significant that the bill has 
been endorsed by representatives from both Maryland and Virginia and 
that the support is bi-partisan. Bringing the city's infrastructure up 
to modern standards and making the Nation's capital a city of which all 
Americans can be proud is in everyone's interest.
    Mr. Chairman, we believe, as I think you do, that the Federal 
Government must recognize the costs it imposes on the District and the 
burden it places on the city's infrastructure, even as it limits the 
city's ability to raise revenue. We acknowledge that there may be other 
ways to assist the District of Columbia besides enactment of the 
District of Columbia Fair Federal Compensation Act of 2004. What we do 
know is that the problem of the District's structural imbalance is real 
and that it must be addressed. Nothing less than the long-term 
financial viability of the Nation's capital is at stake, and we urge 
you and your colleagues--and the administration--to craft a solution 
that deals with this problem once and for all.
    That concludes my remarks and I would be pleased to respond to any 
questions that you or your colleagues might have.

    Senator DeWine. Senator, thank you very much.
    Mr. Trachtenberg.

STATEMENT OF STEPHEN J. TRACHTENBERG, CHAIRMAN OF THE 
            BOARD, DISTRICT OF COLUMBIA CHAMBER OF 
            COMMERCE
    Mr. Trachtenberg. Mr. Chairman, Senator Landrieu, I would 
just agree with everything that has been said, but everybody 
has not said it.
    Senator DeWine. We are waiting for you, though.
    Mr. Trachtenberg. I am mindful of the time, so I am going 
to submit my testimony for the record. But I am here largely 
today on behalf of the District of Columbia Chamber of 
Commerce. This is an organization of 2,000 members, the largest 
Chamber in the greater Washington area. Many of our members are 
small business as well as the larger business community 
including restaurants, hotels, hospitals, universities, 
builders, law firms, banks, major corporations, and many, many 
small businesses. All of us are impacted by the financial 
imbalance in the city and largely because of the taxes that 
make it hard for us to compete. And this has been compounded 
since the tragic events of September 11 and their aftermath. I 
think Washington has been on a remarkable bounce-back the city 
has made since September 11 in the economy, and the 
applications to George Washington University have risen after 
September 11, contrary to what you might ordinarily expect. But 
our students, our faculty, the moms and dads that come with 
them to the District are impacted by the fiscal imbalance, the 
quality of the infrastructure of the city, and it reflects on 
the university and on all of the businesses.

                           PREPARED STATEMENT

    Even as we strive to make the economy of Washington 
stronger, we suffer with these problems, and I am most 
gratified by the comments made by both of you indicating that 
you are knowledgeable and sensitive to these issues, and I 
won't underscore these issues any more than they have been to 
date.
    Thank you for the opportunity to be here today.
    [The statement follows:]

             Prepared Statement of Stephen J. Trachtenberg

    Good Morning, Senator DeWine and members of the Committee, for the 
record, I am Stephen J. Trachtenberg, President of the George 
Washington University and the Chairman of the Board of Directors of the 
District of Columbia Chamber of Commerce. I am here today to testify on 
behalf of the Chamber concerning the District's structural fiscal 
imbalance.
    With over 2,000 members, the District of Columbia Chamber of 
Commerce is the largest Chamber in the region and our members come from 
all segments of the District's business community including 
restaurants, hotels, hospitals, universities, builders, law firms, 
banks, major corporations and many small businesses. As Chairman of the 
Board of an organization that is always working to improve the business 
and economic climate of the District, I truly believe that the success 
of our great City depends a lot on the ability of the Federal and local 
governments to work together to address the District's long-term 
structural financial imbalance.
    Since the cataclysmic events of September 11 and their aftermath, 
the District has once again demonstrated both the vitality of the 
District's local business community and the high cost of serving as the 
Nation's capital city. While the Nation is focused on the war and other 
tragedies, the District of Columbia has shouldered the burden of 
wartime security measures that snarl traffic, shutdown commerce, 
discourage tourists and keep business travelers at home. The good news 
is that with intelligent fiscal management and cooperation between our 
local elected officials and the business community, the City's economy 
is growing stronger.
    Wall Street has upgraded our bond rating. The City is in the midst 
of a development boom unparallel in our history. New commercial and 
housing projects are going up all over town. Downtown is being 
revitalized with more retail and restaurants and the tourists are back. 
The local elected officials have reduced spending, consistently 
balanced the City's budget, and improved service delivery. The local 
economy is growing stronger. Despite these positive signs of recovery, 
the District faces the significant challenge of maintaining its 
financial viability over the long term.
    The District of Columbia is unique among municipal governments. As 
the Nation's capital, it does not have the benefit of a State to share 
the costs. It is the only City in the Nation that exercises the 
responsibilities of a city, State and a municipality. With home rule, 
the District inherited an infrastructure burden that is yet to be 
addressed. The Anacostia River has environmental problems, and the 
roads, bridges, and sewer systems are in dire need of infrastructure 
repairs. Almost 42 percent of all District property is not taxable. By 
Federal law the District cannot tax income at its source for 72 percent 
of the people who work here. Thousands of tourists and demonstrators 
visit the capital of the free world. All of these things put a definite 
strain on resources and limit the City's ability to efficiently provide 
the adequate level of essential services to our residents.
    The General Accounting Office recognized that the District does not 
have the capacity to raise enough revenue under the current 
circumstances to provide adequate public services to residents. You 
will hear a great deal today about the GAO report and its conclusions. 
The key point that I will reiterate is this GAO statement:

    ``If this imbalance is to be addressed, in the near term, it may be 
necessary to change federal policies to expand the District's tax base 
or to provide additional financial support.''

    We are asking this committee to listen to GAO and to take 
appropriate steps to recognize the costs imposed on the District as the 
Nation's capital. Help us find a solution to this fiscal imbalance.
    The experts who studied this issue have reported that the 
structural deficit cannot be overcome by raising taxes. The District 
residents and businesses carry the highest tax burdens in the region. 
It hurts a City's long-term financial viability when its businesses pay 
61 percent more in retail taxes and 3 percent more in corporate 
franchise taxes than businesses in the surrounding jurisdictions. If 
the District is to remain competitive in the region, it must be in a 
position to lower taxes on residents and businesses. Clearly the costs 
of being the capital city outstrip our ability to raise revenues. The 
District suffers a substantial deficit that cannot be cured by improved 
efficiencies in the delivery of services, by increasing taxes on 
residents and businesses, or by management improvements. This imbalance 
is caused by conditions beyond of the District's ability to raise 
revenues.
    Congress has taken a piecemeal approach to addressing the imbalance 
issues. Congress historically subsidized District operations until the 
Federal payment was eliminated in 1997. The District of Columbia 
Revitalization Act of 1997 alleviated some of the financial burden by 
assuming responsibility for prisons, courts and the pension 
liabilities. Additional Federal resources are provided each year when 
the Congress earmarks money for a variety of special projects and 
provides resources for Federal entitlement programs. However, I am 
advocating for a more comprehensive sustained approach to this 
structural problem as outlined in the Mayor's report to you. As you 
know, the report outlines three options and on behalf of the Chamber, I 
am asking you to consider them.
    The D.C. Chamber strongly supports the Fair Federal Compensation 
Act of 2004 under which the Federal Government would provide an $800 
million infrastructure payment for transportation, technology upgrades, 
schools and debt service payments. The other options for addressing the 
fiscal imbalance include reinstating an unrestricted Federal payment 
and reimbursing or paying the costs usually paid by a parent State for 
the District's State-level programs. The Federal Government must 
compensate the District for the constraints it imposes on the ability 
to tax income at its source, for the State related functions, and for 
the costs associated with being the Federal enclave. The District 
government and the Federal Government are partnered in the management 
of the Federal city and should be equitably partnered in bearing the 
costs. We need each other. The Congress has no fire department. The 
District has no State. We are only asking for fairness.
    The imbalance between accessible revenues and imposed costs signal 
an approaching train wreck. How can we work with the Congress, the City 
leaders and the region to secure the future of the Nation's capital? 
What would be the right thing to do in light of what the GAO called the 
District's ``substantial structural deficit?'' We urge your close 
scrutiny to these reports and the options for solving this structural 
imbalance. The Chamber asks that the Federal Government take immediate 
steps to address these structural issues. The City, the region and the 
Nation can only benefit by a collaborative effort to solve this 
problem. The Federal Government must assume its share of this burden. 
Being the Nation's capital is an honor and privilege, but an expensive 
one for the businesses and residents of the District of Columbia.
    On behalf of the Chamber and its members, I thank you for the 
committee's continued attention to this pressing issue, and for this 
opportunity to testify before you. The D.C. Chamber of Commerce stands 
ready to respond to any questions or requests to assist in this 
endeavor.

    Senator DeWine. Thank you very much.
    Mr. Trabue, thank you for joining us.

STATEMENT OF TED TRABUE, GREATER WASHINGTON BOARD OF 
            TRADE
    Mr. Trabue. Thank you, Mr. Chairman. For the record, my 
name is Ted Trabue, and I am here today representing the 
Greater Washington Board of Trade. The Board of Trade consists 
of 1,200 member companies which together employ about 40 
percent of our region's private sector workforce. I would like 
to thank the committee for this opportunity to testify on the 
District of Columbia's structural imbalance and applaud each of 
you for addressing this very important issue.
    As a fourth generation Washingtonian, as regional vice 
president for Pepco, and as the chairman of the Board of 
Trade's D.C. Political Action Committee, I have witnessed the 
renaissance of the District of Columbia from a most unique 
vantage point. Indeed, the image of this great city has 
improved immeasurably in recent years. Much of this change in 
image--and change in actual conditions--has been made possible 
by the District's improved financial health and fiscal 
stability. The District has balanced its budget in each of the 
past 8 years. Under the leadership of Mayor Williams and with 
the support of the D.C. Council, the city has taken dramatic 
steps to improve the delivery of many public services, from 
vehicle registration to snow removal to street repairs.
    However, the District cannot continue to meet its 
obligations without a major increase in Federal assistance. 
This is due to what the U.S. General Accounting Office defined 
as a ``permanent imbalance between the District's revenue-
raising capacity and the cost of meeting its public service 
responsibilities . . . based on structural conditions that are 
beyond their ability to control.''
    I have submitted my prepared testimony for the record, but 
I would like to comment about the schools. We are not getting 
the quality of students that we used to. The schools when I 
attended them back in the 1960's and 1970's--when I go into my 
daughter's school today, books are scarce. This is unacceptable 
in the Nation's capital.

