District Government: Information on Its Fiscal Condition and the
Authority's First Year of Operations (Testimony, 07/09/96,
GAO/T-AIMD-96-126).
GAO discussed the District of Columbia's financial condition, focusing
on efforts to resolve its financial crisis. GAO found that: (1) the
District's revenues decreased, from $2.9 billion in fiscal year (FY)
1993 to $2.7 billion in FY 1995, due to a one-time accounting change and
a decrease in the assessment value of commercial and residential
property; (2) over 75 percent of the District's operating grants go to
Medicaid reimbursements; (3) the District's federal payment formula was
discontinued in FY 1995 and replaced with a federal payment of $660
million; (4) this payment does not adequately compensate the District
for the additional responsibility it assumes or the loss of revenue due
to federally imposed restrictions; (5) the District's inability to tax
nonresident wages results in a loss of revenue; (6) the District's
overall expenditures increased from $5.5 billion in FY 1993 to $6
billion in FY 1994, and decreased to $5.4 billion in FY 1995 due to
shifts in Medicaid and employee benefits expenditures; (7) the
District's unfunded pension liability stands at $4.7 billion and is
expected to increase to $7 billion by 2004; (8) the District has delayed
pension, vendor, and Medicaid payments, borrowed internally from its
capital projects fund, and borrowed short-term bonds from the Treasury
to finance its operations; (9) the District Financial Responsibility and
Management Assistance Authority has reviewed 1,562 contracts, developed
a strategic plan and annual report, approved 10 privatization plans for
FY 1996, and allocated reductions to several departments; and (10) the
District needs a new financial management system.
--------------------------- Indexing Terms -----------------------------
REPORTNUM: T-AIMD-96-126
TITLE: District Government: Information on Its Fiscal Condition
and the Authority's First Year of Operations
DATE: 07/09/96
SUBJECT: Financial management systems
Municipal governments
Funds management
Retirement pensions
Future budget projections
Budget deficit
Budget receipts
Property taxes
Privatization
IDENTIFIER: Medicaid Program
New York (NY)
Philadelphia (PA)
District of Columbia
DC Financial Management System
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Cover
================================================================ COVER
Before the Subcommittee on the District of Columbia
Committee on Appropriations
House of Representatives
For Release on Delivery
Expected at
1 p.m.
Tuesday,
July 9, 1996
DISTRICT GOVERNMENT - INFORMATION
ON ITS FISCAL CONDITION AND THE
AUTHORITY'S FIRST YEAR OF
OPERATIONS
Statement of Gregory M. Holloway
Director, Governmentwide Audits
Accounting and Information Management Division
GAO/T-AIMD-96-126
GAO/AIMD-96-126T
(901705)
Abbreviations
=============================================================== ABBREV
CAFR -
CAFT -
CFO -
DRG -
FTE -
FCB -
MAC -
PICA -
DHS -
ICMA -
OSDC -
FMS -
IFMS -
============================================================ Chapter 0
Mr. Chairman and Members of the Committee:
I am pleased to be here today to discuss the results of our review of
the District of Columbia's financial condition and the District of
Columbia Financial Responsibility and Management Assistance
Authority's (Authority) efforts to resolve the financial and
management problems facing the District of Columbia. As you know,
our review was performed in response to your April 25, 1996, letter
asking a number of questions related to the District's financial
condition and the operations of the Authority during its first year.
Also, as you requested, we have looked at actions taken by the
control boards of New York City and Philadelphia--two cities that
successfully overcame financial crises. We have organized your
questions into four general topics that I will discuss today.
First, I will discuss financial and budget trends in the District's
revenue flows and expense patterns, comparing and contrasting the
District's historical experience through fiscal year 1995 with its
enacted and proposed budgets for fiscal years 1996 and 1997,
respectively. To identify the pertinent trends and patterns in the
District's revenues and expenses, we performed some analysis for
fiscal years 1980 through 1992 of the District's Comprehensive Annual
Financial Reports (CAFR) and performed extensive comparative analysis
for fiscal years 1993 through 1995. In addition, we performed
analysis of the District's enacted fiscal year 1996 budget and
proposed fiscal year 1997 budget and financial plan as approved by
the Authority.
Where unusual trends were identified, such as when amounts changed in
a way different than expected based on our knowledge of the
District's operations, we met with District officials to determine
the reasons for these differences. Where we deemed it necessary, we
reviewed the detailed underlying supporting information and
documentation to verify that the explanation provided was supported.
We also reviewed reported fiscal year 1996 expenses incurred through
March 31, 1996, to ensure that the trends identified in our analysis
through the fiscal year ended 1995 were still appropriate. Finally,
we reviewed congressional, GAO, Authority, Office of the Mayor, City
Council, and consultants reports and testimonies to more fully
understand the nature and history of the District's various sources
of revenues and expenses.
Second, I will discuss the District's current cash position. We
focused specifically on the District's cash position at the end of
fiscal year 1995, as adjusted through March 31, 1996. To determine
that the District's cash position as of the date of this testimony
had not substantively changed from what we found in our review, we
discussed the results of our analysis with the District's Chief
Financial Officer. In addition, we reviewed what actions New York
City (starting in June 1975) and Philadelphia (starting in June 1991)
and their respective control boards took to respond to their
respective cash shortages. We performed an analysis of both cities'
cash and overall financial condition for the periods noted, which
were the first year the respective control boards were in place, and
we interviewed several key members of each city's control board and
current and former government officials to understand how and why
they took the actions they did. Also, we discussed with the
Authority the actions it has taken and plans to take to respond to
the District's current cash position and reviewed these planned
actions.
Third, I will discuss the experiences of the New York City and
Philadelphia control boards and the Authority. We performed
extensive reviews of all the published information we could find that
described the nature of each city's financial and management problems
and the related actions taken by each city's control board to remedy
the problems. We summarized both the problems and the actions taken
by the cities and their control boards based on the
purposes/objectives as set out in the enabling legislation of each
city's control board. We placed particular emphasis on efforts made
in each control board's first year, since the Authority has only been
in place for a little over a year. (Authority officials stated that
they commenced official operations on June 1, 1995.) Where
practicable, we interviewed control board members and city and state
officials, past and present, to further enhance our understanding of
the environment in which the control boards operated and to obtain
their thoughts on the prioritization and focus of their efforts in
the first year and to date.
Finally, we will provide some background information and very
preliminary thoughts on the District's financial management system.
The feasibility study called for in the District's fiscal year 1996
appropriation act, approved on April 26, 1996, has not yet been done;
thus, we were unable to evaluate it. Further, because of time
constraints, we were unable to provide an in-depth analysis of the
strengths and weaknesses of the current financial management system
in time for this hearing.
FINANCIAL AND BUDGET TRENDS AND
ANALYSIS
---------------------------------------------------------- Chapter 0:1
The District of Columbia Self-Government and Governmental
Reorganization Act (Home Rule Act), Public Law 93-198, approved on
December 23, 1973, initiated the process by which limited autonomy
was conferred on District residents, with the approval of the Home
Rule charter by referendum election on May 7, 1974. In addition to
the limited autonomy conferred on the District to govern local
affairs, certain financial responsibilities were transferred from the
federal government to the District. The most significant of these
were an unaudited accumulated deficit and an unfunded pension
liability relating to previously established pension plans.
Fiscal year 1979 was the first fiscal year, post-home rule, that an
audited balance sheet was prepared on the District. During this
audit, it was determined that the accumulated deficit was $274
million; however, in a period subsequent to fiscal year 1980, this
amount was changed to $284 million--an additional deficit of $10
million. Fiscal year 1980 was the first fiscal year that a full
financial statement audit was performed on the District. For fiscal
year 1980, the District reported a deficit of $104 million that
increased the accumulated deficit to $378 million. From fiscal years
1981 through 1990, the District incurred surpluses and deficits that
resulted in an audited net surplus of $46 million and an accumulated
deficit of $332 million at the end of fiscal year 1990. This deficit
was fully funded in fiscal year 1991 with deficit reduction bonds,
and the District had a small surplus for fiscal year 1992.
It was not until fiscal year 1993 that the District began to
experience consistent annual deficits. While fiscal year 1993 had a
reported surplus of $8 million, it included 15 months of property tax
revenues due to a change in tax year that resulted in an additional
$173 million in property tax revenue reported for that period. Thus,
fiscal year 1993, adjusted downward for the extra 3 months of
revenues, would have reported a deficit of $165 million. Therefore,
our analysis focused on fiscal years 1993 through 1995--the period
when the District's current financial difficulties began to emerge.
In addition, we have included the congressionally enacted fiscal year
1996 budget and the fiscal year 1997 proposed budget that was
approved by the Authority in our analysis. Figure 1 shows the
reported actual budget surpluses/deficits for fiscal years 1980
through those projected for fiscal year 1997.
Figure 1: The District's
General Fund Annual and
Accumulated Surplus/(Deficit)
for Fiscal Years 1980 Through
1997
(See figure in printed
edition.)
Note 1: 1980 was the first year that a full set of audited financial
statements was prepared.
