District of Columbia: Presentation of the Authority's Financial
Information for Fiscal Years 1997 and 1996 (Letter Report, 12/02/98,
GAO/AIMD-99-22).

Pursuant to a congressional request, GAO compared the audited financial
statements and management letters of the District of Columbia Financial
Responsibility and Management Assistance Authority for fiscal years (FY)
1996 and 1997 to the District's Comprehensive Annual Financial Report
(CAFR) to determine: (1) whether there was agreement of amounts and
consistency of presentation regarding the Authority's financial
information; and (2) why the District's internal control weakness that
relates to the Authority was not identified in the audit report on the
Authority's financial statements. GAO also provided information on the:
(1) Authority's use of interest income from escrow accounts established
on behalf of the District; (2) Authority's purpose for the transaction
entitled Taxable Equipment Lease/Purchase Agreement; and (3) status of
the Authority's implementation of GAO's suggestions for its financial
statements for fiscal years 1995 and 1996.

GAO noted that: (1) the Authority's audited financial statements and the
District's audited CAFR for fiscal years 1996 and 1997 revealed that the
financial statements included the same amounts for Authority operations;
(2) the presentation and categorization of the Authority's amounts were
in accordance with the appropriate sections of the Government Accounting
Standards Board accounting principles for both sets of financial
statements; (3) in the District's auditors' report on internal controls
and compliance for FY 1997, they identified a material weakness
concerning financial reporting controls over transactions involving the
Authority; (4) the District's auditors recommended that the Authority,
along with the District, implement procedures to provide monthly
balances and the related support for all financial activity each month
on behalf of the District; (5) the Authority's auditors stated that this
weakness did not affect the Authority's internal controls over financial
reporting; (6) while Authority officials stated their belief that there
was sufficient documentation available within the District to record
financial activity on its books, the Authority's role in District
operations and the District's dependence on the Authority for data on
certain transactions and balances would necessitate effective
communication of financial activity between the two entities; (7) since
the Authority established the escrow accounts on behalf of the District,
the accounts have earned interest income of $9.8 million and $5.5
million for fiscal years 1997 and 1996; (8) during FY 1997, $5 million
was paid directly to vendors, transferred from an escrow account, or
used to finance the Authority's operations; (9) the Authority entered
into an agreement, entitled Taxable Equipment Lease/Purchase Agreement;
(10) Authority officials stated that the purpose of the agreement was to
obtain needed financing and to free-up budget capacity; (11) GAO
identified seven opportunities for improving the Authority's future
financial statements; (12) the Authority has implemented six of GAO's
seven suggestions; (13) the one exception was the inclusion of a
Management Discussion and Analysis (MD&A) section as part of its audited
financial statements; and (14) with the concept of MD&A expanding across
all governmental entities and presently a requirement in the federal
government and for publicly-traded private sector corporations, GAO
believes that including a MD&A section in the Authority's audited
financial statements is needed and would enhance its financial
statements.

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

 REPORTNUM:  AIMD-99-22
     TITLE:  District of Columbia: Presentation of the Authority's 
             Financial Information for Fiscal Years 1997 and 1996
      DATE:  12/02/98
   SUBJECT:  Financial statement audits
             Municipal governments
             Accounting procedures
             Reporting requirements
             Budget receipts
             Accounting standards
             Budget outlays
             Internal controls
             Financial records
IDENTIFIER:  DC Comprehensive Annual Financial Report
             District of Columbia
             
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Cover
================================================================ COVER


Report to the Subcommittee on the District of Columbia, Committee on
Appropriations, House of Representatives

December 1998

DISTRICT OF COLUMBIA -
PRESENTATION OF THE AUTHORITY'S
FINANCIAL INFORMATION FOR FISCAL
YEARS 1997 AND 1996

GAO/AIMD-99-22

D.C.  Authority's Financial Information

(916252)


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

  CAFR - Comprehensive Annual Financial Report
  CD - certificate of deposit
  CFO - chief financial officer
  FASAB - Federal Accounting Standards Advisory Board
  GASB - Government Accounting Standards Board
  MD&A - Management Discussion and Analysis
  OMB - Office of Management and Budget
  SEC - Securities and Exchange Commission

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


B-279973

December 2, 1998

The Honorable Charles H.  Taylor
Chairman, Subcommittee on the
 District of Columbia
Committee on Appropriations
House of Representatives

Dear Mr.  Chairman: 

In a letter dated March 30, 1998, you requested that we review the
audited financial statements and management letters of the District
of Columbia Financial Responsibility and Management Assistance
Authority (Authority) for fiscal years 1996 and 1997.  Specifically,
you asked that we compare the Authority's audited financial
statements and management letters to the District's Comprehensive
Annual Financial Report (CAFR) to (1) determine whether there was
agreement of amounts and consistency of presentation regarding the
Authority's financial information and (2) determine why the
District's internal control weakness that relates to the Authority
was not identified in the audit report on the Authority's financial
statements.  Subsequently, your office also requested that we provide
information on

  -- the Authority's use of interest income from escrow accounts
     established on behalf of the District,

  -- the Authority's purpose for the transaction entitled "Taxable
     Equipment Lease/Purchase Agreement," and

  -- the status of the Authority's implementation of our suggestions
     for improving its financial reporting, which we made in a prior
     letter on the Authority's financial statements for fiscal years
     1995 and 1996.\1


--------------------
\1 Analysis of the District of Columbia Authority's Financial
Statements for Fiscal Years 1995 and 1996 (GAO/AIMD-97-80R, May 23,
1997). 


