District of Columbia: Oversight in the Post-Control Board Period 
(08-JUN-01, GAO-01-845T).					 
								 
Although the District of Columbia, the Financial Responsibility  
and Management Assistance Authority, and Congress have achieved  
an enormous accomplishment in restoring the District to financial
viability, many of the challenges the District faced in the past 
continue. The District and Congress need current, reliable	 
information about the District's financial condition and	 
developing trends in order to promptly respond to any pressures  
or warning signs that could indicate that future difficulties lie
ahead. Toward that end, the District must ensure that its new	 
financial management system is effectively implemented and	 
provides decision makers with reliable and timely data. In	 
addition, since 1995, Congress has put in place a number of	 
reporting requirements to help provide the financial, planning,  
and performance information that it needs to conduct effective	 
oversight and make decisions. Congress may wish to consider	 
additional mechanisms to ensure that it and the District have the
information needed to help the District maintain its financial	 
viability and address its current and emerging challenges. Such  
mechanisms must be considered and implemented within a context	 
that seeks to balance two sets of values: the overriding	 
importance of Home Rule and respect for the District's democratic
institutions and Congress' oversight and decision making	 
responsibilities for the nation's capital.			 
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-01-845T					        
    ACCNO:   A01155						        
  TITLE:     District of Columbia: Oversight in the Post-Control Board
             Period                                                           
     DATE:   06/08/2001 
  SUBJECT:   Financial analysis 				 
	     Financial management				 
	     Financial statements				 
	     Municipal governments				 
	     Reporting requirements				 
	     District of Columbia				 
	     District of Columbia System of			 
	     Accounting and Reporting				 
								 

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GAO-01-845T
     
Testimony Before the Subcommittee on the District of Columbia, Committee on
Government Reform, House of Representatives and Subcommittee on Oversight of
Government Management, Restructuring and the District of Columbia, Committee
on Governmental Affairs, U. S. Senate

United States General Accounting Office

GAO For Release on Delivery Expected at 11: 00 a. m. EDT Friday June 8, 2001
DISTRICT OF COLUMBIA

Oversight in the PostControl Board Period

Statement of J. Christopher Mihm Director, Strategic Issues

GAO- 01- 845T

Page 1 GAO- 01- 845T DC Post- Control Board Period

Madam Chairwoman, Mr. Chairman, and Members of the Subcommittees: I am
pleased to be here today to discuss issues relating to the suspension of the
activities of the District of Columbia Financial Responsibility and
Management Assistance Authority (Authority). As agreed with the
Subcommittees, my comments this morning will cover three topics. First, I
will highlight the central elements in the District?s financial recovery
since 1995 and the continuing long- term challenges it faces. Second, I will
discuss some of the new reporting requirements that Congress has put in
place since 1995 to assist it in oversight and decision- making regarding
the District. Finally, as requested, I?ll identify some additional
mechanisms that Congress may wish to consider to ensure that it and the
District have the information needed to help the District maintain its
financial viability.

In response to the District?s severe financial crisis, Congress passed the
District of Columbia Financial Responsibility and Management Assistance Act
(commonly known as the Financial Responsibility Act) in April 1995. 1 The
Financial Responsibility Act established the Authority to assist the
District in restoring financial solvency and improving management
effectiveness during a ?control period.? The Financial Responsibility Act
also established an independent Office of the Chief Financial Officer (CFO)
within the District government. The CFO was given responsibility for all
financial offices of the District (budget, controller, treasurer, finance,
and revenue). During a control period, the CFO is nominated by the Mayor and
appointed by the Authority. The act also revised the Office of the Inspector
General?s (OIG) powers and responsibilities and provided that the Inspector
General (IG) be appointed to a 6- year term by the Mayor and approved by the
Authority, during a control period. In 1997, Congress passed the National
Capital Revitalization and Self- Government Improvement Act (Revitalization
Act), which provided key structural changes to the District?s finances,
including the federal government?s assumption of the District?s unfunded
pension liabilities and a larger share of the District?s Medicaid
expenditures.

As you know, the Authority has certified that the relevant provisions of the
law have been met and, on September 30, 2001, the control period will end
and the Authority will suspend its activities. The relevant provisions
include the following: all borrowings by and on behalf of the District of
Columbia from the U. S. Treasury have been repaid; the District has

1 Public Law No. 104- 8, 109 Stat. 97 (April 17, 1995).

Page 2 GAO- 01- 845T DC Post- Control Board Period

obtained access to both short- term and long- term credit markets at
reasonable rates to meet its borrowing needs; and the District has balanced
its budget for 4 consecutive fiscal years in accordance with generally
accepted accounting principles (GAAP) based on the Comprehensive Annual
Financial Report (CAFR) for the District. 2

The District?s outstanding return to financial health is the direct product
of the combined, cooperative efforts of the District and its elected and
appointed leadership, the Authority, and Congress. It in no way minimizes
this remarkable achievement to note, however, that the District, similar to
many other cities, continues to face a series of substantial, long- term
challenges to its financial viability. Addressing these challenges requires
continued dedicated and inspired leadership to make the hard decisions and
often painful trade- offs among equally compelling needs and priorities.
Sound financial and program cost and performance information is and will be
critical to making these decisions in an economical, efficient, and
effective manner.

