[Senate Hearing 111-350]
[From the U.S. Government Publishing Office]


                                                        S. Hrg. 111-350
 
    STABILITY THROUGH SCANDAL: A REVIEW OF THE OFFICE OF THE CHIEF 
                           FINANCIAL OFFICER 

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

                                HEARING

                               before the

                  OVERSIGHT OF GOVERNMENT MANAGEMENT,
                     THE FEDERAL WORKFORCE, AND THE
                   DISTRICT OF COLUMBIA SUBCOMMITTEE

                                 of the

                              COMMITTEE ON
                         HOMELAND SECURITY AND
                          GOVERNMENTAL AFFAIRS
                          UNITED STATES SENATE


                     ONE HUNDRED ELEVENTH CONGRESS

                             FIRST SESSION

                               __________

                             MARCH 31, 2009

                               __________

       Available via http://www.gpoaccess.gov/congress/index.html

       Printed for the use of the Committee on Homeland Security
                        and Governmental Affairs

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        COMMITTEE ON HOMELAND SECURITY AND GOVERNMENTAL AFFAIRS

               JOSEPH I. LIEBERMAN, Connecticut, Chairman
CARL LEVIN, Michigan                 SUSAN M. COLLINS, Maine
DANIEL K. AKAKA, Hawaii              TOM COBURN, Oklahoma
THOMAS R. CARPER, Delaware           JOHN McCAIN, Arizona
MARK L. PRYOR, Arkansas              GEORGE V. VOINOVICH, Ohio
MARY L. LANDRIEU, Louisiana          JOHN ENSIGN, Nevada
CLAIRE McCASKILL, Missouri           LINDSEY GRAHAM, South Carolina
JON TESTER, Montana
ROLAND W. BURRIS, Illinois
MICHAEL F. BENNET, Colorado

                  Michael L. Alexander, Staff Director
     Brandon L. Milhorn, Minority Staff Director and Chief Counsel
                  Trina Driessnack Tyrer, Chief Clerk


  OVERSIGHT OF GOVERNMENT MANAGEMENT, THE FEDERAL WORKFORCE, AND THE 
                   DISTRICT OF COLUMBIA SUBCOMMITTEE

                   DANIEL K. AKAKA, Hawaii, Chairman
CARL LEVIN, Michigan                 GEORGE V. VOINOVICH, Ohio
MARY L. LANDRIEU, Louisiana          LINDSEY GRAHAM, South Carolina
ROLAND W. BURRIS, Illinois
MICHAEL F. BENNET, Colorado

        Lisa M. Powell, Chief Counsel and Acting Staff Director
                       Christine S. Khim, Counsel
             Jennifer A. Hemingway, Minority Staff Director
                     Tara L. Shaw, Minority Counsel
          Thomas A. Bishop, Minority Professional Staff Member
                   Benjamin B. Rhodeside, Chief Clerk


















                            C O N T E N T S

                                 ------                                
Opening statements:
                                                                   Page
    Senator Akaka................................................     1
    Senator Voinovich............................................     3

                               WITNESSES
                        Tuesday, March 31, 2009

Natwar M. Gandhi, Chief Financial Officer, Office of the Chief 
  Financial Officer, District of Columbia........................     4
Charles J. Willoughby, Inspector General, Office of the Inspector 
  General, District of Columbia..................................     6

                     Alphabetical List of Witnesses

Gandhi, Natwar M.:
    Testimony....................................................     4
    Prepared statement with attachments..........................    25
Willoughby, Charles J.:
    Testimony....................................................     6
    Prepared statement...........................................    43

                                APPENDIX

Background.......................................................    55
Letter from Natwar M. Gandhi to Senators Akaka and Voinovich, 
  dated Oct. 1, 2009.............................................    65
Paul Strauss, United States Senator, District of Columbia 
  (Shadow), prepared statement...................................    67
Questions and Responses for the Record from:
    Dr. Gandhi...................................................    69
    Mr. Willoughby...............................................    72


                       STABILITY THROUGH SCANDAL:
                     A REVIEW OF THE OFFICE OF THE
                        CHIEF FINANCIAL OFFICER

                              ----------                              


                        TUESDAY, MARCH 31, 2009

                                 U.S. Senate,      
              Subcommittee on Oversight of Government      
                     Management, the Federal Workforce,    
                            and the District of Columbia,  
                      of the Committee on Homeland Security
                                        and Governmental Affairs,  
                                                    Washington, DC.
    The Subcommittee met, pursuant to notice, at 10:03 a.m., in 
room SD-342, Dirksen Senate Office Building, Hon. Daniel K. 
Akaka, Chairman of the Subcommittee, presiding.
    Present: Senators Akaka and Voinovich.

               OPENING STATEMENT OF SENATOR AKAKA

    Senator Akaka. The Subcommittee on Oversight of Government 
Management, the Federal Workforce, and the District of Columbia 
will come to order.
    Good morning, everyone. Thank you so much for joining us 
today, as the Subcommittee on Oversight of Government 
Management, the Federal Workforce, and the District of Columbia 
meets to examine the Office of the Chief Financial Officer 
(OCFO) for the District of Columbia. This morning, we will 
evaluate the current state of D.C.'s financial management, the 
progress it has made since its financial crisis in the 1990s, 
and how D.C. is addressing future financial challenges.
    Over the past 14 years, D.C.'s finances have undergone 
major change. In the 1990s, longstanding budget deficits and a 
general lack of accountability resulted in the District's 
inability to provide adequate public services to its residents. 
Ultimately, Congress stepped in and passed the District of 
Columbia Financial Responsibility and Management Assistance Act 
of 1995. The act established a Control Board to oversee D.C. 
finances, expanded the powers of the D.C. Inspector General, 
and created the Office of the Chief Financial Officer.
    The Senate held a series of oversight hearings shortly 
after the Control Board and OCFO were established to examine 
the problems leading up to D.C.'s financial collapse and 
reforms happening in other cities facing similar financial and 
social hardships. Recommendations from these hearings served as 
a starting point for D.C.'s fiscal recovery.
    Thanks largely to reform efforts by the D.C. Mayor's Office 
and the OCFO, the Control Board was disbanded and the District 
resumed management of its own finances in 2001. In the years 
since the financial crisis, D.C. has achieved 12 consecutive 
balanced budgets. While many States and cities struggled with 
budget shortfalls, D.C. posted a budget surplus for fiscal year 
2008.
    Despite these accomplishments, the District faces many 
financial hurdles. The OCFO predicts decreases in revenue in 
the coming fiscal years. The OCFO's most recent revenue 
estimate shows a $393.5 million decrease for fiscal year 2009, 
compared with its original revenue estimate from June of last 
year. The struggling economy and higher unemployment rates are 
contributing to D.C.'s weak revenue forecast.
    Additionally, D.C. does not have the ability to increase 
revenues as other cities do. Much of the District's land is 
Federally owned and, therefore, not subject to D.C. taxes. 
Additionally, because a high proportion of people who work in 
the District do not live here, the city's residents pay for the 
upkeep of roads, bridges, sidewalks, and other infrastructure 
used by many non-residents who are not subject to D.C. income 
taxes.
    The District also continues to struggle with financial 
management weaknesses. Due to insufficient internal management 
controls designed to prevent, detect, and deter fraud, the 
District repeatedly has suffered the loss of millions of 
dollars in taxpayer money.
    In 2007, two employees from the Office of Tax and Revenue 
(OTR), a division of the OCFO, were arrested for the 
embezzlement of more than $12 million. Investigations revealed 
a property tax refund scheme, beginning in the 1980s, in which 
fraudulent refund requests were submitted by a Tax and Revenue 
official and paid without detection for decades. At the time, 
there were no internal controls within Tax and Revenue to 
prevent such fraud. It appears that diligence in protecting the 
taxpayers' money was not part of the office's culture.
    The scheme was discovered when the OCFO implemented an 
internal control in 2007 to flag refund checks over a certain 
dollar amount. A Tax and Revenue official tried to issue a 
fraudulent refund check, a warning went up, and she eventually 
was caught. Had the new internal control not been implemented, 
it is possible the fraud scheme would still be going on today.
    I am also concerned by what appears to be a chronic problem 
with Medicaid management in the District. The D.C. Inspector 
General's audits of the D.C. Department of Mental Health 
Programs found that there was no process for revising and 
resubmitting denied Medicaid claims. Audits also uncovered 
incomplete documentation for Medicaid claims, causing the 
District to be denied Federal Medicaid reimbursement for 
services that had been provided. As a result, D.C. residents 
must bear this financial burden. I believe that is unacceptable 
and must be remedied by the OCFO.
    Before I conclude my statement today, I would like to 
address an incident that took place earlier this month in the 
Office of the Chief Technology Officer (OCTO). An official was 
arrested for allegedly accepting bribes and engaging in a 
money-laundering scheme by approving fraudulent time sheets for 
non-existent employees and charging the District for software 
products it never actually received. While I understand the 
official arrested was not under the direct purview of the OCFO, 
I believe this occurrence highlights general problems of 
accountability in contracting and procurement.
    In 2007, the Government Accountability Office issued a 
report identifying a number of weaknesses in the District's 
procurement process, including the need for the OCFO to work 
more closely with the Mayor's Contracting and Procurement 
Office to bridge the gap between the program and finance 
components of contracting. It is my hope that the OCFO, while 
not directly responsible for the recent scandal in the Chief 
Technology Office, uses this unfortunate event as an 
opportunity to re-evaluate the environment in which contracting 
occurs and creates internal controls and robust anti-fraud 
policies where needed.
    I hope today's hearing allows us to gain a greater 
understanding of how the OCFO has addressed recent scandals and 
has worked to implement new policies to improve the overall 
health of the agency and District Government. In this difficult 
financial climate, I believe it is important for Congress and 
District residents to know how the OCFO is safeguarding their 
hard-earned tax dollars.
    I now turn to my friend Senator Voinovich for any opening 
statement that he would like to make. Senator Voinovich.