   BACKGROUND
------------------------------------------------------------ Letter :1

As a result of the District's financial crisis in 1994, the Congress
passed the District of Columbia Financial Responsibility and
Management Assistance Act of 1995 (the 1995 Act).\2 The Congress
established the Authority to perform the following functions, among
others: 

  -- eliminate budget deficits and cash shortages of the District
     through visionary financial planning, sound budgeting, accurate
     revenue forecasts, and careful spending,

  -- ensure the most efficient and effective delivery of services,
     including public safety services, by the District during a
     period of fiscal emergency, and

  -- conduct necessary investigations and studies to determine the
     fiscal status and operational efficiency of the District. 

In assuming these responsibilities, the Authority was to ensure that
funds were available to meet the District's obligations to vendors
and taxpayers in a timely manner.  To accomplish this, the Authority
was required by law to establish several escrow accounts separate
from the District's General Fund so that monies could be separately
maintained to fund District activities including water and sewer
service, public schools, and the University of the District of
Columbia. 

The Authority was established as an entity within the District of
Columbia government,\3 with five board members appointed by the
President of the United States.  The Authority receives a regular,
annual appropriation from the general fund of the District of
Columbia in fixed amounts.  Other appropriations authorizing the use
of (1) gifts, bequests, and other contributions and (2) interest
earned on escrow accounts maintained by the Authority, are available
for an indefinite period. 

The District of Columbia Management Reform Act of 1997\4 (Management
Reform Act) expanded the Authority's responsibilities to include the
development and implementation of management reform plans.  The plans
cover the major entities of the District\5 and all departments of the
District in the city-wide functions of Asset Management, Information
Resource Management, Personnel, and Procurement. 

The Management Reform Act required that the Authority enter into
contracts with consultants to develop plans for the major entities
and four city-wide functions and establish management reform teams to
implement each plan.\6

These new responsibilities increased the amount of funds being spent
by the Authority on behalf of the District.  That act also authorized
the Authority to spend interest earned on the escrow accounts
maintained by the Authority as it considers appropriate to promote
the economic stability and management efficiency of the District
government.\7

Currently for activities for which the Authority controls the funds
provided on behalf of the District, the Authority pays
District-related expenses in one of three ways.  For contracts
originated by the District, the Authority either reimburses the
District's General Fund after District agencies pay vendors, or the
Authority pays third parties directly based on District agencies'
submission of a payment request and approved invoice.  The third
approach involves the Authority using its own contracting authority. 
For those, it approves the services rendered and pays third parties
directly for goods and services provided to District agencies. 


--------------------
\2 Public Law 104-8, 109 Stat.  97, 100 (April 17, 1995), D.C.  Code
Ann.  section 47-391.1. 

\3 Section 101(a) of the 1995 Act. 

\4 Public Law 105-33, title XI, subtitle B, sections 11101 through
11106, 111 Stat.  731 (August 5, 1997) D.C.  Code Ann.  sections
47-395.1 through 47-395.5 (1998 Supplement). 

\5 The entities are Fire and Emergency Medical Services, Public
Works, Administrative Services, Corrections, Human Services
(functions now separated and known as the Departments of Human
Development and Health), Consumer and Regulatory Affairs, Employment
Services, Housing and Community Development, Public Health, Public
Schools, Police, and Financial Management (the last three were
previously taken over by the Authority). 

\6 D.C.  Code Ann.  sections 47-395.2(a) and 47-395.3 (1998
Supplement). 

\7 Section 106(d) of the 1995 Act as added by Public Law 105-33,
section 11711(a), 111 Stat.  782, August 5, 1997, D.C.  Code Ann. 
section 47-391.6(d) (1998 Supplement). 


   RESULTS IN BRIEF
------------------------------------------------------------ Letter :2

Our review of the Authority's audited financial statements and the
District's audited CAFR for fiscal years 1996 and 1997 revealed that
the financial statements included the same amounts for Authority
operations.  The presentation and categorization of the Authority's
amounts were in accordance with the appropriate sections of the
Government Accounting Standards Board (GASB)\8 accounting principles
for both sets of financial statements. 

In the District's auditors' Report on Internal Controls and
Compliance for fiscal year 1997, they identified a material weakness
concerning financial reporting controls over transactions involving
the Authority.\9 The District's auditors recommended that the
Authority, along with the District, implement procedures to provide
monthly balances and the related support for all financial activity
each month on behalf of the District.  The Authority's auditors
stated and we agree that this material weakness did not affect the
Authority's internal controls over financial reporting (preparation
of its financial statements).  While Authority officials stated their
belief that there was sufficient documentation available within the
District to record financial activity on its books, the Authority's
role in District operations and the District's dependence on the
Authority for data on certain transactions and balances would seem to
necessitate effective communication of financial activity between the
two entities.  Absent this level of communication, the District will
continue to have difficulty in recording all District activity and
reconciling District and Authority financial records. 

