16

Mr. GIULIANI. We have very, very similar difficulties. New York
City spends $2.4 billion on Medicaid. It is the largest single line
item expenditure, unless you consider the Board of Education, and
it is the thing that has increased the most in the last several years.

This is a shared responsibility. I think the city government, the
State government, and the Federal Government, none of them are
doing what they should do about Medicaid. In the case of the city,
we weren't doing what we should do about cost containment; we
were selecting every option. We were saying no to virtually—none
of the things that were ever presented. We were maintaining hos-
pitals, public hospitals, at levels of numbers of employees way be-
yond the number of beds that were actually occupied in the hos-
pital. We have hospitals that are 65 percent occupied; they were
being staffed for 95 percent. So some of the problems we were cre-
ating for ourselves. In this budget that I have presented, we do a
major cutback of about $700-$800 million in what the city is
spending.

The second part of it is, in New York—in New York, New York
City has to pay 25 percent of the cost of Medicaid. It is the only
city in the country that is required to do that, which is something
that I’m trying to change with the State government, and the reim-
bursement rate by the Federal Government is only 50 percent.
Both of those also should be adjusted.

But I see this as a three-way thing. I mean we should be doing
more, and we should also be treated equitably a little bit differently
by the State and the Federal Government. We should be doing
more means we should be doing a lot more cost containment.

What I have done is to dramatically step up Medicaid managed
care. The city of New York now has about 20 percent of its Medic-
aid recipients in managed care programs. That 20 percent results
in a savings of about 15 percent over the other 80 percent that are
in Medicaid. We are going to try to get to about 90 percent in a
2-year period. If we do that, we think we can save a tremendous
amount of money, but what we would like to do with that savings
is to see if the State government can return half of those savings
to us so that we can use it and have discretion over it.

Mr. CLINGER. Thank you.

Thank you, Mr. Chairman.

Mr. Davis. Thank you very much.

Mr. Davis. I am going to now recognize our ranking minority
member of the Committee on Government Reform and Oversight,
Mrs. Cardiss Collins.

Mrs. CoLuins oF ILLINOIS. Thank you.

Mr. Mayor, the powers of the financial control boards have
ranged from direct control over revenues, expenditures and borrow-
ing, to merely exercise of review and disapproval authority; there-
fore, my first question is, what mix of oversight and control power
do you believe to be the most effective?

Mr. GIULIANI. I think the oversight and control has to keep ulti-
mate responsibility in the hands of the mayor and the city council.
Otherwise, you don’t bring about the change that you want to bring
about. If the financial control board were to run the city, then at
some point when it stopped running the city you would just be
going back into the same set of problems that you had before. What


37

STATEMENT OF HUGH L. CAREY, FORMER GOVERNOR OF NEW
YORK STATE; AND EDWARD V. REGAN, FORMER COMPTROL-
LER OF NEW YORK STATE

Mr. Carey. Thank you, Mr. Chairman, members of the commit-
tee. I’m delighted to be here to sort of celebrate an anniversary. I’m
very conscious of anniversaries in my advanced age, but today I’m
sort of celebrating a dual anniversary. Thirty pears ago I was en-
couraged to cross the Remagen Bridge, an was comforted be-
cause there were so many brave men ahead of me, and 20 years
ago I was comforted because I decided to cross the Rubicon and go
from Albany to save New York City, the Rubicon of the Hudson
and Harlem River, I don’t know which it was, but I was encouraged
because so many brave men and women followed me, and therein
began kind of an odyssey in terms of getting to know what a con-
trol board is. So maybe I can best address that metaphorically.

A control board is not a hair shirt, it is nonpenitential, it’s not
a straightjacket or restraining sheet to prevent the governance of
the people involved. A control board is somewhere between Slim
Fast and Weight Watchers, it’s a budgetary regimen to produce fit-
ness over a designated period. To really stretch the metaphor, it’s
best compared to Dr. Warner’s corset which became eventually the
two-way stretch girdle and is now Victoria’s Secret. In a word, wear
it; you'll like it.

‘ve provided the committee with a chronology, compendium, of
all the steps to the control board. It’s a rather deep document, it’s
very weighty, it goes through all of the procedures we had to un-
dertake to involve ourselves in a control board, and I've entrusted
it to your staff for research and resources, and we'd be glad do help
in terms of helping on that any time.

I trust that the circumstance which led to New York, New York
City’s condition, in the seventies are rather well known to the com-
mittee. New York had an immediate cash-flow shortage of over
$750 million, a budget gap of over $3.6 billion, credit markets were
closed to the city, and the city condition threatened to affect the
credit of the State which was being safeguarded by the then comp-
troller.

Joblessness was a major problem in the seventies and very se-
vere in big cities like New York and, indeed, Washington.

But there’s one job nobody wanted, and that was to be the person
responsible for the rescue plan for New York City. As a result, as
a Governor with some discretion, I decided that the best way to do
it was not to do it alone, and, as Mayor Giuliani has said and Gov-
ernor Voinovich, the best deal is to bring together a coalition, the
private sector, labor organizations, nonprofits, and voluntary agen-
cies, and do it together.

In other words, in our days of hardship we formed that kind of
partnership or coalition. It was really modeled on the wartime ex-
perience of Harry Truman. My history tells me that when we faced
the peacetime conversion in Harry Truman’s term in office, he
didn’t do it alone, he reached out, grappling with the problems of
lack of resources and wartime economy, needed to shift gears to a
peacetime, shall we say, worldwide leadership role. He did it with
the dollar-a-year men. Harry’s dollar-a-year men came to Washing-
ton, stayed long enough to get the job done, and went their way.


33

it’s available in case some State’s economy goes in the dumpers and
they need help.

But I think—we have a thing called the children and family first
initiative in Ohio, and, again, it’s really looked at as one of the best
in the country. But the whole effort there is to get human service
agencies to work together and cut through the red tape so that
they can provide services to their customers, and one of the frus-
trating things is that these categorical programs make it more dif-
ficult.

For example, Head Start and day care—we lead the Nation in
Head Start. Ohio is 100 percent ahead of the national average. We
have 70 percent of our kids in a Head Start Program and all of our
eligible kids in the program, spend more money on Head Start, by
the way, than any State does. But if you want to put Head Start—
I want to put them in the day care facilities. Well, Head Start
money can’t be used for day care; day care can’t be used for Head
Start. If you could take some of these programs and meld them, I
think you can get a much bigger bang for the buck than you're get-
ting right now and do a better job of taking care of our customers.

Mr. FatTraH. Governor, let me just try to follow up, and I know
it’s not the case in your great State of Ohio. I come from Penn-
sylvania, and we have had——

Governor VOINOVICH. You have got a new great Governor, by the
way.

Mr. FattaH. We have had over the past couple of decades—and
it’s been reported in the literature perhaps to exist in other places
around the country—something of an antibig-city bias in State leg-
islatures as part of the kind of normal political discourse that
sometimes takes place. Do you think cities, big cities, would fare
better under these block grant approaches given that notion, or
whether you think that notion is not really a relevant factor
around the country as we look at urban issues?

Governor VoINovICcH. If you are talking about our customers, the
counties in Ohio run the human services program. A lot of the
money comes through the State, but in effect they are the ones that
administer the program, and this is where we have established our
children and family first initiatives.

I really believe that if we could blend this money and look at
where the needs are and have the flexibility that we would like to
have, that we can do a better job of taking care of our children and
families than we are now doing today. I mean that sincerely. It’s
got nothing to do—I mean I just think that we can take your
money and spend it better than what it’s being spent today if we
have the flexibility, but I don’t want—you know, who’s eligible, how
long and all—let us worry about it, and, you know, we're the lab-
oratories of democracy.

You know, if there’s a good program out there, you want competi-
tion. I'll try to steal a program that Tommy Thompson has in Wis-
consin or—we just—my wife kicked off our Help Me Grow Program.
We have got $600,000 from the private sector, and the State is put-
ting $700,000 into a major program to reduce infant mortality.
That program got started in South Carolina. We thought it was so
good that we’re copying it. And so what you need is innovation out
there, and I think that some of the stuff will work, some of it won't,


42

In New York State there were three agencies, and we have only
mentioned one here, although the Governor now and then looked
over as he, of course, had a habit of doing, wondering what his
former auditor was going to say next, and that because the auditor,
an independent auditing agency, while not as important as a con-
trol board, which I'll touch on in a minute, is a vital part of the
process. I don’t know how you do this in this great city without
having an independently elected auditor, whether you call it an
auditor general, whether you call it comptroller or whatever the
label is. That’s one of the agencies that seems to me it worked well
in New York and you would want it here.

Actually, I took over the office of comptroller from Arthur Levitt,
Sr., who had established the parameters of this office, and for years
to come following both when Mr. Levitt was the comptroller and
then myself, we were known as the one true source of accurate
numbers. There would be shouting and yelling; this person, that
person, this set of numbers, that set of numbers. Here’s the impor-
tant fact: The independently elected comptroller, who was account-
able to the people, so that there was power there to bounce that
person out, either Mr. Levitt or myself, lets say if the Governor
said and could prove those numbers are wrong, or the mayor. The
credibility and the authority that went with that office because it
was elected, I think, was an enormous help in the control board,
the whole oversight process. So that’s one of the agencies.

The second Governor Carey just referred to, and that was a sepa-
rate agency to do the borrowing, because the markets are the ulti-
mate discipline here, they really are, as we all know, and the rat-
ing agencies are going to, in many ways, call the tune, and it’s ter-
ribly important to have an independent group whose only function
is to access the markets to borrow and who develops credibility
with the markets, with the rating agencies, separate From the con-
trol board and separate from the auditing agency. Again, Governor
Carey established and just referred to the Municipal Assistance
Corp—MAC—who performed that duty and still is there to perform
it if need be.

The third and most important agency is the control board itself—
but notice the significant impact and importance of the other two.
The control board itself has to be—and I back up what the Gov-
ernor has said, after all of our interviews and all of our work with
the people that have been involved in the last 20 years in New
York City and New York State, the process, has to be composed of
everybody that’s a player, and that includes the mayor of the city.

T'do not see, in spite of the strong differences between the city
of Washington and the other cities, how you leave the mayor out
of the process. The compromising, the working the problems out,
has to go on—prior to the control board meetings or at the meet-
ings, and the mayor must be—the mayor’s constituents and the
mayor himself or herself must feel part of it—it seems to me that’s
the history of New York City. It is the control board that of course
imposes strictures or eases up and because they have got all the
important people on, and like any democratic process, like your
own committee caucus meetings, Mr. Chairman, that’s where a lot
of problems are worked out, and that’s how the control board, as


10

Let’s assume that everyone—everyone in my city, I think, would
be willing to agree, no matter what their political philosophy or at-
titudes, that city government was operating at a rate of inefficiency
of at least 15 or 20 percent, and the art of governing is to find that
15 or 20 percent and remove it, and what you find when you do
that is, people do find that they can manage with fewer people,
that they then start initiating different ways of managing where
they can get more out of it and they can deliver better services at
a lower price. It creates a dynamic of people taking on more initia-
tive for themselves.

The area in which we have had the most dramatic change is in
crime reduction, and one of the reasons for that is that the New
York City Police Department today is managed differently than it
was managed 1¥2 years ago. It is managed for the specific purpose
of reducing crime.

Previously we used to use crime statistics as a historical device.
Every 3 months or every 6 months we would put out statistics that
explained whether murders were going up or down, whether rapes
were going up or down, whether assaults were going up or down,
then the FBI would do it once a year, and the city would either
look like it was getting safer or getting more dangerous.

Now we use crime statistics to manage the New York City Police
Department in the same way that you would use a profit and loss
statement to manage a corporation. Every single day, the police
commissioner has presented to him the crime statistics for every
precinct in the city. It shows up to that point in the year whether
there were more murders or less murders, more assaults or less,
more robberies, car thefts, or less. Each week he and I review it,
and then we make choices about deploying our police department
specifically for the purpose of reducing crime. If we see that there
is a growth in felonious assault in a particular area, we then will
put more police officers there. If we see there is a growth in car
theft in a particular area of the city, we will put more police offi-
cers there.

It is important because previously the police department was
really managed from the point of view of just making arrests, and
if you are managed from that point of view then the fact is, you
make arrests that may or may not reduce crime and you don’t de-
ploy police officers, let’s say, just for policing in particular areas
where they are not going to make arrests but where they may have
the effect of reducing crime.

By now changing that to managing for the purpose of reducing
crime, a precinct commander has a strong incentive to put police
officers in areas where he may not come back with the result of ar-
rest but he will come back with a 10 or 12 percent reduction in the
number of deaths that take place or the number of assaults that
take place or the number of car thefts that take place. I think that
is one of the reasons why the city had historic reductions in crime
last year, and I can tell you, because I see the statistics once a
week, that those numbers are getting greater this year.

Part of accomplishing what has to be accomplished in American
cities is incorporating in the way in which we manage cities the
principles that you would learn from private business. Many Amer-
ican corporations have gone through massive turnarounds in the


70

sibility are you prepared to have the new agency assume under
your sponsorship. Practically speaking, it is not difficult to confer
authority but the acceptance of responsibility for the exercise of
those powers is another matter entirely.

The issue that sits squarely on the Federal Government’s plate
as the appointing authority is whether you, as their sponsors, will
be willing to give the appointees the substance of the authority
that the law will ostensibly grant. That means that you should re-
sist the urge to micromanage from here unless that amount of
intervention from Capitol Hill is an explicit understanding on the
way in.

I would suggest, however, that the more you get in, the more you
will be in and the more visible the wisdom of your decisions will

e.

You should ask, does the solution fit Washington’s problems and
its opportunities? Unsuccessful generals fight the last war rather
than the one they have before them today. The situation here is
unique, made particularly so by the relationship which the District
has with the Federal Government and its neighbors. What has
worked elsewhere may not work in this case.

In Philadelphia, as David mentioned, we had a new mayor with
a very broad base of public support who was unattached to a gen-
erally agreed-upon crisis and we had all of the major labor con-
tracts coming up within months of his ascension to office. That is
not the case here and your actions and reactions have to recognize
that there are critical differences.

There is little question that the Federal-District relationship will
be reformulated as a result of the fiscal crisis and your reaction to
it. If you as a matter of policy do not intend something to be on
the table as a candidate for change, make those rules clear at the
beginning.

You should ask: What are the most important things to accom-
plish after the District does not run out of cash? The focus on the
District has been on the cash crisis, and although I don’t want to
minimize its importance, it is likely that a device can be put in
place in fairly short order to address immediate liquidity demands.
There is a risk, however, that after a funding device is created,
there will be such a sigh of relief from Wall Street to M Street, that
the consensus around the immediacy of the issue will dissipate.

Issues, as we know, have a habit of coming to a boil and then
evaporating. The real task is to figure out what to do next, how to
keep things from continuing to get worse and to slow the rate of
descent. Making things better is at least one step beyond that
point, What critical first choices have to be made and who are the
architects and the custodians of a long-term plan? The visible task
and programs, the most critical one is to articulate the challenges
which lie ahead. Keep the problem in public view and use the fund-
ing as a means to buy time toward addressing the larger and the
more difficult items on the agenda.

Therefore, a logical question from the beginning is looking ahead:
What are the long-term goals of this effort? Everyone knows that
the first challenge for the new agency will be to keep the bus from
hurdling over the cliff to make sure that bills get paid, that the


52

And it is painful and traumatic and there aren’t enough words, I
suppose, to describe what goes on, but when you hit the critical
mass and then everybody starts to give a little, you get it done so
that’s—it was simple. Again, it’s kind of the “bonding out” illusion.
Future generations had to pay for the mistakes of those in the
past. But it was worked out.

Mr. Carey. Perhaps an enactment which occurred during my
terms in Congress which is now in being would be of help to you.
I understand when the Congress went for home rule or modified
home rule, whichever you called it, those unfunded pension liabil-
ities were there before under the aegis and jurisdiction of the then-
Federal Government and those are being carried on the city’s budg-
et now.

I recall that the ERISA program was put in effect more than a
dozen years ago. Where was ERISA? ERISA applies to the private
sector. Why wasn’t some function of ERISA directed to the city sit-
uation in the District and seen to it that the pension funds needed
to fund out pensioners and retirees were properly provided for?
Somebody was asleep at that switch. Maybe we go back to the Fed-
eral Government and say you weren’t vigilant, you didn’t perform
your due diligence, help us get out this particular one. Maybe that
can be done.

Mr. REGAN. Of course, at the same time, benefits may be on a
two-tiered basis. That would seem a little rich. Again, that goes
into the pot and has to be adjusted.

Mr. Carey. On that note, we had a Kincell Commission, again
from the private sector, an accountant, an auditor who was an ac-
tuarial expert with the Union Carbide Corp. came in. The Governor
had to face the recommendation of the Kincell Commission, and
they were adopted and put a ceiling on the pension. You couldn’t
enrich the pension by taking holiday time.

Lots of reforms came in. I’m painfully aware of those because
there is a tier three which gives the least pension benefits in the
history of New York State. The Governor was put in tier three. I
have had to work hard ever since to offset the fact my pension is
so scant.

Ms. Norton. Like you, Governor, the workers of the District of
Columbia have already agreed to very large modifications in their
pension plan and have already agreed to a two-tiered system for
new employees, but as of yet, the Congress has not stepped up to
do its part.

Mr. Recan. I am aware of that.

Mr. Davis. Thank you.

The gentleman from Pennsylvania.

Mr. FaTTaH. No questions, other than I would just congratulate
both of you for your involvement in saving New York City at a time
of crisis, And your explanation and comments this morning are
helpful.

But I have no questions, Mr. Chairman.

Mr. Davis. OK.

The gentlelady from Michigan, Miss Barbara-Rose Collins.

Miss COLLINS OF MICHIGAN. I thank you, Mr. Chairman.

1 don’t have any questions, but I have read the testimony and I
thank the gentlemen for coming to help us out of this debacle that


50

national city do to handle the raft of visitors coming in here, official
parties that come here, and look how much of that might be shifted
to the rest of us in the United States, because it’s our city too.

Mr. Davis. Thank you. I happen to agree with that, and I think
our Mayor of the city agrees with that, but it’s important for some-
body from the outside to come in and lend that perspective.

Thank you very much.

I’m going to yield now to Ms. Norton, the ranking member.

Ms. Norton. Thank you very much, and I very much appreciate
this testimony, Governor Carey, and Comptroller Regan.

Governor Carey, the list that you just rattled off of what New
York had to do initially is a shocking list. It’s a kind of list of
horribles. Around Washington already has gone the number of peo-
ple that had to be laid off, the 60,000 number, which is 50 percent
more employees than we even have, laid off at one time. I would
like to ask you about the role of the board in that list of horribles,
and then I would like to ask you whether it simply meant that
New York was that far gone, and the reason I ask you is because
we are further gone than New York. Was New York so far gone
that it became necessary to do all of these things at once in order
to save it or to get a loan, and what role did the board play in tak-
ing you through this extraordinary list of changes in the city itself
when nothing at that point had been transferred to the State and
more things were to follow?

Mr. Carey. Well, the timing is exquisite and indeed painful.
However, I see the Mayor grappling now with an attempt to get his
budget under control by next October. That’s an awfully—as you
know, when you have a half year to deal with, the cuts have to be
doubled in size. That’s a difficult, difficult situation to face.

The answer is, you do it in a progressive way. You forecast the
force levels in different departments going a year ahead. You bring
into bear attrition. You may have to deal with some sabbaticals.
You may have to look at other sources in order to help, in other
words, that given department to fulfill its function. You do all these
in common planning, and the severity is not going to be less than
extreme. I know it is going to be difficult, but the only way you get
back on course again is to get the force levels in the city that will
do the job.

Ms. Norton. Does that mean that the situation had gotten so
bad, there wasn’t the time and the space at that time to sequence
some, of that out so it might have occurred over a longer period of
time?

Mr. Carey. A lot of things occur at once. The freeze on new
hirings has to take place, the attrition process goes into play, carly
retirements are encouraged, and in a sense you get the labor lead-
ers, the ones who have run the department, to come in and suggest
what are the proper force levels that we can deal with. There is an
input there, and that’s when you set the ceilings on various depart-
ments,

In terms of productivity, there are gains there. Those productiv-
ity gains belong to the work force. If they can show productivity
gains it will bring down the cost of doing services. Less overtime,
or maybe a little fess generous pension plan. That goes to the bene-


56

Tat then spurred the State into action which created PICA by
statute. The rationale for creating PICA was that the threat of a
fiscal emergency would lead to the interruption of essential public
services that would threaten the public health and safety, not only
of the people of Philadelphia, but also other people in the Common-
weaith of Pennsylvania.

And so the board was created to do essentially two things. One
was to help the city regain access to capital markets and the other
was to foster sound financial planning and budgetary practices to
get. the city out of the position it was in at that time.

Let me very quickly say something about the board because this
might be of some interest to you as you contemplate an entity for
the District of Columbia. The PICA Board includes seven individ-
uals. Five of them are voting members of the board, all of whom
are private citizens. The five voting members of the board are ap-
pointed, one each by the Governor and by the minority and major-
ity ieaders of State House and Senate.

‘There are two additional public members of the board. One is the
finance director of the city of Philadelphia. The other is the sec-
retary of the budget for the Commonwealth of Pennsylvania.

Let me tell you who the five voting members were. One was the
head of a local science museum who was also a venture capitalist.
Ancther, a woman, was a small business owner who operates a per-
sonal computer services company, which provides training for peo-
ple to learn how to operate computers.

A third member of the board, another woman, was a partner of
one of the city’s leading law firms. The fourth member of the board
was a stockbroker who had previously served earlier in his life as
the chairman of the Philadelphia Stock Exchange. And the fifth
voting member of the board was your humble servant who formerly
served as a tenured faculty member at the Wharton School of the
University of Pennsylvania.

None of the five voting members of the board were active in poli-
tics at the time they were selected, but one member of the board
had previously been a candidate for mayor of the city of Philadel-

1a.

The term of office for members of the board is coterminous with
the appointing authority which of course varies depending upon the
election cycle. The members of the board were not compensated for
their services. Let me emphasize that. We never received a dime
for the numerous hours that we spent in assisting in dealing with
this problem. In fact, I had recently organized a small consultin
firm but at the time I was appointed chairman. At the PICA Board,
1 was spending over 60 percent of my time in a noncompensated
effort.

The chairman of the board is elected by the board, not appointed
chairman. However, in the tradition of the Pennsylvania Authori-
ties, usually the person who is appointed by the Governor is elected
chairman and that was the reason I was elected chairman of the
PICA Board.

We had a professional staff that included four professionals and
two support staff. Ron Henry, whom you will hear from in just a
minute, was the executive director of the staff. The staff, obviously,
is paid.


60

cial Director of the City of Philadelphia, and the Secretary of the Budget of the
Commonwealth of Pennsylvania, both of whom serve as ex-officio, non-voting mem-
bers of the board. The five non-governmental members of the board are appointed,
one each, by the Governor, and by the majority and minority leaders of the State
House and Senate. The Chairman is elected by the voting members of the board,
but in the tradition of Pennsylvania authorities, the person appointed by the Gov-
ernment is expected to assume the chair.

1 members of the board must have had experience in finance or management,
and must be residents of Philadelphia, or have their primary place of business or
employment in the City. Among the five original voting members of the PICA board
were the President and CEO of a local science museum, who also is a venture cap-
italist; the President and CEO of a personal computer training and consulting com-
pany; @ partner in one of the City’s leading law firms; and a local stockbroker, who
was formerly President of the Philadelphia Stock Exchange. I am an economist by

srofession, and formerly served as a tenured professor on the faculty of the Wharton
hool at the University of Pennsylvania. Members of the board were known by key
political leaders in the City and the State and had the respect and support of the
usiness community. While not active politically at the time of his appointment, one
board member formerly had been a candidate for Mayor of Philadelphia.

Board members are not compensated for their services, and are prohibited from
seeking public office for one year after completing their terms. Board members serve
at the pleasure of their respective appointing authority, and their term of office is
coterminous with their appointing authority,

PURPOSE OF PICA

PICA was created in an atmosphere of crisis in which many believed the City’s
government was “out of control”, that its officials did not responsibly manage
estimation, collection, or disbursement of revenues, and generally had failed to ad-
dress the many economic and social challenges facing Philadelphia, But PICA was
expected to be a combination of cooperation, assistance, and oversight. It is not a
“control board” with the power to hire, fire, enact or repeal taxes, or otherwise dis-
enfranchise the people of the City. It is intended to be a catalyst for spurring elected
officials into responsible behavior in the management of the City’s fiscal affairs.

ICA was created because of the threat that a fiscal emergency would interrupt
delivery of essential services and would adversely affect the. Pealth, safety and wel-
fare not only of the City, but also of other citizens of the Commonwealth of Penn-
sylvania. For that reason, the State created the oversight board to enable the City
to gain access to capital markets for deficit elimination and seasonal borrowings and
to avoid default on existing obligations and chronic cash shortages. The board was
also required to foster sound financial planning and budgetary practices by City offi-
cials. Both goals, i.e., financial assistance and the requirement of sound fiscal man-
agement by City officials, were co-equal objectives of PICA, and both received care-
ful attention in PICA operations.

PICA’s borrowing authority on the City’s behalf was secured by a dedicated reve-
nue source of 1.5 percent of the City’s resident wage tax. Board operations are ex-

ected to be self-financing; in fact, the initial $156,000 extended to the board by the
tate to get operations up and running was repaid to the State from proceeds from
the first bond offering.