             OPENING STATEMENT OF SENATOR VOINOVICH

    Senator Voinovich. Thank you, Mr. Chairman. I thank you for 
holding this hearing to discuss both the progress and 
challenges still facing the District of Columbia.
    The District's progress since the 1990s has been something 
Senator Akaka and I have followed close while serving on this 
Subcommittee, and I look forward to learning today from our 
witnesses about their next steps. As Senator Akaka said, a 
testament to the leadership of Dr. Gandhi, the District 
recently announced its 12th consecutive balanced budget amidst 
national economic hardship while continuing to boast an annual 
surplus.
    I remember when you took over, Dr. Gandhi, we were in real 
trouble, and it reminded me very much of when I took over as 
mayor of the city of Cleveland when our books were inauditable 
and we had a financial supervisor involved. And I think the 
fact that you stayed on board and have worked over the years is 
something that we all can be thankful for. So often what 
happens, someone like yourself comes in and then they do their 
thing and then leave.
    And I must say today, Senator Akaka, one of the real joys 
that I have--and there are not too many with the economy the 
way it is--is that the books of the city of Cleveland remain 
auditable and they get good marks because of the fact that we 
put in place a new system and then made sure that we attracted 
the people that were necessary, the professional people to get 
the job done. And in a lot of municipalities around the 
country, in too many cases, a lot of them get jobs because of 
who they know, and I know, Dr. Gandhi, that you hire people on 
what they know and their experiences so that they can give you 
the team that you need to get the job done.
    I am sure that you are worried about where we are with the 
economy, but, again, you are better off than a lot of other 
places in the country, because I think that you have been 
prudent, and the mayor has been working with you.
    On the other hand, I think that there have been some 
recommendations on how you can improve the operation. We will 
be hearing about those from Mr. Willoughby today. I am sure 
that you are interested in those suggestions. And the main 
issue today, I think, is have you been able to attract the 
folks that you need to get the job done? I noticed in your 
testimony you are talking about getting a new person to come 
in. Are they out there? Can you get them?
    So, Mr. Chairman, I am just glad to be here today and feel 
very good that when we got started with this, things did not 
look like they were going to go well. And we had confidence in 
you. I think we have been fortunate also to have Mayor Williams 
and now our new mayor, who seem to be professional people, who 
are running the city based on good public policy and financial 
management, and that helps a great deal, too.
    Senator Akaka. Well, thank you very much for your 
statement, Senator Voinovich.
    I would now like to welcome today's witnesses to the 
Subcommittee: Natwar M. Gandhi, who currently is the Chief 
Financial Officer for the District of Columbia; and Charles 
Willoughby, who currently is the Inspector General for the 
District of Columbia.
    As you know, it is the custom of this Subcommittee to swear 
in all witnesses. I would ask you to stand and raise your right 
hand. Do you solemnly swear that the testimony you are about to 
give the Subcommittee is the truth, the whole truth, and 
nothing but the truth, so help you, God?
    Mr. Gandhi. I do.
    Mr. Willoughby. I do.
    Senator Akaka. Thank you. Let the record show that our 
witnesses answered in the affirmative.
    I want the witnesses to know that while your oral 
statements are limited to 5 minutes, your entire statements 
will be included in the record.
    Dr. Gandhi, will you please proceed with your statement?

  TESTIMONY OF NATWAR M. GANDHI,\1\ CHIEF FINANCIAL OFFICER, 
  OFFICE OF THE CHIEF FINANCIAL OFFICER, DISTRICT OF COLUMBIA

    Mr. Gandhi. Thank you, Mr. Chairman. Mr. Chairman, Senator 
Voinovich, and Members of the Subcommittee, I am Natwar M. 
Gandhi, Chief Financial Officer for the District of Columbia. I 
am here to offer remarks about our progress in financial 
management generally and since the tax scandal broke in 
November 2007.
---------------------------------------------------------------------------
    \1\ The prepared statement of Mr. Gandhi with attachments appears 
in the Appendix on page 25.
---------------------------------------------------------------------------
    Mr. Chairman, in 1995, as you pointed out, the Congress 
created the Office of the Independent Chief Financial Officer 
to work with the mayor and the council. Since then, we have 
completed 12 consecutive balanced budgets, with two more in the 
pipeline, and turned a cumulative $550 million deficit into an 
impressive $1.2 billion fund balance. Further, we transformed a 
nearly bankrupt District Government plagued with junk bond 
ratings into a financially credible jurisdiction with strong 
ratings. Attachment 1 to my testimony and the display board 
right here in the testimony room tell the story of the 
District's successful return to fiscal solvency and financial 
stability.\1\
---------------------------------------------------------------------------
    \1\ The chart referred to appears in the Appendix on page 38.
---------------------------------------------------------------------------
    This turnaround is a case study in a commitment to improve 
financial management and practices. Our general obligation bond 
ratings have improved at an unprecedented speed. They now stand 
at A plus and A1 level from all three rating agencies 
simultaneously. In addition, we recently received a triple A 
rating from Standard & Poor's and double A ratings from Moody's 
and Fitch on our inaugural issuance of the income tax revenue 
bonds. These ratings will lower our borrowing cost by an 
estimated $28 million over the next 4 years.
    Another significant area of financial improvement has been 
in the management of our debt burden. In June 2007, I 
recommended to the mayor and the council a hard cap of 12 
percent in the ratio of total debt service to total 
expenditures. It is now the law. Attachment 2 to my testimony 
shows the District's debt burden since 1992.\2\
---------------------------------------------------------------------------
    \2\ The chart referred to appears in the Appendix on page 39.
---------------------------------------------------------------------------
    Now I will turn to the improvements we have made since the 
tax fraud. This criminal enterprise was able to thrive over 20 
years because of a failure of managerial oversight and internal 
controls. Immediately following the discovery of the fraud, we 
strengthened both the automated and manual controls over the 
refund process, replaced the tax office management, and removed 
numerous employees who benefited from the fraud and failed to 
report suspicious activities. In addition, we established an 
independent Audit Committee composed of distinguished 
professionals and chaired by former IRS Commissioner Sheldon 
Cohen to provide financial advice and review the financial 
management and internal controls of our office. We also hired 
Stephen Cordi, a distinguished tax administrator, as our tax 
commissioner. Mr. Cordi and his new management staff have made 
significant progress in instituting changes at the tax office. 
Each year, the Inspector General retains an external accounting 
firm to audit the District's financial statements and internal 
controls. The auditing firm of BDO Seidman gave us a clean 
audit opinion on our Comprehensive Annual Financial Report 
(CAFR), for fiscal year 2007 and 2008. However, they found the 
manual tax refund process to be a material weakness in fiscal 
year 2007. We worked hard to improve our controls in the refund 
process and other areas. As a consequence, in the just-released 
CAFR for fiscal year 2008, the auditors reduced the severity of 
their finding. Attachment 3 to my testimony shows the history 
of the auditors' detailed analysis of our internal controls.\3\ 
I want to assure you that we have been working hard to reduce 
these and other areas of weakness in our controls.
---------------------------------------------------------------------------
    \3\ The chart referred to appears in the Appendix on page 40.
---------------------------------------------------------------------------
    Now I shall turn to our revenue situation, and I want to 
assure you that we are gathering the requirements for the 
procurement of both a new integrated tax system and a real 
property tax system as we strengthen our revenues.
    In terms of our revenues, the economic outlook of the 
District of Columbia has changed dramatically from that of a 
year ago. The current forecast assumes that the economic 
condition will continue to deteriorate as employment and wages 
edge downward, commercial property transfers slow further, and 
construction projects are delayed. Even with this grim outlook, 
we are managing our fiscal affairs well.
    On the plus side, we are fortunate to be a center for these 
growth areas: Government, education, and health. And even 
though our revenues are shrinking, the diversity of our tax 
base will help us to pull through these times in better shape 
than many other States and localities.
    On the negative side, a significant portion of our 
population is not well educated or trained to fill jobs in the 
growing employment areas. The services that they will need, and 
that we must provide, will continue to tax our resources at 
increasing levels.
    In summary, Mr. Chairman, the District has accomplished 
much--some might even say miracles--in the last decade. Its 
fiscal condition is sound. Our mayor and the council, the 
entire elected leadership, possess a steadfast commitment to 
fiscal responsibility that has become widely recognized.
    This concludes my oral remarks, and I request that my 
written testimony be made part of the record, and I will be 
delighted to answer any questions you may have. Thank you, sir.
    Senator Akaka. Thank you very much, Dr. Gandhi.
    Mr. Willoughby, will you please proceed with your 
statement?

