-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-02-1001		

TITLE:     ISTRICT OF COLUMBIA: Fiscal Structural Balance Issues

DATE:   09/04/2002 
				                                                                         
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GAO-02-1001

                                       A

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

   September 2002 DISTRICT OF COLUMBIA Fiscal Structural Balance Issues

   GAO- 02- 1001

   Letter

   September 4, 2002 The Honorable Joe Knollenberg Chairman Subcommittee on
   the District of Columbia House Committee on Appropriations

   Dear Mr. Chairman: The District of Columbia has historically faced many
   challenges due to its unique circumstances and role as the nation*s
   capital. After several years of struggling with financial crises and
   insolvency in the early 1990s, the District has significantly improved its
   financial condition by achieving five

   consecutive balanced budgets, an upgraded bond rating, and unqualified, 1
   or *clean,* opinions on its financial statements. More recently, however,
   District officials have sounded the alarm that the District faces an
   imbalance between its long- term expenditure needs for program services
   and capital investment, and its capacity to generate revenues over the
   long run. These officials assert that the District faces a fiscal
   structural imbalance as a result of several factors, many stemming from
   the federal government*s presence in the city, the absence of a state to

   provide funding for the state- like services provided by the District, and
   restrictions on the District*s tax base. In response to your June 26,
   2002, letter, this report provides our

   preliminary assessment of several elements of the District*s reported
   fiscal structural imbalance. However, we have not yet completed the work
   necessary to conclude whether, or to what extent, a fiscal structural

   imbalance may exist in the District. Specifically, you asked us to provide
   information on the following:

    the District*s definition of fiscal structural imbalance and its
   contributing factors;

    the constraints on the District*s revenue, including the prohibition of
   an income tax on nonresidents; 1 An unqualified opinion means that the
   financial statements are presented fairly, in all material respects, in
   conformity with generally accepted accounting principles.

    the District*s estimates of its spending requirements, including its
   cost estimates for providing services to the federal government and its
   spending for state- like functions;

    changes in the District*s financial relationship with the federal
   government resulting from the National Capital and Self- Government
   Improvement Revitalization Act of 1997 (Revitalization Act); 2 and

    alternative approaches to measuring structural imbalance in the
   District.

   The information being presented in this report is based on our work
   performed to date on this issue. We currently have ongoing work in this
   area and plan to issue a future report which will provide a more
   comprehensive analysis of the District*s reported fiscal structural
   imbalance.

   Results in Brief Like many cities, the District faces a series of
   substantial, long- term challenges to its financial position. The key
   question is whether city

   officials can provide an acceptable level of services to address the
   District*s needs with their current tax base. The District argues that it
   faces a fiscal structural imbalance between revenues and its expenditures
   that undermines its capacity to meet its current responsibilities. In
   contrast with a cyclical fiscal imbalance caused by temporary economic
   downturns, the District suggests that its imbalance is longer term and
   more fundamental* and therefore, structural in nature. The District*s
   estimated measures of fiscal structural imbalance are premised on the
   continuation

   of current budget policy over a longer term period spanning economic
   cycles, but do not consider the results of policy alternatives.

   District officials have cited constraints they face in raising revenues as
   well as what they assert are unique expenditure responsibilities stemming
   from the District*s position as a federal city that must also provide
   state- like functions. On the revenue side, unlike state governments, the
   District is prohibited by federal law from taxing the incomes of
   nonresidents working in the District. District officials also point to the
   fact that the District is unable to tax a significant portion of property
   due to the federal presence.

   2 The Revitalization Act is Title XI of Pub. L. No. 105- 33, 111 Stat. 712
   (1997). Public Law 10533 in its entirety is entitled the Balanced Budget
   Act of 1997.

   While federal tax exempt property does constitute a substantial amount of
   property in the District, the federal presence also draws substantial
   economic activity which provides the District with additional revenues
   from sales and income taxes generally not available to other cities of its
   size.

   On the spending side, the District officials state that they are uniquely
   burdened by the responsibilities of a state and by requirements to provide
   services to the federal establishment. However, the District*s estimated
   costs associated with providing state- like services are not supported by
   detailed analysis and data, and are derived from cost allocation formulas
   largely based on the judgment of District officials. Moreover, while the
   District does have responsibilities similar to those of many states, it
   also has state- like types of revenues. Similarly, the District*s
   estimates of its costs for providing services to the federal government
   lack detailed support, and do not consider the services provided by the
   federal government for its own property in the District.

   Perhaps most importantly, the District*s estimates of its fiscal
   structural imbalance are premised on the maintenance of the existing level
   and costs of services now provided into the future. As a result, the
   estimates do not consider the potential for mitigating an imbalance with
   cost savings through management efficiencies, reassessing current
   policies, and restructuring of key programs. For instance, a 2002 McKinsey
   & Company, Inc. study concluded that about $110 million to $160 million of
   cost savings

   could be achieved annually in such areas as health, human services,
   education, and transportation if the District*s costs were brought into
   line with those of comparable cities.

   The District received some federal relief through the 1997 Revitalization
   Act, which required the federal government to take over certain services
   in such areas as criminal justice, transferring their financing from DC
   taxpayers to the nation*s taxpayers as a whole. In addition, the federal
   government assumed financial and administrative responsibilities for one
   of the District*s largest fiscal burdens, which it inherited from the
   federal government as part of the transition to Home Rule in 1973* its
   unfunded

   pension liability for vested teachers, police, firefighters, and judges.
   Also, the federal government*s share of the District*s Medicaid payments
   was increased from 50 to 70 percent. At the same time, the Revitalization
   Act

   eliminated the federal government*s annual payment to the District, which
   had reached $660 million per year. As a result of the above changes, the
   District estimates net financial benefits ranging from a low of $79.1
   million

   to a high of $203 million per year during the period from 1998 through
   2002. Although District officials state that the Revitalization Act did
   not fully address their challenges, they indicate it was an excellent
   first step in

   helping the city move toward longer term financial stability. While the
   District*s estimates point to many specific factors they do not constitute
   a comprehensive assessment of imbalances between expenditures and revenue
   capacity. The District has not performed the analysis to determine whether
   it has the capacity to provide a level of services comparable to those
   provided by other cities with similar needs and costs. As a practical
   matter, such an analysis is key to determining the presence of an
   underlying structural imbalance in the District*s finances. Compared to
   the District*s estimates, this approach has the advantage of not being
   tied to current service levels, costs, management approaches, or tax
   policies. From the perspective of this more comprehensive, comparative
   approach, a jurisdiction could suffer from a fiscal structural imbalance
   even if its current budget were balanced* for example, the imbalance would
   be reflected in lower services, higher taxes, or deterioration of
   infrastructure when compared to averages in other

   communities. On the other hand, a jurisdiction with chronic current
   deficits may not have a structural imbalance if its deficits were prompted
   by spending levels or tax rates out of line with comparable jurisdictions
   with similar needs.