                           PREPARED STATEMENT

    A lot has been said today, and I have agreed with all of 
it. It is undeniable. The United States Government spends money 
trying to help governments. As a native Washingtonian like 
myself, I call this city home. And we believe this is critical 
to sustaining this District's impressive renaissance. 
Accordingly, we urge you to report this legislation favorably 
to the Senate and to support its prompt consumer and passage.
    Thank you very much for your time and consideration of 
these comments.
    [The statement follows:]

                    Prepared Statement of Ted Trabue

    Good morning. My name is Ted Trabue, and I am here today on behalf 
of the Greater Washington Board of Trade. The Board of Trade consists 
of 1,200 member companies which, together, employ about 40 percent of 
our region's private sector workforce. I would like to thank the 
Committee for this opportunity to testify on the District of Columbia's 
structural imbalance, and applaud each of you for addressing this very 
important issue.
    As a fourth generation Washingtonian, as Regional Vice-President 
for Pepco, and as Chairman of the Board of Trade's D.C. Political 
Action Committee, I have witnessed the renaissance of the District of 
Columbia from a most unique vantage point. Indeed, the image of this 
great city has improved immeasurably in recent years. Much of this 
change in image--and change in actual conditions--has been made 
possible by the District's improved financial health and fiscal 
stability. The District has balanced its budget in each of the past 8 
years. Under the leadership of Mayor Williams and with the support of 
the D.C. Council, the city has taken dramatic steps to improve the 
delivery of many public services--from vehicle registration to snow 
removal to street repairs.
    However, the District cannot continue to meet its obligations 
without a major increase in Federal assistance. This is due to what the 
U.S. General Accounting Office defined as a ``permanent imbalance 
between the District's revenue-raising capacity and the cost of meeting 
its public service responsibilities . . . based on structural 
conditions that are beyond their ability to control.''
    As you know, the GAO was asked to analyze the District's finances 
and recently issued a report. It found a structural imbalance that 
ranges in magnitude from $470 million to $1.1 billion. The GAO cited 
three reasons for why this imbalance exists and why it is due to 
circumstances beyond the District's control:

       THE DISTRICT PROVIDES STATE SERVICES WITHOUT STATE INCOME

    In addition to the customary responsibilities of a major U.S. city, 
the District of Columbia must be responsible for services traditionally 
provided by county and State governments. These include Medicaid 
services, public education, police and fire protection, mental health 
services, child support enforcement, and tax collection.
    However, the District has no State government to help defray the 
cost of these State services. The District's tax base is not 
sufficient, long term, to sustain the delivery of State functions 
without Federal assistance.

        THE MAJORITY OF PROPERTY IN THE DISTRICT IS NOT TAXABLE

    Approximately 60 percent of District property is owned by the 
Federal Government or other nonprofit institutions and is therefore not 
taxable. This inability to tax a majority of real property in 
Washington, DC--which has emerged as one of the strongest commercial 
property markets in the country--devastates our ability to serve our 
residents and meet our ongoing commitments.

           THE DISTRICT IS UNABLE TO TAX INCOME AT ITS SOURCE

    The District is prohibited by both congressional statute and the 
Constitution--as interpreted by Federal courts--to tax non-resident 
income. As this committee knows, it is routine for other cities, such 
as New York and Philadelphia, to tax the income of people who come into 
the city to work. Non-residents comprise approximately 70 percent of 
the vehicle traffic coming across District bridges and using District 
roads and other services. The District cannot use revenue from these 
commuters to offset the costs of providing these services.
    The Board of Trade recognizes that the District of Columbia's 
inability to levy a commuter tax impairs its revenue-raising 
authorities and that many cities have the power to levy such a tax. A 
commuter tax has strong opposition outside the District and if pursued, 
would likely prove to be regionally divisive.
    To be sure, the analysis provided by the GAO identified what it 
labeled ``significant management inefficiencies'' in three key areas: 
Medicaid, elementary and secondary education, and public safety. The 
remaining challenges faced in each of these areas have been 
longstanding concerns for the Board of Trade, and have been well-
documented over time. Importantly, however, the report also concluded 
that ``even if the District's services were managed efficiently, the 
District would have to impose above-average tax burdens just to provide 
an average level of services.''
    The findings of the report are quite clear: there are clearly areas 
where the District government can, and should, be doing better. 
However, management efficiencies alone cannot remedy the structural 
imbalance between the District's ability to raise revenues and its need 
to adequately provide essential public services.
    We commend Congresswoman Eleanor Holmes Norton and Congressman Tom 
Davis of Virginia for their leadership in co-sponsoring legislation 
that would alleviate the structural imbalance. The District of Columbia 
Fair Federal Compensation Act of 2004 would authorize an $800 million 
contribution to the District. This contribution would represent the 
median of the District's estimated structural imbalance.
    This contribution--coupled with efforts within the District 
government to operate in a more efficient and cost-effective manner--
would enable the District to meet its core responsibilities without 
imposing an unacceptable burden on its citizens and businesses.
    We believe this is critical to sustaining this District's 
impressive renaissance. Accordingly, we urge you to report this 
legislation favorably to the Senate and to support its prompt 
consideration and passage. Thank you very much for your time and 
consideration of these comments.

    Senator DeWine. Well, thank you all very much.
    Ms. Dalton, Dr. Rivlin, when you come up with the 
structural imbalance, how do you account or do you account for 
what this committee has seen as far as this horrible aging 
infrastructure in the District of Columbia? How does that get 
counted into that? Because if you were the Mayor or on this 
subcommittee and you tried to deal with the District's long-
term problems, whether it is the water, whether it is the 
sewer, bridges, you are looking at the next 20 years. And if 
you really want to do what needs to be done, you have to 
figure, well, we have got to set aside x number of dollars 
every single year to catch up. It is just like a house, an old 
house that you have neglected for many, many years. You have 
got payback time now. How do you count that into this figure 
that you have come up with? Is it in there?
    Ms. Rivlin. Well, I will not speak for the GAO, but I think 
in our report we stressed that this was a very large number. It 
is hard to say exactly how much District costs are increased 
every year, but they are by the fact that maintaining even 
minimally a building which is old and has been badly maintained 
for a long time is very expensive. And, clearly, this 
infrastructure deficit which is very serious in roads and 
streets and schools and public health facilities--and you name 
it, it is decrepit--it is costing the District currently a 
substantial amount of money, and this will only escalate if we 
do not meet the problem.
    Senator DeWine. Ms. Dalton.
    Ms. Dalton. There are two ways that you can look at it. 
One, which is really kind of the short-term way, is how much 
money is the District putting into infrastructure every year 
and how does it compare to other State systems. But probably 
the more important way to look at it is what kind of inventory 
infrastructure needs do they have, because infrastructure is a 
cumulative effect. And when you have years where you cannot put 
money into infrastructure, it just continues to build and 
probably costs more, which is why in our work we took a look 
at, you know, what was in that inventory of infrastructure 
needs. Even though we only received probably a partial list, it 
was very significant. And that is how we really kind of looked 
at the infrastructure issues to see was there a backlog, was 
there a need, and, yes, there was.
    Senator DeWine. So the figure that you have cited, that 
does take into consideration all this infrastructure that this 
subcommittee is looking at and the Mayor is looking at?
    Ms. Dalton. No, it does not. What it looks at in terms of 
structural balance is just how much money on an annual basis is 
the District investing infrastructure. It has not looked at the 
cumulative need for infrastructure, and those build over time.
    Senator DeWine. So I would maintain that one could argue 
that that figure that you cited is understated.
    Ms. Dalton. It is quite possible it is. As we were making 
our estimates, we tried to be as conservative as we could, 
which is one of the reasons why you see a range in terms of our 
estimation because there are a number of variables and 
assumptions that are built into those estimates, and we did 
take a conservative approach.
    Senator DeWine. And as Dr. Rivlin said, you know, we all 
know just from our own houses that the longer you wait, if you 
have an old house--and we have an old house here in the 
District--the longer you wait, the more you are going to pay.
    Ms. Dalton. Definitely.
    Senator DeWine. And you pay every year just to maintain it, 
and then when you finally get around to fixing it, it is just 
huge.
    Ms. Dalton. The analogy would be in the private sector 
where you look at deferred maintenance.
    Senator DeWine. Right.
    Ms. Dalton. And you want to manage that so it does not get 
out of control. The same applies to the Government. If you do 
not manage deferred maintenance, you have got trouble.
    Senator DeWine. Absolutely.
    Senator Thompson, you chaired the Government Affairs 
Committee that would probably have this bill or a similar bill. 
Put your Senate hat back on and all your experience as a person 
who understands how things work in our Nation's capital and 
understands how things work in the Senate. How do we get 
something like this passed in Congress? We have got a tough--
this is not an easy time. There are never easy times here in 
Congress. How do we persuade our colleagues?
    Senator Thompson. That goes to the heart of the question, 
and I have thought about it. We now have at least three 
analyses of the city's infrastructure. I don't think there is 
much--I think what is going on, we have got a management 
problem. The city is making progress. I don't know how you 
institutionalize something in addition to what we already have. 
I think most everybody has confidence.
    So I think we have to have--and I am really sincere where I 
say that this is a case of national investment. It doesn't look 
to me like we want to--the thing is we need to make investment 
in our Nation. We took a time-out where we all sat down 
together and we all thought about our common interests. I think 
in that same spirit we can come up with something we can be 
proud of. I think that with safeguards going in and 
understanding what is going to be needed is important.
    Senator DeWine. Good. Senator Landrieu.
    Senator Landrieu. Thank you, Mr. Chairman. Just a couple of 
points and then a question or two, but I am assuming that you 
all are familiar with a report I guess submitted by the Mayor 
to us today. I would like to refer at least the staff and those 
that might have it to page 7 of this report, where it talks 
about the estimated wages and salaries earned in the District 
and by D.C. residents. It is quite very interesting, and 
actually somewhat jolting to see, Mr. Chairman, how much income 
is earned by non-District residents in the District as compared 
to the earnings of District residents in the District. Just for 
the record I would like to read that the total earnings in the 
District in billions--I am assuming this is annual earnings--is 
$40 billion, and the amount of money earned in the District of 
Columbia by non-District residents is $30.9 billion. And the 
amount earned by District residents in the District is $9.1 
billion for a total of $40 billion.
    What is very notable about this is that these earnings were 
not taxed earnings, but earnings earned in the city using city 
services, whether it is transportation, roads, sidewalks, fire, 
police, emergency response teams, electricity, lights, and you 
can just go on and on, and it is earned but not able to be 
taxed. That is an awful lot of money that is basically not 
available to the District to support the city itself. That is 
point No. 1.
    Point No. 2, I want to say before the hearing ends, which 
will be in a few moments, is that my comments about management 
efficiencies are really directed to the city generally itself, 
and not to the school system, and I want to make this very 
clear. I think that there are many opportunities still 
available for the school system to become more efficient, more 
responsive, more inclusive, stronger, within its current budget 
constraints. And I say that, having studied now----
    Senator DeWine. And I agree with that as well.
    Senator Landrieu. Thank you. And the Chairman and I have 
studied this now for years and years, looked at it from every 
different angle, compared it to other cities that have the same 
demographics, same socioeconomic levels, to see that there is a 
better quality of education being provided for less dollars 
than is generally true of Washington, DC.
    I would just say for the record that I want to be clear, 
that my comments about management are for the city generally, 
not the school system.
    The third point is--and I appreciate, Senator Thompson, 
your comments about how we are going to get from where we are 
to where we need to be. But I think just sort of one 
unrestricted payment to the District for a variety of sort of 
menu choices will probably not meet the test of accountability 
or the way monies are invested these days at least, and perhaps 
a more structured help would make more sense along the lines 
that we have suggested, for transportation, which is obvious.
    I am sitting here thinking, Mr. Chairman, of the 
contribution the State of Louisiana makes and other States 
towards their public school system that is not happening here, 
which we could potentially help in that direction.
    Then to help with capital funding, at least from my limited 
experience in Louisiana, we had a capital outlay budget at the 
State level that helped all cities and all counties, parishes 
in our case, around the State, not to the extent that the 
parishes and cities ever wanted, but it was a pretty 
significant help in terms of general capital outlay, which of 
course does not exist here because there is no State.
    So along those lines I think we could put something, could 
begin coming together and finding some form, but clearly, based 
on the earnings of people from outside of the District, in the 
District and our inability to tax, the high level of taxation 
for businesses and residents that is already in place for the 
600,000-plus people that live here, something has got to be 
structured.
    I will look forward to working with you all and would 
recommend the reading of this study.
    The other interesting thing, is it would be interesting--I 
know people say why go back that far? The problem is 2004. But 
maybe understanding what happened back in the 1920's, because 
it is a huge falloff of direct Federal assistance.
    The final point is maybe exploring making more generous the 
Federal match for this city's Federal programs would help. I 
fight very hard for more generous match for Louisiana, because 
I have a high percentage--Senator, you do also in Tennessee, 
Senator DeWine to some extent in Ohio--but my State is one of 
the poorest in the Nation, so I am constantly fighting, and I 
think on fairly substantial ground to get our Federal matches 
as generous as possible, claiming our people are less able to 
pay. The District could also in some ways make that claim and 
perhaps arguing for more generous Federal matches would 
indirectly, indirectly actually bring more dollars to the city.
    So I guess I will conclude by saying there are many ways to 
skin this cat. I think we have gotten some good ideas this 
morning, and I would be for doing it for the city, not at this 
point for the school system. I am not saying I will not help 
the school system, but not a blank check to a system that is 
not, in my view, and in many views, not well managed, and when 
we do structure something, not have it just one big check for a 
selection of menus, but something that is transparent, 
accountable, so the taxpayers are sure that they are getting 
their money's worth.

