Posthearing Questions: District of Columbia's Structural	 
Imbalance and Management Issues (19-NOV-04, GAO-05-162R).	 
                                                                 
On June 22, 2004, GAO testified before the Subcommittee on the	 
District of Columbia, Senate Committee on Appropriations on the  
District of Columbia's structural imbalance and management	 
issues. This letter responds to a request from the subcommittee  
that GAO provide answers to follow-up questions from the	 
Honorable Richard Durbin, United States Senate. 		 
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-05-162R					        
    ACCNO:   A13692						        
  TITLE:     Posthearing Questions: District of Columbia's Structural 
Imbalance and Management Issues 				 
     DATE:   11/19/2004 
  SUBJECT:   Accountability					 
	     Balanced budgets					 
	     Decision making					 
	     Federal funds					 
	     Financial management				 
	     Funds management					 
	     General management reviews 			 
	     Internal controls					 
	     Municipal governments				 
	     Reporting requirements				 
	     Performance plans					 
	     Performance-based budgeting			 
	     Policies and procedures				 
	     Transparency					 
	     Medicaid Program					 

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GAO-05-162R

United States Government Accountability Office Washington, DC 20548

November 19, 2004

The Honorable Mike DeWine
Chairman
Subcommittee on the District of Columbia
Committee on Appropriations
United States Senate

Subject: Posthearing Questions: District of Columbia's Structural
Imbalance and Management Issues

Dear Chairman DeWine:

On June 22, 2004, I testified before your subcommittee on the District of
Columbia's structural imbalance and management issues.1 This letter
responds to a request from your staff that I provide answers to follow-up
questions from the Honorable Richard Durbin, United States Senate. The
questions and answers follow.

MANAGEMENT CHALLENGES

Update on Management Challenges and Possible Improvements

o  	Can you provide us with any current insights about whether the
District has taken steps to address these concerns, and whether those
efforts have produced positive results?

o  What additional improvements would you like to see?

As I stated in my June 2004 testimony before your subcommittee, the
District of Columbia has made progress in improving management and
maintaining fiscal discipline. In fact, it appears the District has made
some progress since we issued our comprehensive report-District of
Columbia: Structural Imbalance and Management Issues-in May 2003 (upon
which my June 2004 testimony was based).2 For example, District officials
have taken steps to balance their budgets for fiscal years 2004 and 2005.
Also, the District's bond rating has been upgraded by all of the major
rating agencies in part due to the region's improving economy and better
financial management.

1 GAO, District of Columbia: Structural Imbalance and Management Issues,
GAO-04-908T
(Washington, D.C.: June 22, 2004).
2 GAO, District of Columbia: Structural Imbalance and Management Issues,
GAO-03-666
(Washington, D.C.: May 22, 2003).

Further, our recent mandated review of the District's performance and
accountability plan for fiscal year 2003 found that the District complied
with statutory reporting requirements and that the report provided a
comprehensive review of the District's

3

performance. We also found that the 2003 performance report provided an
update on the following performance management programs.

o  	The District reported on the expansion of performance-based budgeting
to 27 additional agencies. All 77 agencies are expected to be utilizing
performancebased budgeting by 2006.

o  	The District also reported plans to expand its recommendations and
court orders tracking system to begin tracking the costs of implementing
recommendations and court orders. Originally this system was intended to
only track the extent to which recommendations and court orders had been
implemented throughout the District.

o  	In addition, the District reported plans to implement an online
budgeting and performance program (Argus) to link agency budgeting and
performance reporting. The District expected to implement the program in
October 2004 in those agencies that are already using or implementing
performance-based budgeting. This system will allow for monthly
performance reporting and enhance oversight of agencies' data collection
efforts. Through this system, agencies will prepare budget requests based
on actual program costs. Further, the system will eliminate an agency's
ability to modify performance targets or past performance without
management approval.

The District's performance goals represent about 90 percent of its total
expenditures. While the District has made steady progress in implementing
a more results-oriented approach to management and accountability, actions
have not been completed on our prior recommendations related to expanding
coverage of goals and measures to all activities within the Mayor's
authority, as well as the monitoring of court costs.

Despite the progress that has been made, challenges still remain, as
evidenced by several studies and investigations that have been released
since the issuance of our May 2003 report. For example, the independent
auditor of the District's financial statements for fiscal year 2003 again
reported District Medicaid provider accounting and financial reporting as
a material weakness.4 We highlighted Medicaid management as a major
challenge in our May 2003 report. According to the independent auditors'
report, certain conditions have hindered the ability of the District of
Columbia Public Schools (DCPS) and Department of Mental Health to
accurately estimate and record amounts owed from the federal government
for eligible services in a timely fashion. This means that the District
continues to bear more of the burden of its high Medicaid costs with local
funds than necessary and does not fully leverage the permanently enhanced
federal Medicaid match (70 percent) that Congress gave it in 1997.
Addressing these problems in a timely manner

3 GAO, District of Columbia: FY 2003 Performance Report Shows Continued
Improvements, GAO-04
940R (Washington, D.C.: July 7, 2004).
4 Government of the District of Columbia, Office of the Inspector General,
District of Columbia:
Independent Auditors' Report on Compliance and on Internal Control Over
Financial Reporting

(Washington, D.C.: Feb. 2004).

has taken on greater significance because the District has proposed
eliminating its Medicaid reserve fund in fiscal year 2005 ($55 million in
fiscal year 2004). This reserve was intended to serve as a cushion in the
District's budget in the event of less-than-expected federal
reimbursement, which had been a significant problem in previous years.

In another example, in September 2003 the DC Appleseed Center for Law and
Justice5 and Piper Rudnick LLP issued a study on special education
problems in DCPS, which we also discussed in our May 2003 report.6 The
District lacks appropriate special education programs and services, which
frequently results in DCPS expending resources to subsidize private school
placements and related transportation expenses, as well as the costs
associated with due process hearings. According to the DC Appleseed Center
for Law and Justice report, these problems are exacerbated by DCPS's
inadequate dispute resolution process. The report concluded that DCPS's
inability to promptly address parental inquiries and concerns about
inadequate special education services and facilities results in anger and
mistrust on the part of parents. Responding to parental concerns earlier
and more effectively could minimize anger and mistrust, thereby reducing
lawsuits, due process hearings, and their related legal costs. The report
also laid out recommendations for improving DCPS's dispute resolution
process.

Moreover, the District Office of the Inspector General reported in
September 2003 that DCPS lost the use of approximately $4.5 million in
federal homeland security funds because it was unable to identify a use
for and obligate these funds in a timely fashion.7 Although DCPS lost out
on the use of these funds, it nonetheless has identified a need for
security enhancements totaling $5.7 million.

As agreed with your staff, we did not conduct updated reviews of or new
interviews with officials in District agencies in advance of my June 2004
testimony. Nonetheless, several GAO studies completed since the issuance
of our report in May 2003 further describe the status of the District's
management challenges. Several select examples of other more recent GAO
work related to the District follow. In some cases, GAO has also
recommended that certain actions be taken to address management
challenges.

o  	District-wide management and performance. In our July 2004 review of
the District's performance and accountability report for fiscal year 2003
(described above), we identified certain gaps. Specifically, the 2003
performance report did not include 33 activities that represent 10 percent
of the District's budget, including public charter schools (the most
significant program activity that lacked goals). Previously, we
recommended that the District establish goals for the charter schools and
report on progress. District

5 The DC Appleseed Center for Law and Justice is an organization that
brings together volunteer teams
of attorneys and other experts to conduct studies of serious local issues,
research and analyze them,
develop and publish recommendations for systemic reform, and advocate for
solutions.
6 DC Appleseed Center for Law and Justice and Piper Rudnick LLP, A Time
for Action: The Need to
Repair the System for Resolving Special Education Disputes in the District
of Columbia

(Washington, D.C.: Sept. 2003).
7 Government of the District of Columbia Office of the Inspector General,
Use of Homeland Security
Funds at the District of Columbia Public Schools (Washington, D.C.: Sept.
2003).

officials told us that goals have been established for the charter schools
and will appear in the 2004 performance report. According to the report,
most of the remaining program activities relate to particular funds (e.g.,
the disability compensation fund), and measures are not set for such
funds.

o  	Medicaid-mental health system. In March 2004 we issued a report on the
status of reforms to the District's mental health system, which is managed
by the Department of Mental Health (DMH), including its enrollment and
billing system.8 DMH has developed and implemented a comprehensive
enrollment and billing system designed to coordinate clinical,
administrative, and financial processes. Under this system, a core
services agency, which is a DMH-certified provider, enrolls eligible
consumers in the District mental health system and develops treatment
plans, provides and coordinates services, and bills DMH on a
fee-for-service (FFS) basis. This system has two key attributes. First, it
links payment directly to treatment planning and services provided.
Second, it increases access to certain community-based mental health
services, with a significant share of the costs reimbursable by federal
Medicaid funds for community-based mental health services. For fiscal year
2003, DMH received $17.5 million in federal Medicaid funds, and DMH
expects further growth in Medicaid revenue. In transitioning to FFS,
however, providers have faced challenges managing cash flow in a system
that no longer guarantees revenue regardless of performance. In addition,
because provider contracts were tied to the FFS billing projections, DMH
could not pay claims in 2003 for providers that were delivering more
services than had been projected until their contracts were changed. As a
result, providers did not always receive claims payments on a timely basis
in fiscal year 2003. By August 2003, DMH made the necessary contract
changes to allow providers to be paid for the remainder of the fiscal year
and, according to senior officials, had a plan in process for fiscal year
2004 to prevent this problem from recurring.

o  	Medicaid-program and fiscal integrity. In July 2004, we issued a
report on state and federal efforts to prevent and detect improper
Medicaid payments

9

to providers. Fraudulent and abusive billing practices across the 50
states and the District include billing for services, drugs, equipment, or
supplies not provided or not needed. States can generate cost savings by
applying certain measures to providers determined to be at high risk for
inappropriate billing and by generally strengthening their program
controls for all providers. We identified a number of program control
approaches and surveyed all of the states and the District on the extent
to which they have implemented them. These include time-limited
enrollment, on-site inspections, and criminal background checks, as well
as increased use of information technology and prescription drug controls.
According to our inventory, the District had implemented 9 of these 20
cost-saving approaches.

8 GAO, District of Columbia: Status of Reforms to the District's Mental
Health System, GAO-04-387
(Washington, D.C.: Mar. 31, 2004).
9 GAO, Medicaid Program Integrity: State and Federal Efforts to Prevent
and Detect Improper
Payments, GAO-04-707 (July 16, 2004).

o  	Public safety and justice-jail facilities. In August 2004 we issued a
report that reviewed the status of health and safety conditions at the
District of Columbia's Jail and Correctional Treatment Facility (CTF)
along with its management of capital improvement projects at the
facility.10 We reported that District health inspectors consistently
identified problems at the facility regarding air quality, vermin
infestation, fire safety, and plumbing (among other things). However, we
found that District health inspectors did not always document where
deficiencies were identified or exact times and dates when they were
identified-making it difficult for CTF officials to determine how
prevalent health and safety deficiencies were, whether problems were
occurring in the same locations, or whether they changed over time.
Further, we found that the District lacked written policies and procedures
concerning the management of jail-related capital improvement projects. We
recommended that District health inspectors improve the specificity of
their reports. We also recommended that the District strengthen management
of capital improvement projects by establishing specific time frames for
completing work and developing and implementing policies and procedures.

o  	DCPS-special education. In September 2003, we issued a report on
special education disputes and mediation strategies across the states
(including the District).11 Officials told us that disagreements usually
arose between parents and school districts over fundamental issues of
identifying students' need for special education, developing and
implementing their individualized education programs, and determining the
appropriate education setting. We found that most due process hearings
were concentrated in five states-California, Maryland, New Jersey, New
York, and Pennsylvania-and the District of Columbia. We reported that
2,311 special education disputes occurred in these five states and the
District in the year 2000-compared to 709 in all other states combined.
Also, the District had 336 due process hearing per 10,000 students,
compared with 24 per 10,000 in New York. We also found that dispute
resolution activity was generally low relative to the number of students
with disabilities.

The District has made and is making real and important progress in
addressing its long-term and difficult management challenges. However,
more work needs to be done. Sustained progress is needed to address the
critical financial, program, and performance management challenges that
the District faces across various agencies and program areas.

Link between Structural Imbalance and Management Challenges

o  	While you note that addressing these management issues could help
reduce future budget shortfalls, such improvements will not offset the
structural imbalance. I assume that conclusion is not in any way intended
to signal that ignoring the management problems is acceptable, but can you
please comment further on that?

10 GAO, District of Columbia Jail: Management Challenges Exist in
Improving Facility Conditions,
GAO-04-742 (Aug. 27, 2004).
11 GAO, Special Education: Numbers of Formal Disputes Are Generally Low
and States Are Using
Mediation and Other Strategies to Resolve Conflict, GAO-03-897
(Washington, D.C.: Sept. 9, 2003).

Ignoring the management challenges that we and others have identified is
not acceptable, nor did we mean to imply this in our report or my
testimony. District officials agree that management issues need to be
addressed. For example, in the District's formal response to our May 2003
report, the District Chief Financial Officer (CFO) concurred that improved
program performance would permit the District to enhance the quality of
the services it delivers and position the District to obtain a higher
level of federal reimbursement than it currently receives. The CFO also
acknowledged that significant opportunities for efficiency improvements
exist within District programs and noted that the District is taking some
corrective actions.

Nonetheless, it is important to consider certain critical points regarding
the District's management challenges and their relationship to the fiscal
structural imbalance we confirmed in our report. The models we used to
estimate the range of the District's fiscal structural imbalance presume
that services are provided with average efficiency. To the extent that a
jurisdiction does not deliver services with average efficiency, its actual
level of services may actually be below average. Due to a combination of
its significant management problems and its substantial structural
deficit, the District is likely providing a below-average level of
services even though its tax burden is among the highest in the nation.
Accordingly, the District's management problems waste resources that it
cannot afford to lose and draw resources away from providing even an
average level of services.

By addressing the management challenges that GAO and others have
identified over the years, the District could free up local funds and
possibly gain additional federal funds for use in increasing the level of
services to its residents and visitors. For example, improving Medicaid
management could allow the District to obtain a greater level of federal
Medicaid funding and fully leverage its enhanced Medicaid match. However,
management improvements will not offset the underlying structural
imbalance because it is caused by factors beyond the direct control of
District officials. As a consequence, District officials may face more
difficult policy choices than most other jurisdictions in addressing a
budget gap between spending and revenues based on current policies.

As we stated in our May 2003 report, by virtue of the District being the
nation's capital, justification may exist for a greater role by the
federal government to help the District address its structural imbalance.
However, this strategy is not without its own risks. For example,
significant management problems in the District mean that the aid
provided, if not used wisely, could result in more wasteful spending or in
the District postponing management reforms. Given its management
challenges, it is important that the District establish basic management,
performance, and accountability standards to ensure the efficient and
effective use of any federal resources. Along these lines, it should
continue planned management reforms, including the movement to
performance-based budgeting. It should also address management problems
and implement recommendations for improvements that have been highlighted
by GAO and others.

LEGISLATIVE REMEDIES

o  	What guidance can GAO offer as Congress evaluates legislative measures
to address the District's fiscal structural imbalance challenge?

o  	What should be included in legislative language that would ensure
adequate and appropriate transparency and accountability for the use of
any federal contributions that may be authorized to address the structural
imbalance?

o  	What safeguards would you recommend be considered as essential
elements of any funding proposal?

o  	Using H.R. 4269, the District of Columbia Fair Federal Compensation
Act of 2004, as a baseline, what additions would improve that approach?

Due in part to its substantial structural deficit, the District is likely
providing a below average level of services even though its tax burden is
among the highest in the nation. As a consequence, District officials may
face more difficult policy choices than other jurisdictions in addressing
a budget gap between spending and revenues based on current policies. For
example, given its existing high tax burdens, further raising taxes would
likely worsen its competitive advantage in attracting new businesses and
residents to the city rather than surrounding jurisdictions. It would also
be difficult to cut services further.

If raising taxes or cutting services is to be avoided, an alternative
option District officials might exercise would be to continue deferring
improvements to its capital infrastructure. However, this strategy also is
not viable in the long run, in that deteriorating infrastructure would of
necessity lead to further reductions in the levels and types of services
provided and ultimately would necessitate either higher taxes or cuts in
services.

Federal policymakers are faced with difficult choices regarding what role
they should play, if any, in addressing the District's structural
imbalance. Federal policymakers could choose not to address the District's
structural imbalance and require local officials to deal with the
difficult choices it faces to meet its obligations. This approach
recognizes that other jurisdictions also face substantial structural
deficits, and District officials are in the best position to decide for
themselves the most effective means of balancing trade-offs between high
tax burdens and reduced levels of public services for local residents and
visitors to the nation's capital.

Alternatively, additional federal assistance for the District could
compensate for its structural imbalance. However, this assistance might
suggest that some other states, also with sizable structural imbalances,
would have an equally sound claim on additional federal assistance.
Nevertheless, by virtue of the District being the nation's capital, and
the restrictions placed upon it, justification may exist for a greater
role by the federal government to help the District maintain fiscal
balance. As previously noted, this strategy is not without its own risks.
For example, management problems that plague the District mean that the
aid provided, if not used wisely, could result in the District simply
postponing many management reforms necessary to avoid the wasteful
expenditure of much needed resources and would assist in closing current
budget gaps. Given its management challenges, the District

must achieve basic management performance and accountability standards to
ensure an efficient use of any resources.

In the end, it is up to Congress to decide whether or in what form to
provide the District with additional federal assistance to compensate for
its structural imbalance. As the Mayor of the District of Columbia
discussed in his May 2004 report to the Senate Committee on
Appropriations, there are various forms that enhanced federal assistance
could take. The Mayor outlined three forms: an unrestricted federal
payment, assumption of state-like functions by the federal government, and
federal funding that would be targeted for specific purposes as laid out
in the District of Columbia Fair Federal Compensation Act of 2004.

No matter what form this assistance might take, it is important for
Congress to have assurances that the funds would be spent efficiently and
effectively and be used for any intended purposes. These safeguards should
be written into any legislation. Specifically, District officials should
be required to report to Congress on how they plan to spend the federal
assistance and regularly report on how it is being spent. For instance,
Congress could require District officials to submit a master plan to
Congress on how they intend to spend the federal assistance-before any
funds are obligated-and update this plan as circumstances or priorities
change. Further, any reports and financial statements should be required
to undergo periodic review by independent auditors. In addition, Congress
may consider further specifying the types of projects for which federal
funds could be used. Congress may also consider a matching requirement to
ensure that some local funds continue to be used for infrastructure and
capital projects.

Finally, as I discussed in my testimony before your subcommittee, it is of
critical importance to have an effective and transparent capital
decision-making and management system in place for all District agencies.
In my response to the third set of questions that follow, I discuss
principles and practices that should be followed to ensure efficient and
effective capital decision making and management.

PLANNING AND OVERSIGHT

o  	What types of preliminary evaluations should be conducted and what
management controls should be in place as a prerequisite for addressing
the District's infrastructure needs?

o  	In your oral testimony, you referred to an inventory of infrastructure
and noted that what GAO was provided as part of its work was an
"incomplete" array. Can you elaborate further and describe any impediments
GAO encountered in getting complete information?

o  	What do you suggest would help ensure that the District compiles and
maintains an accurate and full inventory of its infrastructure needs and
estimates, as well as having in place a fully functional system for
tracking investments made and projected future costs?

If the District were to receive additional federal assistance to
compensate for its structural imbalance and enhance its ability to fund
capital investments-as is proposed in the District of Columbia Fair
Federal Compensation Act of 2004 (H.R. 4269)-it is important that the
District follow sound practices in order to avoid the costly management
inefficiencies it has experienced in the past. Congress needs assurance
that any federal assistance to the District would be spent effectively and
efficiently. It is critical to have clear, transparent reporting and
accountability mechanisms in place to ensure the proper use of federal
funds. One option for Congress would be to require the District to develop
and submit for review a set of capital planning and management policies
and procedures that would be reliably followed by all District agencies.

Regarding my comments about the District's infrastructure inventory, we
had some difficulties obtaining complete and timely information on
infrastructure projects that were not recommended for financing due to
funding constraints. This emphasizes the importance of the District having
systems in place to track information related to all infrastructure
projects, including proposed projects not approved for funding.

A key way to ensure that federal capital funds are spent effectively and
efficiently is to have a clear capital decision-making and management
system in place. Along these lines, GAO has developed an executive guide
that identifies organizational attributes that are important to the
capital decision-making process as a whole, as well as capital
decision-making principles and practices used by leading state and local
governments and private sector organizations.12 These principles and
practices could be applied to any District agency or the District as a
whole. Key elements of this guidance are to closely link any planned
capital investments to a government's or organization's strategic goals
and objectives, ensure that effective information systems are in place to
support sound decision making and management, and ensure that city leaders
to clearly communicate their vision and goals to project managers.
Specifically, we have identified five basic principles of effective
capital decision making and linked certain practices that leading public
and private entities use to carry out each principle.

12 GAO, Executive Guide: Leading Practices in Capital Decision-making,
GAO/AIMD-99-32 (Washington, D.C.: December 1998).

We did not examine the District's capital planning and management
functions in advance of my June 2004 testimony, and District officials may
already be following some of these principles and practices in certain
program areas. Nevertheless, the District should consider these principles
and practices in ensuring the implementation of an effective, transparent,
and reliable system for making capital decisions and managing them from
start to finish. Our executive guide contains additional detail on each of
these practices along with numerous examples from the leading
organizations that we studied.

Principle I: Integrate organizational goals into the capital
decision-making process.

o  	Conduct comprehensive assessments of needs to meet mission and
results-oriented goals and objectives. Conducting a comprehensive needs
assessment or analysis of program requirements is an important first step
in an organization's capital decision-making process. A comprehensive
assessment of capital needs considers an organization's overall mission
and identifies the resources needed to fulfill both immediate requirements
and anticipated future needs based on the resultsoriented goals and
objectives that flow from the organization's mission.

o  	Identify current capabilities, including the use of an inventory of
assets and their conditions, and determine if there is a gap between
current and needed capabilities. Leading organizations gather and track
information that helps them identify the gap between what they have and
what they need to fulfill their goals and objectives. To help assess
current capabilities and establish a baseline, such organizations maintain
automated systems that track the use and performance of existing assets
and facilities. Current and accurate information is essential. Some
functions performed by asset inventory and tracking systems include (1)
identifying asset and facility location and status, (2) tracking and
reporting asset and facility condition and deferred maintenance needs, and
(3) tracking user satisfaction. Routinely assessing the condition of
assets and facilities allows managers and other decision makers to
evaluate the capabilities of current assets, plan for future asset
replacements, and calculate the costs of deferred maintenance.

o  	Decide how best to meet the gap by identifying and evaluating
alternative approaches (including noncapital approaches). Leading
organizations consider a wide range of alternatives to satisfy their
needs, including noncapital alternatives, before choosing to purchase or
construct a capital asset or facility. Managers carefully consider options
such as contracting out or divesting the activity the asset would support.
When they determine that capital is needed, managers also consider repair
and renovation of existing assets. When evaluating alternatives, prudent
decision makers also consider the various funding options available to
them. They weigh the different impacts of debt financing, engaging in

joint-venture projects, or using current-year appropriations. Leading
organizations examine their needs and seriously consider whether capital
is needed to fulfill their requirements. They look at two primary issues
to evaluate options available to them: (1) whether the function is
essential to fulfilling the organization's core responsibilities and (2)
whether the organization has the specific expertise to perform the
function well and cost effectively.

Principle II: Evaluate and select capital assets using an investment
approach.

o  	Establish a review and approval framework supported by analyses. We
found that establishing a decision-making framework that encourages the
appropriate levels of management review and approval, supported by the
proper financial, technical, and risk analyses, is a critical factor in
making sound capital investment decisions. A well-thought-out review and
approval framework can mean capital investment decisions are made more
efficiently and supported by better information. Some leading
organizations have review processes in place that determine the level of
analysis and review that will be conducted based on the size, complexity,
and cost of the project. As part of the capital review and approval
process, leading organizations develop a decision or investment package to
justify capital project requests. Common categories of information in the
packages include links to organizational objectives; solutions to
organizational needs; project resource estimates and schedules; and
project costs, benefits, and risks. These packages provide decision makers
with a valuable tool for analysis and planning at the time the project is
being considered. Decision packages are supported by a range of materials.
Types of materials include detailed economic and financial analyses, such
as cost-benefit analyses and analysis of return on investment.

o  	Rank and select projects based on established criteria. Leading
organizations have defined processes for ranking and selecting projects.
The selection of capital projects is based on preestablished criteria and
a relative ranking of investment proposals. Leading organizations
determine the right mix of projects by viewing all proposed investments
and existing capital assets as a portfolio. Organizations generally find
it beneficial to rank projects because the number of requested projects
usually exceeds available funding. Sound criteria help link potential
investments to program priorities and desired results.

o  	Develop a long-term capital plan that defines capital asset decisions.
Once projects are ranked, they should be put into a long-term capital
plan. Leading organizations develop long-term capital plans to guide
implementation of organizational goals and objectives and help decision
makers establish priorities over the long term. While a plan must respond
to changing requirements, it is based on the long-range vision for the
organization embodied in its overall strategic plan. Therefore, any
year-to-year changes to the capital plan should be driven by strategic

decisions. Leading organizations prepare long-term capital plans to
document specific planned projects, plan for resource use over the long
term, and establish priorities for implementation. These plans usually
cover a 5-, 6-, or 10-year period and are updated either annually or
biennially. Long-term planning requires that decision makers rank capital
needs and promotes making informed choices about managing the
organization's resources and debt. Some leading organizations also prepare
long-term asset and facility maintenance plans that are incorporated into
their long-term capital plans. This helps decision makers determine
whether and when to purchase a new capital asset or continue to maintain
an existing one.

Principle III: Balance budgetary control and managerial flexibility when
funding capital projects.

o  	Budget for projects in useful segments. One strategy that has been
proven to be useful to organizations in dealing with problems posed by
full funding in a capped environment is to budget for projects in useful
segments. This means that when a decision has been made to undertake a
specific capital project, funding sufficient to complete a useful segment
of the project is provided in advance. The U.S. Office of Management and
Budget has defined a useful segment as a component that either (1)
provides information that allows the agency to plan the capital project,
develop the design, and assess the costs, benefits, and risks before
proceeding to full acquisition (or canceling the acquisition) or (2)
results in a useful asset for which the benefits exceed the costs even if
no further funding is appropriated. For full up-front funding and the
funding of useful segments to be effective, organizations must be able to
develop good, firm cost estimates of the full cost of either the project
or the segments early in the life of the project. To develop these
estimates, the organization must have good information and data systems in
place. Some organizations fund capital projects in useful or meaningful
phases by breaking up their capital planning and budgeting cycles into
segments, such as predesign, design, and construction. Funding is provided
for one of these segments at a time and generally is not guaranteed from
one phase to the next.

o  	Consider innovative approaches to full up-front funding. Alternative
strategies used by some leading organizations and federal agencies to
accommodate full funding of capital projects in a constrained budget
environment include contracting out for capital-intensive services, using
an investment component that is similar to a savings account, and
developing public/private partnerships. These strategies enhance an
organization's flexibility to finance the full costs of projects without
compromising management's ability to make decisions based on full costs.

Principle IV: Use project management techniques to optimize project
success.

o  	Monitor project performance and establish incentives for
accountability. Successful implementation of a capital investment

project is determined primarily by whether the project was completed on
schedule, came in within budget, and provided the benefits intended.
However, the first step is to provide decision makers with good
information about costs, risks, and scope of a planned project before
committing substantial resources to it. This, in combination with full
upfront funding, can help to prevent cost overruns, project cancellations,
and projects that fail to meet completion schedules. By monitoring project
performance against cost, schedule, and performance goals-as well as
establishing incentives to meet those goals-organizations can increase the
likelihood that projects will be successfully completed. Typically, a good
project plan is used to manage and control project implementation and
includes performance measurement baselines for schedule and cost, major
milestones, and target dates and risks associated with the project.
Regular review of the status of cost, schedule, and performance goals by
individuals outside the project team allows for an independent assessment
of the project. Leading organizations also establish incentives to
encourage teams to meet project goals. Leading organizations generally
hold managers accountable for meeting goals. Further, leading
organizations use a number of built-in incentives for managers and teams
to meet project goals. Among them are reporting project status to
individuals or groups in positions of authority outside the project and
using the project manager's overall performance in determining the
assignment to future projects.

o  	Use cross-functional teams to plan for and manage projects. Leading
organizations use multidisciplinary teams, consisting of individuals from
different functional areas led by a project manager, to plan and manage
capital projects. Teams typically consist of people from the user
community and from the organization's budget, accounting, engineering,
procurement, and other functions. A core project team is established early
in the life cycle of a project and additional individuals with particular
technical or operational expertise are incorporated during appropriate
phases of the project. Moreover, successful teams have spirit, trust, and
enthusiasm and a sense of ownership over the project.

Principle V: Evaluate results and incorporate lessons learned into the
decision-making process.

o  	Evaluate results to determine if organizationwide goals have been met.
One way of determining if a capital investment achieved the benefits that
were intended is to evaluate its performance using measures that reflect a
variety of outcomes and perspectives. By looking at a mixture of hard and
soft measures, for example, financial improvement and customer
satisfaction, managers are able to assess performance based on a
comprehensive view of the needs and objectives of the organization. To
implement this balanced approach to performance measurement, leading
organizations developed financial and nonfinancial criteria for success
that link to the organization's overall goals and objectives. Another way
to determine if a capital investment is contributing to the success of an

organization's goals and objectives is to conduct an audit after the
project is completed. The primary focus is not to evaluate the technical
aspects of the project, but rather to evaluate the process and whether the
end users are satisfied. The lessons learned from the audit can be
incorporated into the design and construction of the next project.

o  	Evaluate the decision-making process: reappraise and update to ensure
that goals are met. Although some organizations evaluate their capital
decision-making process on an ongoing basis, this is not the norm. Leading
organizations seemed generally to revise the processes in response to an
internal crisis, such as severe budget constraints, or to a perception of
changing needs, a changing environment, or both. In such situations,
organizations felt that they had to conduct self-assessments and undergo
major changes in their capital decision-making practices in order to
continue successful operations.

We are also sending this report to the Honorable Mary Landrieu, Ranking
Minority Member of your subcommittee; the Honorable Richard Durbin, United
States Senate; the Honorable Eleanor Holmes Norton, House of
Representatives; and the Subcommittee on the District of Committee,
Committee on Appropriations, House of Representatives. This report is also
available to other interested parties at http://www.gao.gov.

For additional information on our work on the District of Columbia's
fiscal imbalance and management issues, please contact me at (202)
512-6806 or [email protected]. Individuals making contributions to this
report were Thomas Yatsco, Jeanette Franzel, Norma Samuel, Linda Elmore,
Jerry Fastrup, and James Wozny.

Sincerely yours,

Patricia A. Dalton Director, Strategic Issues

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