THE NATURE OF OVERSIGHT

Before the board could assist the City in addressing its fiscal problems, the PICA
statute required the adoption of an Intergovernmental Cooperation Agreement (ICA)
between the City and the board. The Agreement spells out the requirements and
standards for the preparation, approval, and board monitoring of the City’s financial
plan; the terms and conditions for the board’s issuance of bonds; and the establish-
ment and management of the “City Account,” which is the repository of the proceeds
of taxes or other revenues pledged by the Authority to secure any bonds.

In addition, before any financial assistance could be provided, the City was re-
quired to develop a five-year financial plan providing for a balanced budget, and a
plan for eliminating the structural deficit. The Authority was empowered to approve
the financial plan after its adoption by the Mayor and the City Council.

arterly reports on the financial plan are required to be submitted by the Mayor
to the "Authority. Tf the quarterly report shows a variance from a balanced budget,
the Mayor is required to explain how the variance will be corrected within the next
three months through enhanced revenues or reduced spending. In the meantime,
monthly rather than quarterly reports on spending and revenue must be sent to the
Authority until the variance is corrected.


48

that you gave back in 1975 where you talk about New York City
as the city with the strongest municipal unions in the Nation.

Mr. Carey. The toughest.

Mr. Davis. But you had a wage freeze, which I think had been
unheard of — .

Mr. Carey. And givebacks.

Mr. Davis. And givebacks.

Mr. Carey. And then the unions invested their pension funds in
the various securities which we offered them.

Mr. Davis. With the largest construction industry in the Nation
in the city, you put a freeze on new capital construction. In the fi-
nancial capital of the world you couldn’t borrow money without
going through this—the city couldn’t borrow money. So it shows
that tough times sometimes bring some strange people together for
the good of all.

But I think as we look back we have to say this was really one
of the successes in this country, one of the creative successes.

Mr. Carey. On the borrowing I’ve noted, I think, some state-
ments by Dr. Norton, a great neighbor of ours in New York City
during other hay days, and she pointed out that the benefit of this
control board is that over the period of time it will reduce the cost
of borrowing and those moneys which are earned by the city by a
better credit rating and reduced cost of borrowing can go to the
benefit of children, of the elderly, and what's needed in the city. If
you don’t give the money to Wall Street because of a financial plan
which lowers your cost of borrowing, then the money is there for
the neighborhoods.

Mr. Davis. OK. Let me, if I could, just note the presence in the
room, Governor, of your son Paul, who is with White House legisla-
tive liaison.

We are happy to have you here and note, as we draft this legisla-
tion, we are trying to get a consensus among some very disparate
groups in Congress that ordinarily don’t cooperate on issues, but I
think we are all trying to work together and with the White House
on this and with the Mayor and council and try to forge ahead.

But. your testimony is very helpful about being more inclusive in
the process, making sure everybody is here, and you are telling us
that it can all work out.

Mr. Carey. I can only note a moment of history again, that it
was my return to this body in a very tough election in 1962 that
my son Paul was born, and the birth of him as the seventh son was
such a big event in the District, he accounted for 280 votes, which
was my margin. [Laughter.]

Mr. Davis. Well, we're glad to have him with us today.

Let me just ask Mr. Regan, we hear a lot about individuals ex-
pressing concern for the cl ildren and the District and so on, but
it seems to me the biggest harm is to continue to pile up debt that
these children are going to have to pay for out of programs as they
get older. Do either one of you have a comment on that?

Mr. REGAN. Sure. I'll start it because it is finishing my statement
or elaborating on it more you let it drift, the higher the debt. There
is no magic bullet; there are good solutions. You have heard about
them. But the first thing you do is stop the bleeding. You just can-
not let it go on, and this is why you are here, Mr. Chairman, with


20

good to have that insight not just on this side of the panel but on
that side as well.

The work that you are doing to create a pro-business environ-
ment _and creating private sector investment in the form of tax
cuts, I think you bring a practical example of that here on how that
actually works and how you can increase not only the actual raw
dollars coming in but the local financial investment by the private
sector which creates jobs, which drives the city in its vibrance.

Further, the entitlement programs, the workfare being the larg-
est in the Nation and only a few months old is a testament to be
the ability to be able to have a plan and execute it in a timely fash-
ion, and the reduction in employees that you are moving toward is
something that will provide absolutely a fesson learned in the gov-
ernance of the capital and how we can improve our financial condi-
tion here, and I want to thank you for coming here and thank you,
Chairman, and I yield back.

Mr. Davis. Thank you very much.

Mr. Mayor, I know you are on a tight schedule. I just want to
thank you for being here.

To Mrs. Molinari, she is one of our stars here in the House. We
are pleased to have her here to introduce you, and I want to thank
both of you for being here.

Mr. Mayor, thanks for your willingness to be with us and share
your experience and thoughts on a very difficult issue. I know you
are working very hard to battle problems in New York. Your ap-
pearance here today as we consider the problems in the Nation’s
Capital are going to help us with the unenviable task ahead of us.

Thank you.

Mr. GIULIANI. Thank you very much, Mr. Chairman. I really ap-
preciate the opportunity and the insightful questions.

The fact is that Congresswoman Molinari is even a bigger star
in New York City than here, and we are very, very proud of her
and very proud of all the good work that she is doing, and if there
is any way in which we can help, I really want to emphasize that
the spirit of this testimony is to offer suggestions. Some of these
things, some don’t work. We are all struggling with the same prob-
lem, and we want to be supportive of the mayor, the city council,
and all of you in this very important effort. Washington, DC, is a
very important city to all of us. Thank you.

Mr. Davis. Thank you, very much.

Mr. Davis. I’m going to at this time recognize the gentleman
from Ohio to introduce our next distinguished panelist.

Mr. LaTourette.

Mr. LaToureTTE. Thank you very much, Mr. Chairman.

Mr. Chairman, it is my pleasure to welcome Governor Voinovich
to this subcommittee hearing today to testify on the benefits of es-
tablishing an oversight and control board in cities facing financial
crisis.

Unfortunately for the Governor, he took over the city of Cleve-
land as mayor in 1979 at the height of the city’s financial crisis.
The previous administration had defaulted on $15 million worth of
notes owed to local banks, and the city had seen its access to credit
markets eliminated. Fortunately for our city, Cleveland, the new
mayor proved to be just the man for the job. By working closely


38

That’s the way we did it in New York City as well, using the Tru-
man model. It was bipartisan and needs to be bipartisan. For in-
stance, the Governor was chairman, but the mayor of the city was
on the board, the comptroller of the State the comptroller of the
city, members from the private sector, members from labor, a pro-
fessional staff headed by an executive director.

Now how did the board conduct itself? As chairman for 8 years,
I can recount, the sessions were friendly, forthright, often turbu-
lent, frequently humorous, but constructive. In 8 years of dealin;
with several budgets toward recovery, we achieved consensus an
never heard one dissenting vote when it counted.

Where did the board come from in 1975? Well, President Gerald
Ford, the White House, and Treasury Secretary were Republicans,
one part the Democratic Governor, two parts State legislature, one
Republican, one House Democratic.

For the benefit of the record, let me refer to the involvement of
President Ford and his staff in 1975. Contrary to misleading re-
ports, President Ford never told New York to, “drop dead.” Rather,

e and I agreed we had to have a plan that would work so the city
and State would not become chronic invalids depending on Federal
support. Strengthen the unit of government, work it out, and then
back away and let it work out its own future resolution with a rein-
forced kind of structure.

We worked out a seasonal loan plan under the guidance of Bill
Seidman, advisor to the White House, the same Bill Seidman who
lately headed up the FDIC with such an outstanding performance
record.

The implementation of SLA, the seasonal loan agreement—was
headed by Secretary of the Treasury Bill Simon, whom we often re-
ferred to as “Simon Legree.” Bill was tough but very fair. Time
would not permit me now to note all the other Federal officials in-
volved, but in the next administration under President Carter,
Roger Altman, as Deputy Secretary of the Treasury, became our
mentor, and he was most effective and helpful in those difficult
years.

Yes, President Ford helped us again in securing passage of the
required legislation in Congress with only one onerous stricture.
President Ford looked me in the eye and insisted that all docu-
ments involved in the loan agreement would provide that my per-
sonal guaranty would be on those documents in my signature. So
at one time I was a guarantor for $3.6 billion with interest. Two
comments: One, we paid the principal and interest in 6 years, and
during that time, at least on paper, my signature was worth more
than my predecessor's, Nelson Rockefeller. [Laughter.]

On working on the structure of the control board, I have given
the committee a compendium of the organizations involved, includ-
ing the funding as well of what became a rather famous organiza-
tion, the Municipal Assistance Corp. known as Big MAC. Some of
these were of course control organizations, and some were funding,
and my good friend the comptroller is most familiar with the con-
duct of them because he was a watchdog on these agencies.

We have a heroes list, we have a heroines list, of people that
came forward and served on that board. The private sector was
heavily involved, private sector in labor and private sector in man-


69

hold all of—virtually all grant revenues and support from the city
of Philadelphia. .

We could not function for very many days in the absence and in
the cutoff of State revenues and, as a result, it was a nuclear weap-
on. And I think the PICA Board made quite clear from the day of
its formation that although it did not want to use that weapon,
that it would not hesitate to do so if it needed to in order to ensure
compliance of the city with the statutory framework that resulted
in its creation.

So in summary, I believe that without all of these elements, the
Philadelphia success story would not be present. Without political
will and leadership from the elected officials of the city, without
support from the State government, and without the rational inter-
vention and cooperative intervention by an independent oversight
board created under State legislation, I would not be able to be
here today talking about Philadelphia as a success story but, in-
stead, would probably be appearing in front of the State legislature
and the Federal Government trying to figure out some way for a
bailout for this city.

I am very pleased that I don’t have to do that because I per-
sonally don’t think I would have very much chance of success. So
it is a lot easier to talk about what we have been able to accom-
plish with the help of the PICA process.

Thank you very much.

Mr. Davis. Mr. Cohen, thank you very much.

Mr. Henry. Thank you for bearing with us.

Mr. HENRY. I always wanted to be anchorman on a relay team
like this one. In July 1994, I testified before the previous House
District of Columbia Committee and I have left a copy of that testi-
mony with the stenographer for inclusion in the record.

I noted at that time, in most cases of fiscal distress, matters have
to become undeniably bad for a critical mass of either of the public
or elected officials to acknowledge that something is wrong. I also
said that the most critical obstacle to achievement of a long-term
solution is the ability of the District of Columbia to receive addi-
tional financing from the U.S. Treasury without the imposition of
stringent conditions or performance standards. Those observations
are still true today.

It appears, notwithstanding the truly dire situation in which the
District government finds itself, that most of its elected officials
have not reached the point where they acknowledge the full impact
of getting to the undeniably bad stage or that there are no other
viable alternatives to a control board with real power over the oper-
ations of the District government.

With that as a context, it is sad to say that it is likely that mat-
ters will get somewhat worse before they can get at all better.
There have been discussions about the nature of the structure the
Congress inevitably will put in place. Whether you will follow the
New York model that we heard about today, the Philadelphia
model which we have just discussed, or even the Chelsea, MA
model which is a complete receivership.

I would suggest that discussions of structure begs some of the
questions that should really underlie your consideration of the leg-
islation. The first question which comes to mind is what respon-


FINANCIAL CONTROL BOARDS

WEDNESDAY, MARCH 8, 1995

House OF REPRESENTATIVES,
SUBCOMMITTEE ON THE DISTRICT OF COLUMBIA,
COMMITTEE ON GOVERNMENT REFORM AND OVERSIGHT,
Washington, DC.

The subcommittee met, pursuant to notice, at 10:10 a.m., in room
2154, Rayburn House Office Building, Hon. Thomas M. Davis III
(chairman of the subcommittee) presiding.

Present: Representatives Davis, Gutknecht, LaTourette, Flana-
gan, Norton, Collins of Michigan, Clinger [ex officio], and Collins of
Minois [ex officio].

Also present: Representative Molinari.

Staff present: Ron Hamm, staff director; Roland Gunn and Al
Felzenberg, professional staff members; Howard Denis, counsel;
Ellen Brown, clerk; and Cedric Hendrichs, minority professional
staff.

Mr. Davis. The meeting will come to order.

I want to welcome all of you to our third hearing on the financial
and budgetary crisis faced by the District of Columbia, our Nation’s
Capital. These hearings are designed to educate the subcommittee,
Congress, the residents and government of the District of Colum-
bia, and the Nation on the true financial situation of the District
and what other cities in similar situations have done to deal with
their problems.

Today we will hear from people from three great American cities
that experienced tough financial times in recent years: Cleveland,
New York, and Philadelphia. By taking the time to be with us
today, these distinguished Americans demonstrate their concern for
Washington, DC, as not only another great American city in trou-
ble but also as our Nation’s Capital. They have come to share their
experiences so that we in Congress can learn and hopefully benefit
from them.

All of the people who will testify shortly have greater experience
with control boards and other forms of urban rejuvenation than we
have. That is the purpose of today’s hearing, to gain insight from
people who have actually been there and who can tell us how these
mechanisms work or don’t work.

Last week we learned that Washington’s problems are not
unique. All the other cities we have examined stumbled into the
abyss the same way Washington has. They attempted to do too
much and lived well beyond their means.

The titles of a book and a newspaper article I encountered re-
cently succinctly summarize the cause of these problems. In 1980

qa)


72

T also said that “. . . the most critical obstacle to achievement of a long-term so-
lution is the ability of the District to receive additional financing from the U.S.
Treasury without the imposition of stringent conditions or performance standards.”

Both observations are still true today. It appears, notwithstandin the truly dire
situation in which the District government finds itself, that most of its elected offi-
cials have not yet reached the point where they acknowledge the full impact of get-
ting to the “undeniably bad” stage, or that there are no other viable alternatives
to a control board with real power over the operations of the District’s government.

With that as the context, it is likely that matters will have to get somewhat worse
before they can get at all better.

There has been discussion about the nature of the structure that Congress inevi-
tably will put in place—whether you will follow the New York model (one of over-
sight and contingent control), the Philadelphia model (oversight with the capacity
to withhold funds under certain circumstances) or the Chelsea model (a complete
receivership). I would suggest that discussions of structure beg the questions that
really should underlie your consideration of the legislation:

The first questions which comes to mind is, “What responsibility are you pre-

pared to have the new agency assume under your sponsorship?”
Practically speaking, it is not difficult to confer authority, but the acceptance of
responsibility for the exercise of that power is another matter entirely. The issue
that sits squarely on the Federal government's plate, as the appointing authority,
is whether you (as their sponsors) will be willing to give the appointees the sul
stance of the authority the law ostensibly will grant them. That means that you
have to resist the urge to micromanage from here, unless that amount of interven-
tion from Capitol Hill is an explicit understanding on the way in. I would suggest,
however, that the more you get in the more you will be in, and the more visible
the wisdom of you decisions will be.

* You shold ask, “Does the solution fit Washington’s problems and opportuni-

ties?”

Unsuccessful generals “fight the last war,” rather than the one they face today.
The situation here is unique, made particularly so by the relationship which the
District has with the Federal government and its neighbors. What works in one
place may not work somewhere else. In Philadelphia, we had a new mayor with a
very broad base of public support who was unattached to a generally agree-upon cri-
sis. And we had a four major labor contracts coming up within months of his as-
cension to office. That’s not the case here, and your actions and reactions have to
recognize that there are critical differences.

There is little question that the Federal-District relationship will be re-formulated
as a result of the fiscal crisis and your reaction to it. If you, as a matter of policy,
do not intend something to be on the table as a candidate for change, make those
rules clear at the beginning.

¢ You should ask, “What are the most important things to accomplish after D.C.
doesn’t run out of cash?”

The focus on the District has been on the cash crisis, and although I don’t want
to minimize its importance, it is likely that a device can be put in place in fairly
short order to address immediate liquidity demands. There is a risk that after a
funding device is created that there will be such a sigh of relief from Wall Street
to M Street that the consensus around the immediacy of the issue will dissipate.
Issues, as we know, have a habit of coming to a boil, only to evaporate.

The real task is to figure out what to do next, how to keep things from continuin,
to get worse and to begin to slow the rate of descent. Making things better is beyon
that point. What first-line choices have to be made, and who are the architects and
the custodians of the long-term plan?

The “visible” task (and perhaps the more critical one) is to articulate the chal-
lenges which lie ahead, and use the funding as the means to buy time towards ad-
dressing the larger and more difficult agenda.

Therefore, a logical question from the beginning is “Looking ahead, what are
the longer-term goals of this effort?”

Everyone knows that the first challenge for the new agency will be to keep the
bus from hurtling over the cliff—to make sure that bills get paid and the District
meets its immediate financial responsibilities. That said, what do you see down the
road 2, 5 and 10 years from now?

I would not attempt to set those goals for you, but urge you to sct a standard
that will permit Congress, the citizens of the District and the nation to judge wheth-
er the war has been won or lost. It will be the standard for you to apply to decide
what you should do next, and when. It will begin the painful process of making peo-
ple responsible for their decisions.



71

District meets its financial obligations as soon as possible. That
said, what do you see down the road, 2, 5, 10 years from now?

I would not even guess to attempt to set those goals for you, but
urge you to set a standard that will permit the Congress, the citi-
zens of the District, and the citizens of the Nation to judge whether
the war has been won or lost.

It will be the standard for you to apply to decide what you should
do next and when. It will begin the painful process of making peo-
ple responsible for their decisions.

The next questions which flow from that point are what are the
most critical things that you need to have done tomorrow and don’t
have a prayer to accomplish even within the next 2 years? How
then do you get along without them? Everyone has their own sto-
ries about how bad some part of the District government is, and
even if a relatively small percentage of them is true, you have a
huge problem to deal with. Sad to say, most of those problems
aren’t going. to be fixed today, tomorrow, or even by the time the
baseball strike is over. It could be that long.

Institutionalization of fundamental change is the single most dif-
ficult and frustrating part of the effort upon which you are about
to embark. But it can also be the most rewarding. You can be very
sure that there are people within the District government who give
the taxpayers a day’s work for a day’s pay, and labor under ex-
traordinary difficult decisions. You can also be sure that there are
those who will decide that their future relationship with the Dis-
trict of Columbia, residential, educational, financial, and commer-
cial on the basis of what they believe the structure you put in place
will be able to do.

Please remember that there are hundreds of thousands of people
who have done nothing to cause this cataclysm. They want only to
make a decent living, educate their children, and live in a safe and
stable community with reliable services. As dysfunctional as the
current system is, it is all they have. It will be immensely difficult
to turn the District government around even if, or perhaps espe-
cially, things go well, there will be bruised egos and shattered
power bases strewn around the landscape. You have, however, no
alternatives. You know that things have indeed become undeniably
bad. And I wish you luck.

Thank you.

{The prepared statement of Mr. Henry follows:]

PREPARED STATEMENT OF RONALD G. HENRY, FORMER EXECUTIVE DIRECTOR OF
PENNSYLVANIA INTERGOVERNMENTAL COOPERATION AUTHORITY

Mr. Chairman, I am Ronald G. Henry. From 1991 through 1994 I served as the
Executive Director of the Pennsylvania Intergovernmental Cooperation Authority,
the fiscal oversight agency for the City of Philadelphia. I previously worked as both
a public finance attorney and as an investment banker, and I currently maintain
a consulting practice in matters relating to public finance and management.

I complement you on your effort to reach out to those of us who have been in-
volved in work with distressed local governments in an effurt to pull them back from
the brink of insolvency, and thank you for the opportunity to testify. The process
should encourage the Congress to take the broad view that will be necessary to help
the District government regain its financial footing.

In July of 1994 I testified before the House District of Columbia Committee. I
noted that in most cases matters have to become undeniably bad for a critical mass
of either the public or elected officials to acknowledge that something is wrong.


14

suspect it will take some cataclysmic event to bring a sharp focus to the situation.
While I would not hold myself out to be an expert on Washington's finances, the
difficult and complicated issues which the next mayor and council must face inevi-
tably offer ap tunities in this election year for inflammatory rhetoric at the cost
of rational debate. At base, however, until there is consensus on the scope and na-
ture of the problem, it is unlikely that there will be consensus on the scope and na-
ture of the solutions. Unfortunately, in most cases matters have to become undeni-
ably bad for a critical mass of either the public or elected officials to acknowledge
that something is wrong, and I complement you on addressing the problem at this
time.

In the case of Philadelphia, the PICA Act mandates that the City develop a five-
year plan, report results quarterly (or when extraordinary events occur) and annu-
ally update the plan and add another year to it. The current plan, the third, covers
fiscal years 1995 through 1999. At one point, in December of 1992, the Authority
declared the existence of a Plan variance, and monthly reporting was required
thereafter until a plan of correction was set in place in May of 1993. The plan and
reperting regimen have been valuable, as have periodic PICA Staff reports on the
details of the budget and government operations.

We have learned several things over the last three years, and while I would offer
the cautionary thought that all situations are different, I would like to share some
of those lessons with you.

The first: a financial plan is not just a “financial” plan. Fiscal results do not exist
in a vacuum. What we have been doing with the City of Philadelphia since 1991
has been the creation and monitoring of a management plan and its financial re-
sults. While the goal of the process is the production and maintenance of a budget
that is balanced from year to year and to highlight areas of financial risk, it is
equally clear that the fiscal picture is a representation of the results of a series of
other choices. Many of those decisions are made elsewhere, whether by other levels
of government or the private sector, but many more are made by the city itself. It
is imperative in any planning effort to step back and assess what the budget num-
bers mean in terms of services, burdens and the long-term prospects for the city and
its citizens. It should be an objective view of assets, liabilities, threats and opportu-
nities. A budget that is “balanced” in an accounting sense at the same time may
be financing a government that is not functional.

‘The second: there is no such thing as a “value neutral” public policy. When public
officials are urged to “make hard choices” they are being asked to make value pede.
ments. Whether it is the Internal Revenue Code’s preference for single family home
ownership, or whether D.C. should be permitted to enact a non-resident income tax,
every decision implies a judgment of relative social value. I believe that individuals
are economically rational and that they will react to external events which impact
them within their capacity to do so. It is, therefore, inevitable that decisions made
by government will provoke a response that creates fiscal and programmatic ripples
(and at times tidal waves).

Fundamental to the problem is a reluctance on the part of many public officials
to face the reaction when they make choices mandated by limited resources. I would
suggest that  pablie aggravation and opposition to so-called “hard choices” arises al-
most as much from a perception of unfairness as it does from the actions them-
selves, and the reaction at times represents pent-up hostility against the system
that happens to be focused on one event. As we quickly learned in Philadelphia, a
government that seems to be out of control, out of touch and the source of anecdote
after anecdote of inefficiency and abuse has a credibility problem at least as large
as its fiscal crisis.

The third point is that expecting the process to be free of politics is like tryin;
to repeal the law of gravity. Politics is the process by which decisions are made an
power allocated in society, and our system relies upon interests being articulated
and advocated as forcefully as possible. In such an environment it is hard to reach
consensus on the nature of a fiscal problem, and it is even more difficult thereafter
to create and maintain the degree of unity among the stakeholders whose participa-
tion and cooperation is necessary to reach a solution. Not the least risk is that the
participants in the “grand coalition” created by perceived adversity have only that
adversity to hold them together. Long-standing animosities or other institutional
pressures will drive them apart once the perception of adversity moderates, and
support for reform diminishes accordingly.

Philadelphia, the 1990-1993 period was marked by a unique convergence of po-
litical power clustered around the issue of the City’s solvency. Elected officials on
the local, regional and State level found enough common ground to pass the PICA
‘Act and for the City to construct a series of credible financial plans and concession-
ary labor contracts. In even the most stable systems, however, relationships and in-



31

ity on the local level, and I think you heard me talk about the po-
lice officers. I mean if Columbus didn’t have 12.5 percent of their
dollar going for mandates they could take care of their own police
officers. at the dickens is Congress providing police officers for?
That’s a local government function.

So I think that what needs to be done is to start off sifting some
of this stuff out and see where, you know, indirectly or directly, you
can maybe help the situation from—in terms of legislation or
maybe even some government regs.

Mr. CLINGER. I think you put your finger on that. I mean the
proliferation of unfunded mandates really is of fairly recent origin.
That really wasn’t a problem until more recent years, but it cer-
tainly increased exponentially in a very short time.

Mayor Giuliani talked about, the way you attract business back
and the way you create—begin to recreate a healthy city as one of
the ways is to create a climate in the city, and that has to do with
crime. And I’m sorry I wasn’t here to hear your testimony, but was
that a problem for you in terms of making the city a livable city?
How did you deal with the crime problem?

Governor VoINovicu. I think, to start off with, a well managed
city or well managed State or well managed county does more to
keep businesses and get them to expand and attract them than
an, hing you can put your finger on. They—you start with that.

think in the area of police protection, we had an absolute para-
digm. We went from a situation where I went to a meeting, my
first meeting, neighborhood meeting, with the chief of police, and
we got dumped on like I’ve never been dumped on in my entire life.
The chief was ready to jump up, and I put my hand on his hand,
and I said, “We’re here to listen, Chief,” and what we did was, we
went down and we developed police community relations commit-
tees in all the districts, where we had citizens come in once a
month with the district commander to talk about the problems in
the neighborhoods. We established—we had an auxiliary police in
the city, but they had been neglected, so I punched it up—that up,
gave them money, gave them uniforms, eliminated the adversarial
relationship between the regular police department and the auxil-
iary police. We began a very, very aggressive block watch program
to get citizens involved in policing their own neighborhoods and
changed the management of the Cleveland Police Department and
also the complexion of that department over the years so that it
was more reflective of the people in the community, and when I
left, city council members and neighborhood people were having po-
lice officers, and I'd go to these and they'd honor police officers for
the good work that they were doing in the community, and they'd
bring in their families.