Note 2: Amounts for 1996 and 1997 are projected.
Source: Prior CAFRs and Fiscal Year 1997 Budget and Financial Plan.
GENERAL FUND REVENUES
-------------------------------------------------------- Chapter 0:1.1
The District's revenue structure is made up of three types of revenue
streams--locally generated revenues, operating grants, and the
federal payment--as shown in figures 2 and 3.
Figure 2: The District's
General Fund Revenues in
Nominal Dollars for Fiscal
Years 1993-1997
(See figure in printed
edition.)
Note 1: Amounts for fiscal years 1996-1997 are projected.
Note 2: Local revenues do not include transfers from Lottery &
Games.
Note 3: Nominal refers to revenues valued in actual dollars.
Source: Fiscal years 1993-1995 CAFRs and Fiscal Year 1997 Budget and
Financial Plan.
Figure 3: The District's
General Fund Revenues in
Inflation-Adjusted Dollars for
Fiscal Years 1993-1997
(See figure in printed
edition.)
Note 1: Amounts are shown in fiscal year 1995 dollars. Amounts for
1996-1997 are projected.
Note 2: Indices used are from the Department of Commerce and the
Bureau of Economic Analysis.
Local revenues consist primarily of levies that the District imposes,
such as real property, income and business, and sales and use taxes.
Operating grants consist mainly of reimbursements and grants from the
federal government for the costs of social service programs, such as
the federal share of Medicaid. Generally, the federal payment may be
viewed as compensating the District for any unreimbursed services
that the District may provide the federal government as well as
revenue losses that may be attributable to (1) the large percentage
of federally owned tax exempt property in the District, (2) the
federally imposed limitations on the height of buildings in the
District, and (3) the federally imposed limitation on the District's
authority to tax the income of nonresidents.
LOCAL REVENUES
-------------------------------------------------------- Chapter 0:1.2
In fiscal years 1993 through 1995, local revenues declined by $175
million--from about $2.9 billion in fiscal year 1993 to about $2.7
billion in fiscal year 1995. In inflation-adjusted 1995 dollars, the
decline and, thus, the loss of purchasing power, was even greater.
In inflation-adjusted 1995 dollars, the District's local revenues
decreased about $315 million during this period, primarily due to the
decrease in real property tax revenues. However, increases in income
and business taxes and sales and use taxes helped offset the real
property tax decrease. For fiscal years 1996 and 1997, the District
projects local revenues to remain relatively flat.
From fiscal years 1993 through 1995, reported real property tax
revenues decreased by $274 million to $654 million. There are two
primary reasons for this decline. The first reason relates to the
previously mentioned, one-time accounting change that artificially
inflated fiscal year 1993 revenues but did not affect the cash
received from real property tax revenues. Specifically, the District
changed its real property tax year-end, which caused an additional 3
months of revenue to be recognized for accounting purposes in fiscal
year 1993. This change resulted in a small annual surplus in the
District's financial statements. If the change had not occurred, as
previously mentioned, the District would have recorded an annual
deficit of about $165 million in fiscal year 1993. According to
District officials, the tax year was changed so that the real
property tax year-end would coincide with the District's September 30
fiscal year-end, which would ease reporting requirements. If fiscal
year 1993 real property tax revenues had been adjusted by removing
the additional 3 months of revenues, the decline between fiscal years
1993 and 1995 would not have been as great.
The second reason for the decline in real property tax revenue is a
decrease in the assessed value of the District's commercial and
residential property. Lower assessed property values generally
equate to lower property tax revenues. From fiscal years 1993
through 1995, the assessed value of the District's taxable property
declined by about 6.3 percent, with most of the decline attributable
to commercial property. Consolidation of federal office space,
increased competition from suburban office space, and the downward
renegotiation of rents on existing space have contributed to the
decline in the assessed value of commercial property. In addition, a
declining population and falling employment among District residents
have caused a decline in housing values and residential sales in all
but a few District neighborhoods. The District forecasts real
property taxes to decline slightly in fiscal years 1996 and 1997.
OPERATING GRANTS
-------------------------------------------------------- Chapter 0:1.3
Operating grant revenue has fluctuated in recent years. Operating
grants increased from $760 million to $960 million from fiscal year
1993 through fiscal year 1994, but then decreased to $855 million in
fiscal year 1995. Operating grants are primarily a function of the
level of expenditures on social programs. As the level of
expenditures in these programs increases or decreases, the level of
revenues from operating grants increases or decreases accordingly.
In fiscal year 1995, over 75 percent, or about $653 million, of the
District's operating grants were for health and welfare programs. In
addition, a significant portion of the operating grant revenue is due
to Medicaid expenditures--the District's largest health care
expenditure. In fiscal year 1995, Medicaid expenditures for private
providers of health care services totaled $744 million. The District
is to receive 50 cents for each dollar spent on Medicaid from
operating grants. Thus, at least $372 million, or 44 percent, of the
total operating grant revenue for fiscal year 1995 represented
reimbursements to the District for Medicaid expenditures.
The District forecasts operating grants to decrease from $855 million
in fiscal year 1995 to $823 million in fiscal year 1996, due to an
over $100 million decrease related to the housing authority being
placed into receivership that was partially offset by increases to
Medicaid and other grants. Further, operating grants are projected
to increase from $823 million in fiscal year 1996 to $850 million in
fiscal year 1997--a change of about 3 percent which is primarily due
to the Medicaid program.
THE FEDERAL PAYMENT
-------------------------------------------------------- Chapter 0:1.4
The District has been receiving a federal payment since the 1800s.
Historically, the federal payment has fluctuated because of changes
in the method and calculations used to determine its amount. Recent
history shows that in fiscal year 1992, the Congress adopted a
formula to set the general purpose portion amount of the payment to
24 percent of the second prior fiscal year's own-source revenues
(local revenues) collected in the District. In addition to the
formula, the Congress also funded certain initiatives as part of the
federal payment. The general purpose portion made up about 97
percent of the total federal payment for fiscal years 1993 and 1994,
and no initiatives have been included in the federal payment since
then.
In fiscal years 1993 and 1994, using the aforementioned formula, the
federal payments were $636 million and $648 million, respectively.
In fiscal year 1995, this formula was discontinued and replaced with
a federal payment of $660 million that District officials projected
to remain level through the year 2000. Assuming the inflation rate
of about 3.3 percent per year through 2000 that the District used in
its budget projections and no adjustment to the federal payment, the
District will actually lose about $116 million in purchasing power
during this period.
Major studies\1 performed on the District have concluded that there
are inadequacies in the federal payment. For example, it does not
fully compensate the District for (1) the additional responsibilities
it carries as a result of the federal government's presence or (2)
the loss of revenue due to federally imposed restrictions. This
structural issue affects the District's relationship with the federal
government and is one of the issues the Authority is expected to
focus upon.
The District's ability to significantly increase its revenue is
limited by the Home Rule Act and a large federal presence. Section
602 (a)(5) of the Home Rule Act prohibits the District from taxing
nonresident income. Studies performed by the Rivlin Commission, the
Appleseed Foundation, and the McKinsey & Company/Urban Institute
concluded that this limitation deprives the District of a substantial
potential revenue. The studies reported that the District's
inability to tax nonresident wages results in a loss of revenue
because nearly $2 of every $3 earned in the District is earned by
nonresidents. In addition, about 42 percent of the assessed value of
all land and improvements in the District is tax exempt and about 23
percent of the total assessed value is federal property. Thus, the
District is unable to obtain revenues from a significant portion of
its land.
Many sources have estimated the impact of eliminating the
restrictions that prevent the District from taxing nonresident income
and federal property. The D.C. Appleseed Center for Law and
Justice\2 concluded that the removal of these restrictions could have
resulted in estimated revenues for the District of $471 million in
nonresidential income tax and $694 million in additional property
taxes in fiscal year 1995, which is $505 million more than the $660
million federal payment received.
--------------------
\1 These studies include those by the Rivlin Commission, McKinsey &
Company/The Urban Institute, and the Fair Budget Coalition.
\2 D.C. Appleseed Center For Law and Justice, The Case for A More
Fair and Predictable Federal Payment for the District.
DISTRICT'S OVERALL
EXPENDITURES
-------------------------------------------------------- Chapter 0:1.5
The general fund, at $4.2 billion, or 79 percent of the District's
$5.4 billion in gross\3
expenditures/expenses for fiscal year 1995, far exceeded the
expenditures and expenses of the other funds that comprise the
District's budget and, thus, is the primary focus of our analysis.
Overall, expenditures/expenses increased from $5.5 billion in fiscal
year 1993 to $6.0 billion in fiscal year 1994 and decreased to $5.4
billion in fiscal year 1995.
The significant change from year to year was primarily due to shifts
in Medicaid and employee benefits expenditures/expenses between the
years. Fiscal year 1994 had particularly large human support
services expenditures because Medicaid expenditures increased by
almost $300 million, of which more than $200 million was due to
Medicaid cost reimbursement settlements with institutional providers
for fiscal years 1991 through 1993. District officials do not expect
this large Medicaid increase to reoccur in future years because the
District has moved away from cost settlements for in-patient hospital
services and now reimburses these providers based on predetermined
rates. The District projects cost settlements of $66 million and $59
million for fiscal years 1996 and 1997, respectively.
