Financial Audit: District of Columbia Highway Trust Fund's Fiscal Year
1997 Financial Statements (Letter Report, 09/30/1998, GAO/AIMD-98-254).

The report presents the results of GAO's audit of the District of
Columbia Highway Trust Fund's financial statements for fiscal year 1997.
GAO also examines the forecasted statements of the Fund's expected
conditions and operations for the next five years. This report presents
(1) GAO's opinion on District management's assertion about the
effectiveness of the Fund's internal controls as of September 1997 and
(2) the results of GAO's evaluation of the District's compliance with
laws and regulations during fiscal year 1997 as they relate to the Fund.

--------------------------- Indexing Terms -----------------------------

 REPORTNUM:  AIMD-98-254
     TITLE:  Financial Audit: District of Columbia Highway Trust Fund's
	     Fiscal Year 1997 Financial Statements
      DATE:  09/30/1998
   SUBJECT:  Financial statement audits
	     Federal aid for highways
	     Internal controls
	     Municipal governments
	     Financial management systems
	     Accounting procedures
	     Projections
	     Trust funds
	     Fuel taxes
	     Auditing standards
IDENTIFIER:  DC Highway Trust Fund
	     District of Columbia

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GAO/AIMD-98-254

Cover
================================================================ COVER

Report to Congressional Committees and Subcommittees

September 1998

FINANCIAL AUDIT - DISTRICT OF
COLUMBIA HIGHWAY TRUST FUND'S
FISCAL YEAR 1997 FINANCIAL
STATEMENTS

GAO/AIMD-98-254

D.C.  Highway Trust Fund

(913798)

Abbreviations
=============================================================== ABBREV

  AICPA - American Institute of Certified Public Accountants
  CAFR - Comprehensive Annual Financial Report
  CE - construction engineering
  CFO - Chief Financial Officer
  DPW - Department of Public Works
  FABS - Federal Aid Billing System
  FHWA - Federal Highway Administration
  FMS - Financial Management System
  LADS - Labor Acquisition and Distribution System
  LAN - local area network
  OIS - Office of Information Systems
  OTR - Office of Tax and Revenue

Letter
=============================================================== LETTER

B-278916

September 30, 1998

Congressional Committees and Subcommittees

This report presents the results of our audit of the financial
statements of the District of Columbia Highway Trust Fund for the
fiscal year ended September 30, 1997, and our examination of the
forecasted statements of the Fund's expected conditions and
operations for the next 5 years.  These financial statements and the
forecasted statements are the responsibility of the District's Chief
Financial Officer, the Fund's administrator.  This report also
presents (1) our opinion on District management's assertion regarding
the effectiveness of the Fund's internal controls as of September 30,
1997, and (2) the results of our evaluation of the District's fiscal
year 1997 compliance with laws and regulations as they relate to the
Fund.

We conducted our work pursuant to the provisions of section 3(e) of
the District of Columbia Emergency Highway Relief Act and in
accordance with generally accepted government auditing standards.

We are sending copies of this report to the Chairmen and Ranking
Minority Members of the Senate Committee on Appropriations and its
Subcommittee on the District of Columbia; the House Committee on
Appropriations and its Subcommittee on the District of Columbia; the
Senate Committee on Governmental Affairs and its Subcommittee on
Oversight of Government Management, Restructuring and the District of
Columbia; and the House Committee on Government Reform and Oversight
and its Subcommittee on the District of Columbia.  In addition,
copies will be sent to the Department of Transportation's Federal
Highway Administration; the District of Columbia's Mayor, interim
Chief Financial Officer, and Inspector General; the District of
Columbia Auditor; and the Chairman of the District of Columbia
Financial Responsibility and Management Assistance Authority.

Major contributors to this report are listed in appendix III.  If you
have any questions regarding this report, please contact Gloria L.
Jarmon, Director, Health, Education, and Human Services, Accounting
and Financial Management Issues, at (202) 512-4470.

James F.  Hinchman
Acting Comptroller General
of the United States

Congressional Committees and Subcommittees

The Honorable John H.  Chafee
Chairman
The Honorable Max S.  Baucus
Ranking Minority Member
Committee on Environment and Public Works
United States Senate

The Honorable John W.  Warner
Chairman
Subcommittee on Transportation and Infrastructure
Committee on Environment and Public Works
United States Senate

The Honorable Bud Shuster
Chairman
The Honorable James L.  Oberstar
Ranking Minority Member
Committee on Transportation and Infrastructure
House of Representatives

The Honorable Thomas E.  Petri
Chairman
The Honorable Nick J.  Rahall, II
Ranking Minority Member
Subcommittee on Surface Transportation
Committee on Transportation and Infrastructure
House of Representatives

Letter
=============================================================== LETTER

B-278916

To the Mayor of the
District of Columbia

This report presents the results of our audit of the financial
statements of the District of Columbia Highway Trust Fund for the
fiscal year ended September 30, 1997, and our examination of the
forecasted statements of the Fund's expected conditions and
operations for the next 5 years, as required by section 3(e) of the
District of Columbia Emergency Highway Relief Act.\1 This report also
presents (1) our opinion on District management's assertion regarding
the effectiveness of the Fund's internal controls as of September 30,
1997, and (2) the results of our evaluation of the District's
compliance with laws and regulations during fiscal year 1997 as they
relate to the Fund.