So I think that, again, if that’s a major problem here—and
Mayor White has done a fine job of continuing it. We put in a po-
lice review board. Everyone said it was terrible, the unions were
opposed to it, and we had a couple of very, very bad racial inci-
dents, and it has worked, it has been great. It provides kind of a
place where, if somebody really feels they are aggrieved and the
system isn’t working, they can go there.

There were a lot of little things that we did that we put into
place, and, by the way, the Cleveland Roundtable that I mentioned


17

you should be trying to do is have the financial control board avail-
able for the emergency, to help with some of the very tough deci-
sions that have to be made, but ultimately those decisions should
have to be made by the mayor and the city council. They can use
the financial control board as a device to get this done, because
some of these things will be very politically unpopular and you
have to really think out how long a period and then how you are
going to return things to the normal political—to the normal politi-
cal structure.

Mrs. CouutNs oF ILLINOIS. Which leads to another one of my
questions. If a financial control board would have over independent
borrowing authority, for example, who would have the responsibil-
ity for any debt that they might incur if the board’s term of exist-
ence were to expire? Would it go directly to the mayor or to nobody
in fact?

Mr. GIULIANI, It would have to be assumed by the city govern-
ment. I would think long and hard before I would give them inde-
pendent borrowing authority.

Mrs. COLLINS OF ILLINOIS. What about spending authority? Same
type of question.

Mr. GIULIANI. Same type of question. I think what they should
do is perform a very, very strict oversight role, provide the ability
for recommendations and decisions, set parameters for reductions
that have to be made, and then at a certain point, if the city’s
budget remains out of balance, then there would be additional
power that the financial control board could maintain, but the first
effort should be to try to work with the mayor and the city council
to, in essence, move things toward fiscal stability, and then if that
doesn’t happen then there would be additional power that the fi-
nancial control board could exercise, because I think what you are
going to find is that the mayor and the city council will want to
work with the financial control board if you do it in the right way.

Mrs. CoLLINs oF ILLINOIS. Well, what role would you see the
board playing in assisting city officials and structuring new con-
tracts or benefit packages for the city’s work force?

Mr. GIULIANI. Labor negotiations are like a major exercise that
nobody really understands from the outside. They happen—they
happen on the inside.

The financial control board can play a very useful role by making
it clear how much money really exists, how much is really there.
Maybe from my own experience or experience that we have had in
the last year and a half, it would have been impossible for us to
restructure New York City without the cooperation of the munici-
pal labor unions. It could not have been done, at least not that
quickly, and the way in which we obtained their cooperation~and
it isn’t 100 percent cooperation—is by being open and straight with
them about how much money was available and how much mone
wasn’t available. We opened the books of the city to them, we al-
lowed their experts to come in, we allowed them to examine how
much money we had, because our contention was that we didn’t
have money for raises and that we needed—in essence, we needed
benefits given back to us, and we obtained about $1.2 billion last
year in benefits that we were able to negotiate back to the city.


23

that was passed that dealt with money, spending, in any way had
to have the approval of the Financial Supervisory Commission.

So if we got to a point where council got a little jittery on some
stuff and weren’t maybe doing what they were doing, I always said
to them, “Hey, we can’t do it, not in accord with the plan, can’t put
the stamp on it, can’t put the stamp on it, legislation is null and
void.” So the advisory commission was extremely important.

Let me briefly touch on the actual public partnerships we put in
place in Cleveland, and I’m saying to you today that if you are just

oing to put in a financial recovery group or commission and you
think that’s it, forget it, because you'll do, itll be around for a
while, and then it will go away and things will go back to the way
they were before.

Let me just tell you some other things I think you need to do.
First of all, in addition to having a volunteer management audit of
the books of the city, which were inauditable—I thought we were
$55 million in the hole when I took over; we were actually $110
million in debt—we created an operations improvement task force
which was an all-volunteer organization of 89 full-time Cleveland
executives loaned by 62 companies, to determine how city services
could be provided in a more efficient, economical manner. The task
force was funded by two of Cleveland’s major foundations, the
Gunn and Cleveland Foundation. They came up with $250, and we
raised $500,000 from the private sector, so there was some money
there that would back up the task force. They made 650 rec-
ommendations. We implemented 75 percent of them.

Now I’m going to tell you something. It works. I did that as Gov-
ernor. We did the same thing when I became Governor of the State
of Ohio. We got the private sector involved, went through the whole
operation, and we have saved millions and millions of dollars be-
cause of those recommendations.

The next thing we did—and I’m not sure if this is as important
here as it was in Cleveland—we formed the Cleveland Roundtable.
That was our urban coalition, and that roundtable addressed the
issues of housing, employment, minority business development, po-
lice-community relations, racism, and education in the community,
and it empowered a lot of people who were out in the city an
brought them to the table. African Americans, Hispanics, Appa-
lachian whites were sitting at the table with the bishop and the re-
ligious leaders and the bankers and the industrialists. It was like
a little United Nations, a bunch of people sitting at the table who
had different clout but had a voice that could be heard, and it was
really important to moving us forward.

And we did one other thing, we created Cleveland Tomorrow to
lend their expertise to addressing our long-term economic chal-
lenges. This group commissioned two studies to identify critical
base line data and then proceeded with a three-part strategy to bol-
ster economic development, focus city resources on job creation, and
rebuild the central city and Cleveland’s neighborhoods, and today
Cleveland Tomorrow is still regarded as the No. 1 public-private
partnership in the United States of America.

You might also know that Cleveland ranks No. 1 in the private
sector’s investment in housing—very important, they get involved.


19

and probably you should review it every ‘had or 2 years to deter-
mine how close you are getting to that goal.

Structural—I also would strongly recommend—I’m not certain if
this is done in the District of Columbia, it isn’t-done in many State

overnments—I would strongly recommend that a financial control
Board really get the credit for Putting the city on this basis of doing
not just a Sudget but a financial plan. What that means is, your
budget should really be spread out over a 4-year period so that
when you do the budget for this year we really go through a two-
step process.

T haven’t done a budget for next year yet, what I've done is a fi-
nancial plan. In early February the mayor is required to put out
a 4-year financial plan in which I do a tentative budget for the next
fiscal year and for the three that follow that. Then we debate that,
and then I submit a budget for the next fiscal year.

Now the reason that is important is—and the financial control
board can play a big role in this—is it shows you the implications
of your spending in future fiscal years, it also shows you when gim-
micks or tricks are being used, where someone is selling an asset
and taking the benefit of that in just one fiscal year. You are not
going to have that asset available for the next fiscal year or the one
after that. So one of the benefits that emerged from a financial con-
trol board is changing some of those practices.

Now interestingly, in New York, the city of New York does that.
Because of the fiscal crisis, this additional level of review has been
imposed, which I think is very valuable, but it hasn’t been done for
the State. It is a very valuable exercise, and it shows you in future
years if you are moving toward structural balance or you are just
creating the effect of it in one fiscal year only to make things worse
in the next.

Mr. GUTKNECHT. Thank you.

T yield back.

Mr. Davis. All right. Thank you.

I now recognize the gentleman from Ohio, Mr. LaTourette.

Mr. LaTouretre. Thank yu very much, Mr. Chairman, and in
ight of the mayor’s schedule and the fact that his testimony has
already answered so many questions, I won’t ask any questions but
I will make one observation.

One is that when GAO testified before this committee last week
I was struck by the fact that they had indicated that New York
City was actually reducing taxes at the same time it faced a budget
deficit situation, and you have reconfirmed that again here today.
What a revolutionary idea, to actually reduce taxes and have a
model in New York City to demonstrate that you can benefit jobs
creation and the economy in general, and it is something we should
probably try to copy here in Washington, Mr. Chairman.

I yield back my time.

Mr. Davis. Thank you very much.

The gentleman from Illinois, Mr. Flanagan.

Mr. FLANAGAN. Thank you, Mr. Chairman, and I also will forego

uestion in lieu of an observation.
ank you for coming. here, Mayor. Your testimony has been en-
lightening. I’m from Chicago, Mrs. Collins is from Chicago, many
people here represent large metropolitan areas, and it is always


32

is very much into dealing with the problems of racism in the com-
munity, and so that’s a very important—if you don’t have good
human relationships in a community—I always say that relation-
ships, human relationships, people getting along together, are more
important than infrastructure, than roads and bridges and the rest
of it. We forget about it, but that’s fundamental to any good com-
munity, is the people work together, respect each other, and there’s
communication going on.

Mr. CLINGER. Thank you.

Thank you, Mr. Chairman.

Mr. Davis. Thank you.

I now recognize Mr. Fattah, the gentleman from Pennsylvania,
if you have any questions.

Mr. FattaH. Thank you, Mr. Chairman. I don’t have any ques-
tions at this time.

Mr. Davis. All right. Thank you very much.

The vice chairman of the subcommittee, Mr. Gutknecht from
Minnesota.

Mr. GUTKNECHT. Well, Mr. Chairman, in the interests of time I
won't ask any questions either, but I would like to just make a cou-
ple of observations.

I really feel like a pair of brown shoes at a black tie event this
morning, to have the excellent testimony that we have had; and,
second, I want to thank the Governor again because, as grandma
used to say, “the darkest part of the night is just before the dawn,”
and I think that you have given us reason to believe that there will
be a dawning, there will be a new day for the District of Columbia,
and that if we do this right, hopefully we won’t have to do it—or
future Congresses won’t have to do this again.

So again, thank you so much for being generous with your time.
You have answered the questions that I had already.

Thank you, Mr. Chairman.

Mr. Davis. Thank you very much.

Let me just ask Mr. Fattah—I think he had one question. The
gentleman from Pennsylvania.

Mr. Fatrau. Thank you, Mr. Chairman.

Just a quick question, Governor. There’s a lot of discussion about
block grants, and I want to know whether you think that, as we
look at the financial situation here in the District and as that
might play out, including other cities around the country that are
in ‘delicate financial situations, how do you think State control over
block grants versus direct appropriations and entitlements may im-
pact? If you just have some general comment on that.

Governor VoINOVICH. I can give you some real specific comment.
The temporary family assistance bill, for example, block grant, I’m
in favor of that becoming an entitlement to the State and not to
individuals. I’m in favor of Congress not prescribing how we spend
that, that Congress give us the flexibility so that we are able to
take those dollars and use them and work harder and smarter and
do more with less and not have to get waivers, like we have to do
today, in order to utilize those dollars in the most effective way.

We also insist that if you are going to freeze the money, that you
not just use 94, that you go back and you average that amount over
several years, and that you also put in place a rainy day fund, that


14

than investing at least some of that prosperity in tax reduction, the
city didn’t reduce taxes, the city actually increased some taxes and
jest kept saying yes to everything, and yes to even things that no-

ody was even asking about. So it went from 1982 to 1983 till
about 1987-88, moved up to about 220,000 again, and then if you
actually do an apples to apples comparison, because some of these
jobs had been moved out to quasi-government agencies, in 1990
when I became mayor New York City was on its way to having
250,000 employees.

So in essence, we had done all the downsizing, we had fired all
of those people, we had laid all those people off, and you can see
a similar thing happening in the rest of city services, and then we
built way back up, and the cost of those employees in 1987, 1988,
1989, and 1990 was much greater than it was in 1975. So now we
are going through the same thing all over again. Now we have
taken the city work force, now it’s on its way down to about
201,000. The next budget will take it down to about 195,000, and
the one after it about 185-187,000.

So you are right, we are going through the same process all over
again. It also, I think, underscores the way to use a financial con-
trol board, when it works and when it doesn’t work.

The financial control board will work very well during the time
of crisis. It kept the pressure on the city to reduce the work force,
to be efficient, to renegotiate agreements with labor unions. As the
financial control board became more of the political apparatus of
the city, it did no good in 1983, 1984, 1985, it was there while the
city gained all the weight back again.

0 the real art here is a short period, a real emergency, let it ex-
ercise power, and then the city itself has to politically learn the
mechanism for saying no, and it has to become politically—I see it
very often as a political plus to say no, because the people of the
city are sophisticated enough to understand that if you continually
say yes you are just pandering and ultimately hurting them.

is. NORTON. The chairman has called my time. I just want to
finish this off by saying that if the control board, during this time
when it was becoming more and more dormant, had helped the city
recognize that a permanent range of employees is what they should
continually strive for, then I take it they would have performed a
useful function by calling that to the city’s attention, and then you
wouldn’t have had the government grow back just to havé to be re-
duced again.

Mr. GIULIANI. Or if they had followed a rule of growth in spend-
ing no greater than the rate of inflation of some standard that
would have created a brake on it.

The city in 1983, 1984, 1985—and it could spend more money,
it was goin through tremendous prosperity, but if it had had some
discipline about the amount that it was spending and had it in-
vested some of it in tax reduction so that the private sector could
also grow, I don’t think we would be experiencing the difficulties
we are experiencing now.

Mr. Davis, Thank you very much.

T would like to now call on the chairman of the Committee on
Government Reform and Oversight, the gentleman from Pennsylva-
nia, Mr. Clinger.


73

The next questions, which flow form that point, are “What are the most criti-
cal things that you need to have done tomorrow and don't have a prayer to ae-
compli even within the next two years? How, then, do you get along without
them?”

Everyone has their own stories about how bad some part of the District govern-
ment is, and even if a relatively small percentage of them is true, you have a huge
problem to deal with. Sad to say, most of those problems aren’t going to be ‘ixed
today, tomorrow, or even by the time the baseball strike is over.

Yes, it could be even that long.

Institutionalization of fundamental change is the single most difficult and frus-
trating part of the effort upon which you are about to embark, but it also can be
the most rewarding.

You can be very sure that there are people within the District government who
give the taxpayers a day’s work for a day’s pay, and labor under extraordinarily dif-
ficult conditions. You also can be sure that there are those who will decide their
future relationship with the District of Columbia—residential, educational, financial
and commercial—on the basis of what they believe the structure you put in place
will be able to do.

Please remember that there are hundreds of thousands of people who have done
nothing to cause this cataclysm. They want only to make a decent living, educate
their children and live in a safe and stable community with reliable services. As
dysfunctional as the current system is, it is all they have.

It will be immensely difficult to turn the District government around. Even if (or

haps especially if) things go well, there will be bruised egos and shattered power
Bases strewn about the lan: .

You have, however, no alternatives. You know that things have, indeed, become
“undeniably bad,” and I wish you luck.

I wish you luck.

I would be pleased to answer your questions. Thank you.

SUPPLEMENTAL PREPARED STATEMENT OF Ronatp G. Henry, EXECUTIVE DIRECTOR
OF PENNSYLVANIA INTERGOVERNMENTAL COOPERATION AUTHORITY, FROM THE
HEARING ON JULY 14, 1994

Mr. Chairman, I am Ronald G. Henry, and I serve as Executive Director of the
Pennsylvania Intergovernmental Cooperation Authority (known as PICA), the fiscal
oversight agency for the City of Philadelphia. I would note that the views I will ex-
press today are my own, and should not be interpreted as those of PICA or any
other entity or individual.

PICA was created by the Commonwealth of Pennsylvania in 1991 after Philadel-
phia’s investment grade ratings were withdrawn by the major credit agencies. That,
in turn, caused the City’s annual public note offering to fail and precipitated both
a cash crisis and a crisis of confidence in the capacity of Philadel pin to manage
its fiscal affairs. In short, the City lost the ability to finance itself. It had no choice
but to seek help.

The PICA process is based upon the philosophy that the City should not be
“bailed out”, but rather should be given the time and tools to re-make itself. Phila-
delphia was given the right to app! iy to the Authority for financial assistance in the
form of PICA bond proceeds. Our bonds, which may be issued through the end of
1994, are secured by a pledge of a portion of the tax imposed on the wages and
earnings of City residents—over ten years in the case of deficit reduction bonds and
over up to thirty years in the case of debt issued for capital purposes.

In_1992 PICA issued bonds, in the amount of $474.6 million, $120 million of
which was allocated to capital projects, in addition to funds set aside for both accu-
mulated and anticipated operating deficits. In 1993 we issued $174 million for cap-
ital purposes, and additional amounts to refund both City and PICA bonds. Wit
PICA assistance, Mayor Ed Rendell's administration and City Council have moved
the City from huge Projected operating deficits to what we expect will be a substan-
tial operating surplus for the fiscal year ended June 30, 1994.

PICA does not have powers like those of the New York State Financial Control
Board, but the City is required by statute to develop a five-year financial plan based
upon reasonable estimates of both revenues and expenditures, and which shows bal-
anced budgets for each of its years. PICA approval of the plan is @ precondition for
any assistance, and there are sanctions which may be imposed if the Plan should
become unbalanced and the imbalance is not remedied by the City.

When the District (or Congress, for that matter) will come to terms on a long-
term basis with the underlying realities of is fiscal condition is speculative, and I



58

that over the period that I was chairman of PICA, every vote we
had was a unanimous vote on every critical issue. There was not
a public disagreement among members of the board over what we
had to do.

Now, that does not mean that we did not have vigorous debate
among ourselves out of the glare of the public light, over how we
should come down on the quarterly reports and the review of what
we were doing. But we were able to reach a consensus among our-
selves so that on every major issue, we had a unanimous vote. And
I would also add that it was critical that we worked very close}
with the mayor and members of his staff, with the city council,
while preserving the independence of the oversight board.

There were numerous meetings with senior city officials in an ef-
fort to understand what was going to be in the financial plan, what
the city’s plans were for meeting its financial needs, what the size
of a bond issue should be and other matters that we would have
to ultimately act on.

I want to emphasize that we worked very closely with the city’s
elected officials in attempting to resolve these questions.

I think that the PICA experience in Philadelphia was a success.
The city is now on the way to solving its fiscal crisis and great
progress has been made since 1992. But there are many challenges
that remain and I might add here that one of the things that is
necessary to really achieve a long-term solution to this problem is
sustained economic growth in the city of Philadelphia.

I was chatting with David Cohen earlier and asking him how em-
ployment was growing and—since I came to Washington, I haven’t

ept up as closely with this as I might otherwise do and unemploy-
ment is still high in the city of Philadelphia. Employment is not
growing rapidly. There is still a serious problem of poverty, a de-
mand for social services. These are the necessities that make—re-
quire city expenditures for various purposes because there are no
funds to meet these needs of significant level other than through
general revenues of the city. I might mention that 48 percent of the
city’s revenue is based on the wage tax and the wage tax is applied
both to city residents and to persons who work in the city but live
in other places.

I would say that part of the reason we were successful is that
an oversight board of the type we have gives elected officials the
political cover they need to make unpopular choices and to control
spending. In other words, the oversight board, in effect, is a heat
shield. The mayor, members of city council can make decisions on
spending and blame it on the board because they don’t have any
choice in the matter, and this can be a very useful device for allow-
ing the city to reduce payrolls, to eliminate services, to restructure
government, to introduce new management techniques, to renego-
tiate labor contracts and do all of the other things that are nec-
essary.

T would say in closing that I don’t believe that we could have
achieved success in this venture had we not received the full sup-

ort and cooperation of Mayor Rendell and the President and mem-
Bers of the city council. Our objective was to see that the city put
in place the financial planning systems and the management sys-
tems necessary to control spending. And that was done. It was a


6

matically as possible, and to show that New York City could reduce
crime and reduce it quickly.

Over the last year New York City experienced one of the largest
reductions in crime in its history, and in two categories, murder
and felonious assault, it achieved the largest reduction ever in the
history of the city, and New York City now is below the top 50
cities for crime in the United States. That is vitally important, be-
cause no matter what you do with the taxes and no matter what
you do with the balance in the economy, if people believe that a
city is not safe they are going to leave it, and you can’t have eco-
nomic development when people are fleeing.

The second thing that we did was to create an aggressive pro-
business environment, because businesses mean jobs and the fact
is that. we were looking to the wrong place for jobs. The city was
Promisin jobs from government. New York City has 7¥2 to 8 mil-
‘ion people officially. We employ—when you consider our employ-
ment and the number of people that come into the city every day
to work, you are talking about more like 10 or 11 million people.
Even a government that was as large as New York City’s and New
York State’s can only supply jobs for a couple of hundred thousand

eople. It is the private sector that can supply the job needs of mil-
ions and millions of people, and, offering the false promise of gov-
ernment jobs, the city was crushing the real hope of jobs in the pri-
vate sector, and the changes that we made in the budget have re-
versed that trend.

The third thing that we did was to restore fiscal stability in our
city government by substantially reducing the actual dollars spent
and by reducing the size of the work force to bring the private—
the public economy in line with the private economy, and all three
of these priorities really work together.

By working cooperatively with the unions and not engaging in
layoffs but implementing a severance plan, we were able to reduce
the size of the city work force by now ap roximately 15,000. By the
end of this fiscal year the reduction wil Be somewhere in the range
of 20,000. When the city went through the fiscal crisis of the
1970's, that is approximately the amount that the city reduced the
work force by in the same period of time. Then it was 21,000. But
at that time the city did it through layoffs. What they did was,
using civil service rules and seniority rules, just across the board
reduced dramatically the size of city agencies by firing people, but
when the city does that, given the civil service rules we operate
under, you can’t make choices about who you remove and who you
don’t remove, you have to do it by seniority, and sometimes half
the people you are removing are your very best workers.

Instead of doing that, we entered into very, very intense negotia-
tions with all of the city unions, and we offered severance pro-
grams, dollars and help to people to encourage them to leave city
service. By doing that, we were able to target the agencies we
wanted to reduce rather than having to reduce all agencies. We
were even able to go one step further than that, which was to tar-

et the areas where we felt. we had excess employees rather than
faving to reduce across the board. Across-the-board reductions
really just end up creating more expenses later because you have
to hire back the people that you fired or laid off.


29

we needed. When the weather got bad, that kept us going through
those seas.

Ms. Norton. And the State paid for the board?

Governor VoOINOVICH. They paid for it, but it was minimal. We
gave them free office space, and basically it was nickels and dimes.

Ms. NorTon. The staff and so forth?

Governor VoINovicH. Yes, but—let me correct myself. The part
of it that they really helped out was—and now that I—and it’s been
a long time. In fact, I was on the phone yesterday with Bill Reedy,
and he faxed me some stuff to really, you know, refresh my mem-
ory. The State did pay for the accounting firm, the financial super-
visory group that was at that time Ernst and Ernst; this is Ernst
and oung. They did pay for that, and that was a benefit because
we didn’t have to pick up their costs from the city.

Ms. Norton. And I know that can be a great cost.

I am very interested in the contrast between your testimony and
the testimony of Mayor Giuliani who preceded you, because | asked
him about the regrowth of the government which confronted him
when he came into office, and you have testified that the govern-
ment, in effect, did not grow because the 85 percent inflation rate
compared to the 45 percent growth in the budget indicates some
enormous discipline somewhere.

Governor VoINOVICH. Well, let me just point out to you one other
thing, and I’m glad the Members of Congress are here. I went
through the deficit reduction of 1985 that passed. The cities and
the counties paid the price. I lost—not only did I have bad finances
in the early eighties but I lost about $79 million of Federal money.
I lost all the CETA money, I lost half the community development
block grant, and revenue sharing went out the window. So I lost
the Federal money that was available, and then we had the finan-
cial problem, and, as I said, we had to go to the voters and ask
them for additional revenue. But in spite of that, our growth was
45 percent in 10 years versus the inflationary rate. So these were
tough times.

Ms. NorTON. You had to replace the loss of those Federal funds
though local funds?

Governor VoINOVICH. That’s right, and part of the reason wh
that—you know, that put the pressure on. Some of that was good;
don’t get me wrong, I think pressure is good. I think that govern-
ment too often doesn’t—they don’t get the message. I’m going to be
talking to AFSCME here at noon. We are the leader in the country
in quality management, of using uality—we call it quality service
for partnership. The public sector doesn’t get it in most places.

Businesses in my State understand you have got to work harder
and smarter and do more with less, that_you have got to brin
technology and you have got to be more efficient and so forth, ani
so the work force here has got to understand that it is not business
as usual, That’s why having the management audit is part of this
thing, to come in and look at the way things are doing.

The other thing I’d advise is that I’d get involved in quality. You
have got some Federal agencies that are doing real well in quality
and some that aren't, but you have to involve, you have to empower
the people that are making the decisions to get involved and figure
out ways that you can do more with less. The public—the private


65

vatize the service or you don’t privatize the service. And in fact, the
service that has the largest single savings of all, 28 of those initia-
tives is a competition that was won by the union work force involv-
ing the sludge disposal, sludge processing facility in our water de-
partment. That is an operation that was costing $24 million a year
to run,

You can look in our budget and you can see we were spending
$24 million a year in fiscal year 1992 and fiscal year 1993. We
brought in a consultant to design an RFP and to see what we could
do if we would competitively contract out that initiative, and the
consultant, concluded that if we had that work done by a private
contractor that work could be done at $16 million a year.