                     ADDITIONAL COMMITTEE QUESTIONS

    Senator DeWine. That was the second bell for a vote. Let me 
thank you very much. I think your testimony has been very 
helpful, and I think really lends a lot of support for the 
changes that we need to make.
    [The following questions were not asked at the hearing, but 
were submitted to the Department for response subsequent to the 
hearing:]

          Questions Submitted to the General Accounting Office
            Questions Submitted by Senator Richard J. Durbin

                         MANAGEMENT CHALLENGES

Update on Management Challenges and Possible Improvements
    Question. Can you provide us with any current insights about 
whether the District has taken steps to address these concerns, and 
whether those efforts have produced positive results?
    What additional improvements would you like to see?
    Answer. As I stated in my June 2004 testimony before your 
subcommittee, the District of Columbia has made progress in improving 
management and maintaining fiscal discipline. In fact, it appears the 
District has made some progress since we issued our comprehensive 
report--District of Columbia: Structural Imbalance and Management 
Issues--in May 2003 (upon which my June 2004 testimony was based).\1\ 
For example, District officials have taken steps to balance their 
budgets for fiscal years 2004 and 2005. Also, the District's bond 
rating has been upgraded by all of the major rating agencies in part 
due to the region's improving economy and better financial management.
---------------------------------------------------------------------------
    \1\ GAO, District of Columbia: Structural Imbalance and Management 
Issues, GAO-03-666 (Washington, DC: May 22, 2003).
---------------------------------------------------------------------------
    Further, our recent mandated review of the District's performance 
and accountability plan for fiscal year 2003 found that the District 
complied with statutory reporting requirements and that the report 
provided a comprehensive review of the District's performance.\2\ We 
also found that the 2003 performance report provided an update on the 
following performance management programs.
---------------------------------------------------------------------------
    \2\ GAO, District of Columbia: Fiscal Year 2003 Performance Report 
Shows Continued Improvements, GAO-04940R (Washington, DC: July 7, 
2004).
---------------------------------------------------------------------------
  --The District reported on the expansion of performance-based 
        budgeting to 27 additional agencies. All 77 agencies are 
        expected to be utilizing performance-based budgeting by 2006.
  --The District also reported plans to expand its recommendations and 
        court orders tracking system to begin tracking the costs of 
        implementing recommendations and court orders. Originally this 
        system was intended to only track the extent to which 
        recommendations and court orders had been implemented 
        throughout the District.
  --In addition, the District reported plans to implement an online 
        budgeting and performance program (Argus) to link agency 
        budgeting and performance reporting. The District expected to 
        implement the program in October 2004 in those agencies that 
        are already using or implementing performance-based budgeting. 
        This system will allow for monthly performance reporting and 
        enhance oversight of agencies' data collection efforts. Through 
        this system, agencies will prepare budget requests based on 
        actual program costs. Further, the system will eliminate an 
        agency's ability to modify performance targets or past 
        performance without management approval.
    The District's performance goals represent about 90 percent of its 
total expenditures. While the District has made steady progress in 
implementing a more results-oriented approach to management and 
accountability, actions have not been completed on our prior 
recommendations related to expanding coverage of goals and measures to 
all activities within the Mayor's authority, as well as the monitoring 
of court costs.
    Despite the progress that has been made, challenges still remain, 
as evidenced by several studies and investigations that have been 
released since the issuance of our May 2003 report. For example, the 
independent auditor of the District's financial statements for fiscal 
year 2003 again reported District Medicaid provider accounting and 
financial reporting as a material weakness.\3\ We highlighted Medicaid 
management as a major challenge in our May 2003 report. According to 
the independent auditors' report, certain conditions have hindered the 
ability of the District of Columbia Public Schools (DCPS) and 
Department of Mental Health to accurately estimate and record amounts 
owed from the Federal Government for eligible services in a timely 
fashion. This means that the District continues to bear more of the 
burden of its high Medicaid costs with local funds than necessary and 
does not fully leverage the permanently enhanced Federal Medicaid match 
(70 percent) that Congress gave it in 1997. Addressing these problems 
in a timely manner has taken on greater significance because the 
District has proposed eliminating its Medicaid reserve fund in fiscal 
year 2005 ($55 million in fiscal year 2004). This reserve was intended 
to serve as a cushion in the District's budget in the event of less-
than-expected Federal reimbursement, which had been a significant 
problem in previous years.
---------------------------------------------------------------------------
    \3\ Government of the District of Columbia, Office of the Inspector 
General, District of Columbia: Independent Auditors' Report on 
Compliance and on Internal Control Over Financial Reporting 
(Washington, DC: Feb. 2004).
---------------------------------------------------------------------------
    In another example, in September 2003 the DC Appleseed Center for 
Law and Justice \4\ and Piper Rudnick LLP issued a study on special 
education problems in DCPS, which we also discussed in our May 2003 
report.\5\ The District lacks appropriate special education programs 
and services, which frequently results in DCPS expending resources to 
subsidize private school placements and related transportation 
expenses, as well as the costs associated with due process hearings. 
According to the DC Appleseed Center for Law and Justice report, these 
problems are exacerbated by DCPS's inadequate dispute resolution 
process. The report concluded that DCPS's inability to promptly address 
parental inquiries and concerns about inadequate special education 
services and facilities results in anger and mistrust on the part of 
parents. Responding to parental concerns earlier and more effectively 
could minimize anger and mistrust, thereby reducing lawsuits, due 
process hearings, and their related legal costs. The report also laid 
out recommendations for improving DCPS's dispute resolution process.
---------------------------------------------------------------------------
    \4\ The DC Appleseed Center for Law and Justice is an organization 
that brings together volunteer teams of attorneys and other experts to 
conduct studies of serious local issues, research and analyze them, 
develop and publish recommendations for systemic reform, and advocate 
for solutions.
    \5\ DC Appleseed Center for Law and Justice and Piper Rudnick LLP, 
A Time for Action: The Need to Repair the System for Resolving Special 
Education Disputes in the District of Columbia (Washington, DC: Sept. 
2003).
---------------------------------------------------------------------------
    Moreover, the District Office of the Inspector General reported in 
September 2003 that DCPS lost the use of approximately $4.5 million in 
Federal homeland security funds because it was unable to identify a use 
for and obligate these funds in a timely fashion.\7\ Although DCPS lost 
out on the use of these funds, it nonetheless has identified a need for 
security enhancements totaling $5.7 million.
---------------------------------------------------------------------------
    \7\ Government of the District of Columbia Office of the Inspector 
General, Use of Homeland Security Funds at the District of Columbia 
Public Schools (Washington, DC: Sept. 2003).
---------------------------------------------------------------------------
    As agreed with your staff, we did not conduct updated reviews of or 
new interviews with officials in District agencies in advance of my 
June 2004 testimony. Nonetheless, several GAO studies completed since 
the issuance of our report in May 2003 further describe the status of 
the District's management challenges. Several select examples of other 
more recent GAO work related to the District follow. In some cases, GAO 
has also recommended that certain actions be taken to address 
management challenges.
  --District-wide management and performance.--In our July 2004 review 
        of the District's performance and accountability report for 
        fiscal year 2003 (described above), we identified certain gaps. 
        Specifically, the 2003 performance report did not include 33 
        activities that represent 10 percent of the District's budget, 
        including public charter schools (the most significant program 
        activity that lacked goals). Previously, we recommended that 
        the District establish goals for the charter schools and report 
        on progress. District officials told us that goals have been 
        established for the charter schools and will appear in the 2004 
        performance report. According to the report, most of the 
        remaining program activities relate to particular funds (e.g., 
        the disability compensation fund), and measures are not set for 
        such funds.
  --Medicaid--mental health system.--In March 2004 we issued a report 
        on the status of reforms to the District's mental health 
        system, which is managed by the Department of Mental Health 
        (DMH), including its enrollment and billing system.\7\ DMH has 
        developed and implemented a comprehensive enrollment and 
        billing system designed to coordinate clinical, administrative, 
        and financial processes. Under this system, a core services 
        agency, which is a DMH-certified provider, enrolls eligible 
        consumers in the District mental health system and develops 
        treatment plans, provides and coordinates services, and bills 
        DMH on a fee-for-service (FFS) basis. This system has two key 
        attributes. First, it links payment directly to treatment 
        planning and services provided. Second, it increases access to 
        certain community-based mental health services, with a 
        significant share of the costs reimbursable by Federal Medicaid 
        funds for community-based mental health services. For fiscal 
        year 2003, DMH received $17.5 million in Federal Medicaid 
        funds, and DMH expects further growth in Medicaid revenue. In 
        transitioning to FFS, however, providers have faced challenges 
        managing cash flow in a system that no longer guarantees 
        revenue regardless of performance. In addition, because 
        provider contracts were tied to the FFS billing projections, 
        DMH could not pay claims in 2003 for providers that were 
        delivering more services than had been projected until their 
        contracts were changed. As a result, providers did not always 
        receive claims payments on a timely basis in fiscal year 2003. 
        By August 2003, DMH made the necessary contract changes to 
        allow providers to be paid for the remainder of the fiscal year 
        and, according to senior officials, had a plan in process for 
        fiscal year 2004 to prevent this problem from recurring.
---------------------------------------------------------------------------
    \7\ GAO, District of Columbia: Status of Reforms to the District's 
Mental Health System, GAO-04-387 (Washington, DC: Mar. 31, 2004).
---------------------------------------------------------------------------
  --Medicaid--program and fiscal integrity.--In July 2004, we issued a 
        report on State and Federal efforts to prevent and detect 
        improper Medicaid payments to providers.\8\ Fraudulent and 
        abusive billing practices across the 50 States and the District 
        include billing for services, drugs, equipment, or supplies not 
        provided or not needed. States can generate cost savings by 
        applying certain measures to providers determined to be at high 
        risk for inappropriate billing and by generally strengthening 
        their program controls for all providers. We identified a 
        number of program control approaches and surveyed all of the 
        States and the District on the extent to which they have 
        implemented them. These include time-limited enrollment, on-
        site inspections, and criminal background checks, as well as 
        increased use of information technology and prescription drug 
        controls. According to our inventory, the District had 
        implemented 9 of these 20 cost-saving approaches.
---------------------------------------------------------------------------
    \8\ GAO, Medicaid Program Integrity: State and Federal Efforts to 
Prevent and Detect Improper Payments, GAO-04-707 (July 16, 2004).
---------------------------------------------------------------------------
  --Public safety and justice--jail facilities.--In August 2004 we 
        issued a report that reviewed the status of health and safety 
        conditions at the District of Columbia's Jail and Correctional 
        Treatment Facility (CTF) along with its management of capital 
        improvement projects at the facility.\9\ We reported that 
        District health inspectors consistently identified problems at 
        the facility regarding air quality, vermin infestation, fire 
        safety, and plumbing (among other things). However, we found 
        that District health inspectors did not always document where 
        deficiencies were identified or exact times and dates when they 
        were identified--making it difficult for CTF officials to 
        determine how prevalent health and safety deficiencies were, 
        whether problems were occurring in the same locations, or 
        whether they changed over time. Further, we found that the 
        District lacked written policies and procedures concerning the 
        management of jail-related capital improvement projects. We 
        recommended that District health inspectors improve the 
        specificity of their reports. We also recommended that the 
        District strengthen management of capital improvement projects 
        by establishing specific time frames for completing work and 
        developing and implementing policies and procedures.
---------------------------------------------------------------------------
    \9\ GAO, District of Columbia Jail: Management Challenges Exist in 
Improving Facility Conditions, GAO-04-742 (Aug. 27, 2004).
---------------------------------------------------------------------------
  --DCPS--special education.--In September 2003, we issued a report on 
        special education disputes and mediation strategies across the 
        States (including the District).\10\ Officials told us that 
        disagreements usually arose between parents and school 
        districts over fundamental issues of identifying students' need 
        for special education, developing and implementing their 
        individualized education programs, and determining the 
        appropriate education setting. We found that most due process 
        hearings were concentrated in five States--California, 
        Maryland, New Jersey, New York, and Pennsylvania--and the 
        District of Columbia. We reported that 2,311 special education 
        disputes occurred in these five States and the District in the 
        year 2000--compared to 709 in all other States combined. Also, 
        the District had 336 due process hearing per 10,000 students, 
        compared with 24 per 10,000 in New York. We also found that 
        dispute resolution activity was generally low relative to the 
        number of students with disabilities.
---------------------------------------------------------------------------
    \10\ GAO, Special Education: Numbers of Formal Disputes Are 
Generally Low and States Are Using Mediation and Other Strategies to 
Resolve Conflict, GAO-03-897 (Washington, DC: Sept. 9, 2003).
---------------------------------------------------------------------------
    The District has made and is making real and important progress in 
addressing its long-term and difficult management challenges. However, 
more work needs to be done. Sustained progress is needed to address the 
critical financial, program, and performance management challenges that 
the District faces across various agencies and program areas.
Link between Structural Imbalance and Management Challenges
    Question. While you note that addressing these management issues 
could help reduce future budget shortfalls, such improvements will not 
offset the structural imbalance. I assume that conclusion is not in any 
way intended to signal that ignoring the management problems is 
acceptable, but can you please comment further on that?
    Answer. Ignoring the management challenges that we and others have 
identified is not acceptable, nor did we mean to imply this in our 
report or my testimony. District officials agree that management issues 
need to be addressed. For example, in the District's formal response to 
our May 2003 report, the District Chief Financial Officer (CFO) 
concurred that improved program performance would permit the District 
to enhance the quality of the services it delivers and position the 
District to obtain a higher level of Federal reimbursement than it 
currently receives. The CFO also acknowledged that significant 
opportunities for efficiency improvements exist within District 
programs and noted that the District is taking some corrective actions.
    Nonetheless, it is important to consider certain critical points 
regarding the District's management challenges and their relationship 
to the fiscal structural imbalance we confirmed in our report. The 
models we used to estimate the range of the District's fiscal 
structural imbalance presume that services are provided with average 
efficiency. To the extent that a jurisdiction does not deliver services 
with average efficiency, its actual level of services may actually be 
below average. Due to a combination of its significant management 
problems and its substantial structural deficit, the District is likely 
providing a below-average level of services even though its tax burden 
is among the highest in the Nation. Accordingly, the District's 
management problems waste resources that it cannot afford to lose and 
draw resources away from providing even an average level of services.
    By addressing the management challenges that GAO and others have 
identified over the years, the District could free up local funds and 
possibly gain additional Federal funds for use in increasing the level 
of services to its residents and visitors. For example, improving 
Medicaid management could allow the District to obtain a greater level 
of Federal Medicaid funding and fully leverage its enhanced Medicaid 
match. However, management improvements will not offset the underlying 
structural imbalance because it is caused by factors beyond the direct 
control of District officials. As a consequence, District officials may 
face more difficult policy choices than most other jurisdictions in 
addressing a budget gap between spending and revenues based on current 
policies.
    As we stated in our May 2003 report, by virtue of the District 
being the Nation's capital, justification may exist for a greater role 
by the Federal Government to help the District address its structural 
imbalance. However, this strategy is not without its own risks. For 
example, significant management problems in the District mean that the 
aid provided, if not used wisely, could result in more wasteful 
spending or in the District postponing management reforms. Given its 
management challenges, it is important that the District establish 
basic management, performance, and accountability standards to ensure 
the efficient and effective use of any Federal resources. Along these 
lines, it should continue planned management reforms, including the 
movement to performance-based budgeting. It should also address 
management problems and implement recommendations for improvements that 
have been highlighted by GAO and others.