In 1995, the Department of Transportation's Federal Highway
Administration (FHWA) expressed concerns about the District's ability
to provide matching funds for federal aid highway projects and
maintain its existing highway system.\2

To address these concerns, section 2 of the act\3 temporarily waived
the requirement that the District provide matching funds for federal
aid highway projects for fiscal years 1995 and 1996.  In addition,
section 3(a) of the act\4

required the District to establish by December 31, 1995, a dedicated
highway trust fund whose revenues are to be used to repay the
temporarily waived amounts and provide matching funds for the
District's federal aid highway projects financed by FHWA.  This
dedicated trust fund is required to include amounts equivalent to
receipts from motor fuel taxes\5 and to be separate from the
District's General Fund.\6 The District established the trust fund as
required by the act.\7 Motor fuel tax revenues were reported to be
$32 million for fiscal year 1997.

The act establishes priorities for using the Fund's revenues to pay
the District's portion of federal aid highway project costs.  The
first priority of the Fund is to repay FHWA for the District's share
of federal aid highway project costs temporarily waived during fiscal
years 1995 and 1996.  For the $10.2 million temporarily waived during
fiscal years 1995 and 1996, the act provides a repayment schedule
with the final payment due at the end of fiscal year 1998.\8

The remaining priorities of the Fund are to reimburse the District
for local capital appropriated expenditures, which are (1) the
District's share (normally at 20 percent) of federal aid highway
project costs, (2) the salaries of District personnel (estimated at
$6 million per year), excess overhead costs (construction engineering
(CE) cost overruns that exceed 15 percent) associated with federal
aid projects, and other non-FHWA participating costs,\9 and (3) the
funding for local (100 percent District) capital and maintenance
projects.  All federal and local capital appropriated expenditures
are to be paid out of the District of Columbia Department of Public
Works' (DPW) Capital Operating account and then reimbursed by either
FHWA or the Fund.

In addition to establishing the Highway Trust Fund account as
required by section 3(a) of the act, the District was required by
section 4(b)\10 to establish an independent revolving fund account,
separate from its Capital Operating account, to make prompt payments
to contractors working on federal aid highway projects.  On May 28,
1996, the District established the Revolving Fund account by
transferring $5 million from the Capital Operating account.
According to District officials, they do not intend to reimburse the
Capital Operating account until fiscal year 2004 or when it is
determined that funds in the Highway Trust Fund are sufficient to
maintain operations.

We are required by section 4(e) of the act\11 to audit the Fund and
submit a report to the Congress by December 31 of each year,
beginning with the period ended September 30, 1996.  The audit is on
the Fund's financial condition and results of operations for fiscal
years ending September 30 and the District's forecasted statements of
the Fund's expected condition and operations for the next 5 years.
We were able to issue our initial report in December 1997.\12 In that
report, we noted that due to the timing regarding the District-wide
financial statements (due February 1, after the September 30 year-end
close), the submission of the forecasted statements (due June 15,
prior to the fiscal year beginning October 1), and the availability
of supporting documentation from the District, we will not be able to
meet the future December 31 reporting deadlines required by the act.

In our audit of the Fund for fiscal year 1997, we found the
following:

  -- The financial statements were reliable in all material respects.

  -- Management's assertion about the effectiveness of internal
     controls was not fairly stated.  Management asserted that
     internal controls in place at September 30, 1997, were effective
     in (1) safeguarding assets from material loss, (2) assuring that
     there were no material misstatements in amounts reported in the
     financial statements, and (3) assuring material compliance with
     laws and regulations.  Management's assertion on the
     effectiveness of internal controls was not fairly stated because
     of material weaknesses identified in accounting for revenue and
     capital appropriated expenditures and in computer system general
     controls.

  -- There was a reportable noncompliance with one of the laws we
     tested.

  -- The underlying assumptions made and methodology used to develop
     the Fund's forecasted statements provided a reasonable basis for
     such statements, and the statements were presented in conformity
     with guidelines established by the American Institute of
     Certified Public Accountants (AICPA).

The following sections outline each conclusion in more detail and
discuss our conclusions and the scope of our audit.

--------------------
\1 Public Law 104-21, 109 Stat.  257 (1995), D.C.  Code Ann.  section
7-134.2(e) (1998 Supplement).

\2 Approximately 423 of the 1,020 miles of streets and highways and
most of the bridges under the District's jurisdiction are eligible
for federal aid.