   TESTIMONY OF CHARLES J. WILLOUGHBY,\1\ INSPECTOR GENERAL, 
     OFFICE OF THE INSPECTOR GENERAL, DISTRICT OF COLUMBIA

    Mr. Willoughby. Yes, Mr. Chairman. Good morning, Chairman 
Akaka, Senator Voinovich, and Members of the Subcommittee. I am 
Charles J. Willoughby, Inspector General for the District of 
Columbia, and I am pleased to speak before you this morning at 
your hearing entitled ``Stability Through Scandal: A Review of 
the Office of the Chief Financial Officer,'' also referred to 
as OCFO.
---------------------------------------------------------------------------
    \1\ The prepared statement of Mr. Willoughby appears in the 
Appendix on page 57.
---------------------------------------------------------------------------
    You asked me to address specifically: First, the 
independent auditor's report relative to material weaknesses 
identified in the Comprehensive Annual Financial Report (CAFR); 
second, to address progress that the Chief Financial Officer 
has made in responding to recommendations from the Office of 
the Inspector General (OIG); third, to address cooperation 
between the OIG and the OCFO to achieve efficiency and improve 
accountability; and, fourth, ways that the OCFO can improve its 
financial management.
    William J. DiVello, the D.C. Assistant Inspector General 
for Audit, is accompanying me today. With your permission, a 
longer version of my opening statement has been submitted for 
the record.
    By law, the Inspector General must enter into a contract 
with an independent auditing firm to audit the city's financial 
statements. On January 30, 2009, the District of Columbia 
received an unqualified opinion on its financial statements for 
fiscal year 2008 from its independent auditors, BDO Seidman. It 
is noteworthy to mention that this is the 12th consecutive year 
in which the District received a clean opinion on its financial 
statements from independent auditors. While an unqualified 
opinion provides that the financial statements were presented 
fairly in all material aspects, the independent auditors also 
issued a report on internal control and compliance over 
financial reporting, commonly referred to as the ``Yellow 
Book'' Report. The Yellow Book Report noted a continuing need 
to address significant internal control deficiencies and 
material weaknesses.
    The fiscal year 2008 Yellow Book Report cited two material 
weaknesses: The first was the Office of the Chief Financial 
Officer's treasury functions; and the second, was the 
management of the Medicaid program. The treasury functions 
contributing to the material weakness involved the failure to 
reconcile cash and investment account activities. The Office of 
the Chief Financial Officer generally responded positively to 
these findings, providing detailed actions to reconcile all 
accounts on a monthly basis.
    The second material weakness involved management of the 
Medicaid program, which has been a longstanding problem for the 
District, having been reported as a reportable condition in 
prior CAFR years and a material weakness for fiscal years 2007 
and 2008. Recognizing that many of the city's Medicaid's 
problems reside in the billing and accountability areas, the 
District recently created the Department of Health Care Finance 
to better manage the Medicaid program.
    In the fiscal year 2007 CAFR Yellow Book Report, the 
independent auditors cited conditions at the District's Office 
of Tax and Revenue (OTR), as a material weakness that 
contributed to a $50 million fraud perpetrated by an OTR 
manager working collusively with several other individuals. 
Given the severity of the fraud, the District's City Council 
established a Tax and Revenue Investigation Special Committee 
to review the OTR fraud.
    The special committee retained Wilmer Cutler Pickering Hale 
and Dorr, LLP, to examine the facts and circumstances 
surrounding the fraud scheme and to make recommendations to 
prevent a recurrence. Approximately 38 recommendations were 
directed to the OCFO that addressed the failure of internal 
controls, a culture of apathy and silence, which was pervasive 
among many OTR employees, and the lack of effective oversight.
    In the past several years, the OIG has issued numerous 
reports that addressed improvements in various OCFO areas. One 
important report was a Management Implication Report (MIR), 
that we issued in October 2007 concerning systemic internal 
control deficiencies. These deficiencies addressed such issues 
as ineffective policies and procedures, ineffective controls to 
prevent or detect fraud, lack of documentation, and ineffective 
management oversight. In another MIR issued in January 2009, 
the OIG focused on internal control weaknesses in the 
District's payment process. Overall, the findings and 
recommendations the OIG has directed to the OCFO have been met 
with approval, acceptance, and implementation of corrective 
actions.
    Because the OCFO plays an essential role in maintaining the 
integrity of the city's finances and serving as the primary 
accountant for all fiscal matters on a local budget of about $8 
billion, we have engaged the OCFO on several levels to improve 
interagency cooperation and oversight efforts. For example, 
while not a voting member of the CAFR committee chaired by the 
OIG, the OCFO enjoys a tenured role as an active participant in 
regularly scheduled CAFR meetings. CAFR committee meetings 
serve an extremely important function in getting management of 
District agencies and independent components, along with the 
OCFO, to cooperate and coordinate efforts to permit timely 
completion of the independent auditors' financial statement 
audit.
    While the OCFO has taken many corrective actions relative 
to its operations, we believe there are several areas where 
additional management actions should be taken to improve its 
operations:
    First, given the impact that sound internal control has on 
accountability, effective, and efficient government operations, 
the OCFO should issue a citywide directive requiring managers 
to establish, assess, correct, and report on internal controls.
    Next, regarding the payment process, the OCFO needs to 
assign accounts payable officials more accountability by 
developing written policies and procedures that require due 
diligence prior to the payment of invoices. For example, steps 
must be taken to ensure that the payment of contractors' 
invoices is made only pursuant to the approval of authorized 
agency personnel.
    Next, recent frauds perpetrated against the District 
disclosed a need for an intensified anti-fraud program. By 
intensifying its anti-fraud preventive and detective controls, 
the OCFO can better create a culture of ethical behavior in the 
workplace.
    Next, recruiting and retaining qualified personnel, and 
then properly supervising its staff, to include management 
review of transactions and processes, and timely and accurate 
employee evaluations.
    In summary, my office will continue to provide an 
independent assessment of the OCFO to help maintain the highest 
standards of conduct, integrity, efficient, and effective 
government operations.
    Mr. Chairman, my staff and I will be happy to answer any 
questions that you may have. Thank you.
    Senator Akaka. Thank you very much, Mr. Willoughby.
    Dr. Gandhi, as you may know, before coming to Congress I 
was an educator and a principal in the Hawai'i public school 
system. I was troubled by the D.C. Inspector General's report 
that identified payroll and financial monitoring problems 
within the D.C. public school (DCPS) system. I understand your 
office responded by assembling a task force to focus on 
deficiencies within DCPS. I have a two-part question for you.
    Please elaborate on the changes you have made to address 
problems with DCPS finances. And to others, how do these 
changes correspond with the mayor's education reform 
initiatives?
    Mr. Gandhi. Thank you, Mr. Chairman. Those are important 
issues for us as we deliberate on the mayor's major initiative 
on school reform. School finances have been an issue for 
several years, if not a decade or more. In our so-called Yellow 
Book, schools have appeared most of the time, and we have been 
plagued in the schools with antiquated payroll and managerial 
systems. What we have done at the schools, first, is to make 
sure that our Chief Financial Officer there remains very 
aggressive in terms of exercising internal controls; second, 
installed a new payroll system; and third, we have installed 
all the relevant financial management techniques and procedures 
immediately going forward.
    We work very closely with the chancellor and the deputy 
mayor in charge of education to collaborate and enhance the 
mayor's effort to improve the education of our children. So, we 
are equal partners in the mayor's effort to improve our school 
system.
    Senator Akaka. Dr. Gandhi, as you know, a report for the 
Tax and Revenue Investigation Special Committee concluded that 
the tax refund scheme was not identified sooner in part because 
of a pervasive culture of apathy and silence. As you know, 
Ranking Member Voinovich and I believe human capital 
investments like strategic planning, supervisor training, and 
mentorship programs can have far-reaching positive effects on 
morale and performance.
    Please describe the investment your agency has made in 
strategic planning, supervisor training, and other efforts to 
bring about a culture of transparency and accountability. I am 
particularly interested in the details of the integrity and 
accountability training mentioned in your testimony.
    Mr. Gandhi. Yes, sir. The lessons that I have learned, that 