Toward that end, the District must ensure that its new financial management
system is effectively implemented and provides decisionmakers with reliable
and timely data. In addition, since 1995 Congress has put in place a number
reporting requirements to help provide the financial, planning, and
performance information that it needs to conduct effective oversight and
make decisions. Congress may wish to consider additional mechanisms to
ensure that it and the District have the information needed to help the
District maintain its financial viability and address its current and
emerging challenges. Such mechanisms must be considered and implemented
within a context that seeks to balance two sets of values: the overriding
importance of Home Rule and respect for the District?s democratic
institutions on the one hand and Congress? oversight and decision- making
responsibilities for the nation?s capital on the other.

My comments today are based on our reviews of the District?s Comprehensive
Annual Financial Reports for fiscal years 1990 through 2000 and related
financial management reports and documents issued by the District CFO, the
IG, and the Authority; our recent work on the District?s financial
management system and performance planning and

2 A fourth provision, that all obligations arising from the Authority?s
issuance of bonds, notes, or other obligations be discharged, was not
relevant since the Authority never had to issue its own bonds, notes, or
other obligations; thus, there were no such obligations to discharge.

Page 3 GAO- 01- 845T DC Post- Control Board Period

reporting efforts; 3 and our discussions with the Deputy Mayor/ City
Administrator, the D. C. Council Budget Director and other representatives
of the District Council, the CFO and other officials in the Office of the
CFO, the IG and other officials in the OIG, and officials from other states
and cities that have experienced local government fiscal crises and
recoveries, including officials from the Miami Financial Emergency Oversight
Board and Florida Auditor General?s Office, the Office of the New York State
Comptroller, and the Ohio State Auditor.

In 1995, the District of Columbia faced the worst financial crisis in its
history. Unable to pay its employees or its contractors, the District was
running a significant operating deficit, carrying a large accumulated
deficit, and relying on the U. S. Treasury for help in funding its
operations. The District?s ordinary services, such as motor vehicle
inspections and building permits, were difficult to obtain, and the District
could not sell its bonds at market rates. In short, as we testified in
February 1995, the District was without the cash to pay its bills.

Since then, aided by a strong local economy and through the combined and
cooperative efforts of the Authority, the District government, Congress, and
the citizens of the District, the District has experienced a remarkable
turnaround in its financial condition. For example, in fiscal year 1996, the
District ended the year with a $33 million operating deficit and a $518
million accumulated deficit. In contrast, for fiscal years 1997, 1998, 1999,
and 2000, the District generated operating surpluses. The District has
eliminated its accumulated deficit and at the end of fiscal year 2000 had a
positive fund balance of over $465 million- a turnaround of almost a billion
dollars from its accumulated deficit in September 1996.

As shown in figure 1, in looking at the trends in the District?s general
fund balance from 1990 through 2000, its financial situation has improved
remarkably since fiscal year 1997. Prior to fiscal year 1997, the District
had experienced operating deficits in 4 out of 7 years, and the surplus in
1991 reflected a one- time sale of $331 million of ?deficit reduction bonds?
that were designed to eliminate the District?s accumulated deficit at the
time. In addition, the surplus it showed in 1993 included a ?windfall? of
$173

3 District of Columbia: Weaknesses in Financial Management System
Implementation (GAO- 01- 489, April 30, 2001), and District of Columbia:
Observations on Management Issues (GAO- 01- 743T, May 16, 2001). The
District?s

Financial Recovery and Continuing Challenges

Page 4 GAO- 01- 845T DC Post- Control Board Period

million in real estate taxes due to a change in the tax year- recognizing 15
months? worth of taxes in a 12- month period. These transactions masked the
financial crisis that was brewing in the District. In 1994, the District?s
financial crisis became apparent, and the District experienced 3 consecutive
years of significant operating deficits. Once the District?s financial
situation began to turn around in 1997, the District reported an operating
surplus of $186 million. Currently, the District has achieved its fourth
consecutive balanced budget, showing a $241 million surplus for fiscal year
2000- a major achievement for a city that had been struggling to recover
from financial difficulties for years. The District expects this trend to
continue through 2001 with a projected surplus of $65 million.

Page 5 GAO- 01- 845T DC Post- Control Board Period

Figure 1: The District?s General Fund Annual and Accumulated Surplus /(
Deficit) for Fiscal Years 1990 Through 2000.

Source: District of Columbia Comprehensive Annual Financial Reports, Fiscal
Years 1990- 2000.