\3 D.C.  Code Ann.  section 7-134.1 (1998 Supplement).

\4 D.C.  Code Ann.  section 7-134.2 (1998 Supplement).

\5 The District of Columbia levies and collects a tax of 20 cents per
gallon on motor vehicle fuels within the District of Columbia sold or
otherwise disposed of by an importer or by a user or used for
commercial purposes (D.C.  Code Ann.  section 47-2301).

\6 Unless prohibited by law (as in the case of the Fund under the
act), the District's cash from all funds is combined into the General
Fund's cash management pool, which is used to make transfers to all
the District's checking accounts as needed.  Any cash not needed for
immediate disbursement is invested.

\7 D.C.  Code Ann.  section 7-134.4 (1998 Supplement).

\8 As required by section 3(c) of the act, D.C.  Code Ann.  section
7-134.2(c) (1998 Supplement), half of the balance of these amounts is
to be repaid in each of the 2 fiscal years following those in which
the amounts were temporarily waived.  One-half of the $2.2 million
waived in fiscal year 1995 was due and repaid as of September 30,
1996, and the remaining half was due and repaid at the end of fiscal
year 1997.  Likewise, of the $8 million waived in fiscal 1996, half
was due and repaid at the end of fiscal year 1997, with the remaining
half due at the end of fiscal year 1998.

\9 These include the District's expenditures for costs not eligible
under the federal aid highway program, such as the costs for sewer
cleaning, storm drain improvements, and retaining walls.

\10 D.C.  Code Ann.  section 7-134.3(b) (1998 Supplement).

\11 D.C.  Code Ann.  section 7-134.3(e) (1998 Supplement).

\12 Financial Audit:  District of Columbia Highway Trust Fund's 1996
Financial Statements (GAO/AIMD-98-30, December 15, 1997).

   UNQUALIFIED OPINION ON
   FINANCIAL STATEMENTS
------------------------------------------------------------ Letter :1

The financial statements and accompanying notes present fairly in all
material respects, in conformity with generally accepted accounting
principles, the Fund's balance sheet and statement of revenues,
expenditures and change in fund balance for the fiscal year ended
September 30, 1997.  However, misstatements may nevertheless occur in
other financial information reported by the Fund as a result of the
internal control weaknesses described in the following section.

   ADVERSE OPINION ON MANAGEMENT'S
   ASSERTION ABOUT THE
   EFFECTIVENESS OF INTERNAL
   CONTROLS
------------------------------------------------------------ Letter :2

We evaluated management's assertion about the effectiveness of its
internal controls designed to meet the following control objectives:

  -- safeguard assets against loss from unauthorized acquisition,
     use, or disposition;

  -- assure the execution of transactions in accordance with the laws
     and regulations that have a direct and material effect on the
     Fund's financial statements; and

  -- properly record, process, and summarize transactions to permit
     the preparation of reliable financial statements and to maintain
     accountability for assets.

Because of the material weaknesses in internal controls described
below, internal controls do not provide reasonable assurance that for
amounts material in relation to the financial statements, losses,
noncompliance, and misstatements would be prevented or detected on a
timely basis.  In our opinion, because of the effect that the
material weaknesses described in this section had on achieving
control objectives, management's assertion that the Fund's internal
controls provided reasonable assurance that losses, noncompliance,
and misstatements material to the financial statements would be
prevented or detected on a timely basis is not fairly stated, based
on the control criteria used.  Management made this assertion based
upon criteria established under the Federal Managers' Financial
Integrity Act of 1982 and Office of Management and Budget Circular
A-123, Internal Control Systems.

A material weakness is a condition in which the design or operation
of one or more of the internal control elements does not reduce to a
relatively low level the risk that errors or irregularities in
amounts that would be material to the financial statements may occur
and not be detected promptly by employees in the normal course of
performing their duties.  Our internal control work would not
necessarily disclose all material weaknesses.

The following material weaknesses identified in revenue, capital
appropriated expenditures, and computer system general controls, some
of which were initially identified in our prior year audit,\13 may
adversely affect the quality of data on which management decisions
are based.  Unaudited information of the Fund, as reported by the
District, may also contain misstatements resulting from these
deficiencies.

--------------------
\13 Because the 1996 audit report was not issued until December 1997,
corrective actions to address the recommendations could not be
implemented to improve the Fund's internal controls for this audit
(as of September 30, 1997).  Revised control procedures implemented
by the District during fiscal year 1998 are briefly described in this
report.  We will evaluate these procedures as part of our audit of
the fiscal year 1998 financial statements.

      REVENUE
---------------------------------------------------------- Letter :2.1

Weaknesses in revenue procedures resulted in (1) a continuing problem
with motor fuel taxes not being deposited promptly, (2) the District
still not being able to determine or verify that all revenues have
been collected, and (3) incomplete and erroneous motor vehicle fuel
tax returns being accepted and processed.  These weaknesses cost the
Fund interest income and increased the risk that cash receipts and
revenue were exposed to loss from misappropriation, errors, and
irregularities and that cash was manipulated.