The union came to us and said, if we can do this work for $16
million a year, will you pull the RFP? And we said, yes. And the;
agreed to reductions in work force. They agreed to changes in worl
rules and in the 1994 budget and the 1995 budget, and the 1996
budget, that plant is spending—we are spending $16 million a year
to run that plant with a city unionized work force savings of $8
million a year.

Last and not least significant, but also not most significant, is
that we negotiated tough but fair labor contracting with our munic-
ipal unions. Those contracts are saving us in excess of $100 million
a year. The bulk of those savings are in the health care area be-
cause we negotiated a complete restructuring of our health care
plans with our unions but we also have savings as a result of dis-
ability reform.

As a result of changes in work rules, there have been more than
150 changes in work rules in the way that our municipal work
force is organized to do business, whether it is scheduling, job clas-
sifications, or work rules such as the fact that a custodial worker
under the old practice was not permitted to clean walls above the
shoulder level. If they were cleaning walls above the shoulder level
you had to be a wall washer, and wall washers were paid more
than custodial workers, and that 5,000 person attrition that I dis-
cussed. All the wall washers have been attrited out of the work
force. There haven’t been any hired, which means there were no
walls being cleaned in the city at shoulder level for about 5 years.
Not a very logical way to approach doing custodial services in any
business let alone in the government.

Overall, as I said, over a 3-year period, over $800 million of gap-
closing initiatives were successfully adopted which was required in
those two balanced cuttings that I talked about. All of that, to-
gether, has enabled the mayor this year—and we are by the way
in the midst of our budget process now—to propose a fiscal year
1996 budget that includes the city’s first tax cuts since 1945, first
tax cuts in 50 years for the city of Philadelphia and also includes
significant enhancements of services in such thing as the library
system, the recreation department, the Fairmont Park System, the
police department and the fire department. I would suggest prob-
ably the most critical departments from a citizen service delivery—
citizen service delivery perspective.

One of the lessons that we can take from the Philadelphia expe-
rience, first, and I think foremost, you need the political will to ac-
complish difficult things. Nothing that has been explained to you


67

the plate and did that, under the leadership of the Philadelphia
delegation of the legislature, and did provide the funding for that.

Now we would also like them to pay for court costs and other
things that they should pay for, and we continue to work on that,
but we have accomplished what we have without that.

Mr. Davis. Mr. Cohen, can I interrupt you? I want to hear your
testimony and I have got some questions. Mr. Fattah and I need
to get over and vote very quickly.

0, if you could bear with us for about 15 minutes, to take a re-
cess, and then you can summarize. I appreciate you bearing with
us and we will be right back. I declare a recess.

{Recess.]

Mr. Davis. Thank you. I appreciate you bearing with us.

Mr. CouEN. No problem at all.

Mr. Davis. It was all to no avail. We missed the vote by 1
minute, but we paired off so we were covered. This was great testi-
mony. We want to give you a chance to finish and then I have some
questions. We really appreciate your being here.

Mr. COHEN. Thank you. Where I was, I think, was to a point on
the three key lessons from the Philadelphia story. The first is the
political will of the mayor and council, the second was the level of
cooperation that we received from the State government—again,
not to bail us out, but to pay its fair share—and the third is the
importance of PICA as an oversight board in that process, and the
importance of that board simply cannot be overstated or overesti-
mated.

Dr. Anderson has described the way in which the PICA Board is
structured and has functioned. I would just note the following
things that I think were keys to the success of PICA and PICA’s
relationship with the city.

The first, that it was a nonpolitical expert interested board. Be-
cause I am not surprised to hear that Dr. Anderson was spending
60 percent of his time working on PICA because I know all the
evening meetings we had and weekend meetings we had and 6:30
am. meetings we had to be able to air these issues and to discuss
them.

And at virtually all of these meetings, all members of the PICA
Board and as well as Mr. Henry, as the executive director, were
present. And in the absence of that type of a committed and inter-
ested board we could not have had the successes that we had.

The second, a relatively small board. I am not saying that five
or seven members is the right size, but I will tell you, if you get
to 15, you are in deep trouble. You need as small a board as you
can put together to deal with the constituencies that you need to
deal with in order to make the board work as part of that process.

The third was a highly professional and expert staff, and a staff
that was truly interested in working with the board and with the
city in figuring out a way to solve the problems and not at making
headlines itself as being the architects of solving the fiscal prob-
lems of a particular city.

And I have known Ron Henry for a long time, he and I practiced
in the same law firm before we went our slightly separate ways
and, as he pointed out to me right before he took this job and I
took my job, he said, this is great, I will get to be your banker, and


68

he was my friendly banker. It was a very important relationship
to have a staff that knew what it was doing and knew the limits
of its power. and the authority of the PICA Board and did not tread
over those lines.

The third—the fourth item is a cooperative relationship with the
city. And I think that should be coupled with the fifth item, which
is independence from the city. And there is a difference between
being cooperative and just being a captive of the city process and
being cooperative in terms of being constructive but still maintain-
ing independence and not hesitating to criticize or to comment pub-
licly on areas of disagreement that might exist between the city
and the PICA Board.

And for credibility on Wall Street, and for credibility of the ulti-
mate turnaround of the city, you needed both the cooperative side,
the collaborative side, as well as the independence side that the
outside world would know that—would know that the board was
independent and was prepared to blow the whistle when it was
necessary to blow the whistle.

The sixth item I would say is, have a bias on this. I am a city
gmployee and a city official, but I think the role that Dr. Anderson
described on at least a half a dozen occasions in his testimony, the
emphasis on the word oversight as opposed to control was a critical
element of the success in Philadelphia.

I don’t think you can impose the political will or the solution on
the independent elected officials of any particular government. J
think you can structure the kind of a relationship that existed in
the city of Philadelphia without putting the decisionmaking author-
ity in the hands of the outside oversight board, but putting the
weapons and the bully pulpit—and the power of the bully pulpit in
the hands of that board to make—to be able to move the elected
officials to making the appropriate decisions that they are supposed
to make. And I guess I feel very strongly that that is what the offi-
cials were elected to do. It should be their job, ultimately, to make
decisions.

I am a strong believer in the importance of home rule and in the
importance of local officials making their own decisions. I under-
stand when that power is abused and you get into a situation
where you need an oversight board, that there are certain restric-
tions and limitations, but I think the oversight structure that we
used in Philadelphia is much preferable to a control structure
where Bernie ‘Anderson and Ron Henry, and as much respect as I
have for the two of them, I think our system was better where you
had Ed Rendell, John Street, and 16 other elected members of city
council making the decisions under the oversight of a PICA Board
as opposed to Bernie Anderson and Ron Henry making the deci-
sions and the elected mayor and city council sitting on the side-
lines, so I feel quite strongly about that.

The next two—my last two items are also linked and that is the
possession, the oversight board’s needs to hold a nuclear weapon to
ultimately get its way and they have to have the willingness to use
the nuclear weapon. In Philadelphia’s case, the nuclear weapon
was the ability, as Dr. Anderson described, to inform the State that
the city has at variance with its plan had not submitted an accept-
able corrective action and that, therefore, the State should with-


26

and what I’m saying is that there’s got to be some people in this
town, who own property and are stakeholders, who have got to say
to themselves either I'm going to get involved or it’s going to get
worse, and I think that’s what it’s all about.

I can tell you something that—take Del Dewin, who was chair-
man of the Cleveland Tomorrow, is now retired chairman and CEO
of the Eden Corp. Del Dewin will tell you the most important work
he ever did was his work with the city of Cleveland as chairman
of the operations improvement task force and the formation of our
Cleveland Roundtable and Cleveland Tomorrow. I’m not kidding,
urban pioneers, you know, they made a difference, and there are
people right here in this town that are willing to do that, and you
have to identify them and get them to step forward and say this
is your town and if we’re going to make it, it’s going to have to be
an ongoing commitment, it can’t be just a little temporary thing,
set it up and then go away and everything, because it will go back.

I mean right now the one area where we—we failed in Cleve-
land—for years I wanted the State to take over the system because
the political leadership and the government leadership in the
school system just wasn’t there, and now the Federal court has said
that the superintendent of public instruction has taken over. But
one of the things that I know he is going to do is, he’s going to get
the indigenous leadership of the community involved in it, because
once he leaves—and, by the way, his name is Ted Sanders. He was
the head of your Illinois Department of Education. In fact, he was
Assistant, Department of Education, here in Washington under
Lamar. Anyhow, he is our State superintendent.

But you have got to get the indigenous leadership and the people
involved in this effort and understand, you are going to be here for
a while, and I know a lot of you want to stay as long as you can,
but the fact is, that business community provides the continuity.
Just like I said to you, that business community that we started
is still there, those partnerships are still in place, and they realize
they have got to continue to participate. The mayor is cooperating
with them, the city council. It doesn’t mean that things are perfect,
but the fact is that, without that private sector, Cleveland would
never have made it.

Mr. Davis. Was it difficult to get the private sector to buy in? I
mean they wanted to see some things up front before they put their
money out. They saw the city really getting worse without their in-
volvement. How difficult was it to get them involved?

Governor VOINOVICH. Well, to be frank with you, I was Lieuten-
ant Governor of Ohio and I wasn’t going back. Mrs. Voinovich said,
“You aren’t going back.” So I sat down with them and said, “I'll
come back and run, but you pay for the campaign, and you're going
to help me get this thing back on track, and I’m not going to be
like those other mayors that just sit here and have these problems
keep slapping them in the face, we're going to do a complete man-
agement audit of that operation, and we are going to develop a real
partnership and develop a strategic plan, and you are going to help
me get the job done.” So I got commitments right straight up front.
I said, “You are going to raise the money, you are going to provide
it,” and they were there.


78

should reasonably expect you and this board to work together. And

I think it had a salutary effect and no mayor wants to operate

under these restrictions, but when they know that it is in their in-

terests as well as in the interests of people of their city, they can
lo it.

Mr. Davis. The makeup of your board was different than New
York’s and Cleveland’s to hear the testimony earlier today. You had
no labor or union leaders, per se, on the board.

Mr. ANDERSON. No.

Mr. Davis. And the elected officials were not there, per se. You
had, I guess, the finance director for the city but that was a bit dif-

ferent.

Mr. ANDERSON. Also the budget director for the State.

Mr. Davis. Were they voting members?

Mr. ANDERSON. They were not voting members. There were
five~the only voting members were the five private sector mem-

ers.

Mr. Davis, And what kind of access did the mayor and council
have in the decisionmaking process? As you were making decisions,
were they able to get their 2 cents across to you?

Mr. ANDERSON. Oh, yes. There was extensive communication be-
tween the board, the staff of the board, and the city government.
We were in communication every day. We had no secrets.

Mr. Davis. They were at the table but they weren’t able to vote.
Would that have helped——

Mr, CoHEN. If I could, Mr. Chairman, the model here, and this
is a very important distinction, I think, because the model here is
that the decisions were really being made by the mayor and, to a
lesser extent, by the city council. And what was—the PICA Board
and we had, I can’t tell you how many times we had these discus-
sions, and Dr. Anderson, if you did a Nexus search of newspaper
clippings with his name, you would find this sentence 10 times
which is, it is not the PICA Board's business to tell the city of
Philadelphia how many fire stations to have, what to negotiate in
its labor contracts, to lay people off, to cut wages, to do anything.
qt is our job to see that the city of Philadelphia has a balanced

udget.

And it is up to the city to develop a plan to eliminate the struc-
tural deficit, to project 5 years’ worth of balanced budgets, and
then it is up to us to assess the reasonableness of those assump-
tions and the capacity of the city to deliver on its plan so that you
do not have a PICA Board voting to contract out any services or
to have a contracting out program or to negotiate a 2-year wage
freeze or to do any of those things.

Mr. Davis. Would it be an “almost send the wrong message” and
be counterproductive to put the mayor on there? This would have
said the board has the authority as opposed to the mayor and coun-
cil. You had your role and they had theirs.

Mr. ANDERSON. That is the very correct way to view that, that
it would have been counterproductive, ineffective to have the mayor
on the board. It seems to me that that is the difference, Mr. Chair-
man, between a control board and an oversight board.

Mr. Davis. OK. I have some questions before I yield to Ms. Nor-
ton.


3

District would need to borrow cash within weeks. At the same joint
hearing of this subcommittee and the DC Appropriations Sub-
committee, Mayor Barry testified that the District needed an over-
sight board. The GAO appeared at that hearing as well and testi-
fied that the District is technically insolvent.

Emergency conditions are compounded by a deficit significantly
larger than previously suspected and by congressionally required
cuts that now appear impossible to fully achieve by September 30,
the end of the fiscal year. Thus, the subcommittee is working
quickly to establish a recovery board for three reasons: The District
is insolvent; the District must borrow soon; and the District has a
deficit that is now so far out of control that it cannot be tamed
within a single fiscal year.

Chairman Davis has said that he believes that the House and
the Senate must complete their work by the April recess in case
the District must borrow while Congress is out of session. There-
fore, he has established a timetable necessary to get the job done.
I know that I speak for District officials and residents alike when
I express my thanks to the chairman for taking the action nec-
essary to avoid an untenable result. We are racing against the
clock. If Congress is to do the job right in so short a period of time,
we must submit to a quick study of the real life operational experi-
ence of cities that have established boards.

We are enormously grateful that so many of the principal figures
who have been active in making their boards work have agreed to
testify today. Their testimony is a tangible and invaluable contribu-
tion to the Nation’s Capital and thus to the Nation itself. I welcome
all of today’s witnesses and express my sincere gratitude to them.

Thank you, Mr. Chairman.

Mr. Davis. Thank you, Ms. Norton.

I would now yield to the Representative from Staten Island, the
former minority leader of the New York City Council, Susan Mol-
inari.

Ms. Motinart. Thank you, Chairman Davis.

Chairman Davis, members of the committee, it is a great honor
and a privilege to introduce to you the mayor of the greatest city
in the world, the mayor of New York City, Rudolph Giuliani. Rudy
is the best thing that has happened to New York City since Mayor
Fiorello LaGuardia cleaned up Tammany Hall.

Since taking office in January 1994, Mayor Giuliani has done
what many people claimed was impossible: He has made city gov-
ernment more efficient, thereby allowing him to reduce the size of
government while greatly improving our quality of life. In fiscal
year 1995, the city has implemented plans for an absolute decline
in city spending for the first time in over 16 years; and to date the
city-funded work force has been reduced by over 12,300 employees.

I know Mayor Giuliani’s leadership and experience in New York
City will be helpful to your committee as you work through the
District of Columbia’s problems to help solve their fiscal crisis be-
cause the truth is, Mr. Chairman, if you can do it in New York,
you can do it anywhere. It is my great honor to introduce to the
members of this committee the mayor of the city of New York, Ru-
dolph Giuliani.


2

Charles R. Morris called his detailed study of the New York fiscal
crisis of the 1970's “The Cost Of Good Intentions.” Indeed, Mr.
Morris found that the problem was right there in his title. Good in-
tentions alone, without limit or control, are as harmful as bad in-
tentions.

Last month Pulitzer Prize winning journalist William Raspberry
headlined a column on Washington, DC, as the city that couldn't
say no. He likened the city’s spending practices not to those of a
drunken sailor but to a compassionate parent with a credit card,
As Mr. Raspberry wrote, a huge amount of the city’s stupendous
debt is the result of the local government's effort to do good things
it can’t afford. Those days must be gone forever.

The testimony of so many credible people before us in these three
hearings serves as evidence that the people of Washington, DC,
and the people of the surrounding region all have a stake in the
vitality of this city, and that this can be a beginning rather than
an end. The people who are with us today will show that a control
board is not_a monster or a cure worse than the disease that it is
designed to fight.

The people and governments of this region as well as of the Dis-
trict of Columbia itself need to help resolve the present difficulties.
Without the vitality and culture of a healthy Washington, DC, the
Maryland and Virginia suburbs cannot expect their good times to
continue unabated either.

Control boards in and of themselves cannot solve some of the
most pressing ills that plague most of our cities today—high crime,
excessive taxes, shrinking tax bases, poor schools, and the loss of
the middle class. That will require a partnership of local people
from both the public and private sectors with the courage, vision,
and imagination to break with past practices, devise new and bet-
ter ways of serving the people who live, work, visit our urban cen-
ters.

I know of no other current issue where we can better apply Ben-
jamin Franklin's advice to the Continental Congress: “We must all

ang together, or we will most assuredly all hang separately.”

I F ould yield now to Ms. Norton, the ranking member of the sub-
committee, for an opening statement. I would like to ask other
members of the panel to hold any statements they have until later,
but I want to acknowledge the presence of the chairman of our full
committee, the Honorable William Clinger, for once again being
with us today.

The mayor is on a very tight schedule, and we are just very
grateful that he could take time to be with us today.

Ms. Norton.

Ms. Norton. Thank you very much, Mr. Chairman.

I want to thank Chairman Davis for his leadership in producin
two vital hearings in short order as we move to address a fiscal
emergency and to prevent default by the District of Columbia.

The chairman’s course and pace are dictated by dramatic events.
Last month the bond rating agencies downgraded the District's
credit rating so severely that, for all practical purposes, the District
has Jost the ability to Borrow the money necessary to stay in busi-
ness. Yet on February 22, a week after the first of three agencies
downgraded the District’s bonds, Mayor Barry testified that the


15

Mr. CLINGER. Thank you, Mr. Chairman, and, Mayor Giuliani, I
want to commend you for the outstanding job you have done in
turning the city around and making some very tough calls to make
that happen, and I think you deserve a lot of credit for having ac-
complished that.

I just have a couple of questions. I think you indicated that you
have reversed the outflow of businesses from the city. Is that cor-
rect?

Mr, GIULIANI. Yes, sir.

Mr. CLINGER. I mean you are now actually attracting new busi-
nesses in. You know there are a number of proposals here as to
how we can reverse that in the District of Columbia, because we
have had a lot of outflow from the District: Some pretty extreme
things like sort of declaring the whole District an enterprise zone,
or basically making a commonwealth, or a whole range of things.
Do you think we need to be that extreme to accomplish the kind
of reverse trend that you have seen in New York?

Mr. GIULIANI, I really don’t know the details of it. My guess is,

ou. would not have to, that there are three major things that any
business looks to as to whether or not they want to stay where they
are or go somewhere else or come to a new place, and safety is one,
the tax structure is the second one, and then, maybe emerging
from that and other things, just a general impression of whether
this is a city that is going to grow or contract, and if they have a
sense that this is a growth area then they are going to want to stay
there.

I think the most important thing is to get the city in tune with
the economic principles that provide job creators rather than hav-
ing them do things that is inconsistent with the principles that are
used by people who create jobs. People who create jobs own busi-
nesses, and if you can show them that their lot is going to improve
then you are going to keep jobs in the city. If you do the opposite
of that, if you do everything imaginable to show them that their
Jot is going to get worse, then, being sensible human beings, they

eave.

If you have a business, you are producing jobs, and you are in
a city in which crime is getting worse, the quality of life is decreas-
ing, you are being charged more money to live there, then you say
to yourself, well, this is a place I want to leave. If they see that
reversing and changing, you'll see job growth increase.

The District of Columbia is a very desirable place to locate a
business. Government is here, there are a lot of reasons why you
would want to be in the District of Columbia, so you have to be
doing things to businesses that aggressively hurt them in order to
drive them out. You change that, and you are going to keep a lot
of businesses here and a lot of businesses will want to come here.

Mr. CLINGER. Just one other question. One of the most serious
problems that we have in the District is the enormous shortfall on
the Medicaid situation and how we are going to address that. The
Mayor would like us to step in and help finance that. I think there
is not a tremendous amount of enthusiasm at the moment for that
course of action. But what has been the situation in New York?
How have you addressed Medicaid?


5

When I came into office I was determined to change the direction
of New York City and set it on a course for growth and prosperity.
The key to accomplishing this was to reorder the city’s economy by
restoring the proper balance between our public and private sec-
tors. In short, New York City had the largest government economy
in the United States, and its private economy was shrinking, hem-
orrhaging. We had lost over 400,000 private sector jobs in a 4-year
period. ‘Those are numbers that matched the Great Depression.

In order to restructure our economy, we engaged on a very delib-
erate course of reducing the size of the pubhe sector, reducing the
size of government, and taking some of the money that we save
from that and putting it back into the private sector so that we can
restore a more balanced economy in the city with a somewhat
smaller government and a growing private sector.

Last year our first budget for fiscal year 1995 moved to restore
the balance by, for the first time in 16 years, reducing spending in
the city of New York. It was the first budget in 16 years in which
the city spent less money in one fiscal year than in the year before.
In fact, the city had been on a course over a 40 or 50-year period
of each year spending more money than in the year before.

Part of the reason why the city created a structural deficit is
that, if you go back and trace each one of those periods, what you
see is that as the mayor and the city council would get ready to
set the budget for the next year, they would increase the budget,
and then during the year they would spend even more than the
amount by which they increased it.

So let’s say they agreed to increase the budget by 6 percent. That
would be voted by the city council, agreed to by the mayor, and
then over the course of the year that 6 percent increase, in one way
or another, would become an 11 or 12 percent increase in spending.
That had occurred roughly for 16 consecutive years. It had been in-
terrupted by 2 years of a financial control board, in essence, run-
ning the affairs of the city, and that had gone on for the previous
20 or 30 years.

The problem of it is, in almost every single year the increase in
spending was greater than the increase in the size of the economy.

0 the city was outspending the growth of its economy. If the econ-
omy of the city was growing by 5 percent, the city would somehow
find a way to spend 10 percent. If the economy was growing in a
bad year by 2 or 3, even then the city would find a way to spend
5 or 6 percent.

All of that converts itself into a kind of technocrat label called
structural deficit, but structural deficit means that you are spend-
ing considerably more money than your tax base can really allow
you, and then we would do things like raising taxes, raising fees,
raising fines, and we were crushing the private sector, in essence
giving it a very strong message to get out of New York City be-
cause if you stay. in New York City you are going to continue to
pay for our inability to spend within our means.

0 we embarked on a three-pronged approach to redress the
city’s imbalance, and the first one might seem a little bit—a little
bit off the point but probably has the most to do with creating eco-
nomic redevelopment. The first priority was to make our streets
and neighborhoods safer, to increase policing, to increase it as dra-


80

co-pay or premium for yourself or your family if you are in a man-
aged care health plan.

This is not a terribly burdensome, repressive labor contract from
the perspective of a benefit level that is being maintained in the
city of Philadelphia today, and that package that I have just de-
scribed to you, is saving the city of Philadelphia more than $100
million a year. It gives you a sense of where we were beforehand.

And I think the point the Chair makes is absolutely the case.
You can be fiscally responsible, you can gain control of your fiscal
destiny, and have compassion for your work force and your public
and your citizens who are receiving the services you are delivering.
And in fact the argument that we have made is that not making
the difficult choices that we have made would have precisely the
consequences that people fear, that is, if we did not negotiate
changes in the benefits structure of the plan, we would have had
to lay people off and we would have had to go to wage rollbacks
or unpaid furlough days.

Tronically, we would have created a worse situation for our work
force by not negotiating these concessions than we have achieved
for them as a result of the negotiation of the concessions and cer-
tainly from the perspective of the taxpayer which is not facing de-
clines in services, but in fact 3 years after the fact is now experi-
encing a service level that surpasses that which was available to
them before the fiscal crisis. The fiscal sanity has meant their gov-
ernment doing more for them and not their government doing less
for them.

Mr. Davis. Thank you very much. I am going to pass the baton
here to Ms. Norton who I know has some questions.

Ms. Norton. Thank you, Mr. Chairman. There is a kind of con-
trast there between New York, which had to take these draconian
measures immediately just to get some extra money, and what
happened in Philadelphia. And as I try to search for what was the
ingredient that led to the roster of benefits you described, you indi-
cate that the board didn’t do this, the city did it. It suggests that
in order to be in that position, that you need city leadership that
is willing to look for innovative alternatives pretty quick or else the
notion of no layoffs and indeed the opposite, increases, becomes
hard to understand.

So am I right in believing that what made this possible was that
the city leadership, the elected leaders hustled to find ways to get
changes that would make for real dollars and eliminate the need
for the ultimate remedy such as layoffs?

Mr. COHEN. That is accurate and I think I would support what
Dr. Anderson said in his testimony, which is that the presence of
PICA Board, as I said, cannot be—the importance of that cannot
be overstated because what we had, I mean, what we had was this
pile of unpaid bills. I mean, there were $200 million of unpaid bills.

You could go and look at a computer printout of the bills that
were not paid and it made you sick to your stomach because you
saw all those bills, but you also realized that you were on a very
short string, that there is a limit to how long the telephone com-
pany is not going to be paid. Yes, it is the city of Philadelphia but,
eventually, after 8 months of not being paid or 9 months of not


83

Ms. Norton. It would have to have an extraordinarily incentive
to make up for—

Mr. ANDERSON. Forty-eight percent of our revenues.

Ms. NorTON [continuing]. Forty-eight percent of your revenues.

Mr. CouHEN. If I can, we propose in this 5-year plan that the
mayor has just proposed, there is a 7 percent reduction in the wage
tax proposed over the next 5 years. And this plan—and that is on
top of an 8 percent reduction in our business privilege tax over the
same period of time. So that this plan actually includes an—over
a 5-year period, a term reduction in two of the most difficult taxes
for—and we could quibble about the size of the impact they have
on economic development in the city.