Also, for fiscal year 1995 expenditures/expenses, human support
services showed a reduction of more than $200 million, primarily
because of a decrease in the projected liability for disability
compensation. An error in the way the amount had been computed in
the past was corrected in the fiscal year 1995 financial statement
audit. Previous computations of future disability compensation had
failed to show recipients being deleted after the legally required
time for receiving such compensation had expired and the recipient
was required to retire or go off of disability. This reduction
should not reoccur and, thus, for trend analysis and comparison
purposes, was added back to the reported human support services costs
for fiscal years 1996 and 1997 budgeted amounts.
Notwithstanding the large Medicaid increases in fiscal year 1994 and
the disability compensation adjustment in fiscal year 1995, our
review found that the District's proposed expenditures in its fiscal
years 1996 and 1997 budgets were generally comparable to the trends
in its expenditures/expenses for fiscal years 1993 through 1995, as
adjusted for its proposed initiatives.
This means that the District's projected fiscal years 1996 and 1997
budgets show expenses that (1) are about the same as those reported
in 1995 adjusted for the aforementioned changes and (2) have slightly
decreased on an inflation-adjusted basis. This outcome is consistent
with most of the proposed initiatives in the District's financial
plan being management initiatives, as opposed to significant
restructuring (eliminating services, for example). Also, because
they are management initiatives, they may be more difficult to
achieve and will require a detailed plan for implementation and close
oversight. However, in an effort to control spending, the Mayor, in
his Transformation Plan, has proposed reducing full-time equivalents
(FTE) from 40,000 to 30,000 by the beginning of fiscal year 2000.
Our more detailed review of the District's expenditures found that
two critical cost drivers of the growth in the District's
expenditures are Medicaid and pension costs. In addition, much
discussion in the District's budget deliberations has focused on the
subsidy costs related to two aspects of the District's
operations--the general hospital and university. Each of these
expenditures has a significant impact on the District's financial
condition.
The discussion of these four expenditures in our testimony is not
intended to minimize either the impact or the need to revisit other
areas of the District's operations for budget savings or revenue
enhancement opportunities. Clearly, areas such as the school system
(the third largest expenditure), the court system, capital project
needs, and others should be more closely evaluated. However, our
review showed that Medicaid costs and pension costs are the greatest
risks to the District's financial viability from a cost perspective.
In addition, because deliberations on the District's budget by
District officials and the Congress focused on the D.C. General
Hospital and the University of the District of Columbia, we also
focused on these costs.
--------------------
\3 These amounts are the sum of total expenditures from the All
Government Fund Types and Expendable Trust Fund's Combined Statement
of Revenues, Expenditures, and Changes in Fund Balance and total
operating expenses from the All Proprietary Fund Types, Pension Trust
Funds, and Component Unit's Combined Statement of Revenues, Expenses,
and Changes in Retained Earnings/Fund Balances.
MEDICAID EXPENDITURES
-------------------------------------------------------- Chapter 0:1.6
Similar to the current national trend, and as we recently reported,\4
Medicaid spending is consuming an increasing share of the District's
total health care expenditures. From fiscal years 1991 to 1995, the
District's records showed that Medicaid expenditures for private\5
providers increased from $427 million to $744 million, or
approximately 74 percent. The District projected Medicaid
expenditures of $776 million and $780 million for fiscal years 1996
and 1997, respectively, and has made efforts to contain Medicaid
costs, such as moving from cost reimbursements for institutional
providers to reimbursements based upon diagnostically-related groups
(DRG). However, based on the recent growth history of these
expenditures and the poor\6 condition of the District's financial
records that track and account for Medicaid costs, we are concerned
that so little growth is projected in Medicaid expenses.
The District is responsible for 100 percent of the nonfederal share
of all Medicaid expenditures. In other jurisdictions across the
nation, states assume responsibility for this nonfederal share or
require local governments, such as counties, to pay a portion of
these costs. As we previously reported,\7 only three\8 states
require their local governments to pay more than 25 percent of this
nonfederal share for Medicaid services. Most notable is New York
state's requirement for its local governments, including New York
City, to pay approximately 50 percent of this nonfederal share,
except for the long-term care program, for which it pays 19 percent.
As noted, New York City pays a Medicaid matching percent
significantly less than the District. In addition, Philadelphia pays
nothing for Medicaid. If the District would pay 50 percent of its
nonfederal share of expenditures, or the equivalent of a 25 percent
match of its total Medicaid expenditures comparable to New York, or
pay nothing, similar to Philadelphia, the impact on the District's
financial condition would be significant. If the fiscal year 1997
budget submission, which included total private-provider Medicaid
expenditures of $780 million, was modified to show either change, the
District's financial picture would shift from having a net cost of at
least $390 million (100 percent of the nonfederal share or a
50-percent match) to a net cost of $195 million, when made comparable
to New York City, or zero compared to Philadelphia.
While placing the District on comparable footing with New York City
and Philadelphia would significantly improve its financial and cash
position, longer-term solutions would have to address many other
issues that would need to be considered in such a complex discussion.
--------------------
\4 District of Columbia: Information on Health Care Costs
(GAO/AIMD-96-42, April 22, 1996).
\5 GAO's health-care report figures for Medicaid included
expenditures for both public--District-owned facilities, such as St.
Elizabeth Hospital--and private providers. The District 1997 budget
and financial plan does not provide the total Medicaid expenditures
but rather only provides the amount for private providers. During
fiscal years 1991 to 1995, public provider expenditures approximated
between $71 and $100 million per year.
\6 GAO/AIMD-96-42, April 22, 1996.
\7 Medicaid: Local Contributions (GAO/HEHS-95-215R, July 28, 1995).
\8 New York, New Hampshire, and Arizona are the only three states
that require a contribution of more than 25 percent of the nonfederal
share from their local governments for Medicaid services, not
administrative costs.
THE UNFUNDED PENSION
LIABILITY
-------------------------------------------------------- Chapter 0:1.7
In looking at the District's financial condition, the unfunded
pension liability represents one of its greatest long-term
challenges. Today, the unfunded liability stands at $4.7 billion and
is expected to increase to $7 billion in 2004.
The Congress created defined benefit pension plans for District
police officers and fire fighters in 1916; teachers in 1920; and,
judges in 1970. These funds were financed on a "pay as you go"
basis. The responsibility for these payments and the related, and
then undetermined, unfunded liability were transferred to the
District as part of Home Rule. The District of Columbia Retirement
Reform Act, Public Law 96-122, in 1979 committed the federal
government to pay $52.1 million annually from 1980 to 2004 to
partially finance the liability for retirement benefits incurred
before January 2, 1975.\9
In 1980,\10 the federal government provided $38 million to the
District in addition to the first of 25 annual payments of $52.1
million to the pension funds authorized by the Retirement Reform Act.
The then present value of these payments equalled $649 million. The
present value of the pension liability at the time of the transfer
equalled $2.7 billion, resulting in an unfunded liability to the
District of over $2 billion.
Since 1979, the District has funded\11 (that is, covered the costs of
the benefits participants have earned in that year) all benefits that
the pension plans' participants have earned since 1979, and paid in
an additional $1.2 billion towards the unfunded liability. Table 1
shows an analysis of the unfunded pension liability since the plan
was transferred to the District.
Table 1
Unfunded Pension Liability
(Dollars in millions)
If fully
funded Excess
Unfunded District 1979 net District
pension contributi normal contributi
Fiscal year liability on cost on
---------------------- ---------- ---------- ---------- ----------
1980 $2,006 $108 $89 $19
1981 $2,134 $110 $93 $17
1982 $2,336 $136 $89 $47
1983 $2,874 $143 $85 $58
1984 $2,936 $174 $103 $71
1985 $3,393 $165 $110 $55
1986 $3,594 $175 $119 $56
1987 $3,458 $173 $96 $77
1988 $3,614 $179 $103 $76
1989 $3,853 $193 $106 $87
1990 $3,820 $222 $118 $104
1991 $4,005 $225 $112 $113
1992 $4,249 $254 $121 $133
1993 $4,152 $291 $135 $156
1994 $4,337 $307 $142 $165
1995 $4,526 $297 $135 $162
1996 $4,780 $337 $133 $204
1997 $4,973 $321 $126 $195
----------------------------------------------------------------------
Source: D.C. Retirement Board.
Despite these efforts, the unfunded liability is now estimated at
$4.7 billion,\12 and is expected to increase to $7 billion\13 in 2004
due to the accumulation of interest owed on the unfunded portion of
the pension liability transferred to the District back in 1979.
Similarly, the District's pension payment, which is currently
approximately $300 million a year, is expected to increase to $490
million starting in 2004.