The delays in processing and depositing revenue resulted in
approximately $74,500 in potential lost interest income (calculated
using an annual average interest rate of 5 percent for the short-term
Treasury bills in which the District invests any excess cash) for
fiscal year 1997.  Our analysis of 82 statistically selected cash
receipt transactions, out of the 706 monthly tax returns submitted
during fiscal year 1997, showed that the District took an average of
14 days--ranging from 1 day to 49 days--to receive fuel tax payments
with monthly tax returns and log, endorse, and deposit them into the
bank.  Sound cash management practices require cash receipts to be
deposited daily.

In our prior year audit, we recommended that the District revise its
procedures to require daily logging, endorsing, and depositing of
fuel tax receipts received by the District or establish a lockbox
system\14 for processing and depositing such receipts to improve cash
management and enhance the control environment.  On November 24,
1997, the District's Chief Financial Officer (CFO) stated that the
Office of Tax and Revenue (OTR) revised its procedures on October 24,
1997, to require timely processing of motor fuel tax receipts.  We
noted that although OTR did revise its procedures, those changes did
not go into effect until fiscal year 1998.  We will assess the
effectiveness of the new procedures during our fiscal year 1998
audit.

In addition to the revenue processing and deposit delays, the
District is still not able to determine whether all motor fuel taxes
are collected since it relies on an honor (self-assessment) system.
According to OTR officials, the last verification of motor fuel taxes
occurred approximately 8 years ago and revealed that construction
companies underreported the number of gallons of motor fuel consumed
within the District.  Without effective monitoring initiatives, the
District cannot determine whether wholesalers and construction, bus,
and other companies have reported the total quantity of fuel actually
sold to retailers and consumed.

In our prior year audit, we recommended that the District establish
procedures to verify the completeness of motor fuel tax receipts.  In
November 1997, the District responded that it would (1) immediately
institute an audit program for motor vehicle fuel wholesalers, (2)
conduct comprehensive tax audits for the major wholesalers within the
next 24 months, and (3) purchase a commercial database in fiscal year
1998 to assist in identifying the total population of wholesalers
that should be reporting and paying taxes on motor fuel consumed
within the District.  However, in July 1998, OTR officials told us
that the audit program had not yet been prepared and that the
comprehensive audits are still in the planning stages.  In addition,
the commercial database had not been purchased.

In addition to not having procedures to verify or monitor the amount
of fuel used by reporting entities, the District does not investigate
licensed wholesalers and/or construction, bus, or other companies
that do not file motor vehicle fuel tax returns or filers who are not
licensed or bonded.\15 Wholesalers are required to file a Motor
Vehicle Fuel Tax Return for every month for which the motor vehicle
fuel license is valid\16 and pay monthly motor fuel taxes for fuel
sold or otherwise disposed of or used on or before the 25th day of
the next succeeding month.\17 Our review of reporting by the 60
licensed wholesalers showed that 8 did not submit returns for each
month of the audit period.  For example, six wholesalers never filed
a return during fiscal year 1997, and OTR could not explain why this
occurred.  We also noted that nine wholesalers filed returns but were
not licensed to conduct business in the District (2 of these
wholesalers subsequently obtained a license).  The District lacked
controls to alert them of the licensed wholesalers who did not submit
returns or unlicensed wholesalers who submitted returns.

Furthermore, the accuracy of the information reported could not
always be verified.  Monthly tax returns are required to be submitted
with various documents and other supporting schedules (which outline
specific inventories, receipts, and distributions).  Four of the 82
monthly tax returns we reviewed lacked the required supporting
documentation to substantiate the tax amount.  One of the 4 had
incorrect math calculations causing a $17,875 overstatement in the
amount of tax due.  We found that the District lacked adequate
control procedures to review monthly tax returns for accuracy or
reject incomplete returns.  Without the supporting schedules, there
is insufficient documentation to audit or review monthly tax returns
submitted or to ensure compliance with OTR policies and procedures.

--------------------
\14 A lockbox system is a banking service under which the bank
assumes responsibility for receiving, examining, and processing
incoming receipts from a customer.

\15 The bond is in place to ensure the prompt payment of all motor
vehicle fuel taxes and penalties levied or imposed by, and the
faithful compliance with, the terms and conditions of D.C.  Code Ann.
sections 47-2301 to 2315.

\16 D.C.  Code Ann.  section 47-2304.

\17 D.C.  Code Ann.  section 47-2306.

