District Government: Information on Its Fiscal Condition (Testimony,
07/19/96, GAO/T-AIMD-96-133).

Pursuant to a congressional request, GAO discussed the financial and
budget trends in the District of Columbia's revenues and expenses. GAO
noted 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 assessed value of the District's
commercial and residential property; (2) over 75 percent of the
District's operating grants were for Medicaid reimbursements in FY 1995;
(3) the District received a federal payment in FY 1995 totalling $660
million, but this payment did not adequately compensate the District for
the additional responsibility it assumed or the loss of revenue due to
federally imposed restrictions; (4) the District's inability to tax
nonresident wages resulted in a loss of revenue; (5) 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; (6) the
District's unfunded pension liability stands at $4.7 billion and is
expected to increase to $7 billion by 2004; (7) the District has delayed
pension, vendor, and Medicaid payments, and borrowed short-term bonds
from the Treasury to finance its operations; (8) the District Financial
Responsibility and Management Assistance Authority has reviewed 1,562
contracts, developed a strategic plan, approved 10 privatization plans
for FY 1996, and allocated reductions to several departments; and (9)
the New York and Philadelphia financial control boards have taken
numerous actions to reform their cities' accounting and budgeting
practices.

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

 REPORTNUM:  T-AIMD-96-133
     TITLE:  District Government: Information on Its Fiscal Condition
      DATE:  07/19/96
   SUBJECT:  Financial management systems
             Municipal governments
             Funds management
             Retirement pensions
             Future budget projections
             Budget deficit
             Budget receipts
             Property taxes
             Privatization
             Municipal budgets
IDENTIFIER:  District of Columbia
             New York (NY)
             Philadelphia (PA)
             Medicaid Program
             
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Cover
================================================================ COVER


Before the Subcommittee on the District of Columbia
Committee on Government Reform and Oversight
House of Representatives

For Release
on Delivery
Expected at
9 a.m.
Friday
July 19, 1996

DISTRICT GOVERNMENT - INFORMATION
ON ITS FISCAL CONDITION

Statement of Gregory M.  Holloway
Director, Governmentwide Audits
Accounting and Information Management Division

GAO/T-AIMD-96-133

GAO/AIMD-96-133T


(901716)


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


============================================================ Chapter 0

Mr.  Chairman and Members of the Subcommittee: 

I am pleased to be here today to discuss the results of our review of
the District of Columbia's financial condition.  On July 9, 1996, I
appeared before the House Appropriations Subcommittee on the District
of Columbia.  At that hearing, I testified\1 on the District'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.  In addition, I testified on the actions taken by the
control boards of New York City and Philadelphia. 

As you requested, 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 analyses for
fiscal years 1980 through 1992 of the District's Comprehensive Annual
Financial Reports (CAFR) and performed an extensive comparative
analysis for fiscal years 1993 through 1995.  In addition, we
performed an 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. 


--------------------
\1 District Government:  Information on Its Fiscal Condition and the
Authority's First Year of Operations (GAO/T-AIMD-96-126, July 9,
1996). 


   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 0:2

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 0:2.1

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 0:2.2

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 0:2.3

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. 

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\2 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\3 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. 


--------------------
\2 These studies include those by the Rivlin Commission, McKinsey &
Company/The Urban Institute, and the Fair Budget Coalition. 

\3 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 0:2.4

The general fund, at $4.2 billion, or 79 percent of the District's
$5.4 billion in gross\4

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. 


--------------------
\4 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 0:2.5

Similar to the current national trend, and as we recently reported,\5
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
providers\6 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\7 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,\8 only three\9 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. 


--------------------
\5 District of Columbia:  Information on Health Care Costs
(GAO/AIMD-96-42, April 22, 1996). 

\6 GAO's health-care report figures for Medicaid included
expenditures for both public--District-owned facilities, such as St. 
Elizabeths 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. 