we have all learned, from the tax scandals are the following:
    One, the cliche about eternal vigilance is extremely 
important and quite relevant as we manage the complex finances 
of the District.
    Two, establishing internal controls is simply not enough. 
Of course, you have to have effective internal controls, but 
what you really need is to make sure that you keep testing 
them, and make sure that people are following those controls 
effectively.
    Three, you pointed out, sir, is the importance of creating 
a climate of accountability and ethical behavior. That is the 
heart of the matter.
    As this scandal went on for more than 20 years, it was not 
detected, nor was it reported even by the people who were there 
for all those 20 years receiving money, and the managers had no 
clue.
    What we have done is: One, reinstitute strong internal 
controls; two, when I became the head of the Office of Tax and 
Revenue in 1997, every employee had to take a course in ethics, 
ethical behavior, and our Code of Conduct; three, we started 
the background investigation of all of our employees, new 
employees; and then have that investigation and training recur 
on a regular interval.
    But more important than anything else, I think, is the 
example that we need to set at the managerial level, at the 
highest level. One reason why on the day the scandal broke, I 
simply removed 12 managers right from top to bottom, who were 
responsible in terms of providing managerial oversight and had 
profoundly failed. We basically took them out of the office. 
Roughly 40 people have left the office because of the scandal.
    We have zero tolerance because of the remarkable financial 
recovery that we brag about all the time in the District. We 
went from a $500 million deficit to $1.2 billion of fund 
balance from junk bonds to triple A ratings, but it will be for 
nothing if we do not instill the sense of ethics, sense of 
accountability within our midst.
    So this is a paramount issue for all of us in the District, 
and particularly in the area of the Chief Financial Officer's 
operations.
    Senator Akaka. Well, thank you very much. It is good to 
hear what you have done and are still trying to do.
    Let me now call on Senator Voinovich for his questions.
    Senator Voinovich. Thank you, Mr. Chairman.
    I have looked at this chart that you have prepared,\1\ and 
it is very impressive. But when you are talking about a $1.2 
billion--what is it? Is that a surplus?
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    \1\ The chart referred to appears in the Appendix on page 38.
---------------------------------------------------------------------------
    Mr. Gandhi. That is a savings account. That is the 
accumulated surpluses over the years. That is where--if you 
look at the household, that is our savings account.
    Senator Voinovich. So that is money that is available in 
the event that you are not able to meet your revenue estimates 
to run the city? You would tap that in order to make sure that 
you balanced your budget?
    Mr. Gandhi. Part of it. What has happened here is----
    Senator Voinovich. It would be like in the State government 
we would call it our ``rainy-day fund?''
    Mr. Gandhi. Exactly right. That is the rainy-day fund. But 
I want to be careful here. Strictly, of that $1.2 billion, 
about $330 million is what you would call, as you pointed out, 
the rainy-day fund comprised in our case of emergency and 
contingency cash reserves, which is about 6 percent of our 
budget. Congress requires that we put in that rainy-day fund 6 
percent of our budget. In addition to that, our escrow fund, 
other reserves, when you add it all up, it is $1.2 billion.
    Now, in terms of making sure that we balance our budget, so 
far we have been able to do that from our regular operating 
revenues.
    Senator Voinovich. OK, but I want to get a better idea of 
this. By the way, this increased rating by rating agencies, 
that is impressive because they really look at you, and I think 
that is something that you should be very proud of--although 
you have a 12-percent cap on borrowing?
    Mr. Gandhi. Yes, sir, 12 percent.
    Senator Voinovich. In the State government and city, we 
were at 5 percent. Is that a traditional number of 12 percent? 
Isn't that quite a large number?
    Mr. Gandhi. Well, under the Control Board, we used to have 
a 17-percent cap. But when we checked with the financial 
markets, our financial advisers, Moody's basically said that of 
the large cities, it is around 11.5 percent.
    Senator Voinovich. So it is about average.
    Mr. Gandhi. It is about average.
    Senator Voinovich. Across the board.
    Mr. Gandhi. Yes, of the large cities.
    Senator Voinovich. And that basically is for the public's 
understanding, that is the portion of the budget that is being 
used to amortize the bonds that the city has issued over the 
years in order to do the capital improvement and other things 
that you need to do.
    Mr. Gandhi. Exactly right. Or, to put it another way, 88 
cents of every dollar is available to provide services to our 
citizens and 12 cents of every dollar is, as you pointed out, 
to take care of our debt service.
    Senator Voinovich. Do you have a provision where you 
restrict the amount of money that can be used for payroll and 
so forth? In other words, what we had, when we passed the 
increase in income tax, we restricted a certain amount of money 
to amortize debt and to pay debt. Or is that just something 
that there is nothing in the past law that says you have to 
restrict X number of the dollars to take care of that.
    Mr. Gandhi. Well, what is required of us is that we provide 
a balanced budget; that is, at no time will we spend more money 
than we take in and that we would balance this over a 5-year 
period, not just 1 year. We provide to you a 5-year plan.
    Senator Voinovich. Yes, I see that. Now, tell me, what are 
the numbers again? Here it says that you have the revenue 
estimate was back in----
    Mr. Gandhi. June.
    Senator Voinovich. June, yes, And you are down 7.1 percent.
    Mr. Gandhi. Right.
    Senator Voinovich. In other words, you have a nut to crack 
here because of the economy. How much of it is that? And how do 
you intend to take care of that?
    Mr. Gandhi. Right. So just to recap the numbers that you 
pointed out, in 2009 we would lose approximately $400 million 
from what we had estimated. In 2010, that would be about $800 
million, and in 2011, around $1 billion. So the way we are 
trying to manage this, first above all, is that we would cut 
our expenditures. That revenue estimating is done by the 
independent Chief Financial Officer. We provide to the mayor 
what the revenue estimates are. We cost out for the mayor what 
the budget items, budget projects, and budget programs are 
going to cost, and then we assure the Congress that when we 
come before you, we will have a balanced budget.
    Senator Voinovich. OK. So those are the recommendations 
that you are going to make to the mayor. He has got between now 
and--you are on a budget that begins July 1?
    Mr. Gandhi. No. October 1. We are on a fiscal year.
    Senator Voinovich. You are on the Federal schedule. You 
have between now and October 1 to figure out ways that they can 
deal with this $400 million.
    Mr. Gandhi. Actually, $800 million, because we are now 
talking about the 2010 budget. The 2009 budget is already taken 
care of. We already cut about $400 million off our revenue.
    Senator Voinovich. OK. So that is taken care of, and you 
are looking now at 2010.
    Mr. Gandhi. Yes, sir. So the mayor has already submitted a 
balanced budget to the council earlier last week. Now the 
council will work at it, and in June, we will come back to the 
Congress and give our 2010 balanced budget.
    Senator Voinovich. OK. But the question I have is if you 
have taken care of the problem for 2009----
    Mr. Gandhi. Right.
    Senator Voinovich [continuing]. He has made some changes.
    Mr. Gandhi. Yes, sir.
    Senator Voinovich. The issue becomes will those changes 
that he made be continual changes that would impact on the $800 
million so that rather than having $800 million to deal with, 
he is going to have to find another $400 million?
    Mr. Gandhi. Absolutely right. I think that is the whole 
issue of providing a 5-year plan; that is to say, we cannot 
have a recurring expenditure without a recurring source of 
revenue. So what the mayor has done in 2010, actually, for the 
first time in a long time, we have submitted a budget which is 
lower than the previous year.
    Indeed, what the mayor has done--and I greatly commend the 
mayor for that--is that he has simply bent the curve. In the 
past, we have had budget increases that are 6, 7, 8, 10 percent 
every year. We had revenues like that, too.
    Senator Voinovich. So the point is that you are going to 
try to take that within the operation of the city, and you are 
not going to touch the rainy-day fund, you are going to try not 
to do that.
    Mr. Gandhi. Absolutely right,
    Senator Voinovich. If you have an emergency, you probably 
might have to do it.
    Mr. Gandhi. The Congress has put very strict conditions on 
this. In other words, for us to be able to touch the rainy-day 
fund, emergency fund, we need to have a real emergency, a FEMA-
type emergency--floods, earthquakes, stuff of that sort. And 
the decline in revenue also has to be far more substantial than 
what you see here. So by any measure, that fund is untouchable.
    Senator Voinovich. So the point is that for 2010 you are 
estimating a flat budget----
    Mr. Gandhi. Actually, a lower budget.
    Senator Voinovich. A lower budget than you had, so that the 