0 50

100 150

200 250

300 350

400 450

500 Dollars in millions 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999
2000

241 -118

333 2 8

-335 -55

-33 186

445 86

Year

Page 6 GAO- 01- 845T DC Post- Control Board Period

During 1995, the District?s general obligation (GO) bond ratings were
lowered by Standard and Poor?s Corporation, Moody?s Investors Service, and
Fitch IBCA to levels that were considered to be below investment grade. The
bond ratings were lowered because of the District?s financial deterioration
and its lack of a short- or long- term plan for resolving its budget
problems. In 1998, after the District?s financial situation had turned
around, all three rating agencies began to increase the rating on the
District?s GO bonds, a trend that has continued through the most recent bond
ratings. In February 2001, Standard and Poor?s upgraded the District?s bond
rating from BBB to BBB+, citing the District?s improved financial operations
due to substantial operating surpluses and its enhanced debt position. In
March of this year, Moody?s also upgraded the District?s bond rating from
Baa3 to Baa1, citing, among other things, the District?s fourth consecutive
budget surplus in fiscal year 2000. Also in March 2001, Fitch IBCA upgraded
the District?s bond rating from BBB to BBB+ because of the District?s
positive financial performance and strengthening economic indicators.

The District was unable to achieve unqualified, or ?clean,? opinions on its
fiscal years 1995 and 1996 financial statements and received qualified
opinions. 4 The reasons for the qualified opinions included the District?s
inability to provide evidence to support business tax receivables and credit
balances in the tens of millions of dollars and the related impact on
revenues, expenditures, and fund balances as a result of business system
inadequacies. The auditors also cautioned that the District experienced
increases in its accumulated deficit and declines in its pooled cash. Then,
in fiscal year 1997, the District began to turn its financial reporting
around and was able to receive a clean opinion on its financial statements.
The District continued its recovery and, most recently, in fiscal year 2000,
also received a clean opinion on its financial statements.

While the District has made significant progress over the last 6 years, it
still faces short- and long- term challenges to its financial situation. For
example, the District?s current projection for its fiscal year 2001 surplus
is approximately $65 million. This represents a fairly tight financial
margin

4 A qualified opinion means that the financial statements are presented in
conformity with generally accepted accounting principles, with the exception
of any issues( s) identified in the opinion. Bond Ratings

Audit Opinions Continuing Challenges

Page 7 GAO- 01- 845T DC Post- Control Board Period

for a budget of approximately $4.9 billion. In order to ensure that the
District does not experience unexpected deficits, constant monitoring of
actual revenues and expenditures is needed throughout the year. As budget
pressures are identified, the District needs to take quick, decisive actions
in order to address the budget pressures and avoid running deficits. Over
the longer term, as Authority Chair Rivlin noted in her February 14, 2001,
statement, 5 significant challenges still facing the District are securing
its financial future for the longer run and addressing the structural
imbalance of a jurisdiction caught between the need for greatly improving
services and a narrow tax base. Moreover, the bond rating companies also
have issued cautions about future factors that could affect the District.
For instance, Moody?s cautions that the District could be vulnerable in two
areas: (1) potential costs and obstacles to improving the quality and
efficiency of public services and (2) whether elected officials will have
the ability and will to produce results to continue to build stakeholder
confidence. Standards and Poor?s cautions that financial pressures will come
from the District?s limited revenue flexibility, significant amount of
capital needs, and risks associated with the District?s unique economic
profile. Fitch cautions that the District still faces challenges including a
high debt load, funding of health care, and deferred capital and operating
needs, in addition to the possibility of an economic downturn, which is
beginning to be felt in other parts of the country.

A sound financial management system is critical in helping the District
address the continuing pressures that it faces. As we noted in our April 30,
2001 report 6 and our May 16, 2001, testimony, 7 the District continues to
face significant challenges in its efforts to put in place a financial
management framework that ensures timely and reliable financial data on the
cost of the District?s operations. Almost 4 years after the District?s
acquisition of its core financial management system, that system and related
elements are in various stages of implementation. The current mix of
components involves duplication of effort and, in some cases, requires
cumbersome manual processing. As a result, the system does not produce
certain types of financial information on a timely and reliable basis, such
as the cost of services at the program level. In our report, we made several

5 Statement of Alice M. Rivlin, Chair, Authority, February 14, 2001. 6
District of Columbia: Weaknesses in Financial Management System
Implementation (GAO- 01- 489, April 30, 2001).

7 District of Columbia: Observations on Management Issues (GAO- 01- 743T,
May 16, 2001).

Page 8 GAO- 01- 845T DC Post- Control Board Period

recommendations related to the District?s completion of its financial
management system implementation and the District?s need to ensure that the
system effectively and efficiently meets the District?s information
requirements. We are pleased that the CFO and other District leaders are
already taking action on some of our recommendations and plan to implement
the recommendations remaining from our prior reports.