The Appleseed Foundation\14 concluded that these pension plans'
unfunded liabilities should be the responsibility of the federal
government since the liabilities are the results of federal actions
predating the Home Rule Act. Our analysis shows that if the District
did not have the responsibility for the costs of these plans related
to the unfunded liability, the pension expense in its proposed fiscal
year 1997 budget would be reduced by $195 million from the $321
million currently shown in the proposed budget to $126 million. This
change would have a major impact on the projected budget deficit for
fiscal year 1997.
Similar to the Medicaid discussion, many other factors also need to
be considered longer-term in deciding the best way to address the
escalating pension costs that the District will pay.
--------------------
\9 See District Pensions: Federal Options for Sharing Burden to
Finance Unfunded Liability, pages 14-18 (GAO/HEHS-95-40, December 28,
1994).
\10 GAO/HEHS-95-40, December 28, 1994 and D.C. Appleseed Center, The
District of Columbia's Pension Dilemma--An Immediate and Lasting
Solution.
\11 D.C. Appleseed Center, The District of Columbia's Pension
Dilemma--An Immediate and Lasting Solution.
\12 D.C. Appleseed Center, The District of Columbia's Pension
Dilemma--An Immediate and Lasting Solution.
\13 GAO/HEHS-95-40, December 28, 1994 and D.C. Appleseed Center, The
District of Columbia's Pension Dilemma--An Immediate and Lasting
Solution.
\14 D.C. Appleseed Center, The District of Columbia's Pension
Dilemma--An Immediate and Lasting Solution.
SUBSIDY PAYMENTS
-------------------------------------------------------- Chapter 0:1.8
Two other major costs for the District that have been regularly
discussed in budget deliberations are the costs for D.C. General
Hospital and the University of the District of Columbia. The
District paid subsidies to the hospital of $59 million, $47 million,
and $57 million for fiscal years 1993, 1994, and 1995, respectively.
It has projected for fiscal years 1996 and 1997 that it will pay
subsidies of $47 million and $52\15 million, respectively.
Similarly, the District paid the university subsidies of $68 million,
$66 million, and $50 million for fiscal years 1993, 1994, and 1995,
respectively, and projects to pay subsidies of $43 million and $44
million for fiscal years 1996 and 1997, respectively.
Our recently issued report on health-care delivery\16 in the District
pointed out several challenges that confront the hospital if it is to
remain viable, including major capital improvements. In New York
City's effort to turn its financial problems around, it closed a
municipal hospital, had massive layoffs at others, and relied on the
other hospitals in the city to absorb some of the role it had in
delivering hospital care for city residents. The District has
proposed creating a Public Benefit Corporation to include the
hospital's operations and that would allow the hospital to operate
separately from the city entirely, including the city's personnel
requirements and collective bargaining agreements. However, based on
the projected budget subsidies, it is unclear as yet if this
initiative will save the city money or, if so, how much.
The District has not yet evaluated the financial structure of its
university system to identify ways to make it less costly. However,
Authority officials stated that the University of the District of
Columbia had raised its tuition to offset more of its costs. At the
time of its financial crisis, New York City turned its senior
university system over to the state to run and operate. New York
City's presence in delivering this service was scaled back
dramatically and, for the most part, involved delivering higher
education at the junior-college level, charging tuition for the
services, and providing the services at significantly less cost.
--------------------
\15 The projected fiscal year 1997 amount includes $15 million for
the public health clinics, which were transferred to the hospital.
\16 GAO/AIMD-96-42, April 22, 1996.
THE DISTRICT'S CASH POSITION
---------------------------------------------------------- Chapter 0:2
From the inception of its financial crisis, the District has had cash
flow problems. In fact, District officials project that the District
will run out of money this month. The District took several measures
to address its cash flow shortage. For example, in fiscal year 1994,
the District delayed pension, vendor, and Medicaid payments and
borrowed internally from its capital projects fund. In fiscal year
1995, the District again deferred payments to its vendors and, as
stated by the Chief Financial Officer (CFO),\17 the District began
fiscal year 1996 with approximately $200 million to $300 million in
delayed payments owed to vendors and Medicaid providers.
Over the last 3 fiscal years, the District also borrowed short-term
from the U.S. Treasury to finance operations and capital projects.
Fiscal year 1996 borrowings against the fiscal year 1997 federal
payment are estimated to total $639 million of the $660 million
fiscal year 1997 payment. Specific short-term borrowings for fiscal
year 1996 are shown in table 2.
Table 2
Short-term Borrowings for Fiscal Year
1996
(Dollars in millions)
-------------------------------------------------------------- ------
October 1995\a $96
January 1996 \a $283
Planned July 1996\b $260
======================================================================
Total $639
Fiscal Year 1997 Federal Payment $660
----------------------------------------------------------------------
\a District's Cash Flow Statements--D.C. Treasurer.
\b Office of the Chief Financial Officer.
By borrowing against future revenue to pay for these goods and
services already received, the District has not resolved its cash
flow problems but has only postponed them.
During fiscal year 1995, the District's investment grade general
obligation debt was down-graded to noninvestment grade. Because of
this non-investment grade rating, the District's sources for
obtaining short-term and long-term financing are limited and the
interest cost of obtaining financing in the capital markets could be
very costly. The District's financial plan discusses two borrowing
options, another option was also recently added for obtaining funds
from capital markets. The recently reported $220 million short-term
lending offer from the capital markets to the District occurred after
the completion of our work and was not part of our review.
The first option in the District's financial plan includes the
District borrowing short-term from the U.S. Treasury using the
subsequent year's federal payment as collateral to fund its
operations and capital projects. The second option includes the
District borrowing $500 million for accumulated deficit financing and
$900 million (that is, $150 million in each of the next 6 years
starting in fiscal year 1997) to meets its capital needs. In
addition to these borrowings, the District will still need short-term
borrowing for cash flow purposes.
Under the first option, the District projects that by April 1998, it
will have borrowed against the entire fiscal year 1998 federal
payment and will not have cash sufficient to meet its operating
needs. Under current law, the District may borrow from the U.S.
Treasury to meet its capital and cash flow needs, and such borrowings
are payable from the subsequent fiscal year's federal payment.
There are no provisions in the current law for long-term borrowing
from the U.S. Treasury or for deficit financing of the District's
operating deficits. At present, the District must repay Treasury
loans within 12 months. Also, section 461 of the Home Rule Act
authorizes the District to enter into long-term borrowing by issuing
general obligation bonds only for capital improvements or to refund
outstanding indebtedness. The District of Columbia Emergency Deficit
Reduction Act of 1991, Public Law 102-106, authorized the District
(on a temporary basis ending on September 30, 1992) to issue general
obligation bonds to finance payment of the $332 million accumulated
operating deficit in the general fund at the end of fiscal year 1991.
In addition, section 603 (b) of the Home Rule Act provides that the
District may not issue general obligation bonds (other than to refund
outstanding indebtedness) if the District's debt service in a fiscal
year exceeds 14 percent of the estimated revenues during the year the
bonds are issued.
By the end of fiscal year 1996, the District's debt service is
forecasted to be at approximately 11.9 percent of estimated revenues.
Thus, the District would need to seek additional legislative
authority before plans to issue long-term bonds to fund capital
improvements or to finance the District's accumulated operating
deficit would become viable options.
The New York City and Philadelphia control boards, during the first
year that the boards were in place, obtained long-term borrowings to
finance their respective accumulated deficits. New York City, which
at the time had an accumulated deficit of $6.2 billion, received
about $3.6 billion as deficit financing and exchanging of notes.
Philadelphia had both accumulated and projected deficits at the time
its control board borrowed $475 million, as shown in table 3.
Table 3
Pennsylvania Intergovernmental
Cooperation Assistance Authority
Borrowing: Uses of Proceeds of Fiscal
Year 1991 Serial Bonds
(Dollars in millions)
---------------------------------------- ---------------- ----------
Funds to city for deficit reductions\a FY92 $153.5
(cumulative)
FY92 (projected $94.9
deficit)
FY93 (projected $7.8
deficit)
======================================================================
Subtotal $256.2
Grants for capital projects $120.0
Grants to productivity bank $20.0
Debt service reserve fund $47.5
Capitalized interest $20.0
PICA expenses $0.6
Financing costs $10.9
======================================================================
Total $ 475.3
----------------------------------------------------------------------
\a Philadelphia's actual deficit for fiscal year 1992 was $71.4
million, and it reported a surplus of $3 million in 1993. Thus,
Philadelphia was only required to borrow $225 million for deficit
financing.
Source: Offering Statement, June 1, 1992, p. 6.
Like New York City and Philadelphia, the District's accumulated
deficit and any approved projected deficits should be fully funded
through longer-term borrowings or other means, including the need for
any approved capital projects funding. In addition, a funding
mechanism should be established that ensures sufficient funds for its
immediate short-term cash needs. Along with this funding, the
District's financial plan should be modified with enough revenue
enhancement efforts and/or deeper budget cuts to fund the repayment
of any long-term debt incurred and current operations without
incurring further budget deficits.
--------------------
\17 Testimony of District CFO Anthony A. Williams before the House
Subcommittee on the District of Columbia, Committee on Government
Reform and Oversight, March 28, 1996.