Since the Authority established the escrow accounts on behalf of the
District, the accounts have earned interest income of $9.8 million
and $5.5 million for fiscal years 1997 and 1996, respectively. 
During fiscal year 1997, the Authority used $5 million of the
interest income on behalf of the District in accordance with the
law.\10 The $5 million was paid directly to vendors, transferred from
an escrow account, or used to finance the Authority's operations.  As
of September 30, 1997, the balance of accrued interest income in the
escrow accounts was $10.3 million. 

The Authority entered into an agreement, entitled "Taxable Equipment
Lease/Purchase Agreement." Authority officials stated that the
purpose of the agreement was to obtain needed financing and to
free-up budget capacity (budget authority).  After looking at the
economic benefit of the transactions and analyzing account balances
as of September 30, 1997, we concluded that there was not an economic
need for the Authority to enter into the agreement. 

In our prior letter,\11 we identified seven opportunities for
improving the Authority's future financial statements.  To date, the
Authority has implemented six of our seven suggestions.  The one
exception was the inclusion of a Management Discussion and Analysis
(MD&A) section as part of its audited financial statements.  The
Authority is currently required under Section 224 of the 1995 Act to
submit annual reports that address its financial performance and
accomplishments, which, according to the Authority, makes including
the same information in its financial statements unnecessary. 
However, with the concept of MD&A expanding across all governmental
entities and presently a requirement in the federal government and
for publicly-traded private sector corporations, we continue to
believe that including an MD&A section in the Authority's audited
financial statements is needed and would enhance its financial
statements. 


--------------------
\8 GASB establishes accounting principles for state and local
government, and its statements and interpretations apply to the
financial reports of state and local government entities. 

\9 The District's auditors, KPMG Peat Marwick LLP, stated that the
District had not developed adequate procedures to account for funds
held by the Authority and did not effectively reconcile the amounts
which are recorded to the relevant Authority records. 

\10 See footnote 7. 

\11 GAO/AIMD-97-80R, May 23, 1997. 


   OBJECTIVES, SCOPE, AND
   METHODOLOGY
------------------------------------------------------------ Letter :3

Our objectives were to determine (1) whether the Authority's
financial information was in the same amounts and consistently
presented in the fiscal year 1996 and 1997 audited financial
statements of the Authority and the District's CAFR, (2) why the
District's internal control weakness concerning the Authority was not
also included in the audit report on the Authority, (3) the
Authority's use of the escrow accounts' interest income, (4) the
Authority's purpose for the "Taxable Equipment Lease/Purchase
Agreement," and (5) whether suggestions made to the Authority's
management in our prior letter\12 were implemented. 

To address these objectives, we reviewed the Authority's audited
financial statements and management letters and the District's CAFR
and Report on Internal Controls and Compliance for fiscal years 1997
and 1996.  We also obtained detailed supporting schedules, related
documentation, and explanations from Authority officials as we
considered necessary.  In addition, we obtained and reviewed the
specific laws cited and legal interpretations made through
discussions with Authority officials. 

To further support the information provided in the financial
statements and management letters, we interviewed and received
additional supporting documentation from the external independent
auditors of the Authority and the District.  We also interviewed the
Authority's Executive Director, Chief Financial Officer, and General
Counsel. 

We conducted our work from April 1998 through August 1998 in
accordance with generally accepted government auditing standards.  We
requested comments from the Authority's Chairperson on a draft of
this report.  The Authority's Executive Director provided us with
written comments, which are discussed in the "Authority's Comments
and Our Evaluation" section and are reprinted in appendix II. 


--------------------
\12 GAO/AIMD-97-80R, May 23, 1997. 


   COMPARISON OF FISCAL YEAR 1996
   AND 1997 AUDITED FINANCIAL
   STATEMENTS OF THE AUTHORITY AND
   THE DISTRICT
------------------------------------------------------------ Letter :4

The Authority's financial information as reported in its financial
statements is consistent with the Authority's financial information
presented in the District's CAFR.  The fiscal years 1996 and 1997
financial statements of the Authority were included in the District's
CAFR, as a component unit, as required by GASB,\13 and both the
Authority and the District presented the Authority's financial
activities in accordance with GASB. 

As a result of the widely different annual revenue amounts for the
Authority ($8.6 million for fiscal year 1997) and the District ($5.2
billion in fiscal year 1997), the Authority's account balances, which
represent less than .2 percent of the District's revenue, are
summarized in the District's CAFR instead of being reported in
detail, as in the Authority's financial statements.  For example,
several account line items (Due from District-Management Reform,
Other Receivables from the District, and Advances from the District)
on the Authority's financial statements were combined, identified by
a different name, and rounded to the nearest $1,000 when incorporated
into one account (Interfund Account) in the District's CAFR. 
However, the total dollar amounts reported by both the Authority and
the District were the same. 