   At the present time, however, comprehensive data and analysis are not
   readily available to say with confidence how the District*s financial
   situation compares to that of other jurisdictions. Preliminary indications
   suggest that the District would have to sustain a high level of
   expenditures compared to other state and local areas to provide at least
   an average level of services after adjusting for its unique demographic
   profile and costs. However, when compared to other entities, previous
   studies suggest that the city also has among the highest revenue capacity,
   or the ability to raise revenues from its own sources, even accounting for
   the federally imposed constraints on the city*s revenue- raising
   authority. Importantly, the two sides of the equation need to be put
   together to address whether the District has the revenue capacity to
   provide for its unique workload and costs with an average tax burden. Such
   a comparative analysis would need to adjust for the fact that the District
   is not strictly comparable to any

   current jurisdiction in the nation, due to its unique combination of state
   and city functions and revenues and its role as the nation*s capital. We
   are currently undertaking such an assessment and plan to report the
   results of our study in the future.

   We have been conducting our work on this issue since February 2002 in
   accordance with generally accepted government auditing standards, and our
   work is ongoing. 3 The information presented in this report provides our
   preliminary assessment of several elements of the District*s estimates of
   its reported structural imbalance. However, we have not completed the work
   necessary to conclude whether or to what extent a structural imbalance may
   exist in the District.

   In responding to a draft of this report, both the Mayor and the Chief
   Financial Officer (CFO) of the District stated their belief that the
   District faces a fiscal structural imbalance. However, they endorsed our
   conclusion to analyze this issue further, in greater detail, and with
   additional

   sophistication to discern the degree to which the District might face a
   structural imbalance. We continue to conclude that there is insufficient
   information to determine whether and to what degree the District faces a
   fiscal structural imbalance. Our ongoing work will provide more
   comprehensive information and clarify the appropriateness of additional
   information and estimates provided by the District*s CFO. The comments we
   received from the District*s Mayor and CFO are reprinted in appendixes III
   and IV, respectively, and have been addressed in the report as
   appropriate.

   Background One of the most significant challenges facing the District is
   to maintain the financial viability of the city. Earlier this year,
   District officials sounded the

   alarm that the District faces an imbalance between its long- term
   expenditure needs for program services and capital investment, and its
   capacity to generate revenues over the long run. In contrast with a
   cyclical imbalance caused by temporary economic downturns, the District
   suggests its imbalance is more fundamental in nature. These officials
   assert that the District faces a fiscal structural imbalance as the result
   of several factors, many stemming from the federal government*s presence
   in the city, the

   absence of a state to provide funding for the state- like services
   provided by the District, and restrictions on the District*s tax base.
   District officials have stated that the factors contributing to a fiscal
   structural imbalance have existed for years but that their effects had
   been masked during recent years of national and regional economic growth
   and increased tax revenues.

   3 Additional detail on our scope and methodology is presented in app. I.

   As shown in figure 1, the District has projected operating budget
   shortfalls ranging from $67 million to $139 million between anticipated
   revenues and estimated baseline expenditures for each year during fiscal
   years 2002 through 2006 if corrections are not made. These projections
   assume a

   continuation of current tax policies and service levels into the future,
   without implementing changes to address the projected fiscal shortfalls.

   Figure 1: The District*s Projected Operating Budget Without Corrective
   Actions 6,250,000

   Expenditures (GAAP adjusted) 6,000,000

   $139m $75m

   5,750,000

   $67m

   5,500,000

   Revenue $119m

   5,250,000

   $110m

   2002 2003 2004 2005 2006 Fiscal year

   Projected expenditures Projected revenues

   GAAP * Generally accepted accounting principles. Source: District of
   Columbia Chief Financial Officer, January 2002 (unaudited).

   The operating deficit projections in figure 1 include the operating budget
   only and exclude the capital expenditure budget. Therefore, certain
   probable expenditures are not included in the above budget estimates, such
   as public schools* infrastructure needs, needed repair of public roads,
   and Washington Metropolitan Area Transit Authority (WMATA) capital needs.
   District officials have expressed concern that if the fiscal structural
   imbalance issue is not addressed, it will cripple the city*s efforts to

   maintain financial viability and require the city to make drastic cuts in
   its budgets and related services to avoid future deficits.

   In addition, a March 14, 2002, study 4 commissioned by the Federal City
   Council (FCC) 5 concluded that the District is on a path leading to budget
   deficits. The study estimated that without corrective action, the District
   could face budget deficits of at least $500 million by fiscal year 2005
   due to a substantial decrease in revenue growth and unbudgeted spending
   increases in several key areas. 6 The study cited spending for public
   schools (including spending for special education), Medicaid, and WMATA as
   the most significant drivers of the growth in projected expenditure
   levels. The District*s The District*s definition of fiscal structural
   imbalance is premised on an

   Definition of Fiscal imbalance between projected expenditures necessary to
   maintain the

   current level of services and revenues that will be raised under current
   tax Structural Imbalance

   and other revenue policies. Under the District*s definition, a current and
   Its Contributing

   services analysis assumes the current level of services and revenue
   Factors structure as the baseline for concluding whether a fiscal
   structural imbalance exists. A current services imbalance can develop for
   a variety of reasons, including expenditures growing more rapidly than
   expected revenues due to increasing workloads such as number of program

   recipients, a rapid growth rate in health care costs, or a decline in tax
   revenues. The District also points to its uniqueness and the fiscal issues
   stemming from its being the nation*s capital and having the federal
   presence, as well as its responsibility for services ordinarily provided
   by state government.

   4 McKinsey & Company, Inc, A Report to the Federal City Council: Assessing
   the District of Columbia*s Financial Position (Washington, D. C.: 2002). 5
   The FCC is a nonprofit and nonpartisan organization dedicated to the
   improvement of the nation*s capital. FCC was established in 1954 and is
   composed of and financed by 150 business, professional, educational, and
   civic leaders.

   6 As discussed in a later section of this report, the McKinsey study also
   points out that the District has opportunities to achieve cost savings
   that would potentially mitigate the projected deficits.