ACTIONS TAKEN BY THE THREE
CONTROL BOARDS IN THEIR FIRST
YEAR
---------------------------------------------------------- Chapter 0:3
You asked us to respond to several questions relating to the three
control boards\18
ranging from their organizational structure and personnel, to budget
initiatives, to management initiatives implemented in the first year
to resolve their respective cities' financial crises and help improve
operations. In response to your specific questions, the following
sections (1) provide some background on the legislative authority of
the controls boards, (2) summarize the actions taken by the three
respective control boards in their first year of operation, and (3)
include a matrix that provides information about how the control
boards are structured as well as statistical information, such as
their budget and number of personnel. (See attachment).
--------------------
\18 The three oversight boards that we reviewed are the District of
Columbia Financial Responsibility and Management Assistance Authority
(Authority), New York State Financial Control Board (FCB) (including
the Municipal Assistance Corporation (MAC)) and the Office of the
State Deputy Comptroller (OSDC), and the Pennsylvania
Intergovernmental Cooperation Assistance Authority (PICA).
AUTHORITY LEGISLATION
-------------------------------------------------------- Chapter 0:3.1
The Authority was granted broad powers to accomplish a number of
purposes, including
-- eliminating the budget deficits and cash shortages of the
District;
-- ensuring the most efficient and effective delivery of services
by the District;
-- enhancing the District's timely payments of its debts and access
to capital markets;
-- assuring the District's long-term financial, fiscal, and
economic vitality and operational efficiency;
-- examining the programmatic and structural relationship between
the District and the federal government;
-- requiring the District to examine the programmatic and economic
impact of activities before they are implemented; and
-- assisting the District in achieving an appropriate relationship
with the federal government and implementing the actions
necessary to accomplish the purpose of the enabling legislation.
The laws creating the control boards in New York City and
Philadelphia generally had purposes similar to the law for the
District, except for provisions pertaining to the federal government,
even though they each had comparable provisions related to their
respective states.
The Authority was given extensive powers to accomplish these purposes
relating to the financial management activities of the District
government. The Authority's exercise of many of these powers are
confined to a "control year," which, under the law, commenced in
fiscal year 1996. The following are some of the more significant
powers that enabling legislation confers\19 on the Authority. During
a control year, the Authority has the power to:
-- Annually approve the financial plan and budget of the District.
-- Approve all acts and contracts of the District for consistency
with its financial plan and budget.
-- Approve the appointment of the District's Chief Financial
Officer and Inspector General, or remove those officials for
cause.
-- Approve all District borrowings. In addition, at the request of
the District, the Authority may borrow monies from the Treasury
and the public that could be secured by dedicated revenues of
the District. Also, it may control and direct the flow and use
of funds from such borrowings.
-- Assure that the federal payment is used under terms and
conditions that the Authority deems appropriate to implement the
District' s financial plan.
The Authority was given many other powers, including certain
administrative and enforcement powers, to ensure that it had the
necessary authority to achieve the objectives of the enabling
legislation. The New York City\20 and Philadelphia\21 control boards
had similar powers conferred on them, except for those pertaining to
a chief financial officer and inspector general.
--------------------
\19 District of Columbia Financial Responsibility and Management
Assistance Act of 1995, sections 201 to 205, 211 to 213, and 303.
\20 New York State Financial Emergency Act for the City of New York,
State of New York Laws of 1975, sections 5408, 4511, 5412, and
Municipal Assistance Corporation Law of 1975, sections 3010, 3012,
and 3013.
\21 Pennsylvania Intergovernmental Cooperation Authority Act for
Cities of the First Class (Act of June 5, 1991, Public Law No. 6)
Section 203.
THE DISTRICT OF COLUMBIA
FINANCIAL RESPONSIBILITY AND
MANAGEMENT ASSISTANCE
AUTHORITY
-------------------------------------------------------- Chapter 0:3.2
To respond to a number of your questions, we sent a letter of inquiry
to the Authority on May 17, 1996. In response, the Authority
provided us with written responses, reports, and testimonies it had
prepared. We received substantial portions of the Authority's
responses on June 25, 1996. Consequently, we cannot provide an
in-depth assessment of the actions it has taken or the status of
actions in the planning stages.
The following provides a summary of the Authority's response to our
inquiry. In attachment I, we provide some baseline information on,
for example, the Authority's and the New York and Philadelphia
control boards' organization, components, number of employees and
budget, which address a number of your questions. I would now like
to focus on issues concerning the actions the Authority has taken or
plans to take, in the form of management initiatives (financial and
nonfinancial), budget initiatives, actions pertaining to the
Authority itself, and legislative initiatives, to respond to the
major problems facing the District.
The Authority has completed some actions in its first year and has a
large number planned. In our view, the most critical challenge
facing the Authority is to quickly alleviate the District's cash flow
problems. Prospectively, the Authority needs to address the many
other major issues confronting the District, such as the federal
payment, Medicaid, pensions, capital improvements, school system
costs, court system costs, subsidies, service delivery, and its
financial management system. These issues will need to be
prioritized quickly, with specific plans and objectives developed to
deal with each of them. These plans need to have clearly articulated
timetables, deliverables, and outcomes that are measurable if the
city is going to resolve its financial problems and establish sound
financial and managerial policies and procedures. The Congress then
needs to provide oversight to ensure that the Authority and the
District meet requirements set out in the Authority's strategic plan
and the District's financial plan.
MANAGEMENT INITIATIVES
-------------------------------------------------------- Chapter 0:3.3
As part of its enabling legislation, the Authority was given power to
help resolve the financial and operational problems facing the
District, such as ensuring that proposed initiatives are in line with
the District's financial plan and budget, that service delivery is
efficient and effective, and that cost savings and efficiencies are
received. In response to our inquiry, the Authority indicated that
it had completed or planned the following management initiatives to
carry out its responsibilities.
ACTIONS COMPLETED
------------------------------------------------------ Chapter 0:3.3.1
The Authority advised us that, as of May 28, 1996, it had reviewed
1,562 contracts and had another 64 on-hand. Of these, 1,549 were
shown as approved, 3 were rejected, 6 were withdrawn by the agency,
and 4 had other dispositions. According to the Authority, the
District has experienced direct savings from contracts that were
rejected, withdrawn, or modified. In many other instances, the
Authority stated, cost savings are not immediately quantifiable.
Some examples of savings include: a pre-trial services contract that
was rejected and is expected to result in savings of at least
$300,000 annually; a $1 million communications equipment contract
that was returned; and individual contracts for fuel oil that were
withdrawn, resulting in reported savings in excess of $100,000 for
the first quarter of fiscal year 1996. Other management initiatives
the Authority implemented during its first year are as follows:
-- Working with the City Administrator's Office, the Authority
encouraged the removal of contracting authority from the
Department of Human Services (DHS). The Authority said it is
now working with the city to assemble contracting specialists
from the federal government to clean up DHS' contracting
procedures.
-- The Authority engaged an independent public accounting firm to
perform certain procedures regarding the District's payroll and
its accounts payable. The accounts payable study began on
August 28, 1995, and ended on December 14, 1995. The report on
the study, issued on January 12, 1996, estimated, based on the
agreed upon procedures performed, that the District's general
fund accounts payable as of September 30, 1995, was between $231
million and $269 million.
-- The Authority has worked with a car manufacturing company to
repair the District's emergency vehicles in order to deliver
services.
-- The Authority stated that it privatized two functions during
fiscal year 1996. Approximately 300 personal care aide jobs
were replaced by a contract. D.C. Village, a nursing home, was
closed and its patients transferred to private nursing homes.
ACTIONS PLANNED
-------------------------------------------------------- Chapter 0:3.4
-- The Authority said that it was developing a strategic plan and
annual report. The strategic plan is to include a mission
statement, measurable goals and objectives, and timetables for
the expected completion of certain goals. The plan is also to
include an assessment of short-term and long-term objectives and
will discuss the Authority's overall priorities.
-- The Authority said it planned to privatize 10 activities during
fiscal year 1996, which account for approximately 1,096 FTEs and
currently cost over $65 million. These initiatives include such
activities as the sale/leaseback of the 800 bed Correctional
Treatment Facility, food services, police and fire/medical
services, transportation and motor pool services, and solid
waste and transfer disposal.
-- The Authority stated that it plans to perform future work to
distinguish city/county/state functions that the District
performs. The District provides, to a certain extent, public
services that are normally provided by state and county
governments, most notably extensive hospital, education,
correctional, and medicaid services.
-- The Authority stated that it had undertaken two relatively
broad-based comparative initiatives that will be used to develop
approaches to improve performance and to compare the District's
performance with that of other governments. These initiatives
are being undertaken in cooperation with several national
organizations, including the Greater Washington Research Center,
the Brookings Institution, and the International City/County
Managers Association (ICMA). Brookings is examining what
District activities are necessary and whether they are being
delivered in the most efficient and economical way. ICMA will
identify performance measures for the core services that the
District performs and help determine whether these core services
are being delivered in the most efficient and economical way.