It is also important to note that the District has internal control
weaknesses that were identified by its independent auditor during the course
of its annual financial statement audits. The weaknesses reported by the
District?s independent auditor as a result of its 2000 audit include issues
related to reconciliation of bank accounts and cash management, accounting
for payroll transactions, transaction processing for the Public Benefit
Corporation and the University of the District of Columbia, lack of timely
entry of transactions into the District?s core general ledger System of
Accounting and Reporting (SOAR), failure to monitor expenditures against
open procurements, accounting and reporting for intra- District
transactions, and timely reporting of budgetary revisions. Similar to its
response to our report, the District has shown a commitment to addressing
these problems and is taking action accordingly.

At the time of the District?s financial crisis, concerns were raised that
Congress did not have the oversight mechanisms in place and the information
it needed to identify the nature and scope of the District?s problems before
they became a full- blown crisis and to help the District respond
effectively to those problems. Since then, Congress has added new reporting
requirements that, if effectively implemented, could provide Congress with
critical financial and performance information to help Congress in its
oversight and decision- making. We believe that two of the requirements in
place may be especially helpful in providing information and perspective
that Congress needs to make decisions.

 Since 1997, the CFO has been required to submit a quarterly report to
Congress on the District?s financial and budgetary status. This quarterly
financial report, which must be submitted no later than 15 days after the
end of each calendar quarter, is to contain a comparison between the actual
and forecasted cash receipts and disbursements for each month of the
quarter. Within the report, the CFO is required to explain any differences
between the actual and forecasted cash amounts, any changes that would need
to be made to the remaining months? cash forecasts, any impact these changes
would have on the budget or supplemental budget request, or if these changes
would necessitate any reduction in any Congress Has

Established Requirements for Financial and Performance Reporting to Aid Its
Oversight and Decision- making

Page 9 GAO- 01- 845T DC Post- Control Board Period

agency?s expenditures. Provided that this financial information is timely,
reliable, and objective, this quarterly financial report could be useful to
Congress and others in monitoring the District?s financial condition.

 Since 1998, the Mayor has been required to develop and submit to Congress
a performance accountability plan for each fiscal year, including a
statement of measurable, objective performance goals for all of the
District?s significant activities. After each fiscal year, the Mayor is to
develop and submit a performance report that includes (1) the level of
performance achieved in relation to each of the goals in the performance
plan, (2) the title of the management employee most directly responsible for
achieving each goal and the title of the employee?s immediate supervisor or
superior, and (3) the status of any applicable court orders and the steps
taken to comply with such orders. This law?s general approach of
establishing performance goals and reporting on performance is similar to
the requirements for executive branch federal agencies under the Government
Performance and Results Act of 1993.

In reviewing the District?s fiscal year 2000 performance report, we found
that performance management remains very much a work in progress for the
District, and the performance report reflects that fact. The District?s
goals and measures were in a state of flux during fiscal year 2000, changing
as the District introduced new plans, goals, and measures into its
performance management process. These changes were part of its ongoing
efforts to further develop and improve the performance management process.
Nevertheless, these significant and continuing revisions to the District?s
performance goals limit the usefulness of the performance report for
oversight, transparency, accountability, and decision- making. District
officials recognize that much work remains in its goal setting, performance
measurement, and accountability efforts, and they have important initiatives
under way. For example, the Deputy Mayor/ City Administrator recently
outlined the District?s performance- based budgeting initiative that, if
effectively implemented, should help improve the transparency and
accountability of District agencies by clearly showing the relationship
among dollars spent and activities undertaken and services provided.

In addition to these two requirements, there are other permanent and
temporary reporting requirements that are intended to provide Congress with
specific information regarding the state of the District?s finances. 8

8 Public Law No. 106- 522, 114 Stat. 2440 (November 22, 2000).

Page 10 GAO- 01- 845T DC Post- Control Board Period

(See appendix I for a sample of these reporting requirements, most of which
were included in the 2001 D. C. Appropriations Act.)

While the reporting requirements enacted since 1995 are to provide Congress
with important information and perspective on the financial condition,
plans, and program performance of the District- information that was sorely
lacking in the past- Congress may wish to consider the need for additional
mechanisms to help it and the District ensure that they have the information
needed to help the District maintain its financial viability. One option
that Congress may wish to consider is requiring the District to notify it if
certain predefined ?reportable events? occur that require the prompt
attention of Congress and the District to ensure that financial viability is
maintained. Under the Financial Responsibility Act, an Authority could be
reestablished if any number of a specific set of major events occur, such as
the District?s default on any loans, bonds, notes, or other forms of
borrowing or the District?s failure to meet its payroll for any pay period.
The major events that could lead to the reestablishment of the Authority are
clearly to be avoided at nearly all costs. But to do so, Congress and the
District need pertinent information in time to act before a crisis occurs
that would necessitate the return of the Authority. A reportable event
notification system could be designed to provide just such information and
include some or all of the following types of information:

 cash flow pressures that show-

 projected difficulties in meeting any of the District?s financial
responsibilities, including debt service, payroll, pension payments,
payments under interstate agreements, or any other financial obligations of
the District;

 projected difficulties in meeting any of the District?s operational,
program, and service obligations to its citizens;

 a need for increased short- term borrowings to cover the District?s
operations;

 budget gap pressures that could indicate-

 tight operating margins or potential future operating deficits;

 that certain major programs or services within the District are
experiencing difficulties in meeting their missions within their current
structures and levels of resources;

 pressures or questions from the bond rating organizations regarding the
District?s credit ratings; and

 cash projections that indicate a future need for Treasury borrowings.
Options for Additional