In addition, because the Authority and the District are different
reporting entities, there were appropriately some differences in
their presentation and classification of accounts.  For example,
several account balances (Government Appropriation, Interest
Transferred from Escrow Accounts, and Other Income) that the
Authority presented as "revenue" were presented as Interfund
Transfers-In, an "other financing source" in the District's CAFR. 
Further, the Sale of Fixed Asset amount was presented as "revenue" by
the Authority and as an "other financing sources--proceed" in the
District's CAFR. 


--------------------
\13 GASB requires that "combining financial statements for discretely
presented component units should be included in the reporting
entity's comprehensive annual financial report using the same
methodology as combining (and individual fund) statements of the fund
types of the primary government."


   REPORTED INTERNAL CONTROL
   WEAKNESS CONCERNING THE
   AUTHORITY
------------------------------------------------------------ Letter :5

In the District's auditors' Reports on Internal Controls and
Compliance for fiscal years 1996 and 1997, an internal control
weakness was identified concerning controls over financial reporting
involving the Authority's transactions that relate to the District. 
The material weakness related to a lack of communication between the
District and the Authority when transactions involve funds that are
held by the Authority on behalf of the District.\14 No finding on
this issue was reported by the Authority's auditors nor would such a
finding be expected since this internal control weakness does not
affect the Authority's financial operations. 

The District's auditors reported that the District's Office of
Finance and Treasury did not have complete records of the District
funds that are maintained by the Authority in escrow accounts and
could not regularly reconcile its balances for those accounts with
the Authority's recorded balances.  The auditors also cited the
following specific reasons for the above-reported internal control
weakness. 

  -- The Authority did not promptly notify or provide the necessary
     documentation to the District of the specific details regarding
     financial activity that it incurred on behalf of the District. 

  -- The Authority issued the management reform contracts without
     promptly notifying the District of the financial activity to
     allow for the prompt recording of the related transactions. 

  -- The District and the Authority had not developed procedures to
     promptly notify each other of amounts anticipated or actually
     received by the Authority on behalf of the District. 

The District's auditors recommended that the District and the
Authority jointly develop procedures that would result in the
Authority providing to the District the kind of monthly financial
information needed for the District to perform a comprehensive
reconciliation.  They further stated that such information should
include the monthly balances and the financial activity for each
individual escrow account maintained by the Authority on behalf of
the District.  It was also recommended that the Authority and
District develop procedures that provide for dual notification of
activities involving donations and contracts administered by the
Authority for the District. 

The Authority's auditors stated, and we agree, that this material
weakness did not affect the Authority's internal controls related to
preparation of its financial statements.  Authority officials added
their view that the problems cited in the District auditors' report
resulted from an internal control weakness within the District
agencies, and not within the Authority, for the following reasons. 

  -- The Authority did not originally notify the District of the
     management reform contracts and their cost since the Authority
     originally intended to pay for those studies from its available
     funds.  However, the documentation of the contract and costs to
     date were provided to the District agencies once a decision was
     made by the Authority to have the agencies reimburse the
     Authority for these costs. 

  -- The U.S.  Department of the Treasury or the District's Office of
     Treasury is responsible for notifying District agencies of cash
     receipts held on their behalf by the Authority for the issuance
     of general obligation bonds or receipt of the District's annual
     appropriation. 

  -- District agencies should be responsible for recording
     expenditures when they approve amounts for payment, and prior to
     their submission to the Authority for payment from escrow
     accounts. 

The reasons cited for the Authority's disagreement with the
District's auditors' findings are valid for transactions initiated
and approved by the District.  However, as described in the earlier
"Background" section of this report, when transactions are initiated
by the Authority, that data would not necessarily be concurrently
available for the District.  As a result, implementation of the
District auditors' recommendations that the Authority provide monthly
information to the District and that the two entities provide dual
notification on activities involving Authority-administered contracts
and donations is practical and necessary.  Effective implementation
of these recommendations would improve the District's controls over
cash by enabling it to promptly report and reconcile all financial
activity. 


--------------------
\14 Page 13 of appendix B - Internal Control Over Financial
Reporting, in KPMG's Report On Compliance And On Internal Control
Over Financial Reporting Based On An Audit Of Financial Statements
Performed In Accordance With Government Auditing Standards for the
year ended September 30, 1997, dated February 5, 1998. 


   USE OF INTEREST FROM ESCROW
   ACCOUNTS
------------------------------------------------------------ Letter :6

Section 106(d) of the 1995 Act\15 authorizes the Authority to expend
any amounts derived from interest income on accounts held by the
Authority on behalf of the District for such purposes as it considers
appropriate to promote the economic stability and management
efficiency of the District government.  In fiscal years 1997 and
1996, the escrow accounts earned interest of $9.8 million and $5.5
million, respectively.  The Authority used $5 million of the interest
income during fiscal year 1997, and the escrow accounts contained
$10.3 million in accumulated interest as of September 30, 1997 (see
table 1). 