   Some current services imbalances are cyclical, rather than structural, in
   that revenues become insufficient to support existing levels of services
   during periods of economic decline but then return to sufficiency when the
   economy rebounds. In its August 2001 study, 7 the Center on Budget and
   Policy Priorities (CBPP) notes that it is extremely difficult to determine
   the

   degree to which a fiscal imbalance in any state is structural, rather than
   cyclical. The CBPP reported that states are currently facing their worst
   financial crisis in 20 years, and they are responding to their budget
   shortfalls in a variety of ways. Some are using short- term fixes, such as
   tapping into rainy day funds or imposing temporary tax increases or
   spending cuts; others are using long- term fixes, such as imposing
   permanent tax increases or spending cuts.

   The revenue shortfalls projected by District officials for fiscal years
   2002 through 2006, if accurate, would represent recurring deficits in the
   District*s current services budget position if corrective action is not
   taken. These projected shortfalls are premised on the continuation of
   current budget policy over a long- term period spanning economic cycles.
   They do not contemplate changes in budget policy, nor do they compare the

   District*s current budget policy with other jurisdictions. However,
   District officials also suggest that their current environment constrains
   their ability to respond to the projected imbalance through spending cuts,
   tax increases, or borrowing. For example, District officials point to
   deferred infrastructure improvements in public schools, roads, and
   utilities as the legacy of the long- term presence of a structural
   imbalance, low levels of service delivery in some programs, such as public
   education, and high tax

   rates in comparison to other states and local jurisdictions. Although
   District officials have not formally estimated the size of their reported
   fiscal imbalance, they have cited the following expenditure
   responsibilities as the primary factors contributing to such an imbalance:

    the District is not directly compensated for services provided to the
   federal government such as public works and public safety, which the
   District values at $240 million annually;

   7 Center on Budget and Policy Priorities, State Responses to Tight Fiscal
   Conditions: Short Term Fixes May Backfire if the Economy Does not Soon
   Recover; Cyclical Downturn Masks Structural Problems in Some States
   (Washington, D. C.: 2001).

    the District is responsible for state- like services such as human
   services, mental health services, Medicaid, and the University of the
   District of Columbia, which the District values at $487 million annually;
   and

    the District estimates that approximately 400, 000 out- of- state
   vehicles travel on city roads per day and do not pay for road repair the
   District values at $150 million per year. 8 District officials also cite
   the following factors as contributing to limited revenue- raising
   capacity: 9

    66 percent of the income earned by employees working in the District
   cannot be taxed by the District because the employees are nonresidents;

    42 percent of the real property (or 27 percent of assessed property
   value) in the District is owned by the federal government and is thus
   exempt from taxation; 10

    an additional 11 percent of real property (excludes District- owned
   property, but includes nonprofit organizations and embassies) also is tax
   exempt;

    District buildings have congressionally imposed height restrictions 11
   that have reduced the population and the economic density; and  District
   tax rates and burdens on households and businesses are high in

   comparison to Virginia and Maryland and its tax base is limited, thus
   making it difficult to expand the tax base.

   8 These figures were provided to us by the District. We did not audit or
   verify the data. 9 The figures relating to nonresident income and real
   property were provided to us by the District. We did not audit or verify
   the data. 10 These figures were provided to us by the District based on
   real property tax records. We did not audit or verify the data.

   11 DC Code, 2001 Ed. S:S: 1- 206.02 (6) and 6- 601.05.

   Constraints on the The District faces some real constraints on revenue.
   The District, like all

   District*s Revenue state and local governments, is unable to tax property
   owned by the federal

   government. District officials say they face a particular hardship because
   a Include Tax- Exempt larger proportion of their property is owned or
   specifically exempted by

   Property and Federal the federal government than is the case with most
   jurisdictions. The

   Law Prohibiting a District has stated that, according to its real property
   tax records, 42

   percent of its property is federal property. It is difficult to estimate
   the net District Tax on the

   fiscal impact of the presence of the federal government or other taxexempt
   Income of

   entities because of the wide variety of indirect contributions that these
   entities have on District revenues and the lack of information on the
   Nonresidents

   services they use. The presence of tax- exempt entities generates revenues
   for the District, even though they do not pay income or property taxes
   directly. For example, these tax- exempt entities attract residents,
   tourists, and businesses to the District. In addition, employees of the
   tax- exempt entities and employees of businesses that provide services to
   these entities pay sales taxes to the District. We have found no
   comprehensive estimates of these revenue contributions; however, studies
   of individual tax- exempt entities suggest that the amounts could be
   significant. 12 Further, given the

   large portion of the private sector activity in the District that is
   linked to the presence of the federal government and other tax- exempt
   entities, it is unclear whether commercial property would fill the void if
   federally owned property were reduced to the average seen in other cities.

   12 See Stephen S. Fuller, *The Economic and Fiscal Impacts of the Proposed
   International Monetary Fund Building* and *The Economic Impact of George
   Washington University on the Washington Metropolitan Area,* Greater
   Washington Research Center (Washington D. C.: 2000).

   In addition to the amount of nontaxable property in the District, the
   District government, unlike state governments, is prohibited by federal
   law from taxing the income earned in the District by nonresident
   individuals. 13 States that have income taxes typically tax the income of
   nonresidents,

   although some states have voluntarily entered into reciprocity agreements
   with neighbor states in which they agree not to tax the incomes of each
   other*s residents. States that impose income taxes also typically provide
   tax credits to their residents for income taxes paid to other states. In
   addition, some cities that have income taxes tax the incomes of commuters

   who work within their boundaries. These taxes are typically levied at a
   low flat rate (most of the ones we identified were between 1 and 2
   percent) on city- source earnings. Other cities are not authorized to levy
   commuter taxes by their state governments. 14 However, in cases where
   cities are not

   authorized to levy commuter taxes, the state governments are able to
   compensate, if they so choose, by redistributing some of the state tax
   revenues collected from residents of suburbs to central cities in the form
   of grants to the city governments, or in the form of direct state spending

   within the cities. 15 13 Section 602( a) (5) of the District of Columbia
   Home Rule Act, D. C. Code, 2001 Ed. 31- 206.02( a)( 5) states that the
   District*s Council may not *impose any tax on the whole or any portion of
   the personal income, either directly or at the source thereof, of any
   individual not a resident of the District.*

   14 This general discussion is drawn from the State of Wisconsin,
   Legislative Fiscal Bureau,

   Individual Income Tax Provisions in the States (January 2001); Advisory
   Commission on Intergovernmental Relations, Significant Features of Fiscal
   Federalism, volume 1,

   (Washington, D. C.: 1995); Carol O*Cleireacain, The Orphaned Capital:
   Adopting the Right Revenues for the District of Columbia (Washington, D.
   C.: 1997); and District of Columbia Department of Finance and Revenue,
   Study of Property, Income and Sales Tax Exemptions in the District of
   Columbia (Washington, D. C.: 1995). The range of tax rates, in the
   jurisdictions we identified as levying commuter taxes, was verified using
   publicly available tax descriptions drafted by the individual
   jurisdictions.