council and the mayor are going to have to make some 
significant additional changes.
    Mr. Gandhi. The mayor has already done that for 2010, and 
the council is deliberating it now.
    Senator Voinovich. So they have that before them right now, 
and they are trying to figure out how they can do it. If they 
are able to do that, then you take care of the additional $400 
million for 2010.
    Mr. Gandhi. And I am confident that we will do it. Indeed, 
we will never send a budget to you, sir, which is not balanced.
    Senator Voinovich. All right. And, of course, you have had 
to estimate what you think the revenues are going to be for the 
District.
    Mr. Gandhi. Absolutely. The Chief Financial Officer (CFO) 
has the exclusive right to estimate the revenues. So we cannot 
have a so-called rosy scenario doing the revenue estimate.
    Senator Voinovich. OK. I have gone over my time. Senator 
Akaka, thank you.
    Mr. Gandhi. May I take just a comment to compliment Senator 
Voinovich here. We learned the lessons from Cleveland. We 
learned what you did. The fiscal prudence and fiscal discipline 
that you, sir, provided when you were the mayor was a guide to 
us. And Tony Williams used to mention that to us. So we are 
very grateful to you for that.
    Senator Voinovich. Thank you.
    Senator Akaka. Thank you for that comment, Dr. Gandhi.
    Dr. Gandhi, I understand that your office has recovered 
nearly $1 million lost in the tax refund scheme and has filed 
for restitution for almost $4 million in real and personal 
property. I am encouraged by your efforts to recover these 
funds.
    I would like to know what other steps the office is taking 
to get back the lost taxpayer money?
    Mr. Gandhi. Our Attorney General has filed a lawsuit 
against Bank of America for $105 million, including the 
original tax loss plus the penalties and other damages that we 
have suffered. And we will vigorously pursue that. And I think, 
as I pointed out earlier, we want to remain totally vigilant 
whenever the taxpayer dollars are involved.
    Senator Akaka. Dr. Gandhi, I mentioned in my statement the 
issue of Medicaid management concerns, and they concern me 
especially. The District loses millions of dollars every year 
because the Federal Government denies incomplete Medicaid 
claims from the District.
    Will you please describe the steps your office is taking to 
remedy chronic Medicaid reimbursement problems?
    Mr. Gandhi. Thank you, sir. The very first step I do take, 
and have been taking over the last 10 years, every time I meet 
a new city administrator in the city, I tell him that the three 
things you must do immediately is Medicaid, Medicaid, and 
Medicaid, because that is where 20 percent of the budget is. 
Over the last 10 years, we have lost close to $343 million, and 
that we cannot afford to do.
    Second, our fundamental problem here is that the Medicaid 
effort has somewhat disintegrated into three provider agencies: 
The Department of Mental Health, Child and Family Services; the 
Department of Human Services; and the school system. And each 
one of them was trying its own way of reclaiming the money.
    Third, the social workers in Child and Family Services, 
which is where the major problem is, their primary concern is 
to provide services to needy children. A Medicaid claim is the 
last thing on their mind.
    We have been urging the council and the mayor to 
consolidate that effort. Fortunately, what we have now under 
Mayor Fenty is a new Department of Health Care Finance. All of 
our Medicaid efforts are concentrated now under one roof. I am 
quite encouraged by the leadership of that new department. 
Indeed, we just met last week with them to see what progress 
they have made, and the contention here is that they would 
follow aggressively to document the services that are being 
provided and make sure that we claim every dollar that should 
be coming to the District.
    Senator Akaka. Mr. Willoughby, I understand that the D.C. 
Inspector General conducts year-round audits of the District's 
Medicaid system. Medicaid management continues to be a 
consistent problem. Do you believe there are still billing and 
accountability flaws that are not being addressed? Or do the 
reforms made just need time to take root?
    Mr. Willoughby. I think based on our recent audits, I think 
that there are still problems in the Medicaid area, and to that 
extent, we continue to audit Medicaid continuously. Within my 
office, we have set up a particular--we have assigned a unit or 
a component within the Audit Division that is broken down or 
assigned by risk areas, of which Medicaid is one of those risk 
areas.
    So I guess the answer is, yes, I believe there still are 
problems. My office continues to try to explore ways--my office 
cannot make management take certain actions, but I think my 
office can help management to focus on those areas where we 
believe there are weaknesses, of which Medicaid is clearly one. 
And so what we have done, not only do we do the audits, we do 
follow-up audits; once we issue a report or a finding of some 
sort, we then will go back informally and find out what the 
agency or division is doing with respect to addressing the 
problems that we cited. I can say that we have worked closely 
with the CFO's office in that regard.
    I would like to say that I do not want my office to be 
viewed as what I call a ``gotcha'' office. I believe we are all 
working for the same thing--an efficient and effective 
Government. Medicaid is a serious problem. Within the confines 
of the role of an Inspector General, I want to utilize the 
resources and the auspices of my office as much as possible 
without going over that line of performing management's job of 
assisting management in correcting what we see as a serious 
deficiency.
    Senator Akaka. Thank you.
    Dr. Gandhi, I am pleased with the working relationship that 
is mentioned here between your office and also with the 
Government Accountability Office (GAO) to ensure responsible 
management of the economic recovery funds the District 
received. Please tell us more about the District's plans for 
managing recovery funds and the support that GAO is providing.
    Mr. Gandhi. Thank you, sir. We work very closely with the 
Office of the Inspector General and also with the District's 
auditor regarding GAO. Sir, I spent 20 years at the GAO before 
I came to the District, so I am thoroughly familiar with the 
way GAO does its work.
    Just last week, we had a meeting with the GAO people. As 
you know, what GAO is trying to do is to closely examine the 
spending of the stimulus money, roughly two-thirds of the 
money, in 16 States and the District of Columbia. So we are 
going to work very closely with GAO, but in addition, I have a 
task force in my own office which coordinates with the mayor's 
office the effort that we are making to spend the stimulus 
package, which is around $400 million in terms of the fiscal 
relief, and I would say $500 million or so for Metro, Water and 
Sewer Authority (WASA), and other capital projects.
    We will provide all this information as to how the money is 
being spent on our website, working with GAO and with the 
Inspector General's office. So we are on the case.
    Senator Akaka. Thank you for your response.
    Senator Voinovich, do you have further questions?
    Senator Voinovich. Yes. This is fun. [Laughter.]
    Fun because it just puts me back to where I was a few years 
ago.
    How much of a match do you get from the Federal Government 
on Medicaid?
    Mr. Gandhi. We got 70-30. Basically, for every $100 locally 
spent, we are entitled to get $70 back.
    Senator Voinovich. That is a very generous contribution 
from the Federal Government compared to lots of other places. I 
know in Ohio it is 60-40. What is it in Hawaii, do you know?
    Well, the point is you have to raise the local 30 percent.
    Mr. Gandhi. Right. But, sir, if I may point out, we are a 
city. We are not a State. So we would wish that we would have a 
State that would take care of responsibilities, but we are not 
complaining.
    Senator Voinovich. I understand that. You are like the 
county welfare department. So the real issue here is to try and 
do a better job of getting control of your Medicaid costs, and 
you are talking about the reorganization, and, Mr. Willoughby, 
you are looking at it. Is the determination about how that 
welfare agency or Medicaid administrator in the hands of the 
mayor and city council--it is not in your hands, is it?
    Mr. Gandhi. No, sir.
    Senator Voinovich. You can make recommendations to them 
about how to get it done, but they, in fact, are the ones that 
have to put the plan in place. And you are saying that a lot of 
people that are more interested, let's get the money on the 
street, not are so much worried about whether we are working 
harder and smarter and doing more with less.
    Has the District, to your knowledge, looked at any place 
around the country to see if there are best practices about how 
do you go about--because I can tell you this: Medicaid is the 
Pac-Man of any budget?
    Mr. Gandhi. Absolutely.
    Senator Voinovich. At the State level, it just sucks up 
money, and then you would have less money for education, higher 
education, secondary, primary, and the rest of it. Do you know 
that? Have they looked at any--I know the mayor has done this, 
but is there a model that he has looked at that would serve as 
a best practice?
    Mr. Gandhi. Exactly right, and on that issue, you are 
absolutely right about it being Pac-Man. In our case, as I 
said, it is 20 percent of the budget. About a quarter of our 