                                Table 1
                
                      Interest on Escrow Accounts

Description                                                     Amount
--------------------------------------------------------  ------------
Interest income -FY 1996                                    $5,516,716
Interest income -FY 1997                                     9,810,517
======================================================================
Total interest income as of 9/30/97                         15,327,233
Direct payments to consultants                               2,075,199
Transferred from the Federal Payment Fund Escrow Account     1,752,390
Payment to D.C. General Fund for D.C. share of medicaid        476,700
Authority expenditures in excess of budget                     734,471
======================================================================
Total payments/transfer during fiscal year 1997              5,038,760
======================================================================
Balance in escrow accounts as of 9/30/97                  $10,288,473\
                                                                     a
----------------------------------------------------------------------
\a Upon the return of the almost $1.8 million to the Federal Payment
Fund escrow account in October 1997, the Authority's balance of
interest income in the escrow accounts was $12 million. 

Source:  Information provided by the Authority's auditors. 

The Management Reform Act required the Authority to contract with
consultants to perform preliminary studies and reviews of District
agencies so that recommendations could be made on the nature of the
reform required at each agency.  Of the $2.1 million paid in fiscal
year 1997, the largest portion, about $1.3 million, was used for an
ongoing contract to conduct a comprehensive study and make
recommendations on the Metropolitan Police Department's organization
and operation.  The remaining contractor payments of about $800,000
were for various operational reviews of the University of the
District of Columbia, Public Schools, and other agencies. 

At September 30, 1997, the Authority held almost $1.8 million that
had been transferred from interest earned on the Federal Payment Fund
escrow account.  The Authority initially intended to pay for
management reform consulting expenses using the transferred amount. 
However, before the end of the fiscal year, the Authority decided to
have the affected District agencies pay for the consulting expenses. 
Accordingly, it established an amount due back to the Federal Payment
Fund escrow account and authorized the bank to return the almost $1.8
million to the escrow account.  Authority officials stated that the
amount was returned in October 1997. 

The Authority also paid $476,700 to cover the District's share of
medicaid payments and used the remaining $734,471 to pay its actual
operating expenses in excess of budgeted amounts.  This included a
$478,000 increase in personnel costs for fiscal year 1997 that
resulted from (1) hiring additional employees, (2) giving pay raises
totaling $120,000 to 24 employees, and (3) paying $24,500 for lump
sum retroactive locality pay adjustments for fiscal years 1995 and
1996.\16


--------------------
\15 D.C.  Code Ann.  section 47-391.6(d) (1998 Supplement). 

\16 Our letter, dated June 16, 1998 (B-279095.2), to the Honorable
Charles H.  Taylor, Chairman, Subcommittee on the District of
Columbia of the House Committee on Appropriations, we concluded there
was no basis for the Authority to make retroactive payments to the
Executive Director and General Counsel. 


   TAXABLE EQUIPMENT
   LEASE/PURCHASE AGREEMENT
------------------------------------------------------------ Letter :7

On September 30, 1997, the Authority borrowed from a bank $300,000
secured by (1) a lien on personal property (furniture and equipment)
acquired by the Authority during fiscal years 1996 and 1997 and (2) a
pledge of a $300,000 certificate of deposit (CD) purchased from the
bank.\17 Under the agreement,\18 title to the property, with a book
value of $271,770, and the interest earned on the CD, vests in the
bank should the Authority default on the repayment of the loan.  In
addition, in the event of default, the bank is given the right to the
funds on deposit in the CD to satisfy the Authority's obligation. 
The District can pay off the debt at any time without fines or
penalties for early prepayment. 

The agreement calls for the Authority to make 12 quarterly repayments
of $25,000 totaling $300,000, from January 1, 1998, to October 1,
2000.  The Authority is also required to pay $15,487 in interest
during the first 4 quarters of the agreement's term to cover the
first year's interest.  Interest expenses for years 2 and 3 of the
agreement will be determined in accordance with the terms of the
agreement.  It stipulates that the interest rate on the debt accrues
at the rate of 50 basis points in excess of the interest earned on
the CD pledged as security.  The interest rate on the CD is subject
to annual adjustments. 

Authority officials stated that the purpose of the agreement was to
obtain needed financing by recovering the net cost of assets acquired
with fiscal year 1997 and 1996 funds and spreading the cost over a
3-year period and to free-up budget capacity (budget authority). 
After looking at the economic benefit of the transaction and
analyzing the Authority's cash on hand and other account balances as
of September 30, 1997, and analyzing the transaction's future impact,
we concluded that there was not an economic need for the Authority to
enter into this transaction.  Although the transaction resulted in an
increase in the Authority's fiscal year 1997 surplus,\19 it had an
overall negative economic impact by creating a net additional cost of
$3,488 over the term of the agreement (interest payments of $27,863
versus interest earned on the pledged certificate of deposit of
$24,375).  In addition, when the Authority entered into this
agreement, it

  -- pledged $300,000\20 of existing cash to the bank (which placed
     the cash in a restricted account) in order to receive the same
     amount of funds, resulting in no increase in available cash,

  -- had an accumulated surplus of $444,982 at the beginning of
     fiscal year 1997, already had a $253,000 surplus for fiscal year
     1997 from general operations, and had sufficient cash on hand to
     meet its current liabilities,

  -- had access to $10.3 million of escrow account interest as of
     September 30, 1997, which was available for District operations,
     and

  -- created the need to repay $303,488\21 over the term of the loan
     using future appropriations or escrow account interest. 