Mechanisms to Ensure That Congress and the District Have Needed Information

Page 11 GAO- 01- 845T DC Post- Control Board Period

A reportable events notification system for the District would be generally
consistent with the approaches that have been taken in other local
jurisdictions that have had experiences similar to the District?s. For
example, the Office of the New York State Comptroller has an ongoing program
to assess cities and townships that experience trouble generating sufficient
revenues on a continuing basis while maintaining adequate service levels.
The assessment program uses nine financial indicators, such as the
jurisdiction?s fund balance, the liquidity of its cash and investments, and
its current liabilities as a percent of net operating revenues. These
factors are used as ratios to facilitate comparisons with comparable local
jurisdictions. The program also uses nonfinancial indicators, such as the
locality?s reliance on intergovernmental revenues, the jurisdiction?s
management ability (measured by the timeliness of annual reports and
stability of key management positions), and economic activity measures (for
example, the per capita income and number of building permits issued). After
determining the causes for the local jurisdiction?s financial distress, the
State Comptroller offers a wide range of services to address the problem.

Similarly, the Ohio Auditor of State uses various financial indicators that
could result in a ?fiscal watch? of local governments under financial
stress. To determine if a local government qualifies for a fiscal watch, the
Auditor of State conducts an initial review of the jurisdiction?s accounts
payable, deficits, cash, and marketable investments. While under a fiscal
watch, local governments can receive technical assistance ranging from
advice on budget formulation to developing performance audits. A key element
of Ohio?s fiscal intervention system is providing local officials the
opportunity to respond to a fiscal crisis prior to the establishment of an
oversight commission.

Another notable example is the ongoing transition to local control from the
Miami Financial Emergency Oversight Board to the City of Miami, during which
a set of financial integrity principles and policies have been developed and
codified into city ordinances. Among the 10 financial integrity principles
is a provision for financial oversight and reporting, which includes monthly
financial reports issued to city departments, the Mayor, and the city
commission on any potentially adverse fiscal trends or conditions including
comparing the city?s budgeted revenues and expenditures.

The experiences of these governments, our work at the District, and our
related work on reportable events notification systems, suggest that such a

Page 12 GAO- 01- 845T DC Post- Control Board Period

system would be most useful to Congress and the District if, in crafting the
system, the following considerations are kept in mind.

 The District and Congress should seek to reach broad agreement on the
reportable events that would warrant notification to Congress. Such an
agreement would help to ensure that the notification system serves the
common needs of the District and Congress in ensuring that the District
maintains its financial viability.

 The reportable events should focus squarely on those current financial
pressures that have the potential of developing into a triggering event
requiring the re- establishment of the Authority if not promptly and
adequately corrected.

 The reportable events should be selected so that, in the event they occur,
enough time is available for Congress and the District to take any needed
remedial action to address the matter before it leads to a crisis or
triggers the return of the Authority.

 The reportable events should be clearly defined and transparent so as to
limit the possibility of unproductive debate about whether or not a
reportable event has actually occurred.

 The reportable events should be well documented; that is, the notification
of a reportable event should include discussion of what happened and why, an
assessment of the risk to the District?s financial situation, and a
discussion of needed actions, if any, to address the reportable event.

 Such a system should include a ?vital few? set of reportable events.
Reportable events are not intended to be a substitute for more comprehensive
periodic reporting of financial and program performance, but rather are to
draw attention to specific events needing immediate attention.

 The system should seek, as much as possible, to build on financial
information already collected, monitored, and used by the District. This
would help to minimize the reporting burden and, more importantly, help to
ensure that reportable events are valid and reliable indicators of fiscal
performance. In that regard, much of the financial information needed to
support a reportable events notification system likely is already processed
and monitored by the District?s CFO. For example, the CFO produces quarterly
Financial Status Reports, which provide consolidated summaries of the
District?s financial status and describe the current status of revenues and
expenditures, as well as any developing budget gaps and pressures. The
reports also provide updated information about projected revenues and
expenditures for the remainder of the fiscal year.

Page 13 GAO- 01- 845T DC Post- Control Board Period

At the request of Congress, we would be pleased to work with the District
and Congress to develop a reportable events notification system that meets
the common needs of the District and Congress.