      CAPITAL APPROPRIATED
      EXPENDITURES
---------------------------------------------------------- Letter :2.2

The District continues to lack basic internal control procedures to
ensure the proper segregation of duties and maintain adequate
documentation to support all journal entries.\18 In our prior year
audit, we recommended that the District revise procedures to (1)
ensure the segregation of duties in the preparation, processing, and
approval of journal entries and disbursements, (2) perform
supervisory reviews of journal entries related to capital projects,
and (3) maintain detailed support for all adjustments to capital
appropriated expenditures.  The District responded that it would
require journal vouchers and other adjusting entries to be approved
by the agency CFO, controller, or designated department official.

While some improvements were made, we still found that 11 of the 40
expenditure journal entry transactions that we tested were prepared,
approved, and validated by the same person without independent
reviews or approvals.  The lack of supervisory review increases the
possibility of unauthorized or ineligible costs and errors not being
detected and corrected prior to being recorded and paid.  In
addition, the District could not locate support for two of the
journal entry transactions tested totaling $7,727.

The failure to segregate duties and the lack of documentation related
to journal entries increased the risk of misappropriation, errors,
and irregularities related to capital appropriated expenditures.

--------------------
\18 Journal entries record accounting transactions and other
financial activity.

      COMPUTER SYSTEM GENERAL
      CONTROLS
---------------------------------------------------------- Letter :2.3

DPW relies on computerized information systems to process and account
for the Fund's financial activities.  General controls over the
systems are intended to prevent or detect unauthorized access and
intentional or inadvertent unauthorized modifications to the data and
related computer programs.  Our audit revealed that minimal
improvements have been made in this area and that general controls
over the systems remain ineffective.

DPW's Office of Information Systems (OIS) operates a local area
network (LAN) with 70 servers\19 located at two data centers.  Four
servers on the LAN are used to process the five financial
applications that relate to federal aid and local capital projects.
The four applications that involve the Fund are the (1) Overhead
Distribution System, (2) Federal Aid Billing System (FABS), (3) Labor
Acquisition and Distribution System (LADS), and (4) Vehicle Usage
System.  For the most part, these applications obtain data from the
financial management system (FMS)--the central system and the
original point of entry for capital project transactions--or
distribute job cost data to the capital projects in FMS.  For
example, FABS is a reporting system that obtains information from FMS
and organizes the data in a different format for billing to FHWA.  In
addition, LADS and the Vehicle Usage System distribute payroll and
vehicle usage costs, respectively, to the appropriate capital project
in FMS.  The various users and multiple application systems are part
of a decentralized computer environment where strong controls are
vital.

In our prior year audit, we recommended that the District

  -- strengthen physical security over the facilities, system, and
     data by controlling all physical access to LAN centers and
     protecting all backup files;

  -- strengthen logical security (access to facilities, systems, and
     data) and improve controls by conducting a security risk
     analysis, restricting access to security functions, maintaining
     security access files, and applying LAN modification updates
     uniformly;

  -- segregate incompatible duties, provide the appropriate
     supervisory review and, if it is deemed necessary that any one
     person maintain complete access, establish controls to ensure
     that such activities are monitored;

  -- ensure service continuity by completing disaster recovery plans
     and testing at both LAN centers; and

  -- assess the Year 2000 vulnerabilities\20 and develop an
     evaluation and conversion plan for DPW as it relates to the
     Fund.

District officials stated that these recommendations would be
addressed with the implementation of the new financial management
system in fiscal year 1999.  However, the OIS computer environment
still lacked basic system controls to prevent or detect unauthorized
access and intentional or inadvertent unauthorized modifications to
the data and related computer programs.  We found that the following
significant weaknesses still exist in the controls over (1) physical
and logical security, (2) segregation of duties, and (3) service
continuity.

  -- Security over DPW's four servers at the two data centers and its
     data was not adequate to protect against unauthorized access.
     Physical access to one of the two data centers was not
     controlled.  For example, doors were not locked and backup files
     were not protected.  In addition, logical access to computer
     systems and the four financial applications that relate to the
     Fund was not monitored.  For example, current security risks
     were not analyzed, access to security functions was not
     restricted, security access files were not maintained, and LAN
     modifications were not adequately controlled, resulting in
     updates that were not uniform across the four servers.  Further,
     written security policies and procedures had not been formalized
     and distributed.  Without assurance that security procedures are
     adequate, the integrity and reliability of financial data face a
     greater risk of being compromised.

  -- DPW did not adequately segregate duties.  Seven employees who
     had supervisory access also had individual control access over
     the entire computer environment (including data files,
     production software programs, systems software, and utilities).
     Generally, no one person should have complete access to the
     entire computer environment without supervisory review by
     another person.  In addition, another employee performed all
     phases of application modifications.  The failure to segregate
     duties provides the opportunity for controls to be circumvented,
     which can result in unauthorized access and changes to systems
     and software applications.

  -- Service continuity was at risk because there was no current
     written and tested disaster recovery plan.  Contingency disaster
     plans are needed to ensure that financial and other management
     information can be maintained if data processing operations are
     unexpectedly interrupted due to a disruption of electrical power
     or other events that might cause operations to halt.  An
     interruption of computer services can significantly reduce the
     District's ability to meet users' needs for products and
     services and maintain control over District operations.