Repaying this debt would (1) save the Authority more than $1,100 in
net interest to be paid over the next 2 years, (2) remove
restrictions on the outstanding amount of $200,000 currently being
held in a certificate of deposit, and (3) eliminate the need for
further administration of the agreement. 


--------------------
\17 The agreement also requires the Authority to maintain the
certificate of deposit in an amount equal to the outstanding loan
balance owed the bank.  This requirement was made in order to secure
the rate for the loan. 

\18 We found that while the agreement is entitled "Taxable Equipment
Lease/Purchase Agreement," it is in substance a secured loan because
the Authority received $300,000 in cash for the bank's security
interest in property owned by the Authority prior to entering into
the agreement, and absent default on the payments, there is no
provision for ownership and possession of the equipment vesting in
the bank. 

\19 In state and local government accounting, the proceeds of a lease
or loan are reflected as Other Financing Sources, which, depending on
the circumstances, either increases the surplus or reduces the
deficit in the general fund. 

\20 Twelve $25,000 quarterly payments over a 3-year period. 

\21 The amount to repay is equal to the minimum payments of $300,000
plus the net interest paid $3,488 on the outstanding debt over the
interest earned on the pledged certificate of deposit. 


   FOLLOW-UP ON PRIOR GAO LETTER
------------------------------------------------------------ Letter :8

Our May 23, 1997, letter\22 identified seven opportunities to improve
the Authority's future financial statements.  The Authority
implemented all of our prior report's suggestions, except for the
inclusion of an MD&A section as part of its audited financial
statements (see appendix I). 

In our 1997 letter, we suggested to the Authority that, although it
is not a current reporting requirement for state and local government
entities, including a MD&A section could enhance the Authority's
financial statements.  Authority officials stated that they provide a
separate annual report on their progress and accomplishments to the
Congress, as required under Section 224 of the 1995 Act, and that
audited financial statements under GASB are not required to address
the Authority's performance and accomplishments.  They suggested that
including the same information in its financial statements is
unnecessary. 

Federal agencies that prepare financial statements under the Chief
Financial Officer Act of 1990 (the CFO Act)\23 and publicly held
private sector corporations\24 regulated by the Securities and
Exchange Commission (SEC) include as part of their financial
statements an overview of the reporting entity, which is similar to
an MD&A section.  In addition, the Federal Accounting Standards
Advisory Board\25 (FASAB) and GASB have issued exposure drafts that
will expand the use of MD&A.  An MD&A section presents information
based on the results of an analytical review of relevant financial
and performance data of the programs, activities, and funds that make
up the reporting entity.  An MD&A section would enhance the
Authority's financial statements since it is an important vehicle for
(1) communicating managers' insights about the reporting entity, (2)
increasing the understandability and usefulness of the financial
statements, and (3) providing understandable and accessible
information about the entity and its operations, successes,
challenges, and future. 


--------------------
\22 GAO/AIMD-97-80R, May 23, 1997. 

\23 Office of Management and Budget (OMB) Bulletins No.  93-02 and
97-01, Form and Content of Agency Financial Statements. 

\24 SEC Accounting Standards Release No.  299, Management's
Discussion and Analysis of Financial Condition and Results of
Operations, dated September 28, 1981. 

\25 FASAB recommends accounting standards for the federal government,
and OMB, Treasury, and GAO decide whether to adopt the recommended
standards.  If they are adopted, the standards are published by OMB
and GAO. 


   CONCLUSIONS
------------------------------------------------------------ Letter :9

As of September 30, 1997, the same financial activity for the
Authority for fiscal years 1997 and 1996 was reported and presented
properly in the Authority's financial statements and the District's
CAFR.  We agree with the District's auditors that if the District
received from the Authority more prompt and detailed information
regarding monthly balances and financial activity, improved controls
over cash and improved communication between the two entities would
result.  We continue to believe that our prior suggestion that the
Authority include an MD&A section in its audited financial statements
is needed and would enhance its financial statements. 

The Authority has made the required payments on the "Taxable
Equipment Lease/Purchase Agreement" through September 30, 1998.  At
this time, the transaction has 2 years to run and we see no economic
benefit for the Authority in continuing with it.  The Authority has
the ability to pay off the loan by using some of the $10.3 million in
interest income from escrow accounts. 


   AUTHORITY'S COMMENTS AND OUR
   EVALUATION
----------------------------------------------------------- Letter :10

In commenting on a draft of the report, the Authority disagreed with
sections in our report concerning

  -- the lack of communication between the Authority and the District
     when transactions involve funds that are held by the Authority
     on behalf of the District,

  -- the Authority's rights and economic benefits resulting from the
     agreement called "Taxable Equipment Lease/Purchase Agreement,"
     and

  -- our suggestions to enhance the Authority's financial statements
     with an MD&A section. 

In addition, the Authority took exception to a previously issued GAO
legal opinion that was referred to in a footnote to this report
regarding the Authority's compliance with pay rate limits provided in
the 1995 Act. 