residents are Medicaid eligible, and it costs about $7,000 per 
Medicaid recipient as opposed to, say, about $5,000 in Maryland 
or Virginia. Because we are a city, it costs more. So we are 
very much aware of the problem that we face in Medicaid.
    What we are currently doing, working with consultants and 
others, is to see what is going on in other States and how can 
we make sure that, one, we are effective in providing services 
and, two, claiming from the Feds what should be coming to the 
city. Our new city manager, who is in charge of this, he is 
very much on the case on that, sir.
    Mr. Willoughby. Mr. Chairman.
    Senator Voinovich. Yes, Mr. Willoughby.
    Mr. Willoughby. I may have some information. I understand 
that the city looked at best practices when it established that 
Health Care Finance entity, and that my office is currently 
looking at best practices with regard to that matter.
    The other thing I would point out is that within the Office 
of the Inspector General, there is a Medicaid Fraud Control 
Unit, and one of the few to have that kind of unit within the 
Inspector General's office. We work closely with the Health 
Care Finance entity. Individuals within that unit prosecute 
providers for improperly--I guess fraud within the Medicaid 
program as well as prosecution of individuals who are 
mistreated in Medicaid-funded facilities.
    One of our priorities is to try to recoup as much money as 
possible through that vehicle. We work closely with this--
something called the National Association of Medicaid Fraud 
Control Units. My office is very active in that. So one of the 
things we are trying to do is to recoup money through the 
Medicaid program, through prosecution and others joining in 
joint settlements and that sort of thing.
    Senator Voinovich. Good. That is very good.
    I want to comment, Dr. Gandhi, about the fact that these 
people, the management people, were let go. Good for you. Most 
places, the person that gets involved is penalized, and then 
you do not go up the chain of command and hold people 
responsible. I think that is really important because it sends 
a message out from the top all the way down that you better pay 
attention and not be on watch. That is great.
    You are getting stimulus money, and I have asked Tom 
Bishop, our staff member, to give me a printout of it. Do you 
have the capacity now--I mean, is the amount of money coming 
in, to the extent that you have to hire more people in order to 
properly watch over how it is being spent, or are you able to 
do it with the people that you now have?
    Mr. Gandhi. I think in our case, we have enough people to 
basically monitor how the money is going to be spent, but we 
are working very closely with GAO; and if it were to be 
determined that we would need more people, I will not hesitate 
to go to the mayor and the council and say, look, I need five 
more people to make sure that money is spent well.
    But right now, we are OK. We have already pointed out where 
the money is coming from, how much it is, and we have been 
working with people at the Office of Management and Budget 
(OMB), GAO, and in the city administrator's office, giving them 
our analysis of the Medicaid stimulus package that we will get.
    Senator Voinovich. Well, I hope if you need them you get 
them, so that GAO does not come back to us--because I am 
watching those reports on the 16 States. Ohio is one of them 
that they are watching. You better anticipate it rather than 
have them come back and say they do not have enough people to 
get the job done.
    Mr. Gandhi. Right.
    Senator Voinovich. But that is something you can decide.
    Mr. Willoughby, you made 38 recommendations, and the 
question I have is: How responsive has Dr. Gandhi been to those 
recommendations that you have made? Have any of them been 
completed? Have you a priority list of what are the most 
important recommendations of the 38? How are we doing there?
    Mr. Willoughby. Well, from what I understand, there has 
been progress, there is progress made with regard to putting in 
place some of the internal controls. There are still areas that 
need to be addressed. I do know this: We are currently--the 
council has asked us to review the recommendations made by the 
special committee, and we are in the process of assessing what 
of those recommendations--how they have been handled by the 
CFO's office, I guess.
    Senator Voinovich. Mr. Chairman, would it be appropriate 
for use to ask for a report in 6 months about how these 
recommendations have been made so that we can monitor that?
    Senator Akaka. I think it would be appropriate, yes. We 
would like to keep----
    Mr. Willoughby. We will be glad to do that.
    Senator Voinovich. If you could do that, I would appreciate 
it.
    Mr. Gandhi. May I make a comment on that, sir? Our policy 
on casework reports that we get from the Inspector General and 
also from the city auditor is to immediately make sure that we 
sit down and understand the recommendations and start 
implementing them as soon as we can.
    Second, the so-called Wilmer Hale report that was issued by 
the council in the wake of our tax fraud, we have immediately 
followed all the recommendations, and we are nearly complete 
with the implementation of those recommendations as well.
    The idea here is not to argue with them on semantics and 
say, look, we have been doing this. As the IG can testify, we 
work very closely with them not only on this, but also our so-
called annual report that is under the IG's purview.
    Senator Voinovich. Thank you.
    Senator Akaka. Thank you very much.
    Mr. Willoughby, as you know, internal control weaknesses 
have led to mismanagement of D.C. funds, in your testimony, you 
recommend that the OCFO issue a citywide directive requiring 
the assessment and monitoring of internal controls.
    How would you propose the OCFO formulate appropriate 
performance measures to assess and monitor internal controls?
    Mr. Willoughby. I guess I am always, as an Inspector 
General, reluctant to perform the role of management. But I 
think one basic thing--and I think the CFO has referred to 
this--I believe at the core of many of the problems that exist 
there is a lack of sufficient oversight and supervision. And I 
think it is important that you have--I would like to say you 
have levels of supervision, and I think it is important that 
the supervisors exert their supervisory and oversight 
authority. They have to personally monitor. I have said this 
before: I believe that you can restructure and reorganize, as I 
like to say, until the cows come home. But at the end of the 
day, you still have to have someone who is supposed to be doing 
what they are supposed to be doing, whatever that task or 
function is. And then you have to have someone who is going to 
be holding them accountable. So supervisors have to inspect and 
review the work that is being done.
    I know with the OTR matter, for example, what was there, it 
was clear there was a lack of supervision and oversight. There 
was a lack of systems or methods in place to detect fraud. If 
you look at the WilmerHale report, one thing that jumps out at 
you, it talked about bogus or phony documentation being used to 
substantiate refunds. Well, if you had appropriate supervision 
and oversight, then someone should have caught that along the 
way.
    I just do not want to wait until after a matter or a 
problem has been discovered. I try to do preventive things, and 
that is where the MIR from October 2007--we did a compilation 
of reports of audits that had been done between, I think, 2004 
to 2007. We cited specific areas: Lack of mechanisms in place 
to detect fraud, lack of sufficient oversight, lack of 
appropriate policies and procedures. And we cited agencies of 
which the CFO's office, OCTO, and the Contract Procurement 
Office were also cited. Those are things to try to help. A MIR 
is an instrument by which we try to put agency directors and 
heads on notice that these are problem areas that may have 
city-wide ramifications.
    And so I guess that is how, I mean, what you need to do at 
the end of the day is you have to make sure people are held 
accountable. But it does not necessarily just mean disciplining 
them, it is making sure that they do what they are supposed to 
do. I, for one, believe that most of the city employees in the 
District of Columbia are good, honest, hard-working 
individuals, and I think it is incumbent upon those of us in 
oversight and supervisory capacities to ensure by monitoring--
and I mean getting down sometimes in the weeds or laboring in 
the vineyards sometimes, as I like to say--to make sure that 
work is done because at the end of the day that is what is 
going to determine whether or not there is improper or proper 
activity taking place.
    Senator Akaka. Dr. Gandhi, I would like to hear your views 
on that recommendation and on that question, and then ask you 
whether you plan to implement those.
    Mr. Gandhi. I think very specifically as to procurement, 
which has been a perennial problem in the District, what we 
have done from our corner of the city is to make sure that no 
amount will be paid until we are assured of a proper contract, 
of a proper invoice, a legitimate authority, procurement 
authority that would have approved the contract as well as the 
invoice, and assurance that the goods and services have been 
received.
    No amount will be paid or has been paid that does not 
satisfy this requirement of the procurement and the requirement 
that the goods have been received and payments properly 
authorized. And that has been also true of the recent OCTO 
scandal in the Technology Office. All that we have done was 