\7 GAO/AIMD-96-42, April 22, 1996. 

\8 Medicaid:  Local Contributions (GAO/HEHS-95-215R, July 28, 1995). 

\9 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 0:2.6

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.\10

In 1980,\11 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. 

The District has funded\12 (that is, covered the costs of the
benefits participants have earned in that year) all benefits that the
pension plans' participants have earned after fiscal year 1979 and
paid in an additional $1.2 billion towards the unfunded liability
through the end of fiscal year 1995.  Table 1 shows an analysis of
the unfunded pension liability since the plan was transferred to the
District and the estimated payments for fiscal years 1996 and 1997. 



                                Table 1
                
                       Unfunded Pension Liability

                         (Dollars in millions)

                                                 If fully
                                                   funded       Excess
                         Unfunded    District    1979 net     District
                          pension  contributi      normal  contributio
Fiscal year             liability          on        cost            n
---------------------  ----------  ----------  ----------  -----------
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\13 and is expected to increase to $7 billion\14 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\15 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. 


--------------------
\10 See District Pensions:  Federal Options for Sharing Burden to
Finance Unfunded Liability, pages 14-18 (GAO/HEHS-95-40, December 28,
1994). 

\11 GAO/HEHS-95-40, December 28, 1994, and 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 D.C.  Appleseed Center, The District of Columbia's Pension
Dilemma--An Immediate and Lasting Solution. 

\14 GAO/HEHS-95-40, December 28, 1994, and D.C.  Appleseed Center,
The District of Columbia's Pension Dilemma--An Immediate and Lasting
Solution. 

\15 D.C.  Appleseed Center, The District of Columbia's Pension
Dilemma--An Immediate and Lasting Solution. 


      SUBSIDY PAYMENTS
-------------------------------------------------------- Chapter 0:2.7

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 million,\16 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\17 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. 


--------------------
\16 The projected fiscal year 1997 amount includes $15 million for
the public health clinics, which were transferred to the hospital. 

\17 GAO/AIMD-96-42, April 22, 1996. 


   THE DISTRICT'S CASH POSITION
---------------------------------------------------------- Chapter 0:3

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),\18 the District began
fiscal year 1996 with approximately $200 million to $300 million in
delayed payments owed to vendors and Medicaid providers. 

In fiscal years 1995 and 1996, 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 noninvestment grade rating, the District's sources for obtaining
long-term financing are limited and the interest cost of obtaining
financing in the capital markets could be costly.  The District's
financial plan discusses two borrowing options, and another option
was recently added for obtaining funds from capital markets.  The
District accepted a proposal to issue $220 million in general
obligation tax revenue anticipation notes.  The District expects
these notes to be issued shortly.  We did not review this proposal as
part of our work. 

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 it plans to issue long-term debt to fund capital
improvements if it plans on exceeding the 14-percent limit or to
finance the accumulated operating deficit.  The District would also
need to seek legislative authority in order to engage in long-term
borrowing from the U.S.  Treasury. 

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 Authority Borrowing: Uses of
                  Proceeds of Fiscal Year 1991 Serial
                                 Bonds

                         ((Dollars in millions)

------------------------------------------  ------------------  ------
Funds to city for deficit reduction\a       FY91 (cumulative)   $153.5
                                            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. 


--------------------
\18 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. 


   THE NEW YORK CITY AND CITY OF
   PHILADELPHIA CONTROL BOARDS
---------------------------------------------------------- Chapter 0:4

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). 

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,\19 (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. 

In addition, 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.  Despite the highest degree of commitment evidenced by
New York State to avert a bankruptcy, it became apparent that federal
assistance was essential.  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.  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.\20

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.\21 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."\22

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. 


--------------------
\19 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. 

\20 Municipal Assistance Corporation 1976 Annual Report. 

\21 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. 

\22 "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. 


-------------------------------------------------------- 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
Subcommittee may have at this time. 


*** End of document. ***