The Authority stated that it disagreed with the District auditors'
statement that the Authority did not notify the District in a timely
manner of specific details regarding expenditures.  The Authority's
basis for disagreement is that the District incurs expenditures, and
not the Authority.  The Authority, however, does incur expenditures
not only when it initiates payments made for transactions incurred by
the District, but also for transactions it initiates on behalf of the
District.  As such, the District auditors' noted that for these types
of transactions the District did not have complete records of its
funds maintained by the Authority in escrow accounts and could not
regularly reconcile its balances.  The Authority also stated that it
is a temporary entity and that it is appropriate to hold the
District's Office of the CFO responsible for tracking and reconciling
its revenues and expenditures, regardless of where funds may be held. 
Even though it is temporary in nature, until the Authority no longer
exists it has a fiduciary responsibility to provide the necessary
documentation in a timely manner to the District CFO to ensure that
the District's records are adequately maintained, especially in those
cases where it initiates payments on behalf of the District. 

The Authority took exception with our statement that the transaction
provided in the "Taxable Equipment Lease/Purchase Agreement" between
the Authority and a bank is in substance a secured loan.  We believe
our description of this transaction is accurate for several reasons. 
First, while the Authority stated that our view of the transaction
failed to recognize that the equipment "was sold back to the bank,"
the Authority also stated that the bank "only has a lien against the
equipment." If the Authority sold the equipment to the bank, thereby
making the bank the equipment's owner, then the bank would not have
needed to have a lien against equipment it owned when it leased the
equipment to the Authority.  Second, the Authority's statement that
the equipment was sold to the bank is inconsistent with the
agreement.  Section 10 of the agreement states that title to the
equipment is deemed to be with the Authority unless the Authority
defaults on its obligation under the agreement.  Section 21 of the
agreement provides that the bank's security interest in the equipment
ends and the Authority's title is free and clear of all encumbrances
when the Authority satisfies its obligations under the agreement. 
These and other provisions of the agreement establish that the
transaction was a secured loan.  While the Authority states that our
view of the transaction is contrary to the legal position of both the
Authority and the bank's counsel, the Authority did not respond to
our requests for the legal analysis of either its or the bank's
counsel. 

During our review, the Authority staff advised us that the
transaction and use of the proceeds was entered into pursuant to
section 103(g) of the 1995 Act, authorizing the Executive Director to
enter into such contracts as the Executive Director considers
appropriate (subject to approval of the chair) to carry out the
Authority's responsibilities under the act.  The general grant of
authority to contract does not authorize an entity to borrow and
spend the proceeds.  Without explicit authority to borrow--and we are
not aware of any such authority in this case--the Authority's
borrowing and use of the proceeds was an improper augmentation of its
appropriation. 

In addition, the Authority stated that the transaction sets an
example for the District government because it leveraged scarce
operating revenues.  However, the Authority had a $253,000 surplus
for fiscal year 1997, a $444,982 accumulated surplus carried forward
from prior years, and access to more than $10 million of interest
earned on escrow accounts.  Further, it was not leveraging resources
since it had to pledge $300,000 of existing cash, which was placed
into a restricted account, in order to receive the same amount.  The
Authority also stated that our analysis unfairly focused upon the
economic benefit of the transaction.  As discussed in our report, the
transaction did not generate additional cash and resulted in a net
cost to the District with no apparent benefit, financial or
nonfinancial.  Thus, entering into such a transaction without a sound
reason, economic or otherwise, is not a good example for the District
government to emulate. 

The Authority stated that the inclusion of an MD&A section in the
financial statements is unnecessary, time consuming, and redundant. 
OMB and SEC have already recognized the usefulness of an MD&A section
in the financial statements of federal entities and private sector
companies, respectively.  GASB also recognizes the importance of an
MD&A section for state and local government entities as demonstrated
in its exposure draft on "Basic Financial Statements--and
Management's Discussion and Analysis--for State and Local
Government," dated January 31, 1997.  Currently, the Authority
prepares another report with the same types of information that can
be used in an MD&A section.  Thus, utilizing information already
available would not be time consuming and, as stated in our report,
would enhance the understandability and usefulness of the Authority's
financial statements. 

Finally, the Authority took exception to our legal opinion
(B-279095.2) issued on June 16, 1998 relating to its compliance with
the rate of basic pay to senior executives.  At the time we prepared
our opinion, we were aware of the Authority's argument, which was
included in attachments to its November 2, 1998 response commenting
on a draft of this report, but we concluded that the language of
section 102 of the 1995 Act does not permit the Authority's staff to
be paid at rates that exceed the pay limitation.  In addition, the
Congress specifically stipulated in the Authority's fiscal year 1999
appropriation that funds provided to the Authority may not be used to
pay "any compensation of the Executive Director or General Counsel of
the Authority at a rate in excess of the maximum rate of compensation
which may be paid to such individual during fiscal year 1999 under
section 102 of [the 1995 Act] as determined by the Comptroller
General (as described in GAO legal opinion B-279095.2)."