   15 Grants from a state to city government do not represent the net fiscal
   flow between the two jurisdictions. States collect significant amounts of
   tax revenue from individuals, businesses, and transactions located in
   cities. The net fiscal flow would equal state grants and direct state
   spending in a city (excluding any pass- through of federal funds), minus
   all state revenues collected in that city.

   District officials believe that it is unfair for the federal government to
   apply a restriction on their income tax base that does not also apply to
   the 50 states. Another argument that is commonly made in favor of removing
   this particular restriction on the District*s taxing authority is that it
   would enable the District government to defray the costs of providing
   public services, such as road maintenance and fire and police protection,
   that benefit commuters. A recent study estimated that the average commuter
   increased total District expenditures by $3,016 per year, of which about
   $90 was for police and fire protection. 16 Some local economists that we
   interviewed noted that commuters already contribute to the financing of a
   portion of these services, even without a tax on their income. One recent
   study estimates that a typical daily commuter to the District pays about
   $250 per year in sales and excise taxes, parking taxes, and purchases of
   lottery tickets. 17 Another study suggests that spending by commuters
   supports many jobs for District residents who are subject to the city*s
   income tax. 18 We were unable to find data on the amount of taxes paid

   directly by commuters, the tax revenues attributable to jobs supported by
   them, or the amount of money that the District must spend to extend
   services to them, nor have we assessed the accuracy of the estimates cited
   above. Consequently, we cannot determine conclusively whether the net
   fiscal impact of commuters in the absence of a commuter income tax is
   negative or positive.

   16 Howard Chernick, *The Effect of Commuters on the Fiscal Costs of the
   District of Columbia* (Washington, D. C.: 2002). 17 Philip M. Dearborn,
   *Effects of Telecommuting on Central City Tax Bases,* Brookings Greater
   Washington Research Program (Washington, D. C.: 2002). The study did not
   attempt

   to estimate the indirect fiscal contributions that commuters may have
   through taxes on their employers.

   18 Stephen S. Fuller, *The Economic and Fiscal Impacts of the Proposed
   International Monetary Fund Building at 1900 Pennsylvania Avenue, NW on
   the District of Columbia,* prepared for the International Monetary Fund
   (Washington, D. C.: 2001).

   Regardless of the current net fiscal impact of commuters, the District*s
   finances clearly would benefit considerably from a tax on nonresidents*
   incomes. The ultimate burden of a nonresident income tax for the District
   would not necessarily be borne by commuters into the District. The
   distribution of the burden would depend on the nature of the crediting
   mechanism that would be established under such a tax. For example, if the
   District*s tax were made fully creditable against the federal income tax
   liabilities of the commuters, as is proposed in the District of Columbia
   Fair

   Federal Compensation Act of 2002, then the federal government would bear
   the cost and would have to either reduce spending or make up for this
   revenue loss by other means. However, if the federal income tax credit was
   not available, and instead the states of Maryland and Virginia allowed
   their residents to fully credit any tax paid to the District against their
   state income tax liabilities, then those two states would suffer a revenue
   loss (relative to the current situation). The two states could respond to
   a District commuter tax by taxing the income of District residents who
   work within their jurisdictions or increasing the tax rates on all of
   their residents. 19 If the District*s tax were not fully creditable
   against either the federal or state taxes, then the commuters themselves
   would bear additional tax burden. The District*s Although the District*s
   overall warning that it faces structural challenges in

   Estimates of Spending balancing revenues and spending requirements should
   be taken seriously,

   the District*s estimates of its spending requirements have serious
   Requirements

   limitations. The District does absorb certain costs associated with
   supporting services typically provided at the state level as well as with
   providing services to the federal government. However, the District*s
   estimates of its costs to provide services to the federal government and
   its costs of providing state- like services are not supported with
   detailed data

   or analysis. Also, the District*s estimates do not reflect municipal- type
   services provided directly by the federal government. In addition, the
   District*s estimates of its fiscal structural imbalance do not include
   potential cost savings from improving management efficiency. Further, the
   District has developed its budget estimates based on the current level of
   services as the baseline going forward. According to District officials,
   no

   studies have been done to determine the level of services necessary, and
   19 The District, Maryland, and Virginia currently have reciprocity
   agreements under which each government allows residents to pay income tax
   only in the jurisdiction where they reside.

   the District continues to struggle to determine the level of services to
   provide, given the perceived political barriers to achieving structural
   changes in large programs such as public schools, Medicaid, and human
   services. Finally, the District has not considered potential savings in
   its estimates of its fiscal structural imbalance.

   District- Estimated Spending According to District officials, the District
   government performs state- like

   for State- Like Functions functions that contribute to what it considers a
   structural imbalance.

   Although the District has costs associated with certain state- like
   functions, it is important to note that the District also collects and
   retains state- like income and sales tax revenues to fund these functions
   and support the activities of some agencies. 20 The District estimated the
   cost of state- like functions to be $487 million in fiscal year 2002.
   However, this estimate is based on very limited analytic support. Broad
   assumptions were made and the analysis was made based on a review of only
   one jurisdiction.

   To arrive at its cost estimate, the District has identified state- like
   functions in 10 different District agencies for fiscal year 2002. To
   identify the statelike functions, District officials reviewed the State of
   Maryland*s fiscal year 2002 operating budget to identify state funding to
   local governments and compared this information with the District*s fiscal
   year 2002 operating budget. Based on this review and comparison, District
   officials identified

   the following 10 District agencies that provide some state- like
   functions:  Department of Mental Health,  Department of Human Services,

    Child and Family Services Agency,  University of the District of
   Columbia,  Department of Motor Vehicles,  Office of Tax and Revenue, 
   Department of Insurance and Securities Regulation, 20 Although some cities
   do levy income and sales taxes, they are usually at a relatively lower
   level than the income and sales taxes at the state level.