                          LEGISLATIVE REMEDIES

    Question. What guidance can GAO offer as Congress evaluates 
legislative measures to address the District's fiscal structural 
imbalance challenge?
    What should be included in legislative language that would ensure 
adequate and appropriate transparency and accountability for the use of 
any Federal contributions that may be authorized to address the 
structural imbalance?
    What safeguards would you recommend be considered as essential 
elements of any funding proposal?
    Using H.R. 4269, the District of Columbia Fair Federal Compensation 
Act of 2004, as a baseline, what additions would improve that approach?
    Answer. Due in part to its substantial structural deficit, the 
District is likely providing a below average level of services even 
though its tax burden is among the highest in the Nation. As a 
consequence, District officials may face more difficult policy choices 
than other jurisdictions in addressing a budget gap between spending 
and revenues based on current policies. For example, given its existing 
high tax burdens, further raising taxes would likely worsen its 
competitive advantage in attracting new businesses and residents to the 
city rather than surrounding jurisdictions. It would also be difficult 
to cut services further.
    If raising taxes or cutting services is to be avoided, an 
alternative option District officials might exercise would be to 
continue deferring improvements to its capital infrastructure. However, 
this strategy also is not viable in the long run, in that deteriorating 
infrastructure would of necessity lead to further reductions in the 
levels and types of services provided and ultimately would necessitate 
either higher taxes or cuts in services.
    Federal policymakers are faced with difficult choices regarding 
what role they should play, if any, in addressing the District's 
structural imbalance. Federal policymakers could choose not to address 
the District's structural imbalance and require local officials to deal 
with the difficult choices it faces to meet its obligations. This 
approach recognizes that other jurisdictions also face substantial 
structural deficits, and District officials are in the best position to 
decide for themselves the most effective means of balancing trade-offs 
between high tax burdens and reduced levels of public services for 
local residents and visitors to the Nation's capital.
    Alternatively, additional Federal assistance for the District could 
compensate for its structural imbalance. However, this assistance might 
suggest that some other States, also with sizable structural 
imbalances, would have an equally sound claim on additional Federal 
assistance. Nevertheless, by virtue of the District being the Nation's 
capital, and the restrictions placed upon it, justification may exist 
for a greater role by the Federal Government to help the District 
maintain fiscal balance. As previously noted, this strategy is not 
without its own risks. For example, management problems that plague the 
District mean that the aid provided, if not used wisely, could result 
in the District simply postponing many management reforms necessary to 
avoid the wasteful expenditure of much needed resources and would 
assist in closing current budget gaps. Given its management challenges, 
the District must achieve basic management performance and 
accountability standards to ensure an efficient use of any resources.
    In the end, it is up to Congress to decide whether or in what form 
to provide the District with additional Federal assistance to 
compensate for its structural imbalance. As the Mayor of the District 
of Columbia discussed in his May 2004 report to the Senate Committee on 
Appropriations, there are various forms that enhanced Federal 
assistance could take. The Mayor outlined three forms: an unrestricted 
Federal payment, assumption of State-like functions by the Federal 
Government, and Federal funding that would be targeted for specific 
purposes as laid out in the District of Columbia Fair Federal 
Compensation Act of 2004.
    No matter what form this assistance might take, it is important for 
Congress to have assurances that the funds would be spent efficiently 
and effectively and be used for any intended purposes. These safeguards 
should be written into any legislation. Specifically, District 
officials should be required to report to Congress on how they plan to 
spend the Federal assistance and regularly report on how it is being 
spent. For instance, Congress could require District officials to 
submit a master plan to Congress on how they intend to spend the 
Federal assistance--before any funds are obligated--and update this 
plan as circumstances or priorities change. Further, any reports and 
financial statements should be required to undergo periodic review by 
independent auditors. In addition, Congress may consider further 
specifying the types of projects for which Federal funds could be used. 
Congress may also consider a matching requirement to ensure that some 
local funds continue to be used for infrastructure and capital 
projects.
    Finally, as I discussed in my testimony before your subcommittee, 
it is of critical importance to have an effective and transparent 
capital decision-making and management system in place for all District 
agencies. In my response to the third set of questions that follow, I 
discuss principles and practices that should be followed to ensure 
efficient and effective capital decision making and management.

                         PLANNING AND OVERSIGHT

    Question. What types of preliminary evaluations should be conducted 
and what management controls should be in place as a prerequisite for 
addressing the District's infrastructure needs?
    In your oral testimony, you referred to an inventory of 
infrastructure and noted that what GAO was provided as part of its work 
was an ``incomplete'' array. Can you elaborate further and describe any 
impediments GAO encountered in getting complete information?
    What do you suggest would help ensure that the District compiles 
and maintains an accurate and full inventory of its infrastructure 
needs and estimates, as well as having in place a fully functional 
system for tracking investments made and projected future costs?
    Answer. If the District were to receive additional Federal 
assistance to compensate for its structural imbalance and enhance its 
ability to fund capital investments--as is proposed in the District of 
Columbia Fair Federal Compensation Act of 2004 (H.R. 4269)--it is 
important that the District follow sound practices in order to avoid 
the costly management inefficiencies it has experienced in the past. 
Congress needs assurance that any Federal assistance to the District 
would be spent effectively and efficiently. It is critical to have 
clear, transparent reporting and accountability mechanisms in place to 
ensure the proper use of Federal funds. One option for Congress would 
be to require the District to develop and submit for review a set of 
capital planning and management policies and procedures that would be 
reliably followed by all District agencies.
    Regarding my comments about the District's infrastructure 
inventory, we had some difficulties obtaining complete and timely 
information on infrastructure projects that were not recommended for 
financing due to funding constraints. This emphasizes the importance of 
the District having systems in place to track information related to 
all infrastructure projects, including proposed projects not approved 
for funding.
    A key way to ensure that Federal capital funds are spent 
effectively and efficiently is to have a clear capital decision-making 
and management system in place. Along these lines, GAO has developed an 
executive guide that identifies organizational attributes that are 
important to the capital decision-making process as a whole, as well as 
capital decision-making principles and practices used by leading State 
and local governments and private sector organizations.\11\ These 
principles and practices could be applied to any District agency or the 
District as a whole. Key elements of this guidance are to closely link 
any planned capital investments to a government's or organization's 
strategic goals and objectives, ensure that effective information 
systems are in place to support sound decision making and management, 
and ensure that city leaders to clearly communicate their vision and 
goals to project managers. Specifically, we have identified five basic 
principles of effective capital decision making and linked certain 
practices that leading public and private entities use to carry out 
each principle.
---------------------------------------------------------------------------
    \11\ GAO, Executive Guide: Leading Practices in Capital Decision-
making, GAO/AIMD-99-32 (Washington, DC: December 1998).
---------------------------------------------------------------------------
    We did not examine the District's capital planning and management 
functions in advance of my June 2004 testimony, and District officials 
may already be following some of these principles and practices in 
certain program areas. Nevertheless, the District should consider these 
principles and practices in ensuring the implementation of an 
effective, transparent, and reliable system for making capital 
decisions and managing them from start to finish. Our executive guide 
contains additional detail on each of these practices along with 
numerous examples from the leading organizations that we studied.