In addition, a Year 2000 program evaluation had not been completed
and a conversion plan had not been established for DPW.  District
systems are time dependent with databases and programs created to
store and process the year as a 2-digit field (for example, 1997 as
"97").  Without promptly assessing concerns and strategies for
addressing this issue, the advent of the year 2000 will pose
significant problems for the Fund.

--------------------
\19 A file (or network) server is a high speed computer in a network
that stores program and data files shared by users on a network.

\20 The Year 2000 problem is rooted in the way dates are recorded and
computed.  For the past several decades, systems have typically
employed a two digit field to represent the year, such as "98" for
1998, to save electronic storage space and reduce operating costs.
Using this date convention, however, the year 2000 can be
misinterpreted as 1900, which could cause a system to malfunction or
produce inaccurate information.

   COMPLIANCE WITH LAWS AND
   REGULATIONS
------------------------------------------------------------ Letter :3

Except as noted below, our tests for compliance with provisions of
selected laws and regulations disclosed no instances of noncompliance
that would be reportable under generally accepted government auditing
standards.  However, the objective of our audit was not to provide an
opinion on overall compliance with laws and regulations.
Accordingly, we do not express such an opinion.

D.C.  Code Ann.  section 47-2303 requires that wholesalers/businesses
obtain an importer's license to distribute motor vehicle fuel within
the District.  The law requires that an applicant for a license pay
an annual license fee of $5 and obtain a motor vehicle fuel bond of a
minimum of $5,000 up to a maximum of $100,000.\21 During our audit we
discovered that the District had been assessing and collecting $20
for the annual licensing fee and thus had been overcharging
wholesalers/businesses $15 a year for the past 3 years.  OTR
officials agreed and stated that wholesalers would be reimbursed.

--------------------
\21 The amount of the bond is determined by taking the sum of three
times the average monthly motor fuel tax due from the importer during
the preceding 12 months or an estimate of the succeeding 12 months.

   UNQUALIFIED OPINION ON
   FORECASTED STATEMENTS
------------------------------------------------------------ Letter :4

The act requires that the District prepare and that we examine the
forecasted statements of the Fund's expected conditions and
operations for the next 5 years.  These forecasts are required to
determine the District's ability to meet future local matching
requirements under the federal highway program for capital
improvements to the District's transportation system.  On June 1,
1998, the District prepared the 1999 transportation program's Capital
Improvements Plan for fiscal years 1998 through 2004 (a 7-year
forecast) and submitted it to the Congress for review and approval.

In our opinion, the accompanying statements are presented in
conformity with guidelines for presentation of forecasted information
established by the AICPA.  The underlying assumptions made and
methodology used to develop the statements provided a reasonable
basis for the first 5 years of the 7-year forecast, as revised on
July 24, 1998.  However, there will usually be differences between
forecasted and actual results because events and circumstances
frequently do not occur as expected, and those differences may be
material.  We have no responsibility to update this report for events
and circumstances occurring after the date of this report.

   OBJECTIVES, SCOPE, AND
   METHODOLOGY
------------------------------------------------------------ Letter :5

Management is responsible for

  -- preparing the Fund's financial statements in conformity with
     generally accepted accounting principles;

  -- establishing, maintaining, and assessing the Fund's internal
     controls to provide reasonable assurance that the internal
     control objectives are met;

  -- complying with applicable laws and regulations; and

  -- preparing 5-year forecasted statements of the Fund's expected
     conditions and operations in accordance with standards
     established by the AICPA.

We are responsible for obtaining reasonable assurance about whether
(1) the financial statements are reliable (free of material
misstatement and presented fairly in all material respects, in
conformity with generally accepted accounting principles), and (2)
management's assertion about the effectiveness of internal controls
is fairly stated, in all material respects, for safeguarding assets
against unauthorized acquisition, use, or disposition; compliance
with laws and regulations; and financial reporting controls.  We are
also responsible for testing compliance with selected provisions of
laws and regulations and for performing limited procedures with
respect to certain other information appearing in the financial
statements.  In addition, we are responsible for expressing an
opinion on whether the forecasted statements are presented in
conformity with AICPA guidelines and determining whether the
assumptions used provide a reasonable basis for the preparation of
the statements.

In order to fulfill these responsibilities, we

  -- examined, on a test basis, evidence supporting the amounts and
     disclosures in the financial statements;

  -- assessed the accounting principles used and significant
     estimates made by management;

  -- evaluated the overall presentation of the financial statements
     and the 5-year forecasted statements;

  -- obtained a sufficient understanding of the internal control
     structure related to safeguarding assets and compliance with
     laws and regulations;

  -- assessed the design of controls and whether they had been placed
     in operation;

  -- tested relevant internal controls over safeguarding, compliance,
     and financial reporting and evaluated management's assertion
     about the effectiveness of internal controls;

  -- tested compliance with selected provisions of the following
     laws:  (1) D.C.  Procurement Practices Act of 1985, (2) D.C.
     Quick Payment Act of 1984, (3) D.C.  Emergency Highway Relief
     Act, and (4) D.C.  Code Ann.  section 47-2303; and

  -- examined the assumptions made and methodology used for the first
     5 years of the District's 7-year forecast of the Fund's expected
     conditions and operations and the preparation and presentation
     of the forecasted statements.