    Public Service Commission,  Office of Cable and Television
   Communications, and  District of Columbia National Guard. Using the
   Maryland state budget as a guide, District officials used their judgment
   to assign a *state allocation ratio* to each function in the 10 identified
   District agencies. For example, if a function, such as Temporary
   Assistance to Needy Families, received more than half of its funding from
   the state, then District officials assigned that function a 100 percent
   state allocation percentage. If a function received less than half of its
   funding from the state, the District did not consider it a state- like
   function and gave

   it a zero state allocation ratio. District officials considered the Office
   of Tax and Revenue both a state and local function and assigned it a 50
   percent state allocation ratio. Two other District agencies, the
   Department

   of Human Services and the Child and Family Services Agency, also had a
   combination of state and local functions and therefore had a weighted
   state allocation ratio. District officials acknowledged that the state
   allocation ratios used to

   create their cost estimates were primarily based on their own judgment and
   knowledge of state and local programs. Other than providing a summary of
   Maryland*s state budget, District officials were unable to provide
   additional documentation to support these decisions. District officials
   emphasized that, as with any of the cost estimates the District produced
   to illustrate what it considers a fiscal structural imbalance, these were
   only estimates. They cautioned that these estimates should not be added
   together to represent an aggregate cost resulting in a fiscal structural
   imbalance. A District official said that these estimates were meant only
   to illustrate different ways of understanding the structural imbalance
   issues that face the District.

   The District*s Estimated The services identified by the District as being
   provided to support the

   Costs of Services Provided federal government*s presence are primarily
   administered by the District*s to the Federal Government

   public works and public safety and justice agencies and include:  police
   protection for federal employees and for federally sponsored or

   sanctioned events in the District,  fire suppression for federal
   buildings,

    emergency medical treatment for federal employees, and  snow removal
   and street repairs on streets used by federal vehicles and

   by federal workers commuting to work in the District. District officials
   estimated the services provided to the federal government cost the
   District up to $240 million annually. However, the District did not have a
   detailed list of actual services provided to the federal government to
   support its cost estimate. District officials estimated that 27 percent of
   the total assessed value of property in the District is owned by the
   federal government. As such, District officials have estimated that the
   cost of services provided to support the federal government*s presence in
   the District is based on 27 percent of the proposed budgets for all of the

   District*s public works and public safety and justice agencies. However,
   these budgets include functions, such as the Department of Motor Vehicles,
   that provide minimal services to the federal government. The District*s
   cost estimate for services provided to the federal government

   does not consider the services provided by the federal government to the
   District or expenditures made by the federal government for its own
   property, when in fact, many federal agencies and properties provide for
   their own public safety and security and public works services. The
   National Park Service, for example, provides an extensive network of
   historical, educational, and recreational opportunities within the
   District. The federal government provides upkeep, maintenance, and
   restoration of facilities including not only well- known national sites
   such as the National Mall or Ford*s Theatre, but also parks such as those
   on Capitol Hill, including inner city medians, squares, and traffic
   circles, as well as other areas that provide urban green space within the
   city. According to the U. S. Department of Interior*s fiscal year 2003
   budget request, operating costs for these parks will be $59 million.
   Federal law enforcement agencies operating within the District include

   large forces, such as the U. S. Capitol Police with more than 1, 400
   officers, and smaller forces, such as the Smithsonian Institution
   Protective Services with an estimated 600 officers. In addition, the
   General Services Administration*s Federal Protective Service provides law
   enforcement services to some federal properties throughout the District.
   These services include a share of police protection from disruptions by
   major demonstrations, perimeter security for federal buildings, criminal
   investigations to reduce crime, and training of security personnel.

   District*s Estimates of The District*s estimates of its fiscal structural
   imbalance are premised on

   Imbalance Do Not Address the maintenance of the existing level and costs
   of services now provided Potential Cost Savings

   into the future. The District*s estimates did not address potential cost
   savings that could be achieved by improving management efficiency at the
   agency level. Reducing expenditures by improving efficiency could reduce
   any imbalance between the District*s revenues and expenditures without
   negatively impacting program service delivery to its citizens. For
   example,

   the March 2002 McKinsey & Company, Inc. study on the District*s financial
   position 21 concluded that approximately $110 million to $160 million in
   annual cost savings could be achieved in health, human services, public
   safety, transportation, and the District of Columbia Public Schools (DCPS)
   by fiscal year 2005. If achieved, these potential savings could mitigate a
   fiscal structural imbalance in the District. However, considerable

   uncertainty exists about these estimates. Potentially the District could
   also achieve cost savings by correcting problems that have resulted in
   disallowed Medicaid costs for the District. The District will not be
   receiving over $100 million of Medical Assistance Administration cost
   reimbursements for costs incurred in prior years. These cost
   reimbursements were disallowed for reasons including failure to file
   timely claims or provide adequate support for claims submitted. 22
   Nonreimbursed costs are paid out of local funds, not federal funds.

   21 McKinsey & Company, Inc, A Report to the Federal City Council:
   Assessing the District of Columbia*s Financial Position (Washington, D.
   C.: 2002). 22 The District*s 2003 proposed budget submission includes
   plans to improve Medicaid cost reimbursement in the future.

   Another example where potential cost savings could be achieved is the
   DCPS. In the DCPS* fiscal year 2001 Comprehensive Annual Financial Reports
   (CAFRs), District officials reported a $64.5 million deficit in locally
   appropriated funds. During the fiscal year 2001 audit, the District*s
   financial statement auditors identified material weaknesses within the

   DCPS accounting and financial reporting processes, such as the monitoring
   of expenditures and accounting for Medicaid expenditures related to
   services provided to special education students. DCPS could become more
   efficient by improving its internal controls over financial accounting and
   reporting and reducing the risk of overspending within the DCPS programs.
   Public education has been a large driver of expenditures in the District,
   representing $1.1 billion of expenditures in fiscal year 2001. 23 Since
   1999, the annual increase in the District*s spending for public education
   has ranged between 19.4 and 21.9 percent. Clearly, such

   spending increases are difficult to sustain. Impact of the

   On August 5, 1997, the Congress passed the National Capital Revitalization
   Revitalization Act on

   and Self- Government Improvement Act, referred to as the Revitalization
   Act. The Revitalization Act made substantial changes in the financial the
   District

   relationship between the federal government and the District of Columbia
   as well as in the management of the District government. The District and
   several nonprofit public interest organizations have stated that the
   Revitalization Act, while not fully addressing the District*s fiscal
   challenges, is an excellent first step in helping the District to move
   towards long- term financial stability.