Principle I: Integrate organizational goals into the capital decision-
        making process.
    Conduct comprehensive assessments of needs to meet mission and 
results-oriented goals and objectives.--Conducting a comprehensive 
needs assessment or analysis of program requirements is an important 
first step in an organization's capital decision-making process. A 
comprehensive assessment of capital needs considers an organization's 
overall mission and identifies the resources needed to fulfill both 
immediate requirements and anticipated future needs based on the 
results-oriented goals and objectives that flow from the organization's 
mission.
    Identify current capabilities, including the use of an inventory of 
assets and their conditions, and determine if there is a gap between 
current and needed capabilities.--Leading organizations gather and 
track information that helps them identify the gap between what they 
have and what they need to fulfill their goals and objectives. To help 
assess current capabilities and establish a baseline, such 
organizations maintain automated systems that track the use and 
performance of existing assets and facilities. Current and accurate 
information is essential. Some functions performed by asset inventory 
and tracking systems include (1) identifying asset and facility 
location and status, (2) tracking and reporting asset and facility 
condition and deferred maintenance needs, and (3) tracking user 
satisfaction. Routinely assessing the condition of assets and 
facilities allows managers and other decision makers to evaluate the 
capabilities of current assets, plan for future asset replacements, and 
calculate the costs of deferred maintenance.
    Decide how best to meet the gap by identifying and evaluating 
alternative approaches (including noncapital approaches).--Leading 
organizations consider a wide range of alternatives to satisfy their 
needs, including noncapital alternatives, before choosing to purchase 
or construct a capital asset or facility. Managers carefully consider 
options such as contracting out or divesting the activity the asset 
would support. When they determine that capital is needed, managers 
also consider repair and renovation of existing assets. When evaluating 
alternatives, prudent decision makers also consider the various funding 
options available to them. They weigh the different impacts of debt 
financing, engaging in joint-venture projects, or using current-year 
appropriations. Leading organizations examine their needs and seriously 
consider whether capital is needed to fulfill their requirements. They 
look at two primary issues to evaluate options available to them: (1) 
whether the function is essential to fulfilling the organization's core 
responsibilities and (2) whether the organization has the specific 
expertise to perform the function well and cost effectively.

Principle II: Evaluate and select capital assets using an investment 
        approach.
    Establish a review and approval framework supported by analyses.--
We found that establishing a decision-making framework that encourages 
the appropriate levels of management review and approval, supported by 
the proper financial, technical, and risk analyses, is a critical 
factor in making sound capital investment decisions. A well-thought-out 
review and approval framework can mean capital investment decisions are 
made more efficiently and supported by better information. Some leading 
organizations have review processes in place that determine the level 
of analysis and review that will be conducted based on the size, 
complexity, and cost of the project. As part of the capital review and 
approval process, leading organizations develop a decision or 
investment package to justify capital project requests. Common 
categories of information in the packages include links to 
organizational objectives; solutions to organizational needs; project 
resource estimates and schedules; and project costs, benefits, and 
risks. These packages provide decision makers with a valuable tool for 
analysis and planning at the time the project is being considered. 
Decision packages are supported by a range of materials. Types of 
materials include detailed economic and financial analyses, such as 
cost-benefit analyses and analysis of return on investment.
    Rank and select projects based on established criteria.--Leading 
organizations have defined processes for ranking and selecting 
projects. The selection of capital projects is based on preestablished 
criteria and a relative ranking of investment proposals. Leading 
organizations determine the right mix of projects by viewing all 
proposed investments and existing capital assets as a portfolio. 
Organizations generally find it beneficial to rank projects because the 
number of requested projects usually exceeds available funding. Sound 
criteria help link potential investments to program priorities and 
desired results.
    Develop a long-term capital plan that defines capital asset 
decisions.--Once projects are ranked, they should be put into a long-
term capital plan. Leading organizations develop long-term capital 
plans to guide implementation of organizational goals and objectives 
and help decision makers establish priorities over the long term. While 
a plan must respond to changing requirements, it is based on the long-
range vision for the organization embodied in its overall strategic 
plan. Therefore, any year-to-year changes to the capital plan should be 
driven by strategic decisions. Leading organizations prepare long-term 
capital plans to document specific planned projects, plan for resource 
use over the long term, and establish priorities for implementation. 
These plans usually cover a 5-, 6-, or 10-year period and are updated 
either annually or biennially. Long-term planning requires that 
decision makers rank capital needs and promotes making informed choices 
about managing the organization's resources and debt. Some leading 
organizations also prepare long-term asset and facility maintenance 
plans that are incorporated into their long-term capital plans. This 
helps decision makers determine whether and when to purchase a new 
capital asset or continue to maintain an existing one.

Principle III: Balance budgetary control and managerial flexibility 
        when funding capital projects.
    Budget for projects in useful segments.--One strategy that has been 
proven to be useful to organizations in dealing with problems posed by 
full funding in a capped environment is to budget for projects in 
useful segments. This means that when a decision has been made to 
undertake a specific capital project, funding sufficient to complete a 
useful segment of the project is provided in advance. The U.S. Office 
of Management and Budget has defined a useful segment as a component 
that either (1) provides information that allows the agency to plan the 
capital project, develop the design, and assess the costs, benefits, 
and risks before proceeding to full acquisition (or canceling the 
acquisition) or (2) results in a useful asset for which the benefits 
exceed the costs even if no further funding is appropriated. For full 
up-front funding and the funding of useful segments to be effective, 
organizations must be able to develop good, firm cost estimates of the 
full cost of either the project or the segments early in the life of 
the project. To develop these estimates, the organization must have 
good information and data systems in place. Some organizations fund 
capital projects in useful or meaningful phases by breaking up their 
capital planning and budgeting cycles into segments, such as predesign, 
design, and construction. Funding is provided for one of these segments 
at a time and generally is not guaranteed from one phase to the next.
    Consider innovative approaches to full up-front funding.--
Alternative strategies used by some leading organizations and Federal 
agencies to accommodate full funding of capital projects in a 
constrained budget environment include contracting out for capital-
intensive services, using an investment component that is similar to a 
savings account, and developing public/private partnerships. These 
strategies enhance an organization's flexibility to finance the full 
costs of projects without compromising management's ability to make 
decisions based on full costs.

Principle IV: Use project management techniques to optimize project 
        success.
    Monitor project performance and establish incentives for 
accountability.--Successful implementation of a capital investment 
project is determined primarily by whether the project was completed on 
schedule, came in within budget, and provided the benefits intended. 
However, the first step is to provide decision makers with good 
information about costs, risks, and scope of a planned project before 
committing substantial resources to it. This, in combination with full 
upfront funding, can help to prevent cost overruns, project 
cancellations, and projects that fail to meet completion schedules. By 
monitoring project performance against cost, schedule, and performance 
goals--as well as establishing incentives to meet those goals--
organizations can increase the likelihood that projects will be 
successfully completed. Typically, a good project plan is used to 
manage and control project implementation and includes performance 
measurement baselines for schedule and cost, major milestones, and 
target dates and risks associated with the project. Regular review of 
the status of cost, schedule, and performance goals by individuals 
outside the project team allows for an independent assessment of the 
project. Leading organizations also establish incentives to encourage 
teams to meet project goals. Leading organizations generally hold 
managers accountable for meeting goals. Further, leading organizations 
use a number of built-in incentives for managers and teams to meet 
project goals. Among them are reporting project status to individuals 
or groups in positions of authority outside the project and using the 
project manager's overall performance in determining the assignment to 
future projects.
    Use cross-functional teams to plan for and manage projects.--
Leading organizations use multidisciplinary teams, consisting of 
individuals from different functional areas led by a project manager, 
to plan and manage capital projects. Teams typically consist of people 
from the user community and from the organization's budget, accounting, 
engineering, procurement, and other functions. A core project team is 
established early in the life cycle of a project and additional 
individuals with particular technical or operational expertise are 
incorporated during appropriate phases of the project. Moreover, 
successful teams have spirit, trust, and enthusiasm and a sense of 
ownership over the project.

Principle V: Evaluate results and incorporate lessons learned into the 
        decision-making process.
    Evaluate results to determine if organization-wide goals have been 
met.--One way of determining if a capital investment achieved the 
benefits that were intended is to evaluate its performance using 
measures that reflect a variety of outcomes and perspectives. By 
looking at a mixture of hard and soft measures, for example, financial 
improvement and customer satisfaction, managers are able to assess 
performance based on a comprehensive view of the needs and objectives 
of the organization. To implement this balanced approach to performance 
measurement, leading organizations developed financial and nonfinancial 
criteria for success that link to the organization's overall goals and 
objectives. Another way to determine if a capital investment is 
contributing to the success of an organization's goals and objectives 
is to conduct an audit after the project is completed. The primary 
focus is not to evaluate the technical aspects of the project, but 
rather to evaluate the process and whether the end users are satisfied. 
The lessons learned from the audit can be incorporated into the design 
and construction of the next project.
    Evaluate the decision-making process: reappraise and update to 
ensure that goals are met.--Although some organizations evaluate their 
capital decision-making process on an ongoing basis, this is not the 
norm. Leading organizations seemed generally to revise the processes in 
response to an internal crisis, such as severe budget constraints, or 
to a perception of changing needs, a changing environment, or both. In 
such situations, organizations felt that they had to conduct self-
assessments and undergo major changes in their capital decision-making 
practices in order to continue successful operations.
    We are also sending this report to the Honorable Mary Landrieu, 
Ranking Minority Member of your subcommittee; the Honorable Richard 
Durbin, United States Senate; the Honorable Eleanor Holmes Norton, 
House of Representatives; and the Subcommittee on the District of 
Committee, Committee on Appropriations, House of Representatives. This 
report is also available to other interested parties at 
http://www.gao.gov.