proper.
    The other thing that we should note here is that an 
employee, our own employee, basically alerted authorities about 
this. To facilitate this, we also have a toll-free hotline 
managed by an outside vendor. So if any of our employees were 
to find out that something is going on here, they do not have 
to tell us. They can just call the hotline, which is managed, 
as I said, by an outside vendor.
    So we have taken all possible steps that could prevent 
fraud happening again in the city.
    Senator Akaka. Dr. Gandhi, I am pleased that you are 
setting up a 24-hour hotline.
    Mr. Gandhi. Yes, sir.
    Senator Akaka. Operated by a third-party, as you said, to 
allow employees to report fraud and mismanagement without fear 
of retribution. What other protections are in place to ensure 
that whistleblowers feel comfortable coming forward to report 
fraud and financial mismanagement in the District?
    Mr. Gandhi. Well, we have the whistleblower protection law, 
which is rather a strict law, and goes beyond the Federal law 
in protecting any of our employees who would alert the 
management either through internal channels or through the 
fraud hotline. But more than anything else is the climate that 
we would create of not being afraid to speak up, not to be 
fearful to tell the authorities or colleagues if something 
untoward is happening. It is extremely important that we create 
that level of climate and collegiality within the 
Administration.
    Senator Akaka. Mr. Willoughby.
    Mr. Willoughby. I would also like to point out that the 
Inspector General's office also has a hotline. We also have a 
website on which people can file complaints. And they can also 
walk in and file complaints anonymously.
    I can also say that in my office we have increased our 
outreach efforts. We now have what we call corruption seminars 
where we go out to the various agencies and speak--and I 
personally participate in that--and where we encourage people 
to report matters to our office. And we also impress upon them 
or try to impress upon them their obligation. Under the 
personnel regulations for the District of Columbia, employees 
are obligated to report matters to the Inspector General's 
office. And so we try to inform people and let them know that 
they need to report matters, and if they have a question, what 
I tell the employees is that if it is a question--even if it is 
just something that they are thinking or they think there may 
be a problem, they should contact the Office of the Inspector 
General, and they should never feel reluctant to do so.
    And so we have expanded our outreach efforts to try to 
encourage individuals and, also, I think probably the most 
important thing in my mind is to try to impress upon people the 
importance of what they are doing, because what they are doing 
affects individuals' lives.
    Senator Akaka. Well, let me ask both of you my final 
question. What response result have you had on the hotline?
    Mr. Willoughby. We always have thousands of calls. Now, 
with the OTR matter, we did not get--well, my office was 
involved with the OCTO matter and with the OTR matter from a 
law enforcement standpoint. But we regularly get numerous--
hundreds, thousands of calls that come in, and we do report 
that information to the Congress on an annual basis.
    Senator Akaka. Dr. Gandhi.
    Mr. Gandhi. The same. We have been receiving numbers of 
calls on the hotline, tips. Indeed, one of the tax scandals 
that had appeared was discovered through tips, and that we are 
able to resolve those issues.
    I think the issue of training is very important, this kind 
of climate does not just happen. You have to train. Any new 
employee who joins our office has to go through an orientation 
training where we tell them these are the things you do, these 
are the things you do not do, do not even think about. That is 
very important for us.
    Senator Akaka. Thank you. Senator Voinovich.
    Senator Voinovich. The procurement people, are they under 
your jurisdiction?
    Mr. Gandhi. No, sir.
    Senator Voinovich. Again, it is the city, so you can 
comment on procurement. One of the things that is coming up 
everywhere is we have a major procurement problem everywhere in 
the Federal Government, and you have it in the local 
government. Is it because of the fact that procurement people 
are not out there? Or is there a special kind of education that 
they should be getting? And have you ever talked to anybody 
about maybe working with the University of the District of 
Columbia or some other place to talk about the kinds of people 
that you need to work in procurement?
    Mr. Gandhi. In general, it has been very difficult to hire 
people for the District. To get people with specialized 
training, such as procurement, such as technology, such as 
finance, is additionally difficult.
    Our problem here is that we are competing against the 
Federal Government; we are competing against the accounting 
firms and the consulting firms. And there is no way we can 
provide the kind of attractive salary packages----
    Senator Voinovich. How do you compare with the Federal 
Government?
    Mr. Gandhi. Not well. Our fringe benefits--how shall I put 
it--compare very poorly.
    Senator Voinovich. Well, can you submit that for the 
record. I would like to have that information about it.\1\
---------------------------------------------------------------------------
    \1\ The information submitted for the record appears in the 
Appendix on page 65.
---------------------------------------------------------------------------
    Mr. Gandhi. We will do that.
    Senator Voinovich. Because if you cannot compete for the 
people, how do you expect to bring them on board?
    Mr. Gandhi. Absolutely.
    Senator Voinovich. Or, for that matter, keep them. Because 
I suspect if you get somebody that is good, somebody offers 
them a job in the Federal Government or someplace else.
    Mr. Gandhi. To cite an example, sir, I am a Federal 
annuitant and I enjoy, because of my service at GAO, health 
benefits coming from the Federal Government. Had it not been 
the case, I would have been very reluctant to join the District 
Government.
    Now, I must say that, despite all this, the city is the 
place to be if you want challenging work, if you want to change 
a life. That is the place to be.
    Senator Voinovich. Well, it is a combination of both 
things. I always tell people if you are working in city 
government, part of your compensation has to be that you are 
making a difference in people's lives that is important.
    Mr. Gandhi. Exactly right.
    Senator Voinovich. But I think also they have to feed their 
families and take care of all the other things that need to be 
taken care of.
    Do you have pay for performance in the city government, or 
is it just the regular salary?
    Mr. Gandhi. Well, we do have bonuses. Of course, these are 
not the American International Group (AIG) bonuses, but we 
provide some bonuses as an attraction.
    Senator Voinovich. So you do performance evaluation in your 
shop of people that work for you?
    Mr. Gandhi. Yes, sir. Everyone has to go through the 
performance evaluation, yes, sir.
    Senator Voinovich. Alright. Is that the same case in other 
departments in city government?
    Mr. Gandhi. Right, absolutely.
    Senator Voinovich. They really do performance evaluations?
    Mr. Gandhi. Yes, sir.
    Senator Voinovich. Is it pay for performance based on the--
--
    Mr. Gandhi. Well, promotions and the pay raises would 
depend upon how you have performed.
    Senator Voinovich. OK. What is the biggest revenue raiser? 
Your revenues are down, but if you look at the sources of 
revenue for the city, give me the top two.
    Mr. Gandhi. Absolutely right. Income tax is about 33 
percent; real property taxes, another 33 percent; sales taxes--
--
    Senator Voinovich. Income tax, one-third.
    Mr. Gandhi. One-third. Real property, another third. Sales 
tax, 15 percent; gross receipts, around 5 percent; and then the 
rest of them, around 14 percent.
    Senator Voinovich. So that the hit you are taking in terms 
of your revenues would be probably the sales tax? Where do you 
see the shrinkage most?
    Mr. Gandhi. Most of the shrinkage here is in our commercial 
real property taxes. That has been an engine for us.
    Senator Voinovich. So that point is the brunt, most of 
the--about 50 percent of the real estate taxes come from 
commercial, or is it more than that?
    Mr. Gandhi. Yes, more than that. The reason for that is 
that the District real property has been among the hottest real 
property markets in the country, if not in the world. We are 
second only to Manhattan in terms of real property, commercial 
real property.
    Also, the residential real property is doing comparatively 
well when you compare it with other regions. However, lately, 
because of the freeze in the financial markets, nothing moves. 
So the deals are not being made in the District. So-called deed 
and recordation transfer taxes, we used to get about $400 
million a year. Now we cut that in half.
    Senator Voinovich. In what, the transfer taxes?
    Mr. Gandhi. Transfer taxes, deed and recordation and 
transfer taxes, we cut that in half, primarily because the 
financial markets are frozen, no deals are being made. The city 
cannot get that level of taxes on deed transfers and 
recordations.
    Senator Voinovich. Have you seen an acceleration of people 
filing claims to have their property values reduced?
    Mr. Gandhi. Absolutely right. We have an explosion of so-
called appeals, particularly from the commercial real property 