-- The Authority stated that it was working with the District on a
pilot performance management program at the Department of Public
Works to help the District better establish benchmarks by which
to measure performance.
-- According to the Authority, it is working with the District to
restructure programs, to enhance program delivery, and to hasten
fiscal recovery. For example, the Authority plans to initiate a
thorough review of how resources are used within the District of
Columbia Public Schools and to identify how resources can be
directed to upgrade the school system as a way of restoring and
retaining the city's middle-class tax base.
-- The Authority recommended that a new financial management system
be implemented by the end of fiscal year 1996. The Authority
stated that it reinforced this recommendation by ensuring that
funds were available to perform a comprehensive needs assessment
and the initial developmental stages for a new financial
management system. It is the Authority's view that the District
is responsible for contracting with a consultant to perform the
needs assessment.
BUDGET INITIATIVES
-------------------------------------------------------- Chapter 0:3.5
The act requires the Authority to perform reviews of District of
Columbia budgets to assist the District in its efforts to restructure
its workforce for more efficient service delivery; to eliminate the
District's current budget deficit; and to ensure the long-term
economic, financial, and fiscal vitality of the city. In this
capacity, the Authority said that it had completed or planned the
following actions.
ACTIONS COMPLETED
------------------------------------------------------ Chapter 0:3.5.1
In reports in February and March of this year,\22 the Authority
stated that it allocated reductions in the fiscal year 1996 budget of
the District to specific departments to increase the likelihood that
the proposed reductions would be made. In addition, the Authority
disapproved a City Council-proposed supplemental budget of $5.123
billion. The Authority concluded that the supplemental budget at
this level would increase the accumulated deficit and that approving
a supplemental budget with such harsh fiscal consequences would be
irresponsible. Consequently, on February 23, 1996, the Authority
disapproved the City Council's action and issued a list of
recommendations designed to enable the City to meet the $4.994
billion budget agreed upon by the Congressional Conference Committee
on Appropriations for the District of Columbia.
With the Mayor and the City Council, the Authority reached consensus
on the fiscal year 1997 budget and financial plan, which was
submitted to the Congress for approval. This plan addresses the need
for borrowing for different purposes, such as long-term borrowing for
accumulated deficit and borrowing for capital investment. As I
discussed earlier in this statement, the District has estimated that
it will have an accumulated deficit of almost $500 million at the end
of fiscal year 1996, with a deficit of $116 million for fiscal year
1996. It estimates that it will run out of cash this month.
The actions to borrow proposed in the fiscal year 1997 budget will
require approval from the Congress and would require the Authority
and the District to work together to establish an appropriate
relationship with the Congress so that the District can achieve
balanced budgets and long-term fiscal health. As I discussed
earlier, the control boards in New York and Philadelphia stabilized
the cities' cash position in their first year of operation through
refinancing and long-term borrowing. This issue must be addressed if
the District is to resolve its financial problems.
In recent congressional testimony,\23 the Authority provided its
analysis of the District's fiscal year 1997 budget and its potential
need for borrowing. The Authority stated that the fiscal year 1997
Budget and Financial Plan conformed with the act in that it promoted
the financial stability of the District government and furthered the
interests of the people of the District. The budget estimated
revenues of $5.04 billion and expenditures of $5.14 billion with a
resulting deficit of $98.9 million, down $17 million from the
projected fiscal year 1996 deficit of $116 million. Projections for
fiscal years 1998 through 2000 call for a small deficit in fiscal
year 1998 and small surpluses in fiscal years 1999 and 2000.
--------------------
\22 Report on Final Allocations of the District of Columbia's Fiscal
Year 1996 Budget, District of Columbia Financial Responsibility and
Management Assistance Authority, March 29, 1996, and Report on the
District of Columbia's Fiscal Year 1996 Budget, District of Columbia
Financial Responsibility and Management Assistance Authority,
February 23, 1996.
\23 Statement of Andrew F. Brimmer, Chairman, District of Columbia
Financial Responsibility and Management Assistance Authority, before
the Subcommittee on the District of Columbia, House Committee on
Appropriations, June 26, 1996.
ACTIONS PLANNED
------------------------------------------------------ Chapter 0:3.5.2
As discussed previously in this testimony, our more detailed review
of the District's budgeted expenditures found that the critical areas
of the District's budget that have far-reaching implications for the
District financially and programmatically are Medicaid and the
unfunded pension liability. Further, we noted the high level of
interest by all parties in the District's budget deliberations on the
subsidies paid to D.C. General Hospital and the University of the
District of Columbia. These expenditures individually and in the
aggregate have a significant impact on the District's financial
condition that must be addressed in solving its financial problems.
In a June 17, 1996, report,\24 the Authority enumerated the actions
it plans to take to resolve these issues. They include the
following:
-- The Authority is helping the District undertake a systematic
review of each health and human services program. According to
the Authority, the goal of the review is to ensure that high
quality services are being delivered and to require that the
most efficient and accessible means of delivering the services
are instituted. Service redundancies are to be identified and
services prioritized within existing budget constraints. The
Authority also plans to review similar operations, such as a
review of the mission, operations, and ownership structure of
the District-owned and operated neighborhood health clinics.
The Authority committed to providing $260,000 to the District's
Commission on Health Care Finance to contract for specialized
consulting services to develop a detailed work plan on how the
District will gain control of Medicaid expenditures. The
Authority also agreed to facilitate projects previously
identified by the District.
-- The Authority is studying the unfunded pension liability and
plans to work with District and federal officials to develop a
plan to address this problem. The Authority is analyzing a
District-proposed plan to create a new police, fire fighters,'
and teachers' pension plan for employees hired after October 1,
1996. In May 1996, Congresswoman Norton proposed legislation to
address the unfunded liability in the police, fire fighters',
teachers', and judges' pension plan. The Authority is also
studying this proposal.
Another area that affects the District's ability to resolve its
financial problems is subsidy payments. As part of the District's
efforts to turn its financial condition around in these austere
times, it is imperative that the cost/benefits of these programs and
any other costly aspects of the District operations be looked at for
alternative ways to meet the objective(s) they were created to meet.
The Authority has made some recommendations regarding D.C. General
Hospital and the University of the District of Columbia.
Finally, you asked us to request a list of the Authority's
recommendations for fiscal years 1995 and 1996 as submitted to the
Mayor, the City Council, the President, and the Congress. These
recommendations dealt with actions the District government or the
federal government may take to ensure compliance by the District
government with a financial plan and budget or to otherwise promote
the financial stability, management responsibility, and service
delivery efficiency of the District government, including
recommendations relating to section 207 (a)(1) (10) of the Financial
Responsibility and Management Assistance Act of 1995, Public Law
104-8. We also asked the Authority for a response from the Mayor or
City Council to the Authority on whether they will adopt the
recommendations and what the potential cost savings from these
recommendations are. The Authority did provide a list of
recommendations, which we are providing to you under separate cover
today, but it did not provide any information on the Mayor's or City
Council's response. It stated that it has not, in many instances,
finalized the cost savings of each recommendation.
--------------------
\24 Report to the Congress: Issues Related to the Fiscal Year 1996
Appropriations Act, District of Columbia Financial Responsibility and
Management Assistance Authority.
LEGISLATIVE INITIATIVES
-------------------------------------------------------- Chapter 0:3.6
Under its enabling legislation and other laws, the Authority is
authorized to review permanent and temporary legislation\25 for
consistency with the District's financial plan and budget. Under
section 203(a) of the act, the Authority has reviewed 86 acts
proposed by the City Council. The Authority disapproved five of
these and made recommendations to the District under section
203(a)(3)(B) of the act. The Authority has conducted informal
reviews under section 203(a)(6) in consultation with City Council
staff. It stated that it has not received any formal requests from
the City Council to provide preliminary reviews of acts. The
Authority also stated that it would continue to review proposed
legislation, as required under the act.
--------------------
\25 See Information on Emergency Legislation (GAO/AIMD-96-45R,
February 21, 1996).
OTHER INITIATIVES
-------------------------------------------------------- Chapter 0:3.7
You also asked us specific questions regarding the following:
-- The Authority has contracted with the following consultants and
experts:
an independent public accounting firm was engaged for the audit of
the District' fiscal year 1995 financial statements and
an independent public accounting firm was engaged for the audit of
the Authority's fiscal year 1995 financial statements.
-- The Authority has established four accounts to handle the funds
it is responsible for as follows: (1) an account for the
Authority's operating purposes, (2) an escrow account for
receiving the federal payment and Treasury loans for the
District, (3) an escrow account for the Police Grant for the
Metropolitan Police Department, and (4) account earnings on the
federal payment and Treasury loan.
-- The Authority stated that it had established controls on the use
of these accounts. It did not provide them to us for review but
expressed its willingness to discuss these controls with us
directly. It also added that the Chief Financial Officer (CFO)
has outlined cash management priorities, which the Authority has
reviewed and approved. According to the Authority, the
priorities are used to determine whether requisitions made by
the CFO fit the criteria. In order for an agency to obtain
funds, the terms and conditions must be met and certified to by
the CFO.