                    ADDITIONAL SUBMITTED STATEMENTS

    [Clerk's Note.--The subcommittee received the following 
additional statements to be included for the record. The 
statements follow:]

   Prepared Statement of Natwar M. Gandhi, Chief Financial Officer, 
                          District of Columbia

    I am Natwar M. Gandhi, Chief Financial Officer for the District of 
Columbia. Thank you, Mr. Chairman and members of the subcommittee, for 
including my testimony in the record for the Senate District of 
Columbia Appropriations Subcommittee hearing on the fiscal structural 
imbalance facing this great city. First, let me thank you for holding 
this hearing and providing an opportunity to discuss and comment on the 
long-term fiscal health of the District. And let me also thank Senator 
Landrieu and Congresswoman Norton, along with former Congresswoman 
Connie Morella, for requesting the study that is the basis of the 
hearing. Finally, I must thank the General Accounting Office for their 
thoughtful and thorough analysis of the fundamental fiscal 
circumstances facing the District of Columbia.
    The District has come a long way since the Control Period began, 
with 7 consecutive balanced budgets for fiscal year 1997-fiscal year 
2003, probably the largest cash reserves of any city in the United 
States, and substantially improved bond ratings. In fiscal year 2003, 
revenues grew by 6.3 percent and they continue to grow more rapidly in 
fiscal year 2004. These are wonderful achievements and should be duly 
celebrated. Even so, the District cannot put financial concerns aside. 
The report GAO-03-666, ``DISTRICT OF COLUMBIA, Structural Imbalance and 
Management Issues,'' of May 2003, verifies what we have long argued--
that there is a large, long-term imbalance between the cost of services 
needed by District residents and guests and the revenue the District 
can raise at reasonable rates to cover these costs. The size of the gap 
in fiscal year 2000 was between $470 million and $1.16 million. (In 
current year dollars this climbs to $500 million to $1.2 billion.) This 
report and its implications are the subject of this hearing.
    The purposes of my comments are threefold:
  --First, to explain how the District of Columbia's finances can 
        appear to be doing so well while at the same time things are 
        seriously wrong,
  --Second, to identify the harm done by the Structural Imbalance, and
  --Third, to build upon Congresswoman Norton's very fine proposal in 
        H.R. 4269, the District of Columbia Fair Federal Compensation 
        Act of 2004. If lawmakers so choose, the Infrastructure Fund 
        created by the Bill could be used to cover debt service 
        payments that are $350 million or more annually. This $350 
        million, therefore, helps to close the annual structural gap of 
        $470 million to $1.16 billion. The remaining $450 million 
        yearly can be applied to the $4.2 billion of unfunded capital 
        needs in fiscal year 2005-2010 to address items such as the 
        District's deteriorated infrastructure in Transportation, 
        Public Schools, and Information Technology. (Attached is a 
        table delineating the District's funded and unfunded capital 
        needs.)
    To set the framework, let me make it clear that the District's 
elected leadership will continue to achieve balanced budgets, making 
the best use of the limited resources available to the District. The 
Mayor and Council fully support this goal and have consistently 
accomplished it over the last 7 years. Nonetheless, the structural 
imbalance will be eating away at the financial foundation of the city 
because:
  --The District has an ongoing inability to provide the quality and 
        quantity of services that are needed,
  --In addition to the annual financial gap, the District has billions 
        of dollars in deferred infrastructure needs that it has no way 
        to finance, and
  --The chronic erosion presents a heightened risk of financial crisis. 
        Reserves and boom years can and do cushion an immediate shock 
        and avoid an immediate crisis. But intermittent remedies will 
        not repair the chronic erosion any more than relying only upon 
        emergency room treatment will give a patient long-term robust 
        health. Reliable, consistent fixes are also needed.
    This is a great city and we are all thrilled at the turnaround 
since the mid-1990's. The vitality of the city is evident wherever you 
go. In turning to the Federal Government for financial support in the 
past, we were often told to first ``get our financial house in order.'' 
We now have our financial house in order, and this wise counsel is part 
of the reason that the District's economy is doing so well today. But 
its future is by no means secure unless the structural issues are 
addressed--issues that Congress must consider because the District 
cannot resolve them on its own.

                     WHAT IS A STRUCTURAL DEFICIT?

    In the GAO analysis a structural deficit means that, over the long 
run, the District does not have sufficient tax base to pay for an 
adequate (``average'') level of services at reasonable (or ``average'') 
tax rates. This is primarily because the District has severe needs and 
a high cost environment but a limited tax base. There are several 
dimensions to this, which require assessing both revenue and cost 
considerations.
    On the revenue side, the District's tax base consists of the 
property, sales, income, and other taxes typical of States and local 
jurisdictions taken as a whole. The District is unusual in that, as one 
jurisdiction, it uses all of these sources of revenue. The District 
also is unusual in the severe limitations on the District's tax base, 
notably the inability to tax non-resident earnings, the large 
percentage of tax-exempt property, and the inability to tax the city's 
largest employer, the Federal Government. Nonetheless, the District's 
tax base features high per capita income, good residential and 
commercial property values, and a vigorous hospitality industry. The 
District's per capita tax base is well above the national average for 
State and local governments combined, according to the GAO findings.
    GAO found that the positive features of the District's revenue are 
outweighed by the cost of providing services in the District. Despite 
having high per capita revenue, providing an adequate level of public 
services requires an even higher level of per capita costs. The cost of 
delivering an average level of services is 75 percent to 85 percent 
higher in District of Columbia than the average State system.
    There are three reasons costs are so high in the District:
  --The District of Columbia is entirely an urban jurisdiction with 
        dense population, dense land use, and high land values,
  --The District of Columbia has service needs, principally related to 
        the incidence of poverty, that place a great burden on 
        services, and
  --The District of Columbia operates in a very expensive urban labor 
        market. Wages and benefits account for more than 30 percent of 
        the D.C. Government budget, with salaries alone representing 
        $1.5 billion in fiscal year 2004. In hiring, the District 
        competes against a salary structure dominated by the Federal 
        Government and high-salary private sector services. The 
        unavoidably high cost of doing business also appears in all the 
        contracting services acquired by the District such as medical 
        care and construction.
    Some additional considerations add to the problem in the District 
and are not in the GAO report. Collectively, these argue a structural 
imbalance much closer to the top of the GAO range, at about $1.2 
billion, than to the bottom at about $500 million.
  --The District of Columbia's benchmark, practically speaking, for the 
        quality and cost of public services is the Washington 
        Metropolitan Area (rather than ``average'' quality across 
        jurisdictions nationwide). Both quality and cost are well above 
        average in this Metropolitan Area.
  --The District of Columbia has special service considerations related 
        to terrorism and other costs to protect the Nation's capital.
  --Throughout its history, national leaders have identified a special 
        role for the District of Columbia as the capital city of this 
        great Nation. Because the GAO report is a technical comparison 
        across various jurisdictions, it includes nothing about the 
        special circumstances of the District of Columbia as the 
        Nation's capital.
  --As the District of Columbia moves away from the Federal personnel 
        and retirement programs last used for employees hired in 1987, 
        we face growing demands in retirement and health care costs for 
        retirees first hired post-1987. The District's current payment 
        to the Retirement Board for retirement programs of Police, 
        Firefighters, and Teachers hired post-1987 is about $60 
        million; this will grow to about $103 million in fiscal year 
        2009. Retiree health care costs for all post-1987 employees are 
        currently quite modest, at about $1 million in fiscal year 
        2004. These will reach $96 million for the year in fiscal year 
        2009 due to a change in accounting requirements and to aging of 
        the current workforce.
    Arguably, each of these additional features adds to the annual 
structural deficit already identified by the GAO.

             WHAT HARM IS DONE BY THE STRUCTURAL IMBALANCE?

    Given that the District of Columbia has nearly $900 million in fund 
balance, 7 years of balanced budgets with surpluses every year, and 
inefficient service delivery in some areas, why should anyone believe 
that a structural imbalance actually has an impact on the District?
    Harm No. 1: Needed Infrastructure.--The Mayor and Chairman Cropp 
have spoken about the state of disrepair of infrastructure due to the 
inability to fund capital borrowing. This inability may be partially 
attributed to the District not having the money to repay borrowing and 
partly to the District not having the population to borrow the money. 
As you know, Wall Street closely monitors debt-per-capita as a key 
variable in bond ratings and the District of Columbia's current debt-
per-capita of $5,887, the highest for a U.S. city, roughly 9 percent 
above the second highest city, New York City. This high debt-per-capita 
limits the District's credit-worthiness. Because the District is the 
capitol city, and not a State, it must borrow to meet capital needs for 
a city, a county, a State, and a school district. Other cities borrow 
only for their own needs and therefore maintain a lower debt-per-
capita. For example, Baltimore has debt-per-capita of $805 and Detroit 
stands at $925.
    Attached to my testimony is an analysis of capital spending 
incorporated in the funded Capital Improvement Program along with 
additional new unfunded capital needs through fiscal year 2010. 
Projects that lack funding include the forensics laboratory, mental 
health hospital, a new headquarters for Metropolitan Police Department/
Department of Motor Vehicles, major capital projects for the Washington 
Metropolitan Area Transit Authority, public school maintenance and 
construction, neighborhood service facilities, information technology, 
and local road and Federal highway construction/repair. If the District 
is to begin to recover from many years of capital infrastructure 
erosion, it must find funding for currently unfunded capital 
requirements in excess of $4 billion over the next 6 years. 
Unfortunately, we do not have access to the funds.
    The accumulated unfunded needs of the past and present show up as 
``real'' problems for residents and visitors in the form of:
  --crowded Metro cars, stalled trains, and unreliable escalators,
  --potholes in the streets,
  --crumbling swimming pools, libraries, and school buildings (the 
        average age of the District of Columbia's school buildings is 
        more than 60 years),
  --concerns about potable water, and
  --numerous other outcomes.
    These matters will only get worse without intervention. 
Intervention to rebuild in the short-term will not prevent another 
infrastructure meltdown in the future unless maintenance funding 
becomes available.
    Harm No. 2: High Tax Rates and Tax Burdens.--A second harm is that 
the District of Columbia's tax burdens are unusually high, as the 
District stretches to generate the funds to cover service costs. 
District of Columbia's tax burdens, as measured by the GAO, are 18 to 
33 percent above what national average rates would yield if applied to 
the District of Columbia's tax base. Citizens who live here and 
businesses that locate here must want to be here badly enough to accept 
a very high tax burden in return.
    A family of 4 living in the District with income of $50,000 to 
$150,000, pays about 40 percent more in sales and use, income, and 
automobile taxes than the average for cities around the Nation that 
levy such taxes. This same family pays 24 to 38 percent more than one 
living in the Virginia suburbs and 9 percent more at $150,000 income 
than one living in the Maryland suburbs.
    The District has high tax rates and low thresholds of income 
against which the rates are applied. The District of Columbia's lowest 
individual income tax rate is 5 percent, assessed on the first $10,000 
of net taxable income (NTI), with a middle rate of 7.5 percent on NTI 
between $10,000 and $30,000, and a highest rate of 9.3 percent assessed 
on NTI over $30,000. The 5 percent lowest rate in the District of 
Columbia is greater than or equals the highest income tax rate in 15 
States (including 7 that have no income tax). The District of 
Columbia's middle rate of 7.5 percent exceeds the highest rate in 34 
States, and the highest rate equals or exceeds the highest rate in 48 
States. Compared to the two States with a higher top rate, the 
District's estimated income tax liability on the family of four is 
higher because our highest rate takes effect at a comparatively low 
level of $30,000 NTI. This compares to $76,200 (more than two and one-
half times as high) in Montana and $297,350 (nearly 10 times as high) 
in Rhode Island. None of these circumstances or findings will change 
under the 9.0 percent top rate scheduled to take effect for District 
taxpayers on January 1, 2005.\1\
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    \1\ Oregon, with a 9 percent top rate, is the only State added to 
the District of Columbia's ``comparison'' group. The District's tax 
burdens on the hypothetical family of four are very similar to those in 
Oregon.
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    Harm No. 3: The District of Columbia Needs Better-than-Average 
Services.--Schools are an example of the District of Columbia's need 
for better than average services. Our immediate neighbors include some 
of the very best jurisdictions anywhere in the United States in terms 
of quality of the public schools. If the District of Columbia schools 
offer ``average'' services, many parents with choices will move to a 
suburb in order to enroll their children in a ``world-class'' public 
school. This drives up the proportion of students in the District's 
Public Schools who are without such choices, and, inevitably, the per-
student costs and challenges of even average services become very high. 
It appears as though this cost spiral will not end until only those 
students that are least able to leave the District's public schools 
remain.
    The need for better-than-average services extends to multiple 
areas. Our neighboring jurisdictions maintain a very high standard for 
public safety, public works, and other service areas. This competing 
level of service, combined with the District's struggling public school 
system, make it difficult for the District of Columbia to attract 
residents who place high value on these services.