I think everyone agrees that, at their current levels, they are
two, very, very difficult taxes. Every national survey that has been
done in the past 5 years has concluded that Philadelphia’s busi-
nesses are the most taxed businesses in the country and that
Philadelphia’s individual citizens are the most taxed individual citi-
zens in the country. So that the individual and business tax burden
has become a disincentive to economic development. And this plan
does contain a plan for the first time, as I said, in 50 years to begin
a long-term incremental strategy of reducing those taxes ever so
slightly every year and every budget, every year, stays in balance
even with those reductions.

Ms. Norton. Thank you, Mr. Chairman. And thank all three of
you for this very useful testimony.

Mr. Davis. I have two other brief comments.

First of all to Mr. Cohen, you talked about the goal, really, is
competition, not privatization. Sometimes we get driven by whether
you privatize or not, but what we are really trying to do is, bring
competition to government and privatization is a mechanism to do
that. Sometimes the private sector wins out, but sometimes the
public sector gets leaner and meaner.

Mr. CoHEN. Correct. We have found our commissioners tell us
that the impact of this Program has perhaps been greatest in areas
where we haven't even talked about privatizing any services, yet
because all of a sudden the whole government says—and I am—
Tam not just talking about workers, I am talking about managers,
too, who also run the risk of losing their jobs in a successful privat-
ization, that say we had better get our act together or we could be
next on their list. And this really had a positive impact in the way
people approached the thinking about how they should do their
jobs and how the business of government should be conducted.

Mr. Davis. Finally, Mr. Henry, as I hear your admonition—I
think you are telling us to look as we go through this process, at
where we want to be at the end of this process before we get. in
the process. Where do we want the end result to be. And you need
to look at that by stepping back and seeing where it goes instead
of just setting up a process.

ir, HENRY. That's correct. You are going to put some forces in
play here that will reverberate up and down Pennsylvania Avenue
and each decision you make will foreclose some others at a later
date. It is important, I think, as I believe Ed Regan mentioned to
have an exit strategy to know how you get out of this. It is inappro-
priate to declare victory and leave.


21

with the Cleveland Financial Planning and Supervision Commis-
sion and by developing a 3-year financial recovery plan that took
a hard line stance on expenditures and emphasized a balanced
budget as the way to get the city out of default, then Mayor
Voinovich guided Cleveland back to economic health.

I think I mentioned prior to the last hearing one of my favorite
quotes of the mayor, now our Governor. Upon assuming this chal-
lenge, he said, “This is a tough job, and I’m not going to submit
to the political pressures that mayors have in the past. If it means
I don’t get elected in 2 years from now, tough.” In fact, the mayor
did such a good job in restoring the economic soundness to the city
of Cleveland, he was reelected five times, which is a record for
Cleveland mayors.

As mayor, George Voinovich received national recognition for his
management of our city. The National Urban League named him
as one of four distinguished urban mayors in the country in 1987.
“City and State” magazine selected him as one of the top three
mayors in the Nation and named him to the All-Pro City Manage-
ment Team. Additionally, Governor Voinovich has served as a
board member of the National League of Cities, and he served as
that organization's president in 1985.

Mr. Chairman, I don’t think that we are any longer considering
if we are going to recommend an oversight board for the District
of Columbia, I believe we are trying to determine what shape that
board will take. This hearing will go a long way in helping this
committee come to that determination, and I believe that Governor
Voinovich’s testimony, as someone who has shepherded a major
city through similar circumstances, will be a vital component to
that determination, and I very much look forward to his testimony
here today.

And, welcome, Governor.

Governor VOINOVICH. Thanks very much.

Mr. Davis. Thank you very much,

Governor Voinovich, let me say it’s the policy of this committee
that all witnesses must be sworn before they testify, so if you
would just rise with me and raise your right hand.

[Witness sworn.]

Mr. Davis. Thank you very much, and it is an honor to have you
here, and your reputation precedes you both as mayor of Cleveland
and as Governor of Ohio, and welcome.

STATEMENT OF GEORGE V. VOINOVICH, GOVERNOR OF OHIO

Governor VoINOVICH. Thank you very much, Mr. Chairman.

I appreciate the opportunity to be here; and, Steve, thanks very
much for your very nice introduction; and I must tell you, Mr.
Chairman, it’s a real pleasure to know that the district right next
to mine and the city of Cleveland is represented by Steve
LaTourette.

First of all, let me begin by commending all of you for undertak-
ing the critical challenge of rescuing the District of Columbia from
the straits of insolvency and disarray. I have always felt, and I am
certain that most Americans would agree, that the District should
be a model for our Nation, our shining city on a hill.


FINANCIAL CONTROL BOARDS

HEARING

BEFORE THE

SUBCOMMITTEE ON THE
DISTRICT OF COLUMBIA

OF THE

COMMITTEE ON GOVERNMENT
REFORM AND OVERSIGHT
HOUSE OF REPRESENTATIVES

ONE HUNDRED FOURTH CONGRESS
FIRST SESSION

MARCH 8, 1995

Printed for the use of the Committee on Government Reform and Oversight

a

U.S. GOVERNMENT PRINTING OFFICE
90-866 CC WASHINGTON : 1995

For sale by the U.S. Govemment Printing Office
Superintendent of Documents, Congressional Sales Office, Washington, DC. 20402
ISBN 0-16-047297-0

3


84

I think you have to have an orderly process to get in, run it, and
get out of it so you can extricate yourself and leave behind some-
thing of value.

Mr. Davis. Great. Thank you all very much. We appreciate you
being here with us, sharing the public record with us. This was
outstanding.

I think Ms. Norton will agree as we go into the record and work
through a very difficult situation, your testimony has helped tre-
mendously in that regard. Thank you.

The subcommittee will be adjourned.

(Whereupon, at 3:02 p.m., the subcommittee was adjourned.]

1e)


44

the world on April 1, 1975, when Standard & Poor's withdrew its rating of the city’s
bonds, saying the bonds were not credit-worthy. In practice, the suspension of the
rating shut off the city’s ability to borrow, even for routine cash flow, raising the
very real specter of bankruptcy.

Most experts at the time agreed that had New York City declared bankruptcy,
New York State would have followed with ita own fiscal disaster. Yet neither state
officials nor anyone else had any mechanism for tracking and monitoring the city’s
complex and obtuse operating and capital budgets. As a result, the legislature
passed the Financial Emergency Act (FEA) in 1975, setting up the oversight struc-
ture.

Under the FEA, as amended in 1978, the Emergency Financial Control Board
(EFCB) had full powers to review and approve the city’s financial activities until
the city met certain conditions:

(1) no federally guaranteed debt outstanding

(2) city had adhered to GAAP-balanced budgets for three years, as determined
by the control board

(3) state and city comptrollers jointly certify that the city has market access to
meet substantially its capital and seasonal financing requirements

The EFCB ruled on June 30, 1986, that these conditions had been satisfied, mov-
ing the board into “sunset.” Under sunset, the board’s name was changed to the Fi-
nancial Control Board, and certain of the board’s powers were suspended, particu-
larly the requirement that the board approve the city’s budget. A “control period”
could be reimposed should the board decide that any one of five statutorily defined
events has happened, the significant ones being:

* the city’s incurring of a deficit over $100 million
* the inability of the state and city comptrollers to jointly certify that termi-
nation of control was appropriate

Some close observers of the city’s finances fear that conditions for re-control could
be near. A roughly $3 billion structural gap looms in future years, even though the
mayor managed to close this years gap, and his budget for potential 1995-96
purports to close that years $2.5 billion potential deficit.

iM. THE STATE FISCAL MONITORS

As amended in_1978, the FEA set up three agencies: the Municipal Assistance
Corporation (MAC) to borrow in place of the city; the Emergency Financial Control
Board (FCB), to analyze, review, and approve the city’s finances; and the Office of
the Special Deputy Comptroller (OSDC), to provide technical reviews of budgetary
transactions, including contracts.

The functions of the three agencies complement one another and bring to the
oversight process a productive symmetry. One agency does the financing, another
exercises specific oversight powers and a third functions as an independent auditor.

The Municipal Assistance Corporation is a state authority that sells bonds se-
cured by the city’s sales tax revenues. It has gone to market more than one hundred
times to produce nearly $19 billion in bonds and notes, including refundings. It
holds roughly $4.9 billion in bonds, with maturities stretching to 2008. Having won
market confidence, MAC has a higher bond rating and better market access than
either New York City or New York State.

Its staff manages a huge portfolio efficiently. It also, by statute, issues an annual
report on the city’s finances, which is usually a good analysis of the underlying re-
ports of the monitors.

MAC has nine directors, appointed by the Governor—four on the recommendation
of the Mayor—with the advice and consent of the Senate for four-year terms. In the
past, the chairman, appointed by the Governor, often functioned ’as a strong, inde-
pendent voice on the city’s finances.

The Financial Control Board, chaired by the Governor, is both the major oversight
agency and the Governor's most direct mechanism for obtaining information and di-
recting policy. In practice, the staff serves the Governor and the Governor's ap-
pointed private members, who at times have issued forceful, non-partisan public
analyses of troubling fiscal issues.

‘The bulldog of the agencies during the control period, the FCB issued reports that
were aggressive in attacking city financial problems in difficult times. In seeming
good times since sunset, the FCB has often taken a “cooperative” stance and seldom
criticized city budgets severely. In the early 1990s, the FCB warned of serious long-
term structural imbalance, while being gentle on current problems. Nonetheless, in
the fall of 1993, FCB private members warned of a huge multi-billion dollar out-

ear deficit that would be very hard to close. The FCB’s most important influence

ies in the threat of re-control.



8

work together, and they triplicated administrative functions, so
that we had three different budget offices, three different personnel
offices, three different public relations offices, which I should point
out to you, in the case of the New York City Police Department,
the public relations and press office was larger than the President’s
public relations and press office, the State Department, or the may-
or’s, it was twice the size of the mayor’s, and then the other two
police departments had their own.

By achieving a merger of the three police departments, we will
be able to significantly downsize the number of police officers that
are used as public relations people, budget experts, labor nego-
tiators, and move them out into functions that have them policing,
which ultimately saves the city money.

We recently presented the budget for fiscal year 1996, and that
budget also once again offers a reduced level of city spending, sig-
nificantly reduced fevel of city spending; and, again, the reason for
that is because we have to reduce the size of city spending so that
we can invest some of that money in the private sector.

We have so far reduced several taxes in the city that were sig-
nificant inhibitors of economic growth, the most. significant of
which was probably the hotel occupancy tax, and it is a good object
lesson in what targeted tax reduction can do. .

New York City’s hotel occupancy tax was the largest in the coun-
try, 21.25 percent. For 18 straight months one of the magazines
that services the travel industry each month had an advertisement
in it that said you should boycott New York City because it has the
highest hotel occupancy tax in the world. Many, many people and
many agents did boycott New York City, and we lost hundreds of
millions, if not billions, of dollars in business.

The city and State last year reduced the hotel occupancy tax.
Our hotel occupancy tax now is competitive with the hotel occu-
pancy tax in the 20 largest cities in the United States, and I’m
very, very happy to say that the end result is that we had our best
year for tourism in a long time last year. We are on our way to
our best ever, and with the lower hotel occupancy tax we will col-
lect more money than we did with the higher hotel occupancy tax,
which is a good object lesson in what tax reduction can do if you
do it in a targeted and sensible way.

I could give you similar examples with the commercial rent tax
and some of the other areas in which we have either reduced taxes
or we are planning to do it.

During this period of time, a significant reduction of government
jobs, which was about 15,000, so far, it’s going to go up to 20,000—
‘a very interesting thing happened on the private side of the econ-
omy. For the first time in 4 or 5 years, New York City experienced
job growth on the private side of the economy of about 30,000, so
for the first time in a long time New York City government de-
creased but the private sector began to grow, and ultimately that
is the place in which you are going to supply the job needs of young
people. That process is a process that has to be considered in what
you are doing, because a city can’t just downsize, a city has to
downsize for the purpose of restoring its economy and creating eco-
nomic growth. Otherwise, the downsizing just becomes a constantly
escalating process, and the choices have to be made in favor of not


7

So I would suggest, in determining how you are going to reduce
a work force, that you have to be able to negotiate or create the
legal mechanism in which there is the flexibility to make different
choices. You may not want to reduce the size of a police depart-
ment when you have hundreds of thousands of felonies in a year,
so you may want to keep the police department at roughly the level
that it is at. There may be another agency in which you want to
make reductions, and even within an agency you don’t necessarily
want to do it across the board.

So the end result is, we have been able to reduce the city work
force by the most that it has been reduced probably in any year in
a very, very long time, and we believe we have been able to do it
so far without having to fire anyone or lay anyone off, and the proc-
ess is continuing.

For example, we successfully negotiated two contracts with two
different unions, one the Sanitation Workers Union and the other
the School Custodians Union. One of those unions had a clause in
its contract that prevented even consideration of privatization, the
Sanitation Workers Union. We negotiated, had that clause re-
moved, said that we were willing to discuss and look at privatiza-
tion, and I can tell you that the result of that has been more pro-
ductivity, much harder work, and a great many benefits that the
city has been able to get back from the union as a result of bein,
willing to consider privatization. The city had previously put itself
in the untenable position of agreeing to contractual language that
said not only would the city not privatize the sanitation services,
but fur some strange reason the language read something like the
city would not even consider privatization. This was even—this was
sort of an attempt to even stop thinking.

So by opening again the possibility of privatization, the very best
result that you can actually bring about happened. The thought of
competition has led to significant productivity gains, actual dollar
savings to the city, and a number of other things that increased
service.

In our first year we have privatized 60 different areas of city gov-
ernment, including parks Maintenance, street resurfacing, vehicle
maintenance, school custodian and maintenance services, fire
house cleaning, and all the homeless services that previously had
been owned and operated by New York City we are now aggres-
sively moving out to the private, not-for-profit sector.

As I pointed out before with sanitation workers, we don’t always
make the choice in favor of privatization. Sometimes the thought
of privatization or the competition that it offers means that public
employees work much more effectively, much more efficiently, and
you get the same savings or even more, but in order to create that
mechanism you have to be willing to privatize and you have to be
willing to make the choice in favor of privatization. If you take it
off the table and you don’t do it, then the negotiations aren’t going

appen.

Consolidation can work just as well. For example, New York City
has the largest police department in the United States, and then
it has two other separate police departments. We had a New York
City Police Department of 31,000, a transit police, and a housing
police. Sometimes they worked together, sometimes they didn’t


57

However, in selecting members of the board, the requirement
was that individuals be persons with a background either in fi-
nance or economics and management, that they either be residents
of the city of Philadelphia or they have their principal business or
employment in the city of Philadelphia. Several members of the
board who were not residents of the city of Philadelphia but they
all had an economic stake in the city of Philadelphia.

We were authorized to provide assistance to the city of Philadel-
phia to deal with its financial problems, but in the formation of the
statute creating PICA, there were two things required before we
could offer any financial assistance to the city of Philadelphia. One
was that we had to enter into an intergovernmental cooperation
agreement with the city of Philadelphia. The IGA describes the re-
quirements and standards for the preparation, approval, and mon-
itoring of the financial plan, the terms and conditions for the issu-
ance of bonds, and the establishment and management of a city ac-
count which is the account into which certain tax funds and bond
proceeds would be placed.

The 5-year financial plan was designed to offer a balanced budg-
et in each of the 5 years and the establishment of certain measures
that would eliminate the structural deficit in the city’s accounts.

The board was authorized to review and approve the financial
plan after it was adopted both by the mayor and by the city coun-
cil.

We received quarterly reports and we would have to review those

uarterly reports on the city’s progress in living up to the terms of
the financial plan. I think it is also important here to get some
sense of how the influence was exercised. In any quarterly report
in which there was a variance in the city’s meeting of the balanced
budget with respect to revenue and spending, we would publicly
pronounce that a variance existed.

The city would then be required to submit monthly reports to the
board, and the mayor then would be informed that he had 30 days
to come up with a plan to balance the budget in the future, that
is in the next quarterly report and every quarterly report after
that. If over a period of 30 days, I believe, the variance which was
established or identified in a quarterly report was not corrected,
then the board had the obligation to inform the State of this devel-
opment and we had the authority to withhold tax revenues, State
funds, certain State funds and bond proceeds from the city of Phila-
delphia until such time as the variance was corrected. So that was
the stick that we had to encourage compliance with the 5-year fi-
nancial plan.

Let me say that our operating philosophy was one of cooperation
and not control. In the very first press conference that I had after
being appointed to the board, I made a public statement that, in
my view, we did not intend to control the city of Philadelphia. The
city of Philadelphia has elected officials who were put in place by
the taxpayers of that community. And what we wanted to do was
to be of assistance to the elected officials in coming up with ways
to address the city’s fiscal crisis. That is the way we operated.

We engaged in a close examination of the accuracy of financial
data submitted to us by the city, the assumptions of revenue and
spending which appeared in the financial plan. I can report to you


40

the funding agency to put in the resources so you can plan ahead
properly. I think that is one of that forward planning as I see it
Tight now.

As I heard the Mayor more recently, he is talking about trying
to close his $700 million more budget gap by this October, and then
he is looking forward to what he calls the miracle budget a year
away. I would encourage this committee to guide the Mayor past
the miracle budget to a budget that we can count on 3 or 4 years
ahead. Why? If we are going to ask the private sector, as we did
in New York City, to come in, you can’t do what laboratory techni-
cians won’t do, scientists won’t do, you need lead time, you need
to plan these resources so if this is going to be the city on the hill,
if this is going to be the capital of which we are proud, we can say
we have taken care of this problem and now we can go about the
business of bringing business in, bringing initiatives in.

What helped New York? The I Love New York Program. It grew
tourism from $2 billion to $7 billion because we had something to
offer, not dirty streets and empty buildings, we had great theaters,
we have the opera. We began, Y remember, in Germany when the
Germans said, “Your city is in great trouble; your opera is on
strike.” I said, “We have three opera companies. Only one’s on
strike.” They didn’t know that.

We have got to tell the world, this is the world’s leading city for
the example of a good government. We have got to show that. I
dare to say in time that this city can rival in a small way the bene-
fits of New York City, in a small way. [Laughter.]

I would quote our late President John F. Kennedy. He said, “The
District of Columbia is a wonderful combination of northern charm
and southern efficiency.” Now I believe President Kennedy. I think
that can happen. I really think you have an opportunity here.

The urgency, as I see it, is, the Mayor is grappling with a budget
and a gap by October. You need a Ton er process than that. The
control board, properly comprised, will have private sector people,
some of the Tabor leaders he is dealing with should be sitting on
that board, the confluence of interests come forth on the board. The
leadership will be provided.

I don’t know how it is going to work because none of you, thank
God, are eligible, you can’t serve on the board, but you can cer-
tainly find in this government of ours at a time when we are talk-
ing about restructuring, downsizing, making government more effi-
cient, a model for the District of Columbia. I think it’s a great op-
portunity. I stand ready to help in any way I can, and, as I said,
30 years ago I got involved in crossing a bridge. Thank God, brave
people were ahead of me. I’m glad you are ahead of me now. I'll
follow your lead.

Thank you.

Mr. Davis. Governor, thank you very much.

Mr. Regan, I apologize for putting you after Governor Carey.
That’s a tough act to follow.

Mr. REGAN. No, that’s happened to me on many, many occasions,
but I was always his auditor.

Mr. CAREY. He used to grade my papers.

Mr. REGAN. I was his auditor, so it worked.

Would you have me-——


81

being paid, they will eventually do what they would do to anyone
else.

Ms. Norton. Wait a minute. Dr. Anderson testified that that is
what they wanted but didn’t get.

Mr. COHEN. What we had to do, we had to negotiate the agree-
ment _and then we had to do a plan, and the plan had to specify
exactly how we were going to eliminate that deficit, all those inno-
vative ideas, all those creative ideas. Then the PICA Board would
look at that plan and, if they found our ideas reasonable and be-
lieved that we would proceed to implement it, then the PICA Board
was prepared and did issue bonds in order to fund that deficit.

Ms. Norton. I am trying to figure out how——

Mr. ANDERSON. I think, Ms. Norton, that I understand what you
are driving at here with respect to the timing of this. And let me
walk you through it.

The PICA Board came into office in June 1991. At that time, the
city was facing difficulty in paying its bills. There was a short-term
note offering in August 1991 in which this—although the city did
not have an investment grade rating on its securities, they put to-
gether a private sector loan transaction that was backed up by a
number of banks similar to what the District of Columbia did a
month or so ago, as I recall it, when the former mayor—one of her
last acts.

Then the city had enough to go through around December and
the wolf was at the door again. They then sold—what?—$100—
$110 million.

Mr. HENRY. A small amount.

Mr. ANDERSON. A small amount under one of these special trans-
actions for which they paid a usurious rate of interest. But that got
them through around February or March when the property tax
revenues started to come in. at was happening is the city was
sort of bouncing along, meeting its financial responsibilities, not
paying the merchants. There were some merchants who were 60 to
90 days behind payment. That went on. That number of merchants
was continuing to rise.

But the point here is that nothing was done to reduce the struc-
tural deficit. The deficit was continuing to rise. They were not deal-
ing with that. They were dealing with short-term cash needs.

When Mayor Rendell came in—first of all, to respond to a part
of yor question, when Ed Rendell was running for mayor of Phila-
delphia, at that time, he came up with certain ideas that he want-
ed to implement when he got into office if he won the election. So
when he came in, very early in his term, we began discussions with
him on the terms and conditions, the content of a 5-year financial
plan.

We got the intergovernmental cooperation agreement in place.
He got it to us in February 1992. After we approved his 5-year
plan, we began immediately the process of structuring a bond offer-
ing which we consummated in June 1992 for $475 million.

0 the point here is that we did not extend funding early on. We
insisted that these other mechanisms be in place because, in our
view, that was the only basis on which we could assure that a plan
would be in place to reduce the structural deficit. In the meantime,
the city bounced along on its own accord borrowing money at very


28

So the fact is that the unions participated, and I'll never forget
that before I went to the voters for that first tax increase I said
to the unions, “I’m not going to go there unless you agree before
the election in writing the limit of what you are going to ask for
in wage increases, because I don’t want the increase in taxes to be
soaked up in wages, and the voters are going to want to know that
they are not going to be sucked up in wages,” and with Jackie’s
help and some enlightened labor we got them in the room, we
talked about it, and we got them to sign up.

Mr. Davis. OK. Thank you very much.

T’m going to recognize now our ranking member, Ms. Norton.

Ms. Norton. Thank you, Mr. Chairman.

What occurs to me, Governor Voinovich, is that you have seen
Cleveland from the two most vital posts in the State, having moved
from mayor and this crisis to become the Governor of the State,
and since there is no such higher office in the District of Columbia,
I guess Mayor Barry has to figure that if he does well enough he
will become President of the United States.

I would like to follow up on some of what you said that most in-
terests me. As I recall it, the oversight appeared to be for 1 year
by this commission. Is that correct?

Governor VOINOVICH. No. The oversight commission was in place
until we met all of the criteria that were established in the legisla-
tion.

Ms. Norton. So how long was that period?

Governor VoINovicu. We didn’t—the commission ended—started
in 19—let’s see. The first meeting of the commission was January
24, 1980, and we burned the bonds in 1987. We could have termi-
nated it earlier, but, as I said, one of the conditions was that the
misspent bond funds were paid back, and so what we did was, we
just entered into an arrangement. In effect, what happened was, I
was able to get the banks to come forward and take care of it, and
the deal was, we’d pay them off in 7 years.

I didn’t want—my investment bankers all wanted me to issue
those bonds because, you know—I said, I’m from an old ethnic fam-
ily, we pay cash, you know, and I said I don’t like paying interest,
so we kept it going for 7 years, and it was great because they were
always there. They didn’t interfere a lot, but I knew, particularly
the council members knew, that they were there, and it had a way
of kind of helping us stay on track and not get off.

Ms. Norton. Well, indeed I was interested in your testimony
that you tried to keep them in place as long as possible. What was
your thinking?

Governor VoINOVICH. What I was thinking is that, first of all, we
had their expertise that was available to us. The State continued
to give us a little money for them, not a lot but a little bit, and
I thought I had this great group of experts that were available to
me that are kind of, I can go to, and they were more my partners
than overseers. They were there to help me, and, as I mentioned,
they were very important when you were putting budgets together
and when the council would start saying, “We’ve got to do this,”
and I'd say, “Wait a minute, we can’t do that, that’s not part of the
recovery plan.” So it kept us—I refer to them as the rudder that


45

The FCB has seven members, including the Governor, State Comptroller, Mayor,
City Comptroller, plus three persons (the private members) appointed by and serv-
ing at the pleasure of Governor with the Senate's advice. .

e Office of the State Dey uty Comptroller regularly issues reports on financial
plan submissions, status and efficiency of city operations, and labor contracts sub-
mitted to the control board. OSDC first called attention to the city’s structural defi-
cit in 1991 Under FEA, OSDC was scheduled to go out of business six months after
control ended. An amendment extended its life in 1985 and renamed it the “Office
of the State Deputy Comptroller.”

IV. THE RATING AGENCIES

The oversight structure was set up to restore confidence to the bond markets,
which function as the true control on the city with credit ratings that, in effect,
withhold money or charge excessively for money. The markets did both in the mid-
19708,

Today the major bond rating agencies—Standard & Poor’s and Moody’s Investors
Service—are far from optimistic about the city’s finances. S&P’s rating on New York
City general obligation bonds today stands at A—. S&P has kept the city on its
“negative outlook” watch for four years. In February 1991, it confirmed the rating
but said there was a chance that rating would go down. In July 1993, S&P made
it widely know that the rating was in difficulty.