As I noted at the outset of my statement, in crafting the Financial
Responsibility Act, Congress established an independent Office of the Chief
Financial Officer within the District government with full authority over
all financial offices of the District. Congress recognized that it was
critical for timely, reliable, and objective financial information to be
available to the District and Congress. Congress also recognized that the
CFO?s independence and authority is vital to its effectiveness. It is
important to note, however, that certain powers and functions granted to the
OCFO by the Financial Responsibility Act during a control period will change
under current law, as the District moves into a noncontrol period. For
example:

 In a control period, all budgeting, accounting, and financial management
personnel of the executive branch of the District government (including the
independent agencies) are appointed by, serve at the pleasure of, and act
under the direction and control of the CFO. This authority will cease during
a noncontrol period.

 In a control period, the CFO employs its own legal counsel. The CFO?s
legal counsel is independent of the District?s Office of the Corporation
Counsel, which mainly serves the Mayor, and is under the direct
administrative control of the Mayor. Current law does not provide the OCFO
with authority to employ its own legal counsel during a noncontrol period.

 In a control period, the CFO is appointed and removed with the approval of
the Authority. However, in a noncontrol period, the CFO can be removed by
the Mayor for cause, with the approval of two- thirds of the Council. The
law does not define ?cause.?  In a control period, the CFO has the
authority to contract for services. This

authority will revert to the District?s central procurement process during a
noncontrol period.

 During a control period, the CFO?s budget request is not subject to
revision but is subject to comment by the Mayor and Council as part of the
District?s annual appropriation request. During a noncontrol period, the
CFO?s budget would be included in the District?s regular budget process.

As the District and Congress consider options for ensuring the independence
and authority of the CFO, they may wish to consider whether the requirement
that the CFO certify the availability of funds for Role of the CFO

Page 14 GAO- 01- 845T DC Post- Control Board Period

contracts should be amended to expressly include leases and collective
bargaining agreements, which can involve significant expenditures but are
not currently subject to the CFO?s certification. Currently, these items are
not expressly included in the CFO?s legal responsibility for certification,
thereby leaving the certification of funds process subject to disagreement.
In addition, Congress and the District may want to consider whether the
CFO?s budget, once it is appropriated by Congress, should be exempt from
being reduced by the Mayor. A similar exemption is currently in place for
the City Council.

Earlier this week, the Chair of the District City Council submitted a
legislative proposal to the City Council to specifically address issues
related to the CFO?s independence and the scope of the CFO?s duties. While
we have not had a chance to analyze the proposal in detail, we support
efforts by the District to continue or strengthen the independence and
authority of the District?s CFO in a post- Authority environment. Our
Executive Guide: Creating Value Through World- class Financial Management, 9
notes that one of the essential elements of a successful finance
organization is clear, strong executive leadership. Once the Authority
suspends its activities, it is important to consider whether the CFO will be
able to continue to operate and perform its ongoing fiscal and financial
activities in an independent manner, without encroachment by others,
especially if the District faces difficult choices caused by financial
downturn.

The IG is now appointed to a 6- year term and may be removed by the Mayor
only with Authority approval during a control period. In 1995, around the
time of the passage of the Financial Responsibility Act, the OIG had seven
authorized full- time equivalents (FTE). 10 Since 1995, the OIG has
substantially built its operations, staffing, and audit capabilities.
Currently, the OIG has authorized staffing of 105 FTEs. The current
responsibilities of the IG include the following:

 conducting independent fiscal and management audits of District government
operations;

9 GAO/ AIMD- 00- 134, April 2000. 10 FTEs are used to measure federal
civilian employment. One FTE is equal to 1 work year of 2,080 hours. Role of
the IG

Page 15 GAO- 01- 845T DC Post- Control Board Period

 contracting and overseeing the contract with an outside auditor to perform
the annual audit of the District?s CAFR;

 conducting other special audits, assignments, and investigations;

 annually conducting an operational audit of procurement activities of the
District government;

 forwarding to the appropriate authorities evidence of criminal wrongdoing
that is discovered during the course of its audits, inspections, or
investigations; and

 submitting to the appropriate congressional committees and subcommittees
an annual report summarizing its activities from the preceding fiscal year.

Each year, the IG establishes an audit plan, in consultation with the Mayor,
City Council, and Authority (during a control period) 30 days prior to the
beginning of the fiscal year. The IG?s criteria for selecting audit areas to
be included in the plan include the following: (1) materiality of the
programs, (2) activities and functions considered for audit, (3)
vulnerability of operations to fraud, waste, and mismanagement, and (4)
whether there is a legislative or regulatory audit requirement.

As with the CFO, the key is to ensure the IG?s independence and authority,
which are vital to its effectiveness. During a control period, the IG is
appointed and removed with the approval of the Authority. During a
noncontrol period, the IG can be removed by the Mayor for ?cause,?

although the law does not define ?cause.? In addition, Congress and the
District may want to examine whether the IG has personnel authorities needed
to maintain and assure independence. Finally, as with the CFO, Congress and
the District may want to consider whether the IG?s budget, once it is
appropriated by Congress, should be exempt from being reduced by the Mayor.