           THE DISTRICT'S STRUCTURAL IMBALANCE IS QUITE LARGE

    While many jurisdictions have a structural imbalance according to 
GAO, the District of Columbia's is very large, ranging from $821 to 
$2,032 per resident in fiscal year 2000, or 14.4 to 40.3 percent of 
local revenue. At $821, the low end of the GAO scale, the District 
would rank among the worst States for structural imbalance. At $2,032, 
the high end of the GAO scale, the District's structural imbalance 
would rate about 2.3 times as high as New York, the worst-off State. 
GAO's own perspective is that the District's problem is probably on the 
higher end of the range.
    The District of Columbia provides a high level of services per 
recipient because of the high level of need of our population. In 2000, 
20.3 percent of the District's population was disabled and 12.2 percent 
was over the age of 65. The cost of caring for the aging and disabled 
population has increased at a rate much faster than inflation because 
of price increases in prescription medications, nursing home services, 
and labor costs, driven by a nationwide shortage of nurses and by new 
staffing requirements. As the population continues to age, these costs 
can be expected to increase even further.
    Twenty-five percent of the District of Columbia's residents are 
Medicaid eligible as compared to 12 percent in Maryland and 9 percent 
in Virginia. The District spends, on average, $7,242 per enrollee, 
compared to $5,509 in Maryland and $5,177 in Virginia. (Recall that, 
unlike Maryland and Virginia, the District has no rural areas with 
lower costs to help offset the much higher cost of care in urban 
areas.) The cost per District of Columbia resident to provide Medicaid 
services is $1,776, compared to $649 in Maryland and $445 in Virginia. 
The extra per capita burden of Medicaid costs in the District of 
Columbia is quite high. Even if it were realistic for the District of 
Columbia to improve efficiency by 25 percent, the District's cost per 
capita would still remain twice as high as Maryland's and three times 
that of Virginia.

  WITH ALL THE FINANCIAL CHALLENGES, HOW CAN THE DISTRICT CONTINUE TO 
                        HAVE A BALANCED BUDGET?

    Let me first acknowledge the enormous effort and dedication of our 
elected leadership. We have balanced budgets because they are 
determined to have it so. Clearly there are sacrifices involved, but we 
learned during the now-dormant control period that enormous sacrifices 
also are attached to an unbalanced budget and budget deficits. We 
expect always to have balanced budgets and see this outcome as a key to 
holding on to the basic freedoms of Home Rule. A return to a control 
period would mean the loss of certain democratic rights entrusted to 
our citizens.\2\ There is risk, however--if the roads and other 
infrastructure get too bad and the schools too ineffective and 
children's services too weak to make a difference, then the District of 
Columbia could once again see a generalized drain on its population, 
prosperity, and general vitality. In this scenario, the rising need for 
public services could clash with a waning revenue capacity, leaving the 
District, once more, in deep financial crisis.
---------------------------------------------------------------------------
    \2\ For example, in a Control Year certain legislation passed by 
the council and signed by the Mayor can be overturned by the Financial 
Authority.
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CAN THERE BE A FAIR AND SUSTAINABLE FINANCIAL RELATIONSHIP BETWEEN THE 
                  DISTRICT AND THE FEDERAL GOVERNMENT?

    Financial distress is a pattern going back to the earliest days 
when the District of Columbia was created to be the host city for the 
Federal Government. George Washington chose the site for Washington 
City. Thomas Jefferson worked with Pierre Charles L'Enfant to guide the 
survey work and coordinate the design process.\3\ With canals to be 
built for transportation, flooding and sewage and the Tiber Creek to be 
managed, and road paving needed to save the Federal halls from the 
ravages of muddy streets, a great deal of investment capital was 
needed. Many financing approaches were used, including Federal funding, 
private subscriptions, and public funding by local residents. Debts 
were high and delays in major projects were common. In 1870 the 
furniture of the Mayor of Washington, Sayles J. Bowen, was reportedly 
seized to help pay the city's debts.\4\
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    \3\ Iris Miller, WASHINGTON IN MAPS, 1606-2000, Rizzoli 
International Publications, 2002, p. 48.
    \4\ Cited in ``DC ALMANAC'' at http://prorev.com/dcfactshist1.htm.
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    In 1878, Congress passed the Organic Act establishing a 3-
commissioner system of local government that lasted until 1967. In that 
Act, Congress held that the District should receive 50 percent of its 
operating budget from the Federal Government, to insure sufficient 
services would be available for support of the city and the Federal 
Government. In 1916 a Joint Congressional Committee recommended that 
capital funding should also be subject to the 50 percent allotment. The 
1916 Committee Report ends as follows: ``Our unanimous conclusion is 
that the rate of taxation in the District should be fixed and certain; 
that the Congress should pursue a definite policy of regular and 
liberal appropriations, having in view not only the permanent moral and 
physical advancement of the city, but also its preeminent beauty and 
grandeur as the municipal expression of the Nation's home and its 
peoples' pride.''\5\
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    \5\ ``Report of Joint Select Committee Appointed Pursuant to the 
Act of Congress Approved March 3, 1915 to Determine the Fiscal 
Relations Between the United States and the District of Columbia,'' 
Sixty-Fourth Congress, First Session, House of Representatives Document 
No. 495, p. xxiii. Unfortunately, by 1920, Congress had moved in the 
opposite direction and eliminated the District's 50 percent funding by 
the Federal Government. Reportedly District residents resented paying 
50 percent of the costs for acquisition of Rock Creek Park, the 
Smithsonian, and other projects that, once paid for, were listed as 
Federal assets. Federal officials of the time felt the District got 
more than half the benefit and should pay more. By 1930, Federal 
funding fell to about 25 percent. www.dcwatch.com/richards/0106.htm.
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    This discussion, more than a century long, suggests that the 
longer-term financial problems of the District of Columbia have never 
been fully addressed. The District has had many forms of government 
since the turn of the 19th century--elected and appointed mayors teamed 
with elected councils, a governor and house of delegates were in place 
for a few years, appointed commissioners have served the District of 
Columbia, and currently we enjoy the privileges of Home Rule. 
Throughout, however, I believe we have not had complete resolution of 
the financial aspects of the Nation's home city.

 H.R. 4269, THE DISTRICT OF COLUMBIA FAIR FEDERAL COMPENSATION ACT OF 
                                  2004

    H.R. 4269, the District of Columbia Fair Federal Compensation Act 
of 2004, introduced by Congresswoman Norton provides an excellent 
solution both for the District and for the Federal Government. That 
Bill establishes a Dedicated Infrastructure Account within the general 
fund of the District. The fund would receive $800 million annually in 
Federal monies, with growth adjustments over time. These monies could 
be used only for transportation including streets, information 
technology, and DCPS infrastructure developments and to support debt 
service payments on bonds, notes and other obligations of the District. 
Funds would remain available until expended.
    By supporting debt service payments, the infrastructure fund would 
remove some operational burdens from the District government and close 
part of the structural gap. While varying over time, debt service will 
generally be in the $350 to $400 million range each year until fiscal 
year 2009. The remaining $400 to $450 million could be used to meet the 
$650 million of needed infrastructure projects that meet purposes 
permitted by the Bill and that cannot be funded under the District of 
Columbia's current budget and borrowing constraints. In the 5 years 
between fiscal year 2005 and fiscal year 2009, about 85 percent of 
these projects could be financed.
    While it will take the District some time to work through our 
current infrastructure crisis, this bill makes it possible to plan and 
move forward with the most urgent priorities immediately. And it 
fulfills the goal of long ago members of this august body that, in 
addition to locally raised taxes, Federal support of the District of 
Columbia ``should always be in such sum as will not only continue the 
city of Washington and the District of Columbia in every respect as the 
splendid and beautiful central residence of this great Nation, but also 
cause it to become and be forever maintained as a model for all the 
cities of the world.''\6\
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    \6\ Ibid. p. xvi.
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    There are many ways that funding for the Infrastructure Fund might 
be accomplished. One is a straight payment of $800 million into the 
fund from an appropriation, adjusted annually by either the CPI or 4 
percent--whichever is greater--as proposed in H.R. 4269. Another could 
be the model of the territories whereby, under IRC 933, income earned 
by a resident of the territory from a source in the territory is not 
subject to Federal taxation. If applied to the District, this latter 
approach would yield an estimated $1.8 billion in tax savings to the 
District of Columbia residents for Tax Year 1999 (the tax year most 
closely corresponding to the GAO benchmark year of fiscal year 2000).
    Allow me to suggest yet another alternative that may be simple, 
cost effective, and reliable for all parties. Funding would be 
determined as 30 percent of all Federal personal income tax paid by 
District residents. Upon collecting revenue from the District of 
Columbia residents, the U.S. Treasury would simply allocate to the D.C. 
Infrastructure Fund $30 from every $100 paid. This formula would yield 
about $803 million based on IRS data for Tax Year 2001, and the amount 
would automatically adjust up or down as revenue changes over time.

                                DISTRICT OF COLUMBIA FEDERAL INCOME TAX LIABILITY
----------------------------------------------------------------------------------------------------------------
                                            Number of      Adjusted Gross                        30 Percent of
                Tax Year                     Returns           Income         Tax Liability    Federal Liability
----------------------------------------------------------------------------------------------------------------
2000...................................         216,082    $16,270,673,000     $2,838,570,000       $851,571,000
2001...................................         214,404    $15,913,850,000     $2,677,002,000       $803,100,600
----------------------------------------------------------------------------------------------------------------

    Under the 30 percent approach, the annual amount of support is 
predictable and consistent over time for both the District of Columbia 
and the Federal Government. The funding varies with the economic cycle, 
becoming smaller when the economy is lagging and higher when it is 
booming. This precludes any counter-cyclical funding burden on the 
Federal Government. The formula would be transparent and simple to 
understand and virtually without cost to monitor.
    These features are critical to the District in many ways. Wall 
Street is very alert to changes in the Federal-city relationship, 
fearing that neither the District nor bondholders can rely on Federal 
commitments over the long-term; the 30 percent approach creates 
stability. At the staff level in the District Government, we spend many 
hours and dollars responding to inquiries and requirements presented by 
Federal officials; the 30 percent approach requires comparatively 
little of this kind of effort. In the budget process, the District of 
Columbia cannot count on promised Federal money that is not matched by 
funding or clear legislative language--sometimes this promise simply 
disappears; the 30 percent approach would be secure for each budget 
cycle. And each dollar that is consistently and reliably provided will 
buy more service than a dollar occasionally given.
    Mr. Chairman, I am so pleased to have reached the point where we 
can have such an in-depth dialogue on this matter. The efforts of many 
people--working over two centuries--were required to bring us to this 
point. The District's current elected leadership is as capable, 
conscientious, and dedicated to sound finances as any leadership could 
possibly be. The GAO has shed much light on the nature and duration of 
our financial problems. And you have provided this opportunity for 
meaningful and candid discussions of the issues raised by that report. 
It has been my pleasure to provide this testimony.