In February 1991, Moody’s downgraded its rating on city bonds from A to Baal,
where it stands today.

V. OTHER MONITORS AND FACTORS

Since the fiscal crisis, the city has implemented major accounting reforms, includ-
ing the successful installation of the Integrated Financial Management System
(IFMS) computer system, which tracks revenues and expenditures in detail that any
interested participant can access.

The city also has a new budget monitor authorized under the 1990 City Charter.
The City Comptroller has established a 12-person Bureau of Fiscal and Budget
Studies, funded at $689,000 annually. The bureau has issues numerous major re-
ports on the city’s budget and economy. It has quickly developed as a source of infor-
mation on the city’s fiscal situation.

In addition, various public and private agencies have created or augmented their
analytic staffs to monitor the city’s fiscal developments. These include the ratin;
agencies; staffs of the State Department of Budget, Senate Finance Committee ani
Assembly Ways and Means Committee; municipal ‘union oversight through District
Council 37 and Program Planners; a private “watchdog” group, the Citizens Budget
Commission; and the City Council Finance Committee. This means there are a total
of 13 organizations whose abilities run from fiscal data gathering and analysis to
sophisticated budget and economic analysis and forecasting.

New York City has come from a situation, 20 years ago, of a murky, almost
unfathomable budget document with no independent monitoring, to an accurate, de-
tailed and understandable budget with numerous outside monitors.

VI. GENERAL AGREEMENT ON THE ISSUES

Most informed observers agree on several propositions:

1. The most important discipline on the city involves its need to borrow in the
ublic markets. It needs to maintain investor confidence as defined by the rat-

Ing agencies and underwriters.

2. The city’s financial problems are serious.

3. Continuing state oversight of the city, particularly by the FCB, is imperative

for both substantive and political reasons.

4. Nonetheless, the oversight structure as currently constituted has some redun-

dant and inefficient elements, and in today’s environment, trimming is appro-

priate.

Is this oversight structure the right one? The general answer is yes: this structure
has served the state and city well through some very difficult times. At the same
time, given the current presence of numerous groups focusing on city finances, the
structure can surely be slimmed down. Past and present city officials complain of
the many reports—issued, at times, in seeming competition with one another—to
which they must respond under excessive time pressures.

The oversight agencies are paid for by New York City funds via the city sales tax,
whose revenues are channeled through MAC. Trimming the oversight structure will
therefore save city funds. The justification for this arrangement is in part that the
city had been responsible for getting itself into its fiscal mess and should therefore


27

The crisis that brought them to the table was the default of the
city of Cleveland in 1978, and I think that—I don’t know whether
anybody thinks this is a crisis or not. If they don’t, I think you
have got problems. If they do think it’s a crisis, then I would think
there are some good people here that care about their fellow citi-
zens and their district and their country, and I think that one of
the things that you really ought to be concerned about is that this
town should be the model for everything in finances, in manage-
ment, in human services programs, right across the line. This is
the place we ought to be able to take people and say, “This is the
way it should be done in your town,” and I think that’s the kind
of commitment you all have to make to this thing, that we are
going to make this the model city in the country.

Mr. Davis. All right. Well, we can’t do it without the city govern-
ment as well, and we need to form a Federal-local partnership to
help, and I think we are going to be there for them. But your testi-
mony is critical because you have done it and you have shown that
you can bring a city back. I think that gives us a lot of hope.

My last question to you before I recognize Ms. Norton is, what
kind of resistance did you get from city employees and those groups
as the cuts came down on the bureaucracy? Generally, institution-
ally, they are the ones that are most affected because there is a
cleaning of house.

Governor VoINOVICH. Well, let me say when we put the Financial
Supervisory Commission we had seven members, four voting mem-
bers, but there were—they were like ex officio members—the
mayor, the president of the city council, the director of the Ohio Of-
fice of Budget and Management, and the State treasurer; those
were the four, the elected; and then we had three citizens that
were on the commission that were appointed by me with the ap-
proval of the council. Jackie Presser was one of them, my good
friend Jackie Presser.

Mr. Davis. OK. Thank you.

Governor VoINovicu. And I had him on there because Jackie was
a union leader and I knew that it was very important to have
union leadership involved. The other one was Bob Bligh, who was
a former chairman/CEO of one of our banks, and then another was
George Grabner who headed up Lamps and Sessions, who was one
of our real dynamic citizens, and we went to the unions and we
talked to them that we had some problems. We zeroed out—there
was—you know, these were terrible times, we were in debt, you
know, the recession was there, unemployment, and I think that
maybe out of 10 years—and, by the way, in 10 years, just so you
know what happened, we ended up with 10 percent less employees.
Our budget only increased 45 percent in 10 years, and inflation
went up about 85 percent.

I had to go to the voters. In Cleveland we do have a city income
tax, and Ohio cities have it, but you have to get the voters to ap-
prove it. We went to them after we did our operations improvement
task force. The business community said, hey, they don’t have
enough money to run this joint, pay the debt, replace the infra-
structure, rolling stock, and so forth, so let’s—so we got it, and that
passed with a two-thirds vote of the citizens.


64

gives you a sense of the types of things that a city can do in order
to deal with the financial crisis that virtually all major urban areas
face today.

Some of the issues that are included there, and I will summarize
them quickly, is a total of almost $800 million in what we call gap
closing initiatives that have been successfully adopted since 1992.
They are efficiencies, better revenue collections, no tax increases,

ramatic cuts in services, no across-the-board layoffs. None of
the draconian things, frankly, that you have heard about in some
other cities because a lot of that had been done before 1992.

Dr. Anderson and I were talking about the fact that in the 5
years before Ed Rendell was elected mayor, the city of Philadelphia
was downsized from an employee work force of about 30,000 to an
employee work force of 25,000, so there had been a substantial re-
duction in work force before the financial crisis hit. And there was
a lot of consternation about just how it was that Philadelphia was
going to save all this money given that the work force had alread:

een winnowed out through an early retirement program, through
layoffs, through attrition, through hiring freezes, through cutbacks
in services, through closure of the city’s only publicly owned hos-
pital, through increases in tuition at the community college. All of
the things you heard about were all pre-1992 actions taken by the
city of Philadelphia and were actions, therefore, that were not real-
ly available to us as we approached our fiscal crisis in 1992.

I think that the guts of our plan was a collection of about 250
individual management and productivity initiatives, some of them
saving as little as $10,000 a year, many of them saving millions of
dollars a year, developed in cooperation with PICA, in cooperation
with the city council, in cooperation with the management and pro-
ductivity, the task force which was staffed by over 100 corporations
in the Delaware Valley that participated in a partnership with the
city in figuring out how it is that we were going to get our budget
under control and bring expenditures in line with revenues.

Some of those—some of the highlights of that include lease re-
negotiations, better tax collections, consolidation of telephone sys-
tem, numerous utility savings, computerization that resulted in
further reductions of personnel and really literally a series of hun-
dreds of these types of initiatives that reshaped and reformatted
the way the city of Philadelphia government does business.

We also adopted a contracting-out program, not an easy situation
in the city of Philadelphia which is such a strong union city in and
of itself. It is a program that has affected 28 city services directly.
Twenty-six of those services have been contracted out. Two of
them, the unions have won the competitions that we have run. And
the total annual savings to the city are now running in excess of
$30 million a year as a result of that competitive contracting pro-

‘am.

Mayor Rendell was fond of saying in the campaign, and has tried
to say in the past 3 years, that we call this competitive contracting
and not privatization as other citizens have called it because the
goal is not to privatize anything. The goal is to inject competition
into the delivery of city services to improve the guality of those
services being delivered and to drive down the cost. And if you in-
ject competition, it doesn’t make any difference whether you pri-


4

Mr. Davis. Thank you, and let me thank you, Susan, for intro-
ducing the mayor, and we appreciate your interest and availability
to be with us this morning.

Mayor Giuliani, it is a requirement of the committee that all wit-
nesses must be sworn before they may testify. Would you please
rise with me and raise your right hand.

[Witness sworn.]

Mr. Davis. Thank you. You may be seated and proceed with your
testimony, and I would just say it is an honor to have you Sere
today, and we appreciate your taking the time out of your very
busy schedule.

STATEMENT OF RUDOLPH W. GIULIANI, MAYOR, CITY OF NEW
YORK

Mr. GIULIANI. Good morning, Mr. Chairman, members of the
committee. It is in fact a privilege for me to be here.

Mr. Davis, you are quite correct, all Americans have an interest
in Washington, DC, as a capital and as a great American city, and
as one who has had the privilege of living in Washington, DC, I
have a particular interest in it and real fondness for it.

I have come here today with two purposes. The first is to address
the advisability of implementing a financial control board for cities
in crisis, the situation New York faced in the mid-1970’s. The sec-
ond is to discuss the steps my administration has taken to reorder
New York City’s economy, to reduce government spending, to pro-
mote private sector growth, and to improve the quality of life in
New York City.

The spirit in which I offer both sets of comments are as sugges-
tions. We don’t have all of the answers by any means. We are
struggling with very similar problems that Washington, DC is
struggling with, and I offer these suggestions as some that might
be applicable, some that might not, and being completely support-
ive of the work of this committee and of the Mayor in trying to get
control of a very difficult problem that built up over a long period
of time, and I’m sure that if you all work together you will be able
to get control of it.

n the subject of a financial control board, it certainly can pro-
vide service during a time of extreme financial distress like the sit-
uation New York City faced during its fiscal crisis 20 years ago,
and it can certainly also provide a great many ideas and the ability
and the mechanism to make very, very tough decisions that some-
times elude the political process and, unfortunately, cannot be
made as part of the political process.

However, a financial control board should have a very strict be-
ginning and a very strict end. Once the city has regained fiscal dis-
cipline, the financial control board can easily become just another
layer of bureaucratic oversight and it can itself become a political
tool just as much as a mayor, a city council, or any other group can
become a political tool.

I think really the art to doing it correctly is to have a very strict,
tight sunset period so that the control board would exist during the
time of emergency and then at a fixed point it would be dissolved
so that a city can quickly regain its self-sufficiency.


18

We did that because they were convinced that we weren’t fooling
them, they were convinced that the room wasn’t there, they were
also convinced that if they didn’t do it then the layoffs would have
been massive and they would be dealing with their membership
with a very, very severe problem.

I think that is the core that has to happen. The municipal labor
leaders have to be convinced that someone isn’t laying a game
with them, because, unfortunately, the histo and I can’t say this
is so for the District, the history might be that in the past games
were played with them, they were asked for reductions or they
were denied raises, and then it turned out that the city had a sur-
plus 4 months later and there was money that was hidden away,
and what we had to go through was a process of convincing them
that that was not going on now.

A financial control board can really help in that regard, because
it can give an independent assessment of that, it can independently
explain to the public and to the union leaders what is available,
what isn’t available, what the parameters are, it can be independ-
ently certified, and if you just think about it from the point of view
of a union official who is no different than you are or I am—they
get elected—it is important even for their membership to under-
stand that they are negotiating the best they can negotiate given
the realities. A financial control board makes that possible.

Mrs. COLLINS oF ILLINOIS. Thank you. My time has expired.
Thank you very much.

Mr. Davis. Thank you very much.

I now recognize our vice chairman of our subcommittee, the gen-
tleman from Minnesota, Mr. Gutknecht.

Mr. GUTKNECHT. Thank you, Mr. Chairman, and thank you, Mr.
Mayor, for being here. Your testimony has been excellent, and we
appreciate it more than you know.

Through your experience—and these are kind of tough questions,
and I’m not sure if you can really help us, but I’m wondering, there
is pretty much a consensus now that we are going to have to have
some kind of a control board here in Washington, DC. I’m wonder-
ing if you can offer any insights in terms of the kinds of people we
should be looking for to be on that board, if you have any specific
recommendations in terms of the number of people who should be
on that board, and, finally—and this is probably the most difficult
one of all—how do you know when it is time to terminate the
board? Do you have any specific Suggestions in those regards?

Mr, GIULIANI. The number is really—really a question of the tal-
ent that you can attract. If there are four or five or six really good
people, then that would be the number. I think they have to have
a mix of experience. Some have to have political experience and
they have to understand how politics operates, some can be purely
experts in budgeting and in city government or government in gen-
eral, but_a mix of people including some that understand govern-
ment and how it operates and that there is a level of give and take
and negotiating that has to go on.

As far as how you determine when it sunsets, you can probably
set up numerical criteria for that. If the deficit is $1 billion and you
get to the point where you have removed it or you have gotten close
to removing it, then you no longer need a financial control board,


82

high rates of interest and did nothing to reduce the structural defi-
cit.

Mr. HENRY. If we had not borrowed by the end of fiscal year,
which was June 30, the city would have missed a payroll, stiffed
the pension fund, or missed debt service.

Mr. COHEN. Or all three.

Ms. Norton. Sounds like where the District is now.

Mr. COHEN. And it really was the hammer, if you will. We didn’t
have to implement everything to pet access to the cash infusion.
We had to have the plan that the board approved as being reason-
able if implemented that would have solved the structural deficit.

Mr. Davis. If the gentlelady would yield.

I would just say what you have done, you have reversed the in-
ternal politics of the city. All of a sudden the politics are to come
out and make these decisions as opposed to not letting your em-
ployees get paid.

Mr. HENRY. That’s correct, but also the point that you have
asked before, Mr. Chairman, is absolutely the proper one. Do you
have a board that is able to take the heat? You have to have a
board that is prepared not to accept the plan, that is prepared to
have payless paydays, interestless interest payment days and pen-
sionless pension payment days.

You have to be willing to let the bus go over the cliff. It is a very
high stakes game of chicken, but if that means that the govern-
ment has to shut down as a way of giving a wake-up call to the
people who are elected to do the job, that’s what you have to do.

Ms. Norton. Did PICA ever have to withhold funds or threaten
to withhold funds?

Mr. HENRY. There was one variance in December 1992 following
the labor negotiations. However, we understood that was coming in
the sense that the city did not get all that it had tried to get at
the negotiating table, so it was not a shock or a surprise, but it was
a variance.

Ms. Norton. Finally, just let me ask about your wage tax. We
were always told, if there is a wage tax, then business moves out
of the city, so it is counterproductive. What is the experience with
Philadelphia wage tax?

Mr, ANDERSON. There are many, Ms. Norton, views on that mat-
ter. I think the consensus is that the level of Philadelphia’s wage
tax is a disincentive to the location of businesses in the city.

Now, bear in mind that the wage tax is assessed on people who
live outside the city but work in the city as well.

I don’t think there is any question that the wage tax is a drain
on economic growth in the city of Philadelphia. However, as an
economist who has looked at this issue over a long period of time,
it is my judgment that the city wage tax is not as great a disincen-
tive for economic growth in the city of Philadelphia as many other
economists and some others in the business community believe it
is.

But there is no question that if we could reduce that wage tax,
it would have an incentive to keep some people in the city who oth-
erwise would have a significant incentive to move out and I think
it also would allow Philadelphia to retain more of the businesses
that are there.


55

STATEMENTS OF BERNARD E. ANDERSON, ASSISTANT SEC-
RETARY FOR EMPLOYMENT STANDARDS, U.S. DEPARTMENT
OF LABOR, AND FORMER CHAIRMAN, PENNSYLVANIA INTER-
GOVERNMENTAL COOPERATION AUTHORITY; DAVID COHEN,
CHIEF OF STAFF TO THE MAYOR OF PHILADELPHIA; AND
RONALD G. HENRY, FORMER EXECUTIVE DIRECTOR OF
PENNSYLVANIA INTERGOVERNMENTAL COOPERATION AU-
THORITY

Mr. ANDERSON. Thank you very much, Mr. Chairman. I am very
pleased to have an opportunity to come here today and offer to you
and other members of the committee the Philadelphia story with
respect to the oversight board, and I am very happy to offer in the
presence of my good friend, Eleanor Holmes Norton, and my good

riend, Congressman Chaka Fattah, who was very instrumental in
helping us solve the problem in Philadelphia.

Let me say, Mr. Chairman, that I have submitted for the record
my statement which I would ask be recorded as an official part of
these hearings and I also want to put in a disclaimer at the outset
that I am speaking today as an individual expressing his own
views on this matter, not speaking for the administration, for the
Office of Management and Budget, or for the Department of Labor.
And so my views are my own on this issue and should be taken
as such in the record of these hearings.

Let me say that from June 1991 through December 1993, I had
the great privilege to serve as chairman of the Pennsylvania Inter-
Governmental Cooperation Authority which we fondly call PICA.

at I would like to do is simply describe briefly our experience,
the goals, structure, the background of PICA Board members, its
staff, and our operating style, because I think that is very impor-
tant in understanding how an entity like this can work and how
it can help a city in fiscal distress.

First, in a nutshell, Philadelphia’s problem. Between fiscal year
1986 and 1991, Philadelphia was clearly spending more than it was
receiving in revenue. The rate of spending per annum was about
5.6 percent, revenue was coming in around 3.2 percent per year. It
was projected in fiscal 1991 that if that rate of spending had con-
tinued, the accumulated deficit would have been more than $450
million by fiscal year 1996. And in fact, the accumulated deficit by
fiscal 1992 was over $200 million.

In the midst of that darkening storm of fiscal travail, it was very
clear that the mayor and the city council were unable to come up
with a plan to attack the structural deficit and to put in place
those measures that were necessary to get spending under control.

In fact, the disagreement between the mayor and the city council
was compounded also by the disagreement between the city offi-
cials and State officials on a wide variety of issues, not the least
of which was the State contribution to the city for certain human
service expenditures and the court costs and other expenditures of
that type.

And I think that the result was that without a plan in place to
address the city’s worsening fiscal crisis, the bond markets lost con-
fidence in the city of Philadelphia and in late 1990, the city lost
its investment grade rating on the bonds.


79

I want to ask Mr. Cohen, just to get into an issue that I think
the city is wrestling with now, and that is fiscal discipline doesn’t
mean no compassion at all, does it? In fact if you could just discuss
in terms of being on the compassionate side of politics and under-
standing what that is all about, but at the same time recognize
that you must have money to pay for it.

Mr. CoHEN. That is absolutely the case. Frankly, that is a great
phrase. I have to remember that and pass it along to the mayor.
Being fiscally responsible, balancing your budget, absolutely does
not require you to be punitive with respect to anyone and I think
that probably one of the greatest parts of the Philadelphia success
story is that we have not been punitive to anyone. We have not cut
services anywhere, to be perfectly candid. We have not laid off a
single person in 3 years as a result of any of the 5-year plans that
we have developed.

Even in our contracting out program, where we have essentially
eliminated more than 800 union jobs within the city government as
a result of that program, none of those people has been laid off.
They have all been offered alternative employment within the city
government at other vacant or available city jobs.

We have, as I described the approach of this plan and of the ini-
tial plan, a plan of 1,000 paper cuts and that is—I mean, there are
lots of people that got nicked, that nobody had any gushing wounds
as a result of what we have done. And even on the labor side, and
I—I mean, Mayor Rendell and I try and talk about this all the time
because I think Mayor Rendell gets this sometimes almost horrific
national reputation of how he beat the labor unions and how he
created this plan by goring the labor unions.

And I will tell you that at the end of our contract, at the end of
our contract negotiations in 1992, municipal employees in the city
of Philadelphia, first of all, had their jobs. As I said, no layoffs in
3 years. Second of all, no pay cuts. There were no unpaid furlough
days. There were no rollbacks in wages. Yes, there was a 2-year
wage freeze that was negotiated as part of that contract. But in
April 1992, our entire municipal work force received an 8 percent
pey increase. It was a back-loaded pay increase at the end of their
last contract, so that in April 1992, everyone got 8 percent. Then
they had to wait another 2¥2 years before they were to receive
their next pay increment.

Because of our step system and nonmerit, pay-based increases,
that 2¥2-year period 51 percent of the municipal work force has re-
ceived a raise. Even though there has been a wage freeze, 51 per-
cent of the municipal work force received a raise and, among those
people who have received raises, the average raise is about 6 per-
cent, which is higher than the rate of inflation over that period of

ame.

Our workers ended up with 10 paid holidays, with anywhere
from 10 to 20 paid vacation days, 4 personal leave days. A generous
bereavement benefit. Probably still one of the wealthiest and luxu-
rious pension plans in the city of Philadelphia.

Mr. Davis. I have to keep you quiet before my staff hears about
this deal.

Mr. CoHEN. Fully Paid health insurance under a managed care

model with fully paid dental, optical, and prescription benefits. No


62

ELEMENTS OF SUCCESS

Philadelphia is now well on its be towards the restoration of fiscal stability
through the assistance provided by PICA. Although the fiscal crisis of 1990-91 has
passed, and much progress has boon. made, the City still has some distance to go

fore one can say that fiscal stability has been fully restored. Several factors
should be noted in searching for the essential elements of Philadelphia’s progress
in, Bddressing its fiscal crisis, and meeting the challenges that remain.

First, the City’s revenue base is heavily dependent upon the growth of the local
economy. Throughout the 1980’s, employment growth was either non-existent, or
anemic. Employment has improved since 1991, but joblessness remains a serious
problem in some sectors of the City. Until City leaders find a sustainable source of
economic development, there will ‘continue to be strong pressure on revenue that
must be matched by close control of spending. In 1994, Philadelphia in cooperation
with Camden, New Jersey, was designated an Empowerment Zone city, and will re-
ceive nearly $100 million for neighborhood economic development. Such funds
should help relieve some of the fiscal pressure that remain a drag on local revenue

growth.

Second, the City continues to be adversely affected by a disproportionately high
rate of poverty among a large segment of its population. This generates a strong
demand for costly social services that must be paid through the general fund be-
cause State and federal funds fall short of meeting the need. State funding has
steadily increased since Fiscal Year 1991, and newly adopted measures for the man-
agement of social service delivery has reduced the annual rate of growth of such
costs since 1991, But the human services budget remains a large part of City ex-
penditures.

Third, PICA has played a vital role in facilitating the adoption of spending con-
trols and more efficient management practices throughout City government. The es-
sence of an oversight board is that it stiffens the spine of elected officials and gives
them a heat shield to make the difficult and unpopular choices that are necessary
to control spending. The Mayor and leaders of City Council may find it easier to
cut payrolls, eliminate superflous services, restructure government agencies, intro-
duce new management techniques, and renegotiate labor contracts under cover of
political protection provided by an oversight board. This feature mght well be the
most important ingredient in the success of an oversight board.

Finally, PICA could not achieve success without the full cooperation of the Mayor
and his senior staff, The board, the Mayor, and the City Council worked closely to-
gether to improve financial reporting systems, contracting procedures, management
initiatives, and other aspects of City government fiscal management. The ICA speci-
fied the terms and condition of City reporting to the Authority, but Authority staff
and City government staff collaborated closely on the details of what was required
and the standards that had to be met in order to meet the Authority's requirements
for steady progress under the financial plan. Without close cooperation between city
officials and the oversight board, little progress can be expected toward effectively
addressing the City’s fiscal problems.

Thank you for the opportunity to express my views of the role of an oversight
Board for the District of Columbia. As I stated at the outset of my testimony, these
views are my own, and are not meant to represent the views of the Administration.
T look forward to answering any questions you might have about my testimony or
my role in PICA.

Mr. Davis. I think we will go ahead and hear from Mr. Cohen
at this point.

Mr. CoHEN. Thank you, Mr. Chairman, and members of the com-
mittee. Thank you, Congressman Fattah, for that introduction. I
must say it is a pleasure to testify before Congressman Fattah in
this body, having previously testified before him in the Pennsylva-
nia State Senate, and I don’t know where the next place I will get
to testify in front of you will be.

What I would like to do in a brief opening statement is to give
some of the highlights of the Philadelphia story, not to brag as to
what Philadelphia has accomplished but rather to give you a sense
as you confront the District of Columbia’s problems that these
problems are not unique, that they are not unlike those that were
faced by the city of Philadelphia only 3 short years ago, and that



35

expertise they need to take advantage of the various programs that
are out there to do housing. That is another thing. If you come to
Cleveland today, Mayor ite has done a fabulous job. I think
there’s probably more new housing in Cleveland today than prob-
ably any other city in the country because of these partnerships
that have been set up.

So that a roundtable is not just a chowder society, it’s a group
of people that come together, and if there’s a problem, and it’s—
it also deals—here’s a real good example. We had a big racial prob-
lem at Cleveland State University, and they just couldn’t resolve
it at the university, and the roundtable stepped in and provided
the leadership and the table where people could come together to
resolve that problem, so that it’s just an outstanding institution to
have in place. It helped us encourage our work with our police-com-
munity relations committees and very, very helpful.

Mr. FLANAGAN. It sounds like, although lacking a formal func-
tion, it sounds relatively indispensable to the overall picture for the
future of Cleveland as it was seen then and as it is now, and that’s
indeed encouraging, being that government doesn’t always have to
take an active hand, but in an advisory level. For financial, eco-
nomic, or social reasons, the community can come together and pro-
vide leadership on levels such as these which turn out to be indis-
pensable.

I thank you, Governor, and I thank the chairman. I yield back.

Mr. Davis. OK.

Governor Voinovich, thank you very much for your willingness to
appear today on such short notice, and I know that Mr. LaTourette
was instrumental in contacting you. He deserves this subcommit-
tee’s thanks. He is an outstanding product of Ohio, doing a great
job here for us. We appreciate having him here and on this sub-
committee.