   The Revitalization Act made the following adjustments in the financial
   relationship between the District and the federal government:

    eliminated the federal government*s annual federal payment to the
   District, and

    shifted to the federal government the financial responsibilities and, in
   some instances, administrative responsibilities, for the following justice
   functions in the District:

   23 The District CAFR, exhibit S- 2, p. 115.

    incarceration of sentenced adult felons (the Federal Bureau of Prisons
   assumed responsibility, and the District*s Lorton Correctional Complex was
   recently closed);

    the Superior Court, Appeals Court, and Court System (the Pretrial
   Services Agency and Public Defender Service functions, and the D. C.
   Parole Board were abolished); and

    the District Retirement Program covering judges. Also under the
   Revitalization Act, the federal government assumed financial and
   administrative responsibilities for one of the District*s largest fiscal
   burdens, which it inherited from the federal government as part of the
   transition to Home Rule in 1973* its unfunded pension liability for vested
   teachers, police, firefighters, and judges. In 1998, the federal
   government assumed the accrued pension cost of $3.5 billion that existed

   at the close of 1997. The District remains responsible for funding
   benefits for services rendered after June 30, 1997, and continues the plan
   under substantially the same terms. In addition, the Revitalization Act
   was part of a larger act* the Balanced Budget Act of 1997* that increased
   the federal share of District Medicaid payments from 50 to 70 percent.

   Prior to the Revitalization Act, the District had been receiving a federal
   payment since the mid- 1800s due to the District*s unique relationship
   with the federal government. The Congress recognized that the District*s
   ability to raise revenues was affected by a number of legal and practical
   limitations on its authority* the immunity of federal property from
   taxation; the building height restriction, which has a limiting effect on
   commercial property values; the prohibition on the District from passing a
   law to tax the income of nonresidents; and the restriction on imposing
   sales taxes on military and diplomatic purchases.

   Although the Revitalization Act repealed the federal payment to the
   District of Columbia, it also authorized a federal contribution. The
   Revitalization Act does not present a formula or methodology for
   translating the generalized notion of compensating the District for the
   federal government*s presence into a predictable dollar amount, nor does
   it require that a contribution be made.

   The changes to the District*s finances resulting from the Revitalization
   Act impacted both the District*s revenues and expenditures. The District
   estimates that the net benefit of the Revitalization Act has ranged from a

   net positive low of $79.1 million to a high of $203 million per year
   during the period 1998 through 2002. A detailed breakout of the estimated
   financial impact of the act on the District*s revenues and expenditures is
   presented in appendix II.

   Fiscal Structural The District*s estimates of its fiscal structural
   imbalance point to many

   Imbalance: More specific factors but do not constitute a comprehensive
   assessment of

   underlying imbalances between its expenditures and revenue capacity. The
   Comprehensive

   District has not yet determined whether even under the constraints they
   Approaches Should be

   assert, it has the capacity to provide a level of services comparable to
   those Explored

   provided by other cities with similar needs and costs. The District*s
   estimates essentially use a current services approach to analyzing its
   fiscal structural imbalance. Even if the District is able to resolve the
   measurement and analytical problems discussed in this report, this
   approach would be limited because it assumes the desirability and
   continuation of current service levels and tax policies. An alternative
   approach would measure the existence of a fiscal structural imbalance by
   comparing the District*s spending and revenue capacity to levels in

   comparable jurisdictions. This approach assesses the ability of the
   District to provide at least an average level of services adjusted for its
   unique demographic profile and costs at an average tax burden.

   The main advantage of this approach is that the measure of fiscal
   structural imbalance reflects the underlying social and economic
   conditions affecting the cost of providing public services as well as the
   underlying strength of the tax base. 24 For instance, this measure takes
   into account the specific factors influencing the demand for public
   services (e. g., a large number of school age children, road
   infrastructure) and its ability to fund these services with a tax burden
   on local residents that is comparable to other jurisdictions providing
   comparable services.

   Under this framework, the structural position of a jurisdiction is not
   tied to current service levels, or spending or tax policies. From the
   perspective of

   24 For additional information on analyzing jurisdictions* expenditures and
   capacity, see U. S. General Accounting Office, State and Local Finances:
   Some Jurisdictions Confronted by Short- and Long- Term Problems, GAO/ HRD-
   94- 1 (Washington, D. C.: Oct. 6, 1993) and Robert

   Tannenwald, *Fiscal Disparity Among the States Revisited,* New England
   Economic Review (July/ August 1999).

   this more comprehensive, comparative approach, a jurisdiction could suffer
   from a fiscal structural imbalance even if its current budget were
   balanced* in this case, the imbalance would be reflected in lower
   services, higher taxes, or deterioration of infrastructure when compared
   to averages in other communities. On the other hand, a jurisdiction with
   chronic current deficits may not have a fiscal structural imbalance if its
   deficits were prompted by spending levels or tax rates out of line with
   comparable jurisdictions with similar needs.

   At the present time, however, comprehensive data are not readily available
   to do such a comparative assessment. Preliminary indications suggest that
   the District would have to sustain a high level of expenditures compared
   to other state and local areas to provide an average level of services
   adjusted for its unique demographic profile and costs. However, when
   compared to other entities, the city also has among the highest revenue
   capacity, or ability to raise revenue from its own sources, even
   accounting for the federally imposed constraints on the city*s revenue-
   raising authority. The most recent comprehensive comparison that we found
   uses the

   Representative Expenditure System (RES) to estimate the relative
   expenditure needs of states together with their localities, or in the
   terms used in this report, the benchmarked expenditures of the states and
   localities. 25 This study indicates that, in 1996, the District*s per
   capita relative expenditures were higher than those of any state. However,
   this measure has certain shortcomings that could result in understatements
   of the District*s relative expenditures.

   25 See Tannenwald. The RES approach estimates the amount of money each
   state, together with its localities, would have to spend in order to
   provide a standard, representative package and level of services.

   The two most recent cross- state comparisons of revenue capacity indicate
   that the District*s revenue capacity per capita compares favorably to that
   of most states. 26 These studies use two fundamentally different measures
   of

   revenue capacity, both of which largely take into account the fact that
   the District is prohibited from taxing the District- source incomes of
   nonresidents. For 1999, the most recent year for which the Department of
   the Treasury has estimated the Total Taxable Resources (TTR) of states,

   the District*s value for this particular measure of revenue capacity
   exceeded that of every state, except Connecticut. 27 In 1997 and 1998, the
   District*s value was higher than that of every state. The most recent
   available study that uses the Representative Tax System (RTS) methodology
   for estimating revenue capacity indicates that, in 1996, the District*s
   revenue capacity per capita exceeded that of 46 states. 28 However,
   results of these studies are imprecise and do not allow for

   conclusions on whether the District has a structural imbalance. The
   measures of the benchmarked expenditures and revenue capacity used in
   these studies are out of date. Moreover, as acknowledged by the author of
   the referenced study on expenditures, the estimates of the spending needed
   to realize average levels of service do not reflect certain relevant
   workload and cost differences across jurisdictions.

   Ultimately, the revenue capacity and expenditure needs would have to be
   put together to address whether the District has the revenue capacity to
   provide for at least average levels of services for its unique workload
   and costs with an average tax burden. Such a comparative analysis would
   need to adjust for the fact that the District may not directly compare to
   any

   current jurisdiction in the nation, owing to its unique combination of
   state and city functions and revenues. GAO is currently undertaking such
   an assessment and will report the results of our study next year.

   26 U. S. Department of the Treasury, Office of Economic Policy, 2001
   Estimates of TTR

   (Sept. 28, 2001), and Tannenwald, pp. 3- 25. 27 TTR is defined as the
   unduplicated sum of the income flows produced within a state and the
   income flows received by its residents that a state can potentially tax.
   28 The RTS approach evaluates tax capacity by estimating the per capita
   yield that a uniform, hypothetical, representative tax system would
   produce in each state.

   Conclusions While it has made significant progress over the past several
   years, the District, similar to many other jurisdictions, continues to
   face a series of substantial, long- term challenges to its financial
   viability. Addressing these

   challenges requires continued dedicated leadership to make the difficult
   decisions and trade- offs among competing needs and priorities.

   Presently, insufficient data or analysis exist to discern whether or to
   what extent the District is, in fact, facing a fiscal structural
   imbalance. On the revenue side, the District clearly has constraints in
   its ability to increase its tax base. However, the District*s estimates of
   its possible fiscal structural imbalance have limitations and did not
   address the levels or costs of services for its citizens in the long term,
   whether such services could be supported by its present tax structure or
   tax base, or cost savings that can

   be achieved from management efficiencies. The available studies comparing
   revenue capacity and expenditures across jurisdictions are imprecise and
   some may not be applicable to the District.

   As such, the Congress would benefit from more systematic information about
   the District as it considers proposals for addressing the fiscal
   structural imbalance that the District is currently asserting exists. A
   fundamental analysis of the District*s underlying capacity to finance at
   least an average service level in relation to its needs can help determine
   if there is a fiscal structural imbalance. Such an analysis would provide
   a stronger foundation for decision makers at all levels to address the
   District*s financial condition.

   We currently have ongoing work in this area and plan to issue a future
   report with a more comprehensive analysis of the District*s long- term
   financial condition. Therefore, we are not making any recommendations at
   this time.

   Comments from the In responding to a draft of this report, both the Mayor
   and the Chief

   District of Columbia Financial Officer of the District stated their belief
   that the District faces a

   fiscal structural imbalance, but agreed that further analysis of the
   District*s and Our Response fiscal situation is needed because existing
   data and analysis are not sufficient to discern the degree to which the
   District is, in fact, facing a structural imbalance. The District
   reiterated the general areas it believes are drivers of the reported
   fiscal imbalance, and, in the District CFO*s

   response, suggested that the annual imbalance was roughly twice the amount
   reported earlier this year. However, as we stated in our report, we

   concluded that insufficient data and analysis exist to substantiate the
   District*s earlier estimates of its reported structural imbalance. In
   addition, as stated in our report, the District*s estimates of its costs
   for providing services to the federal government and state- like services
   lack detailed support and have limitations.

   We have work ongoing in this area and plan to issue a future report with a
   more comprehensive analysis of the District*s long- term financial
   condition. Our future analysis will consider the extent to which the
   components of the District CFO*s estimates and other important factors,
   including those where the District has advantages and disadvantages
   relative to other jurisdictions, impact the District*s overall fiscal
   situation. The Mayor and the District*s CFO stated that the District will
   support our

   efforts by providing necessary information and assistance. We are sending
   copies of this report to the Ranking Minority Member of the Subcommittee
   on the District of Columbia, House Committee on Appropriations, and to
   other interested congressional committees. We are

   also sending copies to the Mayor of the District of Columbia, the Chair,
   DC Council, City Administrator/ Deputy Mayor for Operations, Chief
   Financial Officer, and Inspector General. Copies of this report will also
   be made available to others upon request.

   Please contact me at (202) 512- 9471 or Patricia Dalton at (202) 512- 6737
   or by e- mail at franzelj@ gao. gov or daltonp@ gao. gov if you or your
   staff have any questions concerning this report.

   Sincerely yours, Jeanette M. Franzel Director, Financial Management and
   Assurance

   Appendi Appendi xes x I

   Scope and Methodology To determine how the District and other
   jurisdictions define fiscal structural imbalance, including the factors
   that contribute to the District*s reported imbalance, we  interviewed and
   obtained information about fiscal structural balance

   and imbalance from officials in various District offices,  analyzed
   reports and information received to define a fiscal structural imbalance,
   and

    analyzed the District*s general fund revenue and expenditures in fiscal
   year 2001 and prior years to identify significant fluctuations and
   programs that were driving costs. To provide information on the
   constraints on the District*s revenues, we

   interviewed officials from the office of the District*s CFO and several
   local experts on the District*s economy and finances. We also reviewed a
   number of studies prepared by the District, independent commissions, and
   other researchers that contained information, evaluations, and estimates
   relating to these constraints.

   To provide information on the District*s estimates of its spending
   requirements, we interviewed District officials and analyzed District
   budget documents and financial statements. To analyze the services
   provided by the District to support the federal government, we interviewed
   District officials and analyzed relevant supporting information, such as

   budgets and financial plans. We also reviewed relevant information from
   the General Services Administration and other federal agencies on the
   costs and the types of services the federal government provides to its own
   property in the District.

   To identify and analyze the functions that the District contends are
   statelike functions, we interviewed District officials and requested and
   analyzed pertinent supporting information. We also reviewed an April 15,
   1997, study by the D. C. Financial Control Board entitled, *Toward A More
   Equitable Relationship: Structuring the District of Columbia*s State
   Functions.* This study compared the District*s governmental functions to
   eight similar cities that were selected based on population size, degree
   of urbanization, the ratio of employed persons to total population, and
   other factors. In addition, we interviewed several local experts on the
   District*s economy and finances to obtain their perspective on the state-
   like

   functions performed by the District and the expenditures the District
   makes related to the federal presence.

   To address the question of the financial adjustments to the District of
   Columbia*s finances as a result of the Revitalization Act, we reviewed

    relevant provisions of the Balanced Budget Act of 1997; 29  relevant
   provisions of the Revitalization Act;  relevant provisions of the
   District of Columbia Home Rule Act;  the District of Columbia
   Appropriations Acts for fiscal years 1998 through 2002;

    analyses of the impact of the Revitalization Act on the District*s
   budget prepared by the Congressional Research Service;

    the Operating Budget and Financial Plans of the District of Columbia for
   fiscal years 1998 through 2002 and the Proposed Operating and Financial
   Plan for fiscal year 2003;

    prior GAO reports on District government financial operations; and  the
   Department of the Treasury Accountability Report, Fiscal Years 1998

   through 2001. We also met with District officials and obtained their
   documentation related to their projected net savings from the
   Revitalization Act.

   To provide information on the District*s revenue capacity compared to
   other jurisdictions, we reviewed and summarized studies from the
   District*s CFO*s Office, the U. S. Department of the Treasury, and the
   relevant economic literature.

   We conducted the work used to prepare this report from February to July
   2002 in accordance with generally accepted government auditing standards.
   As stated previously, our work on this matter is ongoing. The Mayor and
   the CFO of the District of Columbia provided comments on a

   29 Pub. L. No. 105- 33, S: 4725( b), 111 Stat. 251 518 (1997).

   draft of this report. Those comments are reprinted in appendixes III and
   IV, respectively, and have been incorporated in the report as appropriate.

   The District*s Estimated Financial Net

   Appendi x II

   Benefits from the Revitalization Act Tables 1, 2, and 3 present the
   District*s calculations of the projected net benefits from the
   Revitalization Act on the District*s budget for fiscal years 1998 through
   2002. As shown in table 1, the District estimates that the net benefit of
   the Revitalization Act has ranged from a net positive low of $79.1 million
   to a high of $203 million a year during the period 1998 through 2002.

   Table 1: Projected Net Benefit of the Revitalization Act on the District*s
   Budget (in millions of dollars)

   Fiscal year 1998 1999 2000 2001 2002

   Total revenue impact (476.9) (666.9) (667.1) (667. 1) (667.1) Total
   expenditure impact 678.0 746. 0 784.6 825.1 870.3 Net benefit 201. 1 79. 1
   117.5 158.0 203.2 Net benefit as a % of total

   4. 6% 1.6% 2.2% 2.9% 3.8% a general fund revenue Note: Differences due to
   rounding.

   a Fiscal year 2002 ratio is based on estimated revenues. Source: Fiscal
   year 1999 Operating Budget and Financial Plan, Government of the District
   of Columbia (unaudited).

   Table 2: Estimated Reductions in Revenue as a Result of the National
   Capital Revitalization Act (in millions of dollars)

   Fiscal year 1998 1999 2000 2001 2002

   Loss of federal payment (660. 0) (660.0) (660.0) (660. 0) (660.0) Federal
   contribution 190.0 Loss of court fees a (6.9) (6.9) (7.1) (7. 1) (7.1)
   Total reductions in revenue (476.9) (666.9) (667.1) (667. 1) (667.1) Note:
   Differences due to rounding. a The fees are deposited in the DC Crime
   Victims Fund and used to pay the costs of the District*s Crime

   Victim program. Source: Fiscal year 1999 Operating Budget and Financial
   Plan, Government of the District of Columbia (unaudited).

   Table 3: Estimated Reductions in Expenditures as a Result of the National
   Capital Revitalization Act (in millions of dollars)

   Fiscal year 1998 1999 2000 2001 2002

   Adult Felony Prisoners a 169.0 185.0 190. 6 196.3 202.2 Pretrial Services
   4.6 4. 7 4.7 4. 8 5.0 Parole Board 5. 8 5.9 6. 1 6.2 6. 4 Court of Appeals
   6. 0 6.1 6. 2 6.4 6. 5 Public Defender 7.8 7. 9 8.1 8. 2 8.4 Superior
   Court 73.0 74.6 76.0 77.7 80.0 DC Court System 35.2 36.1 37.0 38.0 39.2
   Medicaid 136.2 166.2 175. 4 185.1 196.2 Pensions 250.0 269.0 290. 0 312.0
   335.9 Debt Service b (9.5) (9.5) (9.5) (9. 5) (9.5) Total reductions in
   678.1 746.0 784. 6 825.2 870.3 expenditures Note: Differences due to
   rounding.

   a Adult felony prisoner savings for fiscal year 1999 are based on the
   amount proposed in the President*s fiscal year 1999 budget with a 3
   percent growth in fiscal years 2000 to 2002. b Debt service impact is
   based on $110 million intermediate- term borrowing in fiscal year 1998,
   and

   short- term borrowing of $200 million in each year for seasonal cash
   needs. Source: Fiscal year 1999 Operating Budget and Financial Plan,
   Government of the District of Columbia (unaudited).

   Comments from the Mayor of the District of

   Appendi x III Columbia

   Comments from the District of Columbia

   Appendi x IV Chief Financial Officer

   (194153)

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   a

   GAO United States General Accounting Office

   Page i GAO- 02- 1001 District of Columbia

   Contents Letter 1

   Results in Brief 2 Background 5 The District*s Definition of Fiscal
   Structural Imbalance and Its

   Contributing Factors 7 Constraints on the District*s Revenue Include Tax-
   Exempt Property

   and Federal Law Prohibiting a District Tax on the Income of Nonresidents
   10 The District*s Estimates of Spending Requirements 13 Impact of the
   Revitalization Act on the District 18 Fiscal Structural Imbalance: More
   Comprehensive Approaches

   Should be Explored 20 Conclusions 23 Comments from the District of
   Columbia And Our Response 23

   Appendixes

   Appendix I: Scope and Methodology 25

   Appendix II: The District*s Estimated Financial Net Benefits from the
   Revitalization Act 28

   Appendix III: Comments from the Mayor of the District of Columbia 30

   Appendix IV: Comments from the District of Columbia Chief Financial
   Officer 31

   Tables Table 1: Projected Net Benefit of the Revitalization Act on the
   District*s Budget (in millions of dollars) 28

   Table 2: Estimated Reductions in Revenue as a Result of the National
   Capital Revitalization Act (in millions of dollars) 28 Table 3: Estimated
   Reductions in Expenditure as a Result of the

   National Capital Revitalization Act (in millions of dollars) 29

   Figure Figure 1: The District*s Projected Operating Budget Without
   Corrective Actions 6

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   Appendix I

   Appendix I Scope and Methodology

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   Appendix I Scope and Methodology

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   Appendix II

   Appendix II The District*s Estimated Financial Net Benefits from the
   Revitalization Act

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   Appendix III

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   Appendix IV

   Appendix IV Comments from the District of Columbia Chief Financial Officer

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   Appendix IV Comments from the District of Columbia Chief Financial Officer

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   Appendix IV Comments from the District of Columbia Chief Financial Officer

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