-- The Authority stated that it is in constant communication with
District officials in both the Mayor's Office and City Council.
It said that it holds meetings with these officials on a wide
range of management and budget issues of mutual concern to the
Authority and the District government. The Authority has not
established any formal mechanism for communicating with District
officials, but said that all sides remain in frequent, daily
contact. The Authority has issued several public notices of
public meetings and has not issued any subpoenas. The Authority
has held two meetings at which the public was invited to provide
views and regularly hears from the public via telephone calls
and letters.
THE NEW YORK CITY AND CITY
OF PHILADELPHIA CONTROL
BOARDS
-------------------------------------------------------- Chapter 0:3.8
At your request, we also reviewed the actions taken by the New York
and Philadelphia control boards whose cities also faced serious
financial problems. These were the New York State Financial Control
Board (FCB) (including the Municipal Assistance Corporation (MAC))
and the Office of the State Deputy Comptroller (OSDC), and the
Pennsylvania Intergovernmental Cooperation Authority (PICA).
While the catalysts for creating the New York City, Philadelphia, and
District control boards were the same--financial difficulties--there
are some key differences that must be considered in defining the
specific problems faced by these cities and evaluating the propriety
of solutions implemented and the relative performance of each control
board's efforts. Some of the more significant economic and
programmatic differences follow.
-- New York City's financial crisis crested in 1975, Philadelphia's
in 1991, and the District's in 1995, a span of 20 years and
various economic times for this country that would affect
available financial solutions;
-- New York City and Philadelphia are large metropolitan areas of
states and hold preeminent roles in their respective states.
The District, on the other hand, has no such relationship.
Instead, it must compete for federal resource support with other
national interests. As discussed earlier, these relationships
affect such things as Medicaid.
-- New York City, especially, and Philadelphia, somewhat, have
larger budgets and populations and more diversified tax bases to
draw revenues from and do not have the legislatively imposed
restraints on their ability to control their own revenue sources
that the District has.
-- The demographics--for both individuals and businesses--have
implications for both the problems of the three cities and
potential solutions. This would include distribution of wealth
of the citizenry, employment/unemployment levels, industry
diversification within the city and surrounding areas, and age
distribution of city residents.
While this list of key differences is not exhaustive, it does point
to the critical need to consider these and other items that would
potentially make the nature of the problems the cities experienced,
the proposed solutions, and the actions of their respective control
boards, not necessarily comparable even though the core
problem--financial difficulties--was the same.
New York City ended fiscal year 1976 with an annual operating deficit
of $1.2 billion and was burdened with an accumulated deficit of
approximately $6.2 billion. Throughout fiscal year 1976, numerous
actions were taken with the assistance of FCB and MAC to prevent the
city from going bankrupt.
During their first year in operation, in order to eliminate the
budget deficits and cash shortages of New York City, the following
MAC and FCB recommendations were implemented: (1) the workforce was
reduced by about 40,000, or 13 percent, from its June 30, 1975,
level,\26 (2) remaining city employees' wages were frozen for 3
years, (3) tolls on bridges and tunnels were increased, (4) commuter
and subway fares were increased, (5) municipal hospitals had massive
layoffs, (6) the tuition-free policy of the City University of New
York was terminated, and (7) taxes were increased by about $775
million. In addition, the FCB adopted a resolution urging the State
to assume the costs of maintaining courts and correction facilities,
and the State enacted legislation in that year to assume these costs.
MAC helped to establish the New York Council on the Economy, which
addressed, among other things: (1) relieving the stock transfer tax
burden on state and city businesses, (2) developing Battery Park
City, which represented a stimulus to the financial real estate
market, and (3) constructing a new convention center.
A key component in New York City's plan of recovery was the
comprehensive overhaul and reform of the city's accounting and
budgetary practices. The objective was the installation of a new
integrated financial management system (IFMS), a computerized system
for accounting, budgeting, purchasing, and payroll, linking the
myriad of city departments and operations for the first time into one
system with a single database.
This project received the highest possible priority as fiscal year
1976 advanced. The OSDC was given oversight responsibility for this
project. Professional personnel were recruited, in some cases
"loaned" by leading banks or corporations, and contracts were put
into place with private accounting and systems management firms for
work that could not be performed in-house. The system was
implemented in July 1977. In addition, a management plan was
implemented that enabled the city to monitor its operations
continuously. The management plan and reports identified
opportunities for improved performance. To strengthen management of
this program, the Mayor, who was also a member of the FCB,
established an office of operations.
Despite the highest degree of commitment evidenced by New York State
to avert a bankruptcy, it became apparent that federal assistance was
essential. The oversight boards helped New York City gain funding
from various sources, such as the state, commercial lending
institutions, city and state pension funds, and the federal
government. By the end of fiscal year 1976, MAC bonds and notes
outstanding on behalf of the city were approximately $3.9 billion,
which stabilized the City's cash position.\27 As a former
congressman, and Chairman of the FCB, the State Governor worked with
New York City in the first control year to attract needed federal
assistance, which was key to the city receiving federal loans and
loan guarantees.
According to New York City officials, the control boards made
significant contributions. The governor in his elected capacity and
as chairman of the FCB committed himself fully to assist the city.
The FCB and its professional staff and the State Comptroller provided
strong support and guidance. MAC carried out its distinctive role to
finance the city and ease its debt obligations. The State
Legislature and the U.S. Congress responded to New York City, and
the U.S. Department of the Treasury expressed its faith in the
City's plans and progress.
In fiscal year 1992, Philadelphia had an operating deficit of $98.7
million and an accumulated deficit of $153.5 million; however, by the
end of the fiscal year, PICA had taken actions to eliminate the
operating and accumulated deficit.
In PICA's first year, it borrowed about $475 million in Special Tax
Revenue Bonds on behalf of the City of Philadelphia. The bond
proceeds were used to fund the cumulative deficit, current year and
subsequent year deficits, and certain capital projects and
productivity enhancement initiatives.\28 In addition, Philadelphia
imposed a 1 percent sales tax, renegotiated labor agreements, and
collected back taxes. As a result of the 1 percent sales tax,
revenues increased by $52.3 million for fiscal year 1992. The
renegotiation with the labor union led to a 33-month wage freeze and
extensive restructuring of health benefits agreements to achieve cost
savings and reductions in paid holiday and sick leave. Delinquent
tax collection increased by 10 percent annually.
A PICA "authority tax" was approved by the Philadelphia city council
in June 1991. This is a 1.5 percent tax on wages, salaries,
commissions, and other compensation earned by residents of the city
and on the net profits earned by businesses, professions, or other
activities conducted by residents of the City of Philadelphia. This
revenue goes into a Special Revenue Fund collected by the
Commonwealth of Pennsylvania. A portion of the PICA tax is used to
cover PICA debt service and other PICA expenses, with the remaining
revenues going to the "City Account."\29
In 1992, Philadelphia began the process of updating its financial and
information systems to enable operating departments to obtain more
detailed management information on a daily basis. It also began
contracting out custodial work in all of its central facilities,
saving the city an estimated $700,000 annually, in addition to
improving the quality of services in city offices and transit
concourse areas. Other productivity measures, which began in 1992,
included a competitive contracting program and renegotiation of real
estate leases resulting in savings of $1 million for fiscal year
1993.
Finally, Philadelphia achieved a balanced budget in fiscal year 1993,
2 years after its control board was established, and has sustained it
through fiscal year 1995. New York City achieved a balanced budget
in the sixth year of its control board's operation and has sustained
small surpluses through 1995. The FCB has been in an advisory role
since fiscal year 1986, after the city had sustained 6 consecutive
years of balanced budgets.
--------------------
\26 We did not receive sufficient information from New York City to
quantify the savings that were realized from the FTE reductions, wage
freeze, increases in transit fares, tolls, etc.
\27 Municipal Assistance Corporation 1976 Annual Report.
\28 Pennsylvania Intergovernmental Cooperation Authority, Financial
Statements for the Period from June 5, 1991, to June 30, 1992, and
Independent Auditor's Report, September 3, 1992.
\29 "The City account" is considered a trust fund for the exclusive
benefit of Philadelphia, and is used to maintain the proceeds of
taxes or other revenues pledged by the Authority to secure bonds.
THE DISTRICT'S FINANCIAL
MANAGEMENT SYSTEM
---------------------------------------------------------- Chapter 0:4
Your April 25, 1996, request asked that we gather information on the
history, capabilities, and status of the District's Financial
Management System (FMS). In our June 14, 1995,\30
testimony before this Subcommittee, we concluded that improvements in
the District's financial information and controls will need to be
addressed. We noted, however, that simply purchasing new hardware
and software will do little to improve financial information and
controls. We stated that major improvements in financial and other
management information can only be realized if they are part of an
overall assessment of processes, people, and equipment. We
recommended that the District clean up existing data in the financial
systems and place special emphasis on ensuring that basic accounting
policies and procedures are followed. In addition, we recommended
that the Authority study the accounting and financial management
information needs of the District.