We limited our internal control testing to those controls necessary
to achieve the objectives outlined in our opinion on management's
assertion about the effectiveness of internal controls.

We conducted our work in accordance with generally accepted
government auditing standards.  We requested comments on a draft of
this letter from the Mayor of the District of Columbia or his
designee.  The District's interim Chief Financial Officer provided us
with written comments that are discussed in the "District Comments
and Our Evaluation" section and are reprinted in appendix I.

   RECOMMENDATIONS
------------------------------------------------------------ Letter :6

We reaffirm the recommendations outstanding from our report on the
audit of the 1996 financial statements of the District's Highway
Trust Fund.  Appendix II indicates the current status of those
recommendations.  To address the newly reported revenue-related
weaknesses identified in this report, we recommend that the Director
of the Office of Tax and Revenue

  -- establish control procedures to investigate instances in which
     unlicensed wholesalers submit tax returns or licensed
     wholesalers do not submit monthly returns;

  -- establish control procedures to (1) review each monthly tax
     return for completeness and accuracy, (2) reject incomplete and
     erroneous monthly tax returns, and (3) contact wholesalers if
     returns are rejected and follow up to ensure complete, accurate,
     and adequately documented monthly tax returns; and

  -- enforce implementation of the D.C.  Code Ann.  section 47-2303
     requirement of a $5 annual license fee for a motor vehicle fuel
     license and implement procedures to repay licensed wholesalers
     who overpaid during the past 3 years.

   DISTRICT COMMENTS AND OUR
   EVALUATION
------------------------------------------------------------ Letter :7

The District's CFO generally agreed with our findings regarding
material weaknesses in internal controls for revenue and computer
system general controls and the related recommendations.  The CFO
cited a number of actions that the District had taken or plans to
take to improve its operating control environment and automated
systems.  However, the CFO's comments did not discuss the current
status of continuing findings related to the Fund's accounting
operations or the adequacy of its controls over revenues and capital
appropriated expenditures as initially discussed in our audit report
on the Fund's 1996 financial statements.

In response to our recommendations related to revenue, the CFO stated
that the Office of Tax and Revenue would implement the following new
procedures:  (1) investigate licensed wholesalers who do not file
monthly returns and unlicensed wholesalers who file monthly returns,
(2) review the completeness of and use an automated spreadsheet to
perform the math audit program on each monthly return, and (3) notify
wholesalers of the $5 annual license fee and repay wholesalers that
overpaid.

In response to our recommendations concerning computer system general
controls, the CFO stated that the Office of Information Systems
(subsequently identified in its response as the Office of Information
and Telecommunications System) has begun implementing new procedures.
The CFO cited improvements that were made to the physical access of
both data centers and the segregation of incompatible duties.  The
CFO also acknowledged that there is no full disaster recovery plan in
place.  Without a complete disaster recovery plan, the District's
ability to meet users' needs for products and services could be
severely hampered.

We will evaluate the effectiveness of the actions taken by the
District as part of our audit of the Fund's fiscal year 1998
financial statements.

Gloria L.  Jarmon
Director, Health, Education, and Human Services
Accounting and Financial Management Issues

July 31, 1998

FINANCIAL STATEMENTS
=========================================================== Appendix 0

   Balance Sheet

   (See figure in printed
   edition.)

   Statement of Revenues,
   Expenditures and Change in Fund
   Balance

   (See figure in printed
   edition.)

   Notes to the Financial
   Statements

   (See figure in printed
   edition.)

   (See figure in printed
   edition.)

   (See figure in printed
   edition.)

   (See figure in printed
   edition.)

   (See figure in printed
   edition.)

   Forecasted Financial Statements
   From Fiscal Years 1998 Through
   2004

   (See figure in printed
   edition.)

   (See figure in printed
   edition.)

   (See figure in printed
   edition.)

   (See figure in printed
   edition.)

(See figure in printed edition.)Appendix I
COMMENTS FROM THE DISTRICT OF
COLUMBIA
=========================================================== Appendix 0

(See figure in printed edition.)

(See figure in printed edition.)

STATUS OF 1996 AUDIT
RECOMMENDATIONS
========================================================== Appendix II

The results of our efforts to audit the Fund's 1996 Financial
Statements were presented in our report entitled Financial Audit:
District of Columbia Highway Trust Fund's 1996 Financial Statements
(GAO/AIMD-98-30, December 15, 1997).  Our recommendations to correct
the internal control weaknesses identified in that 1996 report are
listed below.  We determined the status of the recommendations based
on our fiscal year 1997 audit work and discussions with District
officials.  We plan to update our assessment of the District's
responses as part of our fiscal year 1998 audit.