We have evaluated the Authority's technical suggestions and have
incorporated them as appropriate.  In addition, the Authority
provided attachments to its response regarding it correspondence with
congressional committees on the Authority's compliance with rate of
basic pay.  We have considered these attachments in our evaluation. 
However, these attachments are not included in the report. 


--------------------------------------------------------- Letter :10.1

We are sending copies of this report to the Ranking Minority Member
of your Subcommittee and the Chairmen and Ranking Minority Members of
the Subcommittee of the District of Columbia, Senate Committee on
Appropriations; Subcommittee on Oversight of Government Management,
Restructuring and the District of Columbia, Senate Committee on
Governmental Affairs; and Subcommittee on the District of Columbia,
House Committee on Government Reform and Oversight.  We are also
sending a copy to the Chairperson, District of Columbia Financial
Responsibility and Management Assistance Authority.  Copies will be
made available to others upon request. 

Major contributors to this report are listed in appendix III.  If you
or your staff have any questions, please contact me at (202) 512-4476
or Hodge Herry, Assistant Director, at (202) 512-9469. 

Sincerely yours,

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


STATUS OF GAO'S PRIOR YEAR
SUGGESTIONS
=========================================================== Appendix I

                                              Implemente      Not
Suggestions                                       d        addressed
--------------------------------------------  ----------  ------------
Include a Management Discussion and Analysis                   X
 (MD&A) section to enhance the annual
 report.
Clearly label and describe (1) the Agency         X
 Funds' separate statement, (2) what the
 information represents, and (3) how it
 relates to the Authority's financial
 statements, in the notes to the financial
 statements.
Define the actual, actual (budgetary basis),      X
 and budgeted reporting bases used in the FY
 1996 Combined Statement of Revenues,
 Expenditures, and Changes in Fund Balance.
Delete reference to Propriety Fund in Note 2      X
 since none were reported.
Revise Note 2 to refer to the Combined            X
 Statement of Revenues, Expenditures, and
 Changes in Fund Balance and discuss that no
 encumbrances were reported for fiscal year
 1996.
Include more detailed and useful information      X
 on the types of reimbursement due from the
 District in Note 3.
Explain in Note 5 that fixed assets are           X
 reported on the Combined Balance Sheet at
 their net value and depreciation is not
 reported on the Statement of Revenues,
 Expenditures, and Changes in Fund Balance
 in accordance with governmental accounting
 standards.
----------------------------------------------------------------------



(See figure in printed edition.)Appendix II
COMMENTS FROM THE DISTRICT OF
COLUMBIA FINANCIAL RESPONSIBILITY
AND MANAGEMENT ASSISTANCE
AUTHORITY
=========================================================== Appendix I



(See figure in printed edition.)



(See figure in printed edition.)



(See figure in printed edition.)


The following are GAO's comments on the letter from the Executive
Director of the District of Columbia Financial Responsibility and
Management Assistance Authority dated November 2, 1998. 

GAO COMMENTS

1.  We revised the report as appropriate. 

2.  Our report did not state that the Authority used $734,471 to give
pay raises and lump sum retroactive pay adjustments.  Our report
properly states that these payments were part of the Authority's
expenditures in excess of budgeted amounts. 

3.  Our report did not state that the use of interest earnings took
place in fiscal year 1996.  Our report properly states that the
Authority was authorized to use interest income on all escrow
accounts with the passage of the Management Reform Act and
retroactively applied the interest earnings to its excess
expenditures during fiscal year 1997. 

4.  The Authority stated that its role and function have increased
from its inception without an increase to the Authority's
appropriated budget.  While it is true that the Authority's
responsibilities have increased, the Congress also provided the
Authority with additional sources of financing that could be used for
the increased responsibility.  In fiscal year 1997, the Congress, in
the Management Reform Act, provided the Authority with access to the
interest earned on all escrow accounts held on behalf of the
District. 

5.  The Authority's statements that neither the CD nor the interest
is pledged to the bank is inconsistent with provisions of the
"Taxable Equipment Lease/Purchase Agreement" and related documents. 
Section 10 of the agreement states that the Authority's obligation
under the agreement shall be secured by a Deposit Pledge Agreement
under which the Authority will pledge to the bank a CD representing
$300,000 on deposit with the bank.  Section 2.1 of the Deposit Pledge
Agreement provides that the Authority pledge a continuing lien and
security interest in the (a) CD, (b) all money and funds on deposit
pursuant to, or represented by, the CD, and (c) all rights for
payment of the CD and all interest payable by reason of the CD. 
Finally, section 4.1 of the Deposit Pledge Agreement provides that
the Authority's failure to pay the amount owed to the bank entitles
the bank to the CD, related cash, and unpaid interest to satisfy the
Authority's obligation to the bank. 

6.  The draft report provided to the Authority for formal comment on
October 21, 1998, did not include any recommendations. 

7.  We revised the report to reflect the District's current
functional realignment. 


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

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

Hodge Herry, Assistant Director
Steven Haughton, Audit Manager
Godwin Nwosu, Auditor-In-Charge
Maria Zacharias, Communications Analyst

OFFICE OF GENERAL COUNSEL

Richard Cambosos, Senior Attorney


*** End of document. ***