I think your story should inspire the people and the government
of the District of Columbia rather than frighten them. I’d also point
out to anyone who fears the presence of such a board in the Dis-
trict that you were so wounded by your services as mayor that you
went on to be Governor and voted almost by acclimation last No-
vember, so we wish you well in your future endeavors and thank
you very much for your testimony today. It has really enlightened
us as we move through a very, very tough next few weeks in work-
ing through this legislation.

rovernor VOINOVICH. Well, I’m glad to be here, and I’m genuine
when I say if somebody on the committee wants to get in touch
with me and plug in with some folks that know a lot more about
this in terms of the details, I would be more than happy to do it.

Mr. Davis. Thank you very much.

Ms. Norton. Mr. dhairman, could I say that I would be very in-
terested in being in touch with the Governor with respect to that
business roundtable and what appears to be an extraordinary con-
tribution that they made to the city’s recovery.

Governor VoINOVICH. Thank you.

Mr. Davis. We've got the names, and this subcommittee will be
in contact with them. Thank you very much.

Governor VOINOVICH. I might just mention to you that your good
friend Carol Hoover—Carol was the genesis. She’s the one. We


7

terests shift, and the pressures imposed upon people in public life require them to
pay constant heed to the warning signs of incipient political probloms. Philadelphia
certainly is not an exception to that rule, and I would expect the District to be the
same.

‘What that means, among other things, is that any system has only a limited
amount of time for “business as usual” to take a back seat to institutional change.

‘The fourth point is that good accounting and reporting will explain the results of
prior decisions, and help with future choices. We found very ear ly on that Philadel-
phia’s internal reporting system left. much to be desired. While the Administratio.
is spending significant amounts to upgrade its systems, they still fall far short of
contemporary standards, and it will take at least another year to bring them up to
par. It is a truism in city government that “everyone knows exactly what they have
to spend, but no one knows (or cares) what anything costs.” That makes educated
decision-making very difficult, and camouflages the results of prior decisions.

The effects of government choices are seen in choices made by individuals, and
they in turn over time show up in revenue numbers, changing demands for services
and variations in expenditures. As systems become more efficient, and analysis is
more sophisticated, the information produced becomes more useful and dramatically
compresses the time between a policy decision and the ability to assess its result,
I should note, however, that in political terms this also increases the likelihood that
observers will be able to understand the cause and effect relationships between deci-
sions and their results, and thereby make people responsible for their actions. Not
everyone is prepared for that result.

The fifth point, then, is that accountability is necessary for reform, but it threat-
ens established administrative and political relationships. If a plan-making and re-
porting system is to be successful, it must be comprehensive and the product of
input from all levels of the government. Its results should also circulate within gov-
ernment and be used as tools to make fundamental changes, alter policies and influ-
ence decisions. One goal is to build capacity for informed decision-making and as-
sessment of results—in short, to pick winners and losers. Taken to its logical conclu-
sion, the system could produce a radical re-orientation of budgetary authority, pro-
grams, personnel and policy emphasis as the results of previous decisions are ana-
lyzed and current and future needs are prioritized.

In a general sense, cities do not find themselves at the brink of insolvency because
they've done everything right. Notwithstanding grave problems in the aggregate,
however, there are individuals and groups—internal and external constituencies—
which rely upon particular decisions and programs. They also rely upon the control
of information as a critical resource in their struggle for survival. An effective plan-
ning and reporting system is antithetical to the way in which many within govern-
ment (both elected and non-elected) have done business for generations, and it is
naive to expect them to roll over and play dead when confronted with a copy of a
financial plan. They will oppose, critique, delay and sabotage institutional reform,
and they understand that the staying power of any particular group of reformers
is limited.

One virtue of the PICA process is that the Authority has the capacity to stay at
the table and critique programs time and time again, and to place visible pressure
on the governing process to behave in a consistent manner, while not substituting
PICA’s judgment for that of elected officials. Even with all of that has occurred in
the City of Philadelphia, however, the system is very resistant to change, and every
day, is a challenge to claim a little more without losing what has been gained.

e final point is to recognize the nature of goer situation. The relationship be-
tween Federal government and the District of Columbia is truly unique, and offers
particular problems and opportunities.

In my opinion, the most critical obstacle to achievement of a long-term solution
is the ability of the District to receive additional financing from the U.S. Treasury
without the imposition of stringent conditions or performance standards. As long as
there is the impression that an essentially “blank check” is sitting on the counter
at the other end of Pennsylvania Avenue, I am concerned that the political system
will not come to terms with the underlying problems or develop the political will
that is born of the conclusion that there are no opportunities avatlable to avoid com-
ing to grips with fundamental issues of finance and governance.

Another area of concern is the role of Congress. I would urge you examine the
mandates which you have imposed, and assess both their necessity and their cost.
The Federal relationship is a legitimate issue in the debate about the District’s fis-
cal future, but should not be one which is brought out as a device to avoid meaning-
ful discussion.

Also important, given your intimate role as an approving authority for the budget
of the District, is to differentiate between budget balance and cash flow, and to look



36

went to Detroit. It’s really—Mr. Chairman, with your permission,
Carol Hoover is one of our great leaders. In fact, she is now presi-
dent of the Greater Cleveland Growth Association, which is our
Chamber of Commerce. But Carol encouraged me to create that
Urban Roundtable. We went to Detroit to copy what they were
doing in Detroit, and the irony of it is that I guess 3 years ago De-
troit invited them back to Detroit to tell them how it’s done. So
Carol realiy has the—knows how that works,

Mr. Davis. Thank you. Thank you very much.

For our next panel we have got a truly distinguished panel to
discuss the original New York crisis and how it was dealt with.
First of all, we have former Governor Hugh Carey. He was a seven-
term Member of the House of Representatives. He was born in
Brooklyn, NY; graduated from Saint John’s University and Saint
John’s University Law School; represented the old 12th Congres-
sional District in Brooklyn for seven terms before he was elected
the 51st Governor of New York on November 5, 1974; and as Gov-
ernor he was the architect of the financial plan that averted the
bankruptcy of New York City and began a sweeping program of fis-
cal reform and economic development to restore the State’s vitality.

His extensive tax reduction program in excess of $2.5 billion was
the keystone of restoring New York’s competitive economy in the
1970's. He instituted the I Love New York Program and founded
the Empire State Games. Nationally, he was the spokesman for re-
gional concerns and a proponent of comprehensive programs for
urban industrial revitalization, and he founded the Conference of
Northeast Governors.

In 1991 Mr. Carey was chosen by his fellow Governors as the
first chairman of the National Institute of Former Governors and
was reelected as chairman through 1994. He is a director of
Meditrust, Inc., First Albany Corp., the China Trust Bank, and
Triare Co.’s, and is currently with the W.R. Grace Co. in their gov-
ernment relations division.

We also have Ed Regan, who is currently policy advisor to the
dJerame Levy Economic Institute and is a member of numerous cor-
porate and foundation boards, but he was the New York State
comptroller from 1979 to 1993 engaged in governmental financial
management systems and pension system investments. Mr. Regan
is a frequent lecturer and author on national and regional economic
trends and infrastructure investment and governance processes of
U.S. corporations.

It is the policy of the committee to swear in witnesses. Governor
Carey, you are exempt from that if you would like, or you can do
it as a former Member.

Mr. Carey. Let's play safe.

{Witnesses sworn.]

Mr. Davis. Please be seated.

Governor Carey, would you like to proceed, and let me just say
how thrilled we are to have you here, and with the experience that
you bring to this subcommittee. We are honored to have you here.


51

fit of the plan instead of laying people off. All those things take
place.

Ms. Norton. But, Governor, those weren't on your list, the
things like the tuition in the City University. Your list of
horribles——

Mr. Carey. That was long overdue. When we went down to see
President Ford and we said, “We need your help,” he said, “You
want my help when my State University in Michigan charges tui-
tion and yours doesn’t? You are not going to get any help until you
do it.” So we were told to do it, and, by the way, we have offsets,
the tuition assistance plan for needy students offsets those cuts, so
nobody is denied a college education, as you well know, in New
York City for lack of means. That’s the way it works. So there are
offsets that you get as benefit when you impose tuition.

The transit fare had to be done, but out of that transit fare in-
crease we got stability in the system and put $6 billion into im-
proving the transit system. So we have a better system now, as you
have in Metro here. There are offsets and gains as you begin to im-
pose, as I said, these strictures. That’s part of the planning process,
which the mayor can’t do alone.

Ms. Norton. Your point is an important one though, that in
order to get what you needed you had to, on your side of the ledger,
come up with a number of very strict changes for New York City
all at once.

Mr. Carey. No doubt about it, because the city had fallen into
a pit, and the old rule in holes is, when you are in a big hole stop
digging, you are getting deeper and deeper, so we had to say that’s
it, the hole is too deep, and that’s why we—thank God the District
of Columbia is not in that condition yet, but it’s going to get there
if you don’t step in.

's. NORTON. I would like to ask Comptroller Regan about a part
of his testimony. If you change the name, it says the District of Co-
lumbia. It says New York City’s mid-1970’s fiscal crisis was charac-
terized by enormous short-term debt, huge unfunded pension liabil-
ities, and severe operating deficits, all worsened by years of shoddy
accounting procedures and fiscal gimmicks.

Anybody who has been in the District of Columbia for the last
2 seconds recognizes that as a description that we have heard over
and over again of the District. I would like to particularly ask you
about the unfunded pension liability. We have a huge unfunded
pension liability. This was handed on to the District at the time of
the home rule by the Federal Government. Almost all the growth
has been in interest actually, from what the government handed

us.

What did New York do about its unfunded pension liability in
particular?

Mr. REGAN. It was with the help of actuaries. It was another one
of the problems you can add to the Governor’s list. It was done all
at the same time. There were actuaries hired and contributions
had to rise, and I think it was amortized over, in the case of fire-
men, 40 years and others that weren’t as bad, perhaps a lesser pe-
riod.

Once again, it became part of the whole package. And I would
echo the Governor’s words, you get all of these things done at once.


24

Over the years other public-private partnerships were created.
Build Up Greater Cleveland was a coalition of public and business
officials to identify the infrastructure, our old and crumbling infra-
structure: How are we going to do something about that problem?
The story of Cleveland’s comeback is much more involved than I
could possibly impart in these few minutes. I’m going to leave some
information for you.

IT want you to know that if this commission is interested in com-
ing to Ohio and to Cleveland, I'll be glad to facilitate that for you
and be more than happy to bring to this table, if you would like,
some other people that can add insight into what we did.

A man who—and I'll finish on this note—who I literally conned
into becoming the finance director of the city of Cleveland was a
man named Bill Reedy. He was with Coopers and Lybrand. I tried
to find a finance director, and I couldn't find one; nobody wanted
it. We had a national search, and nobody wanted the job, and Bill
was the chairman of the committee, and I said, “Bill, please”’—you
know—‘I need ye" So he left Coopers and Lybrand and went to
work for us, and he was our finance director for 3 years and helped
quarterback the recovery along with Ernst and Young.

Bill is now the managing partner for Coopers and Lybrand in
their government practice, but he has more insight into what hap-
pened and all of the intricacies than probably anybody in this coun-
try, and I think it would be really worth your while to spend some
time with Bill.

Thank you very much.

[The prepared statement of Governor Voinovich follows:]

PREPARED STATEMENT OF GEORGE V, VOINOVICH, GOVERNOR OF OHIO

Thank you, Congressman LaTourette, for that introduction. You have shown real
leadership in this Committee, and you are making a positive difference in the lives
of Ohioans everyday. Thanks, also, Mr. Chairman, for the opportunity to address
this Subcommittee.

Let me begin by commending all of you for undertaking the critical challenge of
rescuing the District of Columbia from the straits of insolvency. Ihave always felt—
and I am certain most Americans would agree—that the District should be a model
for our nation—our “shining city on the hill.” Sadly, Washi: gto , D.C. is today the
opposite of that image, just as Cleveland was in 1979. But the story of the “Cleve.
land comeback” proves that your challenges are not insurmountable. Here is the
short version of how my hometown bounced back.

From almost any vantage point in Greater Cleveland, the thing that probably
stands out most is the physical architecture of the city—particularly the new down-
town skyline. Of far more importance, however, is the civic architecture we erected
in the early ’80’s to rebuild, not just our neighborhoods and downtown, but our very
soul and self-image. The bedrock upon which we constructed that civic architecture
was the public-private partnership—urban pioneers rebuilding a city where Cleve-
Jand used to be. 1 would respectfully suggest that the first and probably most impor-
tant task of the Subcommittee is identifying the elements of the local civic architec-
ture that must guide the rebirth of Washington, D.C.

en I agreed to leave my post as Lieutenant Governor of Ohio and return to
Cleveland in 1979 to run for Mayor, I made clear to business and civic leaders my
conviction that government was only one thread in the fabric of our community. To
turn Cleveland around, we were going to have to work together and put aside all
of our differences, understand we had a symbiotic relationship, and galvanize our
resources to solve our problems, meet our challenges, and seize our opportunities.
And it worked. Cleveland became the only city to win three All-American City
awards within a five-year period.

‘A key player was the Financial Planning and Supervision Commission. We in-
sisted that the Commission’s membership include local stakeholders, and not be
completely controlled by the state. The Commission developed a financial recovery



54

1 would now like to yield to the distinguished Representative
from the city of Philadelphia, Mr. Fattah, to introduce the members
of our final panel.

Mr. FatraH. Thank you, Mr. Chairman.

And now we have heard from the rest, we will hear from the
best. I take exception in the comment of the former comptroller
from New York who said, after hearing from the Governor of Ohio
and the former mayor of Cleveland and from Governor Carey him-
self, we had gotten the best advise we could get on this subject
matter because there is a truly spectacular story of the experience
in Philadelphia, and the three gentleman who are going to testify
were very much a part of that activity.

And as a member of legislature at that time in the State Senate,
1 was able to be a part—a small part of the creation of a process
that led to Philadelphia being well positioned to enter the next cen-
tury out of debt and responding to the problems in its neighbor-

oods,

I want to introduce the three people who are going to be testify-
ing here today. Dr. Bernard Anderson, who is an Assistant Sec-
retary at the U.S. Department of Labor, was in fact a Governor’s
appointee to the PICA Board, the Intergovernmental Cooperation
Authority.

Note the notion of cooperation rather than control. It was indeed
a cooperative process between the State government and the city
of Philadelphia’s elected government to find a way through a finan-
cial crisis and Dr. Bernard Anderson was the Governor’s appointee
and chair of the PICA Board that worked through that problem.

Dave Cohen, who is the chief of staff to America’s mayor, Mayor
Ed Rendell, who has both been congratulated and recognized for
his work here in the Congress in a bipartisan way and for all of
his hard work to help lead Philadelphia and, in fact, help lead the
way for the rest of the country’s mayors on a number of critical is-
sues.

Dave Cohen is considered in Philadelphia one of the co-mayors
because he is one of the significant players in the relationship be-
tween the administration and the council that has helped move the
city forward.

And Ronald Henry, who served as the first executive director of
the PICA Authority, which you are going to hear much more about
in his testimony, helped craft, through a cooperative working ar-
rangement between the board and the city’s key players, an ar-
rangement that, has returned Philadelphia’s financial health and
fiscal house to order.

So I want to welcome and introduce these gentlemen as the
come to bring the Philadelphia story and help this committee thin
through its obligations.

Thank you.

Mr. Davis. Thank you, Mr. Fattah. Thank you very much.

We are very pleased to have all of you here today. I know what
you say is going to be very important which is why we want you
here today. We appreciate you staying with us through that last
vote recess.

And Mr. Anderson, we will start with you.


63

there is light at the end of the tunnel. And that that light is not
the headlight of an on-rushing locomotive, but it is the light of a
potential solution to these problems, and then to give you some
specific comments on Philadelphia’s oversight board which Dr. An-
derson has so ably described, the Pennsylvania Intergovernmental
Cooperation Authority.

If we can turn the calendar back 3 years ago to 1992, Philadel-
phia at that point, at the time when Ed Rendell was sworn in his
office and John Street, who is president of the city council, was
elected to that position, the city confronted a $200 million cumu-
lative deficit that was projected to grow about $250 to $300 million
a year over the ongoing years unless corrective action was taken.

at annual structural deficit was about 10 to 12 percent of the
city of Philadelphia’s operating budget and the total projected defi-
cit at the end of fiscal year 1996, that was in June 30, 1996, would
have been about $1.4 Billion, which at that point would have rep-
resented about 50 percent of Philadelphia’s operating budget.

The city’s credit ratings were at junk bond status. There had
been no access at all to the long-term credit markets for about 18
months and it was only through what I guess could be charitably
described as creative and unbelievably expensive financing gim-
mickry had the city been able to access short-term credit markets
to make cash-flow borrowing in order to meet its payroll during the
periods of year when our real estate taxes and business taxes were
not going in.

All four municipal union contracts were expiring, all four on
June 30, 1992. And in addition to that, our public transit agency
contract was expiring in March and the school teachers contract
was expiring at the end of August. When you think of all that, you
might wonder why in the world would anyone have wanted to walk
in the door and some of us are still wondering about that.

The bottom line, I think, was provided by City and State Maga-
zine which called Philadelphia the municipality that sets the stand-
ard for fiscal distress in the 1990’s. And in 1992, there was no
truer statement that could have been made. And as Dr. Anderson
said, the pressure to negotiate an intergovernmental cooperation
agreement to prepare a 5-year financial plan that projected bal-
anced budgets in each of the 5 years.

We had to have a zero fund balance or better in each of the 5
years of that initial 5-year plan in order to enable PICA to do a

orrowing for the city that would fund that $250 million cumu-
lative deficit. So we were in a position where, in answer to one of
the questions that was asked Governor Carey, where all those
changes had to be made essentially over a period of 6 months.
There was no luxury of time to be afforded to the city of Philadel-
phia as a result of that structure.

Now, in 1995, we are a long way from 1992 in a number of re-
spects. The city of Philadelphia has just completed running two fis-
cal years with small budget surpluses and it is the first time we
have had two consecutive budget surpluses in the city of Philadel-
phia since the early 1980's.

The answer as to how we did that is enormously complicated. I
have provided to the committee a copy of the city’s current 5-year
financial plan which recites some of this history and, in a sense,




43

you heard the Governor allude to and refer to, that’s how it worked
in New York City.

But one final point. The chairman of the control board—and I'll
use that phrase. You might up end up calling it something dif-
ferent, or you might have a different person, but at the top of this
process has got to be somebody who will exercise leadership when
it is called for. They don’t have to bark and yell every time a new
budget comes out, but when a crisis starts to develop there has got
to be somebody at the top that has developed influence, that has
created a constituency, that in this environment who, when he or
she speaks, is able to move the process.

Without that leader—and let’s say that a chairman of the control
board, which Governor Carey was, without a leader like that, then
you run into problems, and the control board, as you heard Mayor
Giuliani refer to, could slip into becoming just another part of the
political process.

So we can establish all the great agencies we want, and they can
be the best constructed, and you have heard from New York City
and Cleveland, the State of Ohio, and the State of New York, you
have probably had the best advice you could possibly get with the
three individuals that preceded me, the best advice you could get
in the country, as to how to structure things and how to set it up,
but without somebody at the top who understands both the num-
bers and understands the public and understands how to exercise

olicy in a political environment, without that, you will continue to

ump into difficulty. That’s my testimony,

[The prepared statement of Mr. Regan follows:]

PREPARED STATEMENT OF Epwarp V. REGAN, FORMER COMPTROLLER OF New YORK
‘ATE

This is a slightly edited version of a report, original written by Julia Vitullo-
Martin and myself, on New York State oversight of New York City’s fiscal situation.

I, INTRODUCTION

The New York State oversight agencies were created almost 20 years ago, and
this report represents the first time they have been re-examined. In’ preparing this
report we interviewed over 42 individuals who either had been or stil are involved
in the city’s fiscal situation (list attached). They included former senior elected offi-
cials, current office holders and those involved in the agencies mentioned.

While there have been some differences of opinion, the report reflects the strong
consensus of those interviewed: state oversight is necessary, but there is unneces-
sary redundancy in the oversight structure.

plicative reports may contribute to unintended consequences, as some recent
events illustrate. The city is suffering from the double impact of a long-term struc-
tural deficit and currently deteriorating revenues. Proper state oversight is sup-
posed to ameliorate (if not prevent) the consequences of this situation “namely, as
we have seen this fiscal year (7-1-94-6-30-95), a city budget having to be drastically
cut several times and a huge deficit looming for the next fiscal year. Numerous re-
ports by the monitors, issued for the past several years, accurately called attention
to the problems, but they were diffuse, with little focus, and were not subject to fol-
low-up by senior officials or state action.

The oversight structure is necessarily complex. It requires someone at the very
top, that when the appropriate occasion arrives, will pinpoint the facts, and, using
his or her powerful offices” generate an environment for, and the necessary
action to resolve problema before they become difficult—even impossible—to handle.

Il. NEW YORK CITY’S FISCAL CRISES

New York City’s mid-1970s fiscal crisis was characterized by enormous short-term
debt, huge unfunded pension liabilities, and severe operating deficits—all worsened
by years of shoddy accounting procedures and fiscal gimmicks. The crisis broke upon



41

Mr. Davis. Go ahead.

Mr. REGAN. Mr. Chairman, thank you very much, and Governor
Carey.

I Rave distributed to you and your members a statement which
I am not going to read. It is really a history of the financial over-
sight process in New York City. It is the first one, strangely
enough, we discovered—it’s the first one that has ever been done.
You referred—other than Charles Morris’s book, which you have
just referred to, and perhaps the Governor’s testimony which you
just listened to.

But we, myself and some staff assistants, we did this in the tran-
sition period of Governor Pataki. Myself and my staff interviewed
42 people, including Governor Carey and Mayor Koch and every-
body that was involved in this process, reviewed every document.
We have them all, every budget document, all of the legislation, the
whole history we now have, and then I summarized it in that five
or six-page report as to how New York City’s oversight process got
formed and what the process should be going forward, and I'd be
happy to answer questions. Many of the questions that were asked
are covered in that five or six—are answered really in that five or
six pages.

Just two points. Why a control board process? Why an oversight
process? Well, the first is that what you are really going to do is
bond out. I don’t care how you call it, you are going to take the
present deficit, the structural deficit, the accumulated problems,
and you are going to borrow, or the city is going to borrow. That
means, as it did in New York State, as it did in New York City,
as it did in Cleveland, as it did in Bridgeport, and any place else-
where this has been done, that future generations are going to
have to pay the principle and interest and are going to have to pay
for the problems created by others who came before them, and if
you are going to ask future generations to pay 5, 10, 15, and 20
years, now you have got to guarantee them that this will not occur
again and you have got to guarantee them that this cure is perma-
nent. That is the tradeoff you make with the people that have to
pay the debt service in the coming 10 to 20 years.

A second reason, it seems to me, you do an oversight process is
that it reflects how government really works, and I’ve spent 27
years in government, I have some feel for it. There is action in gov-
ernment when everybody’s backs are to the wall. That’s when ac-
tion occurs. Well, an oversight process or a control board has the
effect of moving the “wall up to their backs,” then things can hap-
pen. That’s the democratic process. That’s just the way it works.
You force people to do things that are very difficult to do without
either the wall at their backs or their backs to the wall, and of
course you create an environment among the electorate, among the
constituents, the stakeholders, the unions, the citizens, you create
an environment that change is absolutely needed and change is re-
quired.

So the fact that you have pretty much, as I understand it, Mr.
Chairman, and your other colleagues, resolved the idea that you
are going to move ahead with an oversight process is commendable,
and now, it seems to me, is: how does it now work, which is my
final point.


66

by any of the witnesses earlier in the day, nothing that I have just
outlined for you was easy. I think we have been fortunate in Phila-
delphia in the way that our press has described us that we didn’t
bludgeon anyone. We didn’t cut anyone’s aorta. We just nicked
1,000 people in different places, so everybody was walking around
the city with paper cuts instead of gaping wounds.

But when you nick everybody with paper cuts, they still come
down to the mayor’s office and demonstrate. And the mayor loves
to tell the story of a phone call that he received from a very good
friend and a significant contributor who was apologizing to the
mayor saying that he had to be part of a group that was going to
come down to city hall the next day and demonstrate in front of
his office and he wanted the mayor to understand that.

And the mayor said, “Jim, hold on a second if you don’t mind and
let me check something.” And he said, “OK, sure.” And put him on
hold and kept him on hold for 30 seconds and picked up the phone
and said, “Hi, you can come down. I have to check the book, we
have so many demonstrators coming in down here, I wanted to
make sure that you won’t be put out of the limelight because of
other demonstrations that are going to be held outside my office.”

And you have to have that attitude. You have to accept that if
you are going to do these things, that for a year, you can’t leave
or go into your office without being heckled or bothered by some-
body who is complaining about what it is that you have done. And
both the mayor, the president of the city council, and the members
of the city council stood up to that political will and had the politi-
cal will to stand up to do what was necessary in the city of Phila-
delphia.

Second, and Congressman Fattah knows this very well, you need
some level of cooperation from, in Philadelphia’s case, the State
government, and I will suggest that in the District of Columbia’s
case, the Federal Government.

We made a very big deal over the fact and we continue to make
the big deal over the fact that we have never asked anyone for a
bailout. We never asked the State to pay that $250 million deficit.
When PICA borrowed $475 million on behalf of the city of Philadel-
phia, in 1992, it is the city of Philadelphia that is going to pay
every nickel of that borrowing back.