                                              GOVERNMENT OF THE DISTRICT OF COLUMBIA: CAPITAL IMPROVEMENTS PROGRAM--20-YEAR PROJECTED CAPITAL NEEDS
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                                                    Fiscal Year     Fiscal Year     Fiscal Year     Fiscal Year     Fiscal Year     Fiscal Year     Fiscal Year     Fiscal Year
               Capital Description                     2005            2006            2007            2008            2009            2010          2005-2010       2011-2024     20 Year Total
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Capital--Funded Needs:
    Forensic Lab................................          $3,800  ..............  ..............  ..............  ..............  ..............          $3,800  ..............          $3,800
    Mental Health Hospital......................  ..............  ..............  ..............  ..............  ..............  ..............  ..............  ..............  ..............
    MPD/DMV Headquarters........................  ..............  ..............  ..............  ..............  ..............  ..............  ..............  ..............  ..............
    WMATA.......................................          42,800         $60,600         $77,000         $87,700         $83,800         $84,400         436,300  ..............         436,300
    Government Centers Facilities...............          52,612          40,375          13,500           1,500           1,500  ..............         109,487  ..............         109,487
    Schools.....................................         174,909         147,123          98,299          98,300          98,300          98,832         715,763  ..............         715,763
    Information Technology......................         114,361          33,760           7,179           6,849           3,750           4,750         170,649  ..............         170,649
    Neighborhood Services facilities............          71,198          70,618          29,281          13,972          13,972          13,972         213,013  ..............         213,013
    Transportation Infrastructure...............         244,454         277,385         264,087         252,741         207,522         207,636       1,453,825      $2,906,909       4,360,734
    WASA--CSO...................................          23,477          39,252          51,634          42,859          25,151          25,746         208,119  ..............         208,119
    Economic Development........................          19,725           5,120           5,100           1,000           1,000  ..............          31,945  ..............          31,945
                                                 -----------------------------------------------------------------------------------------------------------------------------------------------
      Capital Funded Needs Total................         747,336         674,233         546,080         504,921         434,995         435,336       3,342,901       2,906,909       6,249,810
                                                 -----------------------------------------------------------------------------------------------------------------------------------------------
Capital--Unfunded Needs:
    Forensic Lab................................          15,000          37,500          27,500  ..............  ..............  ..............          80,000  ..............          80,000
    Mental Health Hospital......................          13,000          37,500          19,500  ..............  ..............  ..............          70,000  ..............          70,000
    MPD/DMV Headquarters........................          20,000          50,000          30,000  ..............  ..............  ..............         100,000  ..............         100,000
    WMATA \1\...................................          16,700          91,500         119,500          61,500          48,200          56,300         393,700         995,214       1,388,914
    Government Centers Facilities \2\...........          15,000          27,237          54,112          66,112          66,112          67,612         296,185       1,195,176       1,491,361
    Schools \3\.................................         125,361         129,953         115,611         186,244         126,849         126,082         810,100       2,386,998       3,197,098
    Information Technology \4\..................          40,000          76,240         115,821         124,151         133,250         141,250         630,712       2,496,874       3,127,586
    Neighborhood Services facilities \5\........          25,000          32,380          77,732          95,299          98,577         101,953         430,940       1,802,223       2,233,164
    Transportation Infrastructure \6\...........         190,650         204,030         249,212         258,278         242,228         281,908       1,426,306       5,176,158       6,602,464
    WASA--CSO \7\...............................          30,000          30,000          30,000          30,000          30,000          30,000         180,000       2,185,170       2,365,170
                                                 -----------------------------------------------------------------------------------------------------------------------------------------------
      Capital Unfunded Needs Total..............         490,711         716,340         838,988         821,584         745,216         805,105       4,237,943      14,052,645      18,290,588
                                                 -----------------------------------------------------------------------------------------------------------------------------------------------
      Total Capital Needs.......................       1,238,047       1,390,573       1,385,068       1,326,505       1,180,211       1,240,441       7,580,844      16,959,554     24,540,398
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\1\ WMATA Unfunded Needs includes the District's share of the $1.4 billion unfunded portion if the Infrastructure Renewal Program, rail and bus replacement program and necessary security
  improvements.
\2\ The Office of Property Management (OPM) is responsible for managing 334 municipal buildings, approximately 14 million square feet of space. The age of these facilities vary from 6 years to
  over 60 years. A significant portion of this space is for Government Center Facilities include Government office buildings and equipment staging areas. The total cost of renovating all
  government center facilities is estimated to be over $1.5 billion over the next 20 years.
\3\ The D.C. Public School System currently operates 146 active schools. Of the 146 active schools, 91 or 62 percent are over 45 years old and only eight have ever had total renovations. The
  total renovation cost is estimated to be $3.5 billion over the next 10 years, at an average cost of $350 per square foot. In addition, ongoing component replacement and capital maintenance
  will average approximately $35 million a year.
\4\ In order to meet the needs of the 21st century, and continue to improve service delivery to residents and business of the District, an additional investment of $630 million for the next 6
  years. An annual replacement cost of $10 million per year thereafter. In addition, future projections include funding of $100 million annually to keep up with next generation technologies.
\5\ The Office of Property Management (OPM) is responsible for managing 334 municipal buildings, approximately 14 million square feet of space. The age of these facilities vary from 6 years to
  over 60 years. A significant portion of this space is for Neighborhood Services which includes Parks and Recreation Centers, D.C. Public Libraries, Fire Houses, Police Stations, Wellness
  Centers, Human Service centers, Correctional Treatment Facilities. The total cost of renovating all Neighborhood Service facilities is estimated to be over $2.4 billion over the next 20
  years.
\6\ The inventory of streets and highways under the District's jurisdiction extends approximately 1,421 centerline-miles of urban roads. Approximately 400 (or 39.2 percent) miles of streets
  and highways are eligible for Federal Aid Match, as are most bridges. the remaining streets are funded solely with local funds including ROW fees and GO bonds.
\7\ D.C. Water and Sewer Authority (WASA) has an estimated need of $2.6 billion to fund the Combined Sewer System Long Term Control Plan (LTCP) which will address the violation of the Clean
  Water Act, due to the dumping of garbage and raw sewage into Class A waters.

                                 ______
                                 
  Letter From the League of Women Voters of the National Capital Area
                                                     June 23, 2004.
Senator Mike DeWine,
Chair, Appropriations Subcommittee on the District of Columbia.
    Dear Senator DeWine: The League of Women Voters of the National 
Capital Area (NCA) thanks you for holding a hearing on the District of 
Columbia's structural deficit.
    In 2000, our national League at its 44th annual convention--
recognizing that the District does not have the capacity to raise the 
revenue required to provide the necessary services for the residents of 
the District, the Federal Government, and the many visitors to our 
Nation's capital--adopted a position calling for the restoration of the 
Federal payment. This position was adopted at the request of our NCA 
League, and I've asked Elinor Hart, who chairs our D.C. Finances 
Committee, to send you the material we presented to League delegates 
throughout the country when we asked them to support restoration of the 
Federal payment.
    We look forward to supporting your efforts to address the 
District's structural deficit.
            Sincerely,
                                          Barbara Sherrill,
                                                         President.
                                 ______
                                 
   Prepared Statement of Leonard Sullivan, Jr., President, National 
    Association to Restore Pride in America's Capital (NARPAC, Inc.)

    Thank you, Mr. Chairman, for including my organization's views in 
the record. NARPAC was founded to address the embarrassing public image 
of our Nation's capital city held by many Americans, and by other 
countries as well (murders, drug use, teen moms, et al). For 8 years, 
we have analyzed the District of Columbia's problems and offered 
solutions (largely unheeded) on our educational web site (see last 
page). We do not lobby and we do not promote unchallenged conventional 
wisdom.
    We agree that our capital city could benefit from additional 
revenues, Federal, regional or local, for capital investment or debt 
relief, but not for the District of Columbia's inefficiently delivered 
operating costs.
    Our rationale is simple: America's capital city should be the best 
possible symbol of what this country stands for, but not for what it 
doesn't stand for. We are adamant that our city should not lobby or beg 
for hand-outs based on faulty inputs (viz., Iraq!). We reject using 
mythical conspiracies and false financial threats to build a misleading 
case for making our capital city the world's best.
    Let me first highlight the faulty inputs and then offer remedies 
other than Federal cash subsidies. For impact, I will be blunt and 
oversimplify the issues. Better explanations are provided on our web 
site.
    The GAO report, so widely endorsed by advocates of hand-outs, 
contains serious analytical flaws. It should have been subjected to a 
separate challenge. It applies a dubious methodology that seeks to 
identify average operating expenditures, based on average bureaucratic 
performance, adjusted for unique local conditions. It was developed to 
rationalize the distribution of Federal grants.
    Did you note this same approach justifies equivalent (often much 
larger) hand-outs to 28 other States just to become ``average'', and 
that the District of Columbia has one of the highest revenue-generating 
capacities?
    The District of Columbia's $700 million higher incremental ``worst 
case'' imbalance ($1.16 billion) stems primarily from what the District 
of Columbia can ``afford to pay'' in taxes and, we believe, was 
miscalculated.
    Recalculation by NARPAC indicates a $480 million arithmetic error 
based on GAO application of an unfamiliar methodology. If living and 
working within 5 miles of the Nation's Capitol dome can justify ``box 
seat'' taxes 10 percent higher than the national norm, the imbalance 
declines $500 million more.
    The low estimate of $470 million is far too high based on more 
substantive analytical errors in ``should spend'' estimates for city 
police and firefighters (while school spending is judged about right!).
    The imbalance can be shifted from -$470 million to +$700 million 
if: (a) police force levels are assumed to be dictated by violent crime 
rates, not murder rates; (b) wages are kept to the BLS average for 
cities rather than arbitrarily increased; and (c) urban workload 
factors are used vice national factors.
    Unfunded capital investment needs are badly exaggerated by using 
unchallenged estimates of DCPS facility requirements based on poor 
enrollment projections, school and land utilization.
    Extrapolating current school enrollment, and applying national 
urban average school size can cut this 6-year backlog ($1.2 billion) by 
perhaps $300 million: selling surplus properties yields over $500 
million more.
    On the other hand, capital investment in the city's transportation 
infrastructure, also unchallenged, (defined broadly to include parking, 
trash, RRoWs, etc.) is probably underestimated by $3 billion-5 billion.
    Did you know there are no plans to extend Metrorail trackage inside 
the District of Columbia in the next 10-20 years?
    The District of Columbia's operating costs are abnormal because the 
District of Columbia has perhaps four times its share of the region's 
poor.
    Does the Federal Government really want the Nation's capital city 
to be its regional poorhouse?
    Finally, NARPAC has tried (harder than District of Columbia's CFO!) 
to quantify the net costs of the Federal presence. We conclude they are 
trivial compared to the benefits of hosting the Nation's capital.
    How can the District of Columbia claim it is ``denied (almost $200 
million in) property taxes'' from Federal parklands?
    NARPAC concludes the District of Columbia should be making far 
greater capital investments in its infrastructure, from roads and 
rails, to sewers and sidewalks, while spending less on the perennial 
consequences of poverty. We also conclude that the District of 
Columbia's ``missing State'' status is overblown, and can be offset by 
a ``willing metro area''. Congress, then, can best assure the District 
of Columbia's financial future via policy changes to:
  --Eliminate arbitrary constraints (Fed or local) on the District of 
        Columbia's own revenue-producing potential by:
    --Removing any Federal objections or statutes prohibiting the 
            development of much taller, denser buildings near the 
            District of Columbia's boundaries with its neighboring 
            ``edge cities'' (outside L'Enfant's Bowl);
    --Requiring the District of Columbia to provide high-density zoning 
            around all existing/future transportation nodes paid for 
            all or in part by Federal funds (defeat local NIMBYs);
  --Motivating the District of Columbia to sell off its surplus school 
        properties, by offering to also:
    --Cede to the District of Columbia surplus Federal properties for 
            high-density development, using the ongoing BRAC Round to 
            realign/close outmoded military bases (doubling the 
            District of Columbia's high-revenue commercial acreage);
    --Eliminating bans on inter-jurisdictional taxes rooted in 
            Congressional conflicts of interest;
  --Impose regional burdensharing by making only regional grants 
        (equitably allocated) for:
    --first-class regional transportation infrastructure;
    --affordable/subsidized housing combined with employment, adult 
            education/skill training;
    --unique (broadly defined) health and learning disability problems, 
            etc.
    Thank you for your attention. Feel free to visit our web site at 
www.narpac.org.

                         CONCLUSION OF HEARING

    Senator DeWine. So thank you all very much. The 
subcommittee will stand in recess.
    [Whereupon, at 11:28 a.m., Tuesday, June 22, the hearing 
was concluded, and the subcommittee was recessed, to reconvene 
subject to the call of the Chair.]

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