holders, and we have provided huge sums of discounts in those 
areas because we know that we are going to lose money there. 
And that is why the $1 billion that we have reduced in our 
total taxes, the bulk of that comes from the real property and 
income taxes.
    Senator Voinovich. All right. And, of course, you cannot 
tax Federal buildings or universities or hospitals.
    Mr. Gandhi. Since you raised the issue, sir, I want to 
point out that we used to have offices on Judiciary Square, on 
the 11th floor. I looked outside my office, and I saw museums, 
monuments, galleries--nothing I could tax. That is a 
fundamental problem.
    Senator Voinovich. You can tax the income from the people 
that are building them, but you cannot tax the buildings.
    Mr. Gandhi. But even there, we have a problem, what we have 
is that most of the people, professional people, I should say, 
working in those firms, consulting firms, the law firms, they 
live in the suburbs.
    Senator Voinovich. They what?
    Mr. Gandhi. Live in Maryland and Virginia. Of every $100 
that are earned in the city, we get to tax only $34; $66 are 
taxed in Maryland and Virginia. It is like going to a 
restaurant, and you would say of all the people who are eating 
here, only one-third will pay, two-thirds will not pay, and 
everyone will complain about bad food and bad service. It is as 
simple as that. We are the only place in the world where income 
is not taxed at the source.
    I recall coming to you, sir, with Tony Williams, and we 
talked about this at that time. And you said, ``Well, how do 
you pay your bills?'' Well, I must say that is difficult. But 
with a great credit to the mayor and the council, the elected 
leadership, and the help that we get from Congress, we are able 
to show performance here which is the envy of many cities.
    Senator Voinovich. Thank you very much.
    Senator Akaka. Dr. Gandhi, because I consider Senator 
Voinovich as a champion of human capital, I want to ask this 
question of you. I understand the OCFO is struggling with 
recruiting and retention. In the wake of the Office of Tax 
Revenue scandal, investment in human capital and incorporating 
accountability and oversight into your human capital planning 
are particularly important.
    What do you see as the OCFO's greatest human capital 
challenges? And have you developed a strategic human capital 
plan to address them?
    Mr. Gandhi. I think that is the heart of the matter, sir, 
to find the right kind of people, people with skills that we 
need, people with training that we need, people with experience 
that we need. Those are not available to us as freely as 
elsewhere, particularly in the areas of tax, economics, 
financial analysis, and technology. We have a hard time finding 
the right mix of people.
    I am very proud of the staff that we do have. They do 
wonderful work. But, still, I can do more if I had more people 
of that requisite skills and expertise.
    Senator Akaka. Thank you
    Mr. Willoughby, I applaud the cooperative partnerships that 
seems to exist between the D.C. Inspector General, the OCFO, 
and D.C. Council in the wake of the Tax and Revenue scandal. 
Aside from increased interagency communications, what benefits 
do you see these partnerships yielding? And how do you believe 
they will contribute to improvements in the management of 
District funds?
    Mr. Willoughby. I believe that the partnerships will 
contribute or are worthwhile because of the fact, as I said, we 
are striving for the same thing--an effective and efficient 
government. I believe that by having open channels of 
communication, agency heads and agency staff will be more 
willing, I guess, to share information with us that would be 
helpful to us in the performance of our duties, that they 
realized the role of this office and, I guess, not only their 
obligation to cooperate with the office, but the importance of 
them doing so.
    When you asked the question, Mr. Chairman, it came to mind 
that one of the risk areas we have is the school system, DCPS, 
as you referred to earlier. We have an on-site presence at 
DCPS, and one of the reasons we have that is to encourage the 
communication and encourage our understanding of operations 
there. And it cuts down on, I guess, delays that we may 
encounter and gives us a better appreciation of operations and, 
consequently, makes our reports more meaningful.
    So, in essence, I guess, I believe that many problems stem 
from--and this is just life--many problems stem from a lack of 
communication, and I think it is very important, if you are 
going to solve a problem, that you have open channels of 
communication.
    Now, as I like to tell agency directors, the nature of the 
work of the IG is such that sometimes I can tell them things 
and sometimes I cannot. Sometimes I wish I could do more to 
help them, but because of the nature of the operation of the 
IG's office, the whole concept, I cannot. But I try to be as 
forthright and as honest because I think in the long run that 
is beneficial, because then we can work together to solve a 
problem, whereas it is not a situation of us against them. So I 
think the communication is extremely important and beneficial 
for that purpose.
    Senator Akaka. Thank you. I have one last question for Dr. 
Gandhi and one for you, Mr. Willoughby.
    Dr. Gandhi, given the financial management challenges of 
the past and anticipated challenges for the future, what are 
your top three priorities for District finances as we move 
forward?
    Mr. Gandhi. The most important priority I have is to make 
sure that we balance the budget going forward and the 
commitment that we have made to the Congress and to the 
citizens that we will remain balanced, not only in the current 
year but on a 5-year plan.
    The second important consideration I have is that the AAA 
ratings that we have received lately from Wall Street, the 
credibility that we enjoy on Wall Street, financial viability, 
we want to make sure that we do not deviate from that.
    And the third priority I have is to make sure that we 
protect the taxpayer dollars. We are the guardian of the 
District's taxpayer dollars, that we never want to deviate from 
that mission, from that stewardship, that we keep enjoying the 
confidence of the taxpayers who trust their hard-earned tax 
dollars to us.
    So those are the three important priorities I keep in my 
mind as I wake up in the morning.
    Senator Akaka. Thank you very much for that, Dr. Gandhi.
    Now, Mr. Willoughby, now that you have heard this, how do 
you plan to aid the OCFO in achieving these priorities?
    Mr. Willoughby. Well, I guess briefly, to continue to do 
what we have been doing. One of the things, when you asked the 
question, Mr. Chairman, about finances, in determining areas to 
look into, we have a number of themes that we rely on. First 
and foremost is what we call revenue enhancement, and basically 
what that says is that we want to make sure that the city, that 
the District of Columbia takes advantage of all the revenue 
sources that similar entities have, and then next to make sure 
that money is spent efficiently and effectively.
    I like to say that money is very important because you 
cannot do anything without money. So I want to make sure that 
the city receives all the money it is supposed to receive, and 
then with that money it delivers the basic services and the 
services that it is intended to. And so that is why Medicaid is 
very important to us, because I believe the city is not taking 
full advantage of that.
    I believe that if we do those things, if we keep in the 
forefront making sure that the city receives the monies that it 
is supposed to be receiving and that the money is spent 
effectively, we will be going a long way toward achieving our 
eventual goal of having an effective and efficient government. 
And the way I can expect to help Dr. Gandhi and other agency 
heads is to continue what we have been doing, being accessible, 
working with them as much as we can within the confines of what 
an IG has the responsibility of doing, and just doing what we 
have been doing, I guess. That is my answer.
    Senator Akaka. Thank you very much, Mr. Willoughby.
    Mr. Willoughby. Thank you.
    Senator Akaka. I want to thank both of you for testifying 
today. Your responses have been great. Based on your testimony, 
we have learned a great deal about problems with the District's 
financial management as well as the progress that has been 
made.
    I believe government functions best when all of its members 
work together, and I am pleased to see the D.C. Inspector 
General taking such an active role in advising and working with 
OCFO. I know that you are working together to exercise good 
financial management and to safeguard District taxpayer 
dollars.
    I hope you will redouble your efforts to make sure that 
good internal controls are in place throughout the District 
Government and to address chronic problems in the Medicaid 
program. It is my hope that recommendations from this hearing 
and continued input from the D.C. Inspector General and GAO as 
well will help D.C. stay on a path to financial recovery.
    This hearing record will remain open for one week during 
which time Members of the Subcommittee may submit additional 
written questions.
    So thank you very much, again, for your presence here, your 
testimony, and your responses.
    Mr. Gandhi. Thank you, Mr. Chairman. Thank you for your 
leadership.
    Mr. Willoughby. Thank you very much.
    Senator Akaka. Thank you. This hearing is adjourned.
    [Whereupon, at 11:31 a.m., the Subcommittee was adjourned.]





















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