And in fact today, we pay $54 million a year to pay off the deficit
reduction bonds that PICA issued in 1992. So if you want—when
people talked earlier about the fact that spending excesses and
digging that hole becomes a mortgaging of the future that future
generations will have to pay off, in the city of Philadelphia, we can

uantify what the mortgaging of the future was done over the half
decade preceding 1992. It is $54 million a year which is almost 3
percent of our operating budget over a 10-year period in order to
pay off that cumulative deficit that this developed.

By the same token, we did ask the State to step to the plate and
pay its fair share of the services it was supposed to pay for. And
in Philadelphia’s case, as Congressman Fattah remembers, that.
was children and youth services, an area that was the State’s re-
sponsibility and, historically, had been underfunded and neglected
by the Commonwealth of Pennsylvania. And the State did step to


11

last 3, 4, or 5 years. The principles that they have utilized are the
principles that we are utilizing: Severance programs rather than
firing; determining the results that you want to achieve; and man-
aging and setting up statistical indicators so that you manage for
that purpose; and, finally, getting over the hurdle and the fear that
takes place so that the idea of doing more with less becomes a very
exciting dynamic of how you can actually deliver better services,
how people can take on more responsibilities, do more things, and
actually turn around the way government views itself.

Much of what we are doing is incorporated in Osborne’s book
called “Reinventing Government.” We think that we are moving in
the right direction. We do know that there is a tremendous amount
more to be done, and we are very, very happy to help in any way
that we can either with the things that have worked that might
help in the District of Columbia, or we are certainly happy to tell
you the things that don’t work, because not everything works, so
that you can avoid some of our mistakes.

Mr. Davis. Mr. Mayor, thank you very much. That is inspiring
testimony and good news for citizens here that there is hope at the
end of what is, right now, a very very difficult time for the city.

I want to ask just a couple of questions before I pass it over for
questions from some of our committee members.

I take it you are saying that the control board, if it stays too
Jong, can get in the way of innovation and stop you from doing your
job. Is that fair?

Mr. GIULIANI. Anything that stays too long gets in the way of in-
novation, and control boards are no different than anything else.

The fact is that for a year or 2 years or 3 years a control board
operating in an emergency can be enormously valuable. It can offer
good ideas, it can offer the support and even be the mechanism for
making unpalatable political choices. Then after a while it becomes
part of the whole process and becomes a player in the political
process, and therefore I think it is an excellent idea but it’s one
that, if you do it, you should have a strict sunset provision and you
should review it frequently to make sure you still need it, because
if you keep it too long it becomes a political mechanism and then
it deprives a city of showing that it can be self-sufficient.

Mr. Davis. Thank you very much.

In your talk about making sure the government is not the em-
ployer of last resort but instead letting the private sector do more,
your tax initiatives have helped keep business in the city which
has been a net creation of jobs; whereas, it looked like in the old
days with the city as the employer of last resort, you were losing
jobs each year. Is that correct?

Mr. GIULIANI. Absolutely. I mean American corporations and
businesses are very sophisticated, they do very detailed analyses of
where they should be located, and if a city is presenting a financial
picture in which the debt of the city is the thing that is increasing
the most, well, if you run a business or I run a business, we look
at that and we come to the conclusion that we are going to pay for
that debt, and you see a city that is going in the other direction,
you are kind of inclined to move your business there continuing.


53

we are in. And as I said at the hearing last week, that perhaps
what we learn here will help the other cities throughout the coun-
try, in particular, my city of Detroit, MI.

And I still don’t know what the answer would be with people
using and enjoying all of the services of a central city and then
going home to the suburbs or the surrounding communities where
our tax base has fled, where the middle class has fled, and the jobs
have fled. So you leave a central city derelict with no funds but ex-
pect it to maintain the same services.

What Governor Carey said, you know, just made a lot of sense,
that you are expecting an awful lot of the District of Columbia to
be the living room of America for all of the tourists, all of the citi-
zens of America and the citizens of the world that come here and
all of the embassies, and yet we don’t make allowances for helping
us keep this living room up.

I don’t know—I think that the board, the financial board prob-
ably is the only answer, the good answer for the crisis but, to me,
that is not an answer for the long run and I think that we also
need to find answers for the long run besides the crisis.

Mr. REGAN. May I respond to that?

Mr. Chairman, I was involved when Wayne County assumed nu-
merous powers and was involved with your mayor at the time,
Mayor Young, because I’d done the same thing in the city of Buf-
falo as we shifted owers, therefore taxes, to Erie County. And of
course, I watched the New York City experience and the commuter
tax.

My own view, my own experience prior to becoming comptroller,
which was the city of Buffalo in Erie County, and my involvement
in the shift of some responsibilities off the Detroit tax base to
Wayne County all makes me put forward this suggestion: That
when the people in the surrounding areas, surrounding in Mary-
land and in Virginia, see that the city of Washington has done ev-
erything it possibly can and you no longer have those kind of head-
lines, which I am sure the people in the suburbs love to chuckle
about and decry, when that is gone, you will have created the at-
mosphere for a suburban tax or a shift of services or a combination
of both, but it will never occur until you create the proper environ-
ment.

But my own experience is, once that environment is created, and
I am not naive, but people will recognize their broader obligations
and will want to share and will participate. That day, as you well
know, is a little bit off into the future.

Mr. Davis. Mr. Regan, Governor Carey, thank you both very
much. I think you have added greatly to the dialog. As we move
forward, I hope we can call on you. You have offered your services.
I am sure we will be taking you up on that. We appreciate you
coming before the panel today. Thank you.

At this point, with a vote pending on the floor, I would like to
recess for 15 minutes at which point we will come back and Mr.
Fattah, I will let you introduce our next panel.

All right. We will be in recess.

[Recess.]

Mr. Davis. I apologize for the delay. The hearing will be back in
session.



59

very difficult task, but the city was able to use this institutional
device as a framework within which to do many of the things that
I think elected officials knew they had to do in order to restore the
city’s fiscal solvency. .

"Il stop there, and I'd be happy to answer any questions that
members of the committee might have.

Thank you.

Mr. Davis. Thank you.

[The prepared statement of Mr. Anderson follows:]

PREPARED STATEMENT OF BERNARD E. ANDERSON, ASSISTANT SECRETARY FOR EM-
PLOYMENT STANDARDS, U.S. DEPARTMENT OF LABOR, AND FORMER CHAIRMAN,
PENNSYLVANIA INTERGOVERNMENTAL COOPERATION AUTHORITY

Mr. Chairman and Members of the Subcommittee; .

Tam pleased to offer testimony for these hearings on the role of a financial over-
sight board for the District of Columbia. My testimony is based on my work as a
member of the Pennsylvania Intergovernmental Cooperation Authority (PICA), and
is not meant to represent the views of the Administration, the Office of Management
and Budget, or the U.S. Department of Labor. The views that I am about to give
are my own, in an attempt to assist the Congress in its oversight responsibilities
in this important area.

From June 1991 to December 1993, it was my honor to serve as the first Chair-
man of PICA the fiscal oversight board for the City of Philadelphia. Perhaps our
experience might be helpful to this Committee, and to the other Members of Con-
gress as you contemplate the structure, functions, and responsibility of a fiscal over-
sight entity to assist in addressing the financial crisis now facing the. District of Co-
lumbia.

In my brief remarks, I want to describe the goals of PICA, its structure, the back-
ground of its seven original members, its administrative staff, and its operating
style. Next, I want to explain why I think PICA has been successful in helping the
City of Philadelphia to get its fiscal house in order as it moves toward the restora-
tion of fiscal solvency and sound financial practices in the management of its fiscal
affairs.

PHILADELPHIA'S PROBLEM IN A NUTSHELL.

Philadelphia’s fiscal problems, which reached a peak in late 1990 when the City
lost the investment grade rating on its debt, was the result of persistent spendin
in excess of available revenue. The City’s revenue sources are tied closely to loca’
economic conditions. In Fiscal Year 1991, about 48 percent of revenue came from
wage and net earnings taxes, 17 percent from real estate taxes, 20 percent from
business taxes, and 14 percent from federal and state appropriations.

Between Fiscal Years 1986 and 1991, City spending grew, at arate of 5.2 percent
per year, while revenue rose by 3.1 percent per year. In 1991 financial projections
showed expected spending growth of 7.6 percent Ber year for Fiscal Years 1992 and
1996, while revenues were expected to grow by only 3.5 percent per year.

The persistent gap between spending and revenue produced annual deficits of $78
million in FY 1990, $75 million in 1991, and an accumulated deficit of nearly
$200 million for FY 1992. If no action had been taken, the accumulated deficit was
expected to reach $450 million by FY 1993.

espite these unfavorable fiscal conditions, the City’s elected officials were unable
to agree on a plan to bring spending under control and to follow sound financial
management practices. The stalemate between the Mayor and Members of the City
Council, and between City officials and State officials in Harrisburgh, the State cap-
itol, contributed to the loss of confidence in the City by the financial markets, whic
led'to a downgrading of the City’s bond rating below investment grade in late 1990.
The loss of access to capital markets crystallized the City’s fiscal crisis and spurred
action by the legislature and the Governor of Pennsylvania.

CREATION OF PICA

PICA was created through the efforts of Philadelphians and State officials who
envisioned a structure to give Philadelphia enough fiscal breathing room to put its
revenue collection and spending processes in order, and to reach a consensus on its
priorities, assets, and limitations. The PICA board, created by statue in June 1991,
consists of seven members: five non-governmental private citizens, plus the Finan:


13

think at some point it became just another part of the political ap-
aratus of the State and either performed no particular useful
nction—sometimes it would perform a political function, and if it
politically agreed with the mayor it would be very laudatory, and
if it didn’t it would be derogatory. So I think that the caution that
1 would give is, control boards work very well during emergencies,
then they become like every other political apparatus.

Ms. Norton. Are they on a standby basis essentially for all prac-
tical purposes now?

Mr. GIULIANI. Yes, they are on a standby basis, but most people
don’t realize that and recognize that, so when they issue analyses,
some of which are helpful and some of which are useless, those
analyses get the same weight that they would get during the period
of time in which there was an emergency.

Ms. Norton. Mayor Giuliani, you are given real credit for tack-
ling the large deficit you found when you came in office, and I
know the kind of credit you are given because Sandy Levinson and
Al Shackley, your school boards czars, were in Washington re-
cently, and I was at the dinner table with them, and I said, “How
are you all getting along with Rudy Giuliani?” and without going
into detail, what they had to say was praiseworthy. They remarke:
especially upon your use of buy-outs or what you call the severance
plan. The District did not attempt those buy-outs until too late vir-
tually, until the Congress had already ordered cuts. That got a
huge rise out of the workers. That intimidated the city, and buy-
outs were going on in the Federal Government but somehow the
city did not begin that process early enough.

ut what interests me is that, + New York went through this
extraordinary crisis where you let go 60,000 people, in no time flat
it appears that New York City grew back its government and that
something like a returning crisis occurred and you were faced with
something not unlike what Mayor Beame faced, and you have had
to tackle that. I would like to know: One, why did it grow back;
and, two, how can one make this thing permanent, everlasting, and
get it over with so you never have to go through what you are now
having to go through again?

Mr. GIULIANI. Your analysis is exactly correct, and sometimes I
compare it to someone who has gone through the difficult process
of losing a tremendous amount of weight and then gaining it all
back again, and, boy, it’s real hard then to do it again, but then
you are going to have to do it again.

The fact is—and I think I can trace this because I used to have
a chart, and I’m sorry I didn’t bring it with me—that really dem-
onstrates this. New York City’s fiscal crisis was roughly in 1975,
and if I just use the number of employees it would probably tell
the story.

At that time, New York City had official direct employees of the
city, about 240,000 employees. Between 1975 to about 1982, New
York City, with a financial control board and the financial control
board for a lot of that operating with full powers, New York City
reduced from about 240,000 to about 185,000 employees. So you see
the chart go all the way down.

Starting in 1982 to 1983, New York City started moving up dra-
matically, because as prosperity of the eighties happened, rather


CONTENTS

Hearing held on March 8, 1995
Statement of:
‘Anderson, Bernard E., Assistant Secretary for Employment Standards,
USS. Department of Labor, and former chairman, Pennsylvania Inter-
ernmental Cooperation Authority; David Cohen, chief of staff to
e mayor of Philadelphia; and Ronald G. Henry, former executive
director of Pennsylvania Intergovernmental Cooperation Authority .....
Carey, Hugh L., former Governor of New York State; and Edward V.
Regan, former comptroller of New York State
Giuliani, Rudolph W., mayor, city of New York
Voinovich, George V., Governor of Ohio ....
Letters, statements, etc., submitted for the record by:
derson, Bernard E,, Assistant Secretary for Employment Standards,
Department of Labor, and former chairman, Pennsylvania Inter:
governmental Conperation Authority, prepared statement of. .
Henry, Ronald G., former executive director of Pennsylvania Intergovern-
mental Cooperation Authority, prepared statement of .
Regan, Edward V., former comptroller of New York State, prepared siate-
ment of ..
Voinovich, George V., Governor of Ohio, prepared statement of

aly

55
37
21

59
71

43
24


34

but the fact of the matter is that the system that we have right
now is not working, it’s broken.

Mr. Fatran. Thank you.

Mr. Davis. Thank you. Thank you very much.

Mr. LaTourette, the gentleman from Ohio.

Mr. LaToureTTe. Thank you, Mr. Chairman.

I promised the Governor I’d get him on his way by noon, and
since I've had the opportunity to see his handiwork up close I'll
yield so Mr. Flanagan can quench his thirst.

I want to thank you, Governor, for taking the time to accept our
invitation today, and if you could work one more miracle—that
would be to get the Indians back on Jacobs Field come April—I
would appreciate that very much.

Just to the gentlelady from the District of Columbia, I’m very
comfortable with the Governor leading the State of Ohio. The ob-
servation that we have no interim step between Mayor and Presi-
dent of the United States may have been one of the better argu-
ments for statehood I’ve heard in a while.

Mr. Davis. Thank you very much,

Mr. Flanagan, any questions?

Mr. FLANAGAN. Thank you, Mr. Chairman.

Thank you, Mr. LaTourette, for yielding.

Mr. LaTourette is very kind to me. He knows how windy I can
be, so I’ll save it to just one question Governor.

We heard earlier in your testimony a very interesting use of the
advisory board in a fire wall, a political fire wall with the city coun-
cil that might not want to do the recommendation, and a strong
leader standing up saying no, no, this is the plan, and we have got
to stick to the plan. That, I think, would certainly have efficacy
here depending on the shape, size, and flavor of the board that we
may use here.

I was also very interested to hear about the Cleveland Round-
table, and I was wondering, over and above its advisory capacity
and a sounding board for economic and social issues, does it have
any formal function over and above that, and does it complement
the financial advisory board in any way?

Governor VOINOVICH. No, it had no connection whatsoever with
the financial advisory board, but it did give the people who live in
the neighborhoods instantaneous empowerment where they felt
they were shut out of the system, and it was through the round-
table—they’ve got a very, very aggressive program in improving
race relationships in the city of Cleveland.

A little offshoot of it was really kind of interesting, that in the
area of jobs we had a lousy labor-management reputation, and
through that group we created a thing called work in northeastern
Ohio, where we got middle echelon labor and business leaders into
school, talking about communication and quality, and that helped
the—today, I think, if you talk to business they’d say, you know,
Cleveland, Greater Cleveland, has a good business-labor environ-
ment.

And, let’s see, what else? Got involved in our housing programs
in working with our Cleveland Tomorrow group to get them to
start to invest in housing in the neighborhoods. In fact, Cleveland
Tomorrow provides money to neighborhood organizations for the


76

through the numbers you receive. It is imperative that you take a truly long-term
view of what fiscal choices are being made today which will have an impact in the
months and years to come. The warning signs are visable—this hearing is acknowl-
edgment enough of that, Use this time to develop a plan and gather consensus.
There are hundreds of thousands of people whose lives will be touched in a very
direct way by the District’s fiscal crisis, and they deserve your best efforts to lay
the groundwork for a long-term solution. I wish you luck.

Thank you for your attention. I would be pleased to respond to questions.

Mr. Davis. Thank you very much.

I am going to ask just a few questions. Let me start with Mr.
Anderson, first then if either of our other witnesses want to say
anything, I would be happy to hear your comments.

How would the PICA Board have worked if you had an obstinate
mayor and council? It worked because it was cooperative. Everyone
recognized the problem and rose to the occasion. I am not saying
there weren’t some differences. But you have to write this legisla-
tion in a way that you have to assume the worst, even though you
hope it doesn’t happen. You had that bomb back there in that case.
Is that what made it work? What would have happened if everyone
decided they just wanted to continue to be obstinate about things?

Mr. ANDERSON. I think that if the mayor and the leaders of the
city council were determined not to cooperate with the board, we
would have long delayed our ability to address the problem. For ex-
ample, in order for the board to do its work, we need information
on the city’s finances, on the tax revenue that it is receiving, on
its plans for expenditure levels, other kinds of information that we
would not be able to obtain if we didn’t get it from the city govern-
ment. We simply need that.

One of the issues, for example, that came up in our negotiation
of an intergovernmental cooperation agreement was what the role
of the PICA Board would be with respect to labor management
agreements. We did not have, as they had in New York, the au-
thority to approve labor-management agreements and we did not
want that authority. :

However, we did want to be informed about any agreement or
recommendations that the mayor would make in negotiations in
order to determine in advance what the impact of that agreement
would be on the city’s ability to balance the budget, and so we ne-
gotiated a clause in the ICA specifying that through the negotia-
tions when the mayor reaches a point where he was making his
final offer and they were about to agree on the terms and condi-
tions, that we would be informed about that.

That was an issue on which the unions of the city disagreed.
They expressed that disagreement to members of city council. They
sued us. That case went to the Pennsylvania Supreme Court and
the city council, in the 11th hour action on—literally 11 o’clock on
one Saturday night, voted against the intergovernmental coopera-
tion agreement.

On Sunday, I made a statement, in response to a call from a re-
porter, indicating that we would not accept that. That is the board
would need to have an intergovernmental cooperation agreement
that provided for us the information we needed to do our job and,
until that was done, we simply would not go along with it.

Now, we had an election coming up. And members of the city
council who were running for reelection said, in effect, and one is


22

Sadly, Washington, DC, is today the opposite of that image just
as Cleveland was in 1979. But the story of the Cleveland comeback
proves that your challenges are not insurmountable, and here’s a
short version of how my home town bounced back.

From almost any vantage point in Greater Cleveland, the thing
that probably stands out most is the physical architecture of the
city, particularly the new downtown skyline. Of far more impor-
tance, however, is the civic architecture we erected in the early
eighties to rebuild not just our neighborhoods and downtown but
our very soul and our self-imagine. The bedrock upon which we
constructed that civic architecture was the public-private partner-
ship, urban pioneers rebuilding a city where Cleveland used to be.
I would respectfully suggest that first and probably the most im-
portant task of this subcommittee is identifying the elements of the
peal civic architecture that must guide the rebirth of Washington,

When I agreed to leave my post as Lieutenant Governor of Ohio
and return to Cleveland in 1979 to run for mayor, I made it clear
to the business and civic leaders my conviction that government
was only one thread in the fabric of our community and that to
turn Cleveland around we were going to have to work together and
put aside all of our differences, understand we had a symbiotic re-
lationship, galvanize our resources to solve our problems, meet our
challenges, and to seize our opportunities, and it worked. Cleveland
became the only city to win three All-America City awards within
a 5-year period and not because of the mayor but because of the
public-private partnership that was established of uniquely involv-
ing the private sector in the governance of the city of Cleveland
and solving the problems that confronted it.

A key player was the Financial Supervisory Commission. I recall
convincing the Ohio Legislature that the commission’s membership
should include stakeholders and not be completely controlled by the
State. The commission developed a financial recovery plan and es-
tablished a criteria that had to be met in order to terminate it, and
that is laid out in the statute. Certain things had to be done in
order for the commission to go away. I chose to keep the commis-
sion intact as long as I could.

One of the things that the legislation provided for us was that
we could borrow money to repay the misspent bond funds. I de-
cided that we would earmark money from the city income tax and
pay it off over a period of years rather than borrowing money to
repay money that we had already borrowed on. We saved the city
$24 million in interest by taking the long route instead of doing it

easy.

Now it took us 7 years. In fact, we had a big burning of the notes
celebration. But it kept the Financial Supervisory Commission also
there, and I refer to it as the rudder I needed when we went
through stormy weather.

I think it’s imperative that the mayor fully cooperate with the
advisory board. I think it is also important to recognize that a posi-
tive working relationship with the city council was crucial to our
moving our collective agenda forward, we put the city first, and one
of the things that legislation provided is that any new legislation


COMMITTEE ON GOVERNMENT REFORM AND OVERSIGHT
WILLIAM F. CLINGER, JR., Pennsylvania, Chairman

BENJAMIN A. GILMAN, New York

DAN BURTON, Indiana

CONSTANCE A. MORELLA, Maryland

CHRISTOPHER SHAYS, Connecticut

STEVEN SCHIFF, New Mexico

ILEANA ROS-LEHTINEN, Florida

WILLIAM H. ZELIFF, Jr., New Hampshire

JOHN M. McHUGH, New York

STEPHEN HORN, California

JOHN L. MICA, Florida

PETER BLUTE, Massachusetts

THOMAS M. DAVIS, Virgin’

DAVID M. McINTOSH, Indiana

JON D. FOX, Pennsylvania

RANDY TATE, Washington

DICK CHRYSLER, Michigan

GIL GUTKNECHT, Minnesota

MARK E. SOUDER, Indiana

WILLIAM J. MARTINI, New Jersey

JOE SCARBOROUGH, Florida

JOHN B. SHADEGG, Arizona

MICHAEL PATRICK FLANAGAN, Illinois

CHARLES F. BASS, New Hampshire

STEVEN C. LATOURETTE, Ohio

MARSHALL “MARK” SANFORD, South
Carolina

ROBERT L. EHRLICH, JR, Maryland

CARDISS COLLINS, Minois

HENRY A. WAXMAN, California

TOM LANTOS, California

ROBERT E. WISE, JR., West Virginia

MAJOR R. OWENS, New York

EDOLPHUS TOWNS, New York

JOHN M. SPRATT, Jz., South Carolina

LOUISE McINTOSH SLAUGHTER, New
York

PAUL E, KANJORSKI, Pennsylvania

GARY A. CONDIT, California

COLLIN C. PETERSON, Minnesota

KAREN L. THURMAN, Florida

CAROLYN B. MALONEY, New York

THOMAS M. BARRETT, Wisconsin

GENE TAYLOR, Mississippi

BARBARA-ROSE COLLINS, Michigan

ELEANOR HOLMES NORTON, District of
Cotumbia

JAMES P. MORAN, Virginia

GENE GREEN, Texas

CARRIE P. MEEK, Florida

FRANK MASCARA, Pennsylvania

CHAKA FATTAH, Pennsylvania

BERNARD SANDERS, Vermont
(Independent)

James L. CLARKE, Sta/f Director
KEVIN M. SABO, General Counsel
JuDITH McCoy, Chief Clerk
BuD MYERS, Minority Sto/f Director

SUBCOMMITTEE ON THE DisTRicT OF COLUMBIA
THOMAS M. DAVIS, Virginia, Chairman

GIL GUTKNECHT, Minnesota

JOHN M. MCHUGH, New York

STEVEN C. LATOURETTE, Ohio
MICHAEL PATRICK FLANAGAN, ITlinois

ELEANOR HOLMES NORTON, District of
Columbia

CHAKA FATTAH, Pennsylvania

BARBARA-ROSE COLLINS, Michigan

EX OFFICIO

WILLIAM F. CLINGER, JR., Pennsylvania

CARDISS COLLINS, Mlinois

RONALD HAMM, Staff Director
ROLAND GUNN, Professional Staff Member
ALVIN FEIZENBERG, Professional Staff Member
Howarp Denis, Counsel
ELLEN C. BROWN, Clerk
CEDRIC HENDRICHS, Minority Professional Staff

ay


46

be financially responsible for the costs incurred in getting itself out. But the city
should not have to pay more than was absolutely necessary for oversight, and the
three original agencies should function as outlined below.

e Financial Control Board, since sunset, continues to play an important role.
It reviews the city’s budget but does not have any responsibility for approving the
city’s budget and financial plans.

1e requirement that the control board approve city contracts and city borrowin;
is also suspended. The control board monitors the possible occurrence of any of the
five triggering events for reimposition of control and must formally consider each
event annually, publishing its determination that none has occurred.

The Office of the State Deputy Comptroller, continues to provide thorough, de-
tailed analysis of the city’s finances, and provide a potential back up in the event
of furture trouble.

The Municipal Assistance Corporation no longer issues new bonds. Nonetheless,
its existence is important because of its excellent reputation on Wall Street and in
the bond markets, and because of its vital connection to city and state credit ratings.
It also should remain organized to retain its ability to:

* issue debt on the city’s behalf should the city hit its debt limit under the
state’s equalization law

* initiate refundings should the interest-rate environment be favorable

* as part of a comprehensive, all-inclusive plan to aid the city, issue new debt
or stretch out old debt

In sum, it is in the interest of the city, the state, and the bond markets, that over-
sight be strong and attentive. At the same