                                                  Action in
                                                   planning         No
                                                         or   specific
                               Action  Action in   planning     action
Recommendation               complete   progress   complete    planned
--------------------------  ---------  ---------  ---------  ---------
To the Director of the Department of Public Works:
----------------------------------------------------------------------
Enforce procedures that             X
 call for maintaining
 documentation for all
 voucher and intra-
 District payments made on
 federal aid and local
 highway projects.
Revise procedures to                           X
 require maintaining
 detailed support for all
 adjustments to capital
 appropriated
 expenditures. This should
 include detailed records
 to support (1) year-end
 closing adjustments and
 (2) any necessary
 schedules and
 reconciliations needed to
 provide an adequate audit
 trail from the financial
 management systems.
Establish procedures to             X
 (1) obtain detailed
 documentation for
 construction engineering
 cost overruns, (2) bill
 FHWA for those overruns
 up to 15 percent of
 aggregate annual
 construction costs, and
 (3) charge the remaining
 overruns to the District
 of Columbia Highway Trust
 Fund's capital
 appropriated
 expenditures.
Obtain the detailed                 X
 documentation to
 determine the validity of
 the $3.4 million year-
 end closing adjustment.
 If any portion of the
 $2.6 million of
 construction engineering
 cost overruns is valid,
 seek reimbursement from
 FHWA for amounts that do
 not exceed 15 percent of
 annual aggregate
 construction costs and
 reduce these amounts from
 those originally charged
 to the capital
 appropriated
 expenditures. If any
 portion of the $3.4
 million is not valid,
 reduce the amounts
 charged to the capital
 appropriated
 expenditures.
Ensure the segregation of                                 X
 duties in the
 preparation, approval and
 validation of journal
 entries and
 disbursements.
Perform supervisory                            X
 reviews of journal
 entries and disbursements
 related to capital
 projects.

To the Director of the Office of Tax and Revenue:
----------------------------------------------------------------------
Enforce procedures to               X
 ensure the recognition of
 revenue in the month the
 tax is due if the revenue
 is measurable and
 available (that is, the
 amount of revenue can be
 determined and is
 collected within 60 days
 of the month-end due
 dates).
Revise procedures to                                      X
 require daily logging,
 endorsing, and depositing
 of fuel tax receipts
 received by the District
 or establish a lockbox
 system for the processing
 and depositing of such
 receipts to improve cash
 management and enhance
 the control environment.
Establish procedures to                                   X
 verify the completeness
 of motor fuel tax
 receipts from wholesaler
 fuel sales to retailers
 or for fuel consumed by
 construction, bus, and
 other companies who buy
 at the wholesale level
 and consume that fuel
 within the District. On-
 site inspections and
 reviews of wholesaler
 shipping documents and
 confirmation with
 retailers and
 construction and bus
 companies annually or on
 a scheduled but random-
 sample basis are examples
 of such procedures.
Segregate incompatible              X
 duties, if the District
 elects to administer
 collections in-house, by
 assigning separate
 individuals to deposit
 motor fuel tax receipts
 and perform recordkeeping
 functions.

To the Director of the Office of Information Systems:
----------------------------------------------------------------------
Strengthen physical                                       X
 security over the
 facilities, system, and
 data by controlling all
 physical access to LAN
 centers and protecting
 all backup files.
Strengthen logical                                        X
 security and better
 control the access to
 data and systems by
 conducting a security
 risk analysis,
 restricting access to
 security functions,
 maintaining security
 access files, and
 applying LAN modification
 updates uniformly.
Segregate incompatible                                    X
 duties and provide the
 appropriate supervisory
 review and, if it is
 deemed necessary that any
 one person maintain
 complete access,
 establish controls to
 ensure that such
 activities are monitored.
Ensure service continuity                                 X
 by completing disaster
 recovery plans and
 testing at both LAN
 Centers.
Assess the Year 2000                                      X
 vulnerabilities and
 develop an evaluation and
 conversion plan.
----------------------------------------------------------------------

MAJOR CONTRIBUTORS TO THIS REPORT
========================================================= Appendix III

ACCOUNTING AND INFORMATION
MANAGEMENT DIVISION, WASHINGTON,
D.C.

Hodge Herry, Assistant Director
Steven R.  Haughton, Audit Manager
John D.  Sawyer, Senior Auditor
Mel Mench, Senior Assistant Director
W.  David Grindstaff, Assistant Director

OFFICE OF THE CHIEF ECONOMIST

Yesook Merrill, Senior Economist

OFFICE OF THE GENERAL COUNSEL

Richard Cambosos, Senior Attorney

*** End of document. ***