One of the IG?s key responsibilities is identifying and reporting to the
Mayor, the District Council, and District department and agency heads any
problems in the administration of District programs and operations and the
need for corrective action. The IG?s role in a post- Authority environment
is critical because of its mandate to audit and report on the economy,
efficiency, and effectiveness of District programs and operations. As such,
Congress, the Mayor, and the District Council should consider how to best
use the IG?s financial and performance- related audits and reporting in
order to provide critical oversight and early warnings of any potential
problems.

Page 16 GAO- 01- 845T DC Post- Control Board Period

Audit committees have long been recognized as a key component of the
corporate governance system for private sector companies. Generally, audit
committees play an important role in corporate governance by providing an
independent view of management?s financial reporting and by facilitating
communication between management and its internal and external auditors.
Typical responsibilities of audit committees include assessing the processes
related to the company?s risks and control environment, overseeing financial
reporting, and evaluating the internal and independent audit processes.

The importance of audit committees has also come to be recognized as
increasingly important in the public sector. In 1997, the Government Finance
Officers Association (GFOA) recommended that every government establish an
audit committee or its equivalent. The GFOA also stated that each audit
committee should be formally established by charter and that the members of
the audit committee should collectively possess the expertise and experience
in accounting, auditing, and financial reporting needed to understand and
resolve issues raised by the independent audit of the financial statements.
The GFOA stated that the primary responsibility of the audit committee
should be to oversee the independent audit of the government financial
statements from the selection of the independent auditor to the resolution
of audit findings. The GFOA also stated that the audit committee should have
access to internal audit reports and plans. Finally, the GFOA recommended
that the audit committee present annually to the governing board and
management a written report on how it has discharged its duties.

The District?s IG has established a CAFR Oversight Committee, which oversees
the progress on the annual financial audit. While not an audit committee,
the CAFR Oversight Committee provides an excellent opportunity for District
financial management staff, OIG staff, and representatives from the Mayor?s
office, the D. C. Council, and the Authority to be updated on the status of
the audit and any issues being encountered by the auditors. Consequently,
issues affecting the audit could be addressed in an effective and timely
manner so the auditor?s progress towards timely completion of the CAFR would
not be impeded. This process has been key in assuring that the District was
able to compensate for current issues and avoid many of the past problems
that resulted in the late issuance of the fiscal year 1999 CAFR. The CAFR
Oversight Committee, however, does not have the full scope of roles and
responsibilities typical of an audit committee, nor does it follow the
organizational requirements of a traditional audit committee. Congress and
the District may want to consider forming an audit committee or Audit
Committee

Page 17 GAO- 01- 845T DC Post- Control Board Period

variation of an audit committee based on the objectives of audit committees
described above, and/ or strengthening and further defining the current CAFR
Oversight Committee already in place.

In summary, the District and its citizens, the Authority, and Congress have
jointly achieved an enormous accomplishment in restoring the District to
financial viability. At the same time, many of the challenges the District
faced in the past continue, requiring difficult decisions now and in the
future. The District and Congress must have reliable, accurate, and timely
financial, program cost, and performance information if they are to
confidently make these hard decisions. Specifically, the District and
Congress need current, reliable information about the District?s financial
condition and developing trends in order to promptly respond to any
pressures or warning signs that could indicate that future difficulties lie
ahead. District officials and Congress could thereby take an active and
prospective role in dealing with issues, rather than finding themselves in a
position of reacting to a crisis. Such information and oversight will also
be helpful to the District in providing confidence that the District is well
managed, providing needed services to its citizens, and maintaining its
financial solvency. We have a very constructive relationship with the
District and we look forward to continuing to work with Congress, your
Subcommittees, and District officials as the District government continues
to strive to provide the services that its residents expect and deserve.

Madam Chairwoman and Mr. Chairman, this concludes my prepared statement. I
would be pleased to respond to any questions you or other members of the
Subcommittees may have.

For further information, please contact Jeanette Franzel, Acting Director,
Financial Management and Assurance, at (202) 512- 9406 or J. Christopher
Mihm, Director, Strategic Issues, at (202) 512- 6806. Major contributors to
this testimony included Richard Cambosos, Sharon Caudle, Doug Delacruz,
Molly Gleeson, Steven Lozano, Meg Mills, Susan Ragland, and Norma Samuel.
Contacts and

Acknowledgments

Page 18 GAO- 01- 845T DC Post- Control Board Period

Since the financial crisis precipitating establishment of the Authority,
Congress has enacted a number of reporting requirements for various entities
within the District of Columbia government. Some of the reports are required
by permanent law while others are temporary. A sample of the permanent
reporting requirements is listed in table 1.

Table 1: Reporting Requirements Enacted as Permanent Law and Codified in D.
C. Code Permanent Laws Report and statute a Description Prepared by Prepared
for

Annual Performance Accountability Plan D. C. Code 47- 231

A performance accountability plan for all departments, agencies, and
programs of the D. C. government for the subsequent fiscal year to be
submitted not later than March 1 of each year

Mayor Senate and House Committees on Appropriations, Senate Committee on
Governmental Affairs, House Committee on Government Reform and Oversight,
and the Comptroller General Annual Performance Accountability Report DC Code
47- 232

A performance accountability report on activities of the D. C. government
during the fiscal year ending on the previous September 30, to be submitted
not later than March 1 of each year

Mayor Senate and House Committees on Appropriations, Senate Committee on
Governmental Affairs, House Committee on Government Reform and Oversight,
and the Comptroller General Financial Accountability Plan and Report D. C.
Code 47- 233

A 5- year financial plan for the D. C. government that contains a
description of the steps the government will take to eliminate any
differences between expenditures from and revenues attributable to, each
fund of the District of Columbia during the first 5 fiscal years beginning
after the submission of the plan, to be submitted not later than March 1 of
each year

Chief Financial Officer (CFO) Senate and House

Committees on Appropriations, Senate Committee on Governmental Affairs,
House Committee on Government Reform and Oversight and the Comptroller
General

Quarterly Financial Report D. C. Code 47- 234

A report on the financial and budgetary status of the D. C. government for
the previous quarter to be submitted not later than 15 days after the end of
every calendar quarter.

CFO Subcommittees on the District of Columbia of the House and Senate
Committees on Appropriations, Senate Committee on Governmental Affairs, and
House Committee on Government Reform and Oversight

Appendix I: District Reporting Requirements

Page 19 GAO- 01- 845T DC Post- Control Board Period

Permanent Laws Report and statute a Description Prepared by Prepared for

Emergency Reserve Fund Use P. L. 106- 522 Sec. 450A, 114 Stat. 2480

Notification to Congress of the use of the emergency reserve fund to be
issued not more than 30 days after the expenditure of funds

Mayor and D. C. Council (and the Authority during a control year)

Senate and House Committees on Appropriations

Quarterly Report on Emergency Reserve Funds P. L. 106- 522 Sec. 450A, 114
Stat. 2481

A quarterly report that includes a monthly statement on the balance and
activities of the contingency and emergency reserve funds

CFO Mayor, D. C. Council, the Authority, and Senate and House Committees on
Appropriations

Report on Federal, Private, and Other Grants P. L. 106- 522 Sec. 126, 114
Stat 2465

Quarterly report providing detailed information on federal, private, and
other grants, to be submitted not later than 15 days after the end of the
quarter

CFO D. C. Council and Senate and House Committees on Appropriations

Inspector General Audit P. L. 106- 522 Sec. 135, 114 Stat. 2468

Annual audit of the financial statements of the D. C. Highway Trust Fund, to
be submitted not later than February 1, 2001, and each February 1 thereafter

Inspector General Congress Annual Review P. L. 106- 522 Sec. 450B, 114 Stat.
2475

A review of the comprehensive financial management policy to be issued at
the end of each fiscal year

CFO Senate and House Committees on Appropriations, Senate Committee on
Governmental Affairs, and House Committee on Government Reform

a District of Columbia Appropriations Act, 2001, P. L. 106- 522, 114 Stat.
2440 (November 22, 2000).

Page 20 GAO- 01- 845T DC Post- Control Board Period

The table below lists a sample of temporary reporting requirements that were
included in the 2001 D. C. Appropriations Act.

Table 2: Temporary Reporting Requirements from the 2001 D. C. Appropriations
Act. Temporary Laws Report and statute a Description Prepared by Prepared
for

Quality of Life Indicators P. L. 106- 522 Sec. 424, 114 Stat. 2477

Quarterly report on the issues of crime, access to drug abuse treatment,
management of parolees, education and special education access, improvement
in rat control and abatement, application and management of federal grants,
and indicators of child well- being

Mayor Senate and House Committees on Appropriations, Senate Committee on
Governmental Affairs, and House Committee on Government Reform

Capital Outlay Borrowings Report P. L. 106- 522 Sec. 110, 114 Stat. 2459

An annual plan, by quarter and by project, for capital outlay borrowing

Mayor DC Council and Congress Management of Real Property Assets P. L. 106-
522 Sec 139, 114 Stat. 2470

A comprehensive plan for management of the District of Columbia?s real
property assets

Mayor and D. C. Council Senate and House Committee on Appropriations, Senate
Committee on Governmental Affairs, and House Committee on Government Reform
Reports on Current Leases P. L. 106- 522 Sec 138, 114 Stat. 2469

Quarterly reports on location of property involved, the extent to which the
property is or is not occupied by the D. C. government, and a plan for
occupying and utilizing the property

Mayor and D. C. Council Senate and House Committees on Appropriations

a District of Columbia Appropriations Act, 2001, P. L. 106- 522 Stat. 2440
(November 22, 2000).

(450028)
*** End of document. ***