In a hearing before the House Subcommittee on the District of
Columbia in June 1996,\31
the Authority's Executive Director stated that a new financial
management system is needed to provide better information for
monitoring such things as departmental differences between budgeted
and actual spending, cash balances, and outstanding debt. The
District of Columbia 1996 Appropriations Act requires the Authority
to report to the District's oversight and appropriations committees
of the House of Representatives and Senate on the results of a needs
analysis and assessment of the District's existing financial
environment, specifying deficiencies in, and recommending necessary
improvements to or replacement of the District's financial management
system, including a detailed explanation of each recommendation and
its estimated cost.\32 The Congress appropriated $2 million for the
assessment and $26 million for the improvements. However, none of
the $26 million may be obligated or expended until 30 days lapse
after receipt of the report by the Congress.\33
The Executive Director of the Authority advised us that the Authority
views the District as having responsibility for the feasibility
study. He further stated that the Chief Financial Officer of the
District was requiring, as part of bid proposals for improving the
existing system, that each bidder provide a systems needs assessment
that identified all of the problems, the bidder's recommendation for
fixing the problems, and the bidder's estimated cost to do so. The
Authority's Executive Director stated that the Authority has no plans
to do any other feasibility study and that the $2 million provided
could go towards the cost of systems improvements. As I mentioned
earlier, the Authority advised us that it included in the fiscal year
1996 budget $2 million for a feasibility study of the current system
and $26 million to implement a new system. Because the study has not
as yet been undertaken, and none of the bids on the system
improvements had been received, and given the timing of this hearing,
the information contained in the following discussion is based solely
on interviews with District financial officials.
In 1976, the Congress created the Temporary Commission on Financial
Oversight of the District (Commission) to develop and implement a
core financial management system. In 1977, the Commission hired a
contractor to design, develop, and implement the District's new
system, commonly called the Financial Management System (FMS).
Between April 1978 and September 1979, the contractor developed the
overall system and its operating characteristics. The new system was
placed in operation in October 1979. In addition to the new system,
the Commission had responsibility for other initiatives, such as FMS
training, developing feeder systems, and preparing for and conducting
audits. Total costs for these efforts were approximately $38
million, of which the Commission spent approximately $18 million for
FMS and training, and the remainder for feeder systems, audits, and
operating costs. The system, as installed, was designed to perform
budget and accounting functions and was considered a state-of-the-art
system.
Over the years, the District made limited modifications to the
system. Changes that have been implemented in FMS were primarily
upgrades to tape and disk capacity and revised reports. According to
District officials, the District did not improve the system to
facilitate management needs and, as a result, the system is not now
capable of providing reliable, timely, and relevant information to
manage operations and costs. District officials also told us that
due to the loss of staff with FMS knowledge--through attrition,
retirements, and layoffs--current FMS users are not as familiar with
the system and its capabilities. In discussions with the District's
CFO and various city officials, they identified several issues
relevant to FMS, including:
-- FMS does not currently provide complete, reliable, and useful
information to assess the District's programmatic and financial
activities. This hampers the District and the Congress from
making informed decisions.
-- FMS does not provide financial statements, such as the balance
sheet and revenue, and expense statements. To prepare interim,
or year-end financial statements, numerous manual entries are
required to restate FMS' balances based on generally accepted
accounting principles.
-- FMS and the payroll system are not integrated. As a result,
numerous manual tasks are required to reconcile reporting
differences between the payroll system and FMS' labor
distribution module, which assigns personnel hours to specific
activities.
-- FMS reports are not designed to meet users' needs. As a result,
agencies are required to manipulate report data into formats
useful to the user. For example, reports generated by FMS are
summary in nature rather than detailed.
-- The District does not have a cadre of skilled personnel with
extensive FMS knowledge. In addition, the available, skilled
staff are limited in number and some are close to retirement
age. Consequently, the full capability of FMS may be
underutilized.
In addition, we surveyed financial management officials at 14 key
District agencies that use FMS. The results of their responses
follow:
-- 21 percent stated that they were satisfied with the system,
-- 43 percent told us that they were partially satisfied with it,
and
-- 36 percent were unsatisfied.
Further, District officials stated that little or no follow-up
training has been provided since the original training when FMS was
implemented. District officials also told us that due to budget
constraints, no formal training has been provided in approximately 4
years.
As I mentioned earlier, the Authority contracted with an independent
public accounting firm to perform an accounts payable study of the
District's financial activities. In performing the study, the firm
experienced difficulty due to the data structure of accounts payable
which required the firm to research through several layers of source
documentation to complete its work. As a result, the firm
experienced numerous delays and dedicated significantly more effort
than anticipated.
As part of our review, we examined steps taken by both the cities of
New York and Philadelphia to improve their financial management.
Both had inadequate accounting procedures and information systems.
As I mentioned earlier, in 1975, the first year of its crisis, New
York City began developing a new integrated financial management
system to account for all revenues and expenditures in a
comprehensive manner. New York City installed its Integrated
Financial Management System in July 1977. Likewise, in fiscal year
1992, Philadelphia began making enhancements to its financial
management system and fully converted to an upgraded system by June
1994.
--------------------
\30 District of Columbia: Improved Financial Information and
Controls Are Essential to Address the Financial Crisis
(GAO/T-AIMD-95-176, June 21, 1995).
\31 House of Representatives Committee on Appropriations,
Subcommittee on the District of Columbia, Hearing, June 5, 1996.
\32 Public Law 104-134 has not been printed as of this date. The
language of the act is set forth in the conference committee report
accompanying the appropriation act (H.R. Report 104-537) reprinted
as 142 Congressional Record H3842, H3862-H3883 (daily edition April
25, 1996).
\33 See 142 Congressional Record H3863.
-------------------------------------------------------- Chapter 0:4.1
Mr. Chairman, this concludes my statement. I will be happy to
answer any questions that you or the other Members of the Committee
may have at this time.
INFORMATION ON SELECTED FINANCIAL
OVERSIGHT BOARDS
=========================================================== Appendix I
Pennsylvania
Intergovernmental
New York State Cooperation DC Financial
Financial Control Authority (PICA) Responsibility &
Board (FCB) (New (City of Management Assistance
Board York City) Philadelphia) Authority (DCFRA)
--------- -------------------- -------------------- -------------------------
Statutory New York State Pennsylvania DCFRA Act April 1995
authority Financial Emergency Intergovernmental
Act for the City of Cooperation
New York, State of Authority Act for
N.Y. Laws of 1975, Cities of the First
Chap. 868 Class (Act of June
5, 1991, P.L.9,
No.6)
Year 1975 1991 1995
establish
ed
Still in Yes, in advisory Yes Yes
operation role only since 1986
Test for Originally, 6 months PICA exists for a Twelve months after DCFRA
complete after budget is term not exceeding 1 certifies that all its
terminati balanced; later year after all its obligations, notes, bonds
on revised so that the liabilities, or borrowing have been
board will exist including its bonds, repaid.
until the earlier of have been fully paid
(a) 7/1/2008, or (b) and discharged.
the date when all
federally guaranteed
loans are retired
and when all bonds
and notes as set out
in section 5415 of
act are discharged,
refunded, redeemed,
or otherwise
defeased.
Appointed Three appointed by One by governor, 1 The President appoints
by governor with advice by President pro all five members after
and consent of the tempore of the consultation with
state senate. Senate, 1 by Congress.
Minority Leader of
the Senate, 1 by the
Speaker of the
House, and 1 by the
Minority Leader of
the House.
Number of 7 7 5
members
Ex 4 2 0
officio
Governor (chairman) Secretary of the
State State comptroller Budget
officials
Mayor
City comptroller Director of Finance
Local
officials 3 from private 5
sector 5
Appointed
Staff 24 -New York State 6 30
size Financial Control
first Board
year
10 -Office of the
State Deputy
Comptroller
6 -Municipal
Assistance
Corporation
Term At discretion of At the pleasure of Initially all members
governor. the appointing appointed for a 3-year
authority; member's period. After initial
term is coterminous term:
with appointing
authority. 1 member appointed for a
term of 1 year,
2 members appointed for a
term of 2 years, and
2 members appointed for a
term of 3 years.
Qualifica Originally not Experience in Knowledge and expertise
tions of specified. With finance or in finance, management
appointed revisions to law in management. and the organization or
members 1978, at least 2 Residents of the operations of a business
private members assisted city or or government. Either
shall be city have their primary primary residence or
residents or have business in such business within the city.
principal place of city, except for
business in the Secretary of the
city. Budget.
Qualifica Expertise in law, Expertise in Expertise in accounting
tions of political science, finance, investment and financial management,
staff policy analysis, and banking, law, public procurement,
public management.\a accounting, and international affairs,
analysis. law, public
administration,
economics, and political
science.
Expenditu $6.1 million\b $0.7 million\c $0.4 million\\d
res year
establish
ed
--------------------------------------------------------------------------------
\a MAC and OSDC staff consist of banking, finance, legal, accounting,
budget analyst, economist and academicians.
\b Fiscal year ended June 30, 1976 includes MAC and OSDC.
\c From inception to June 30, 1992.
\d From inception to September 30, 1995.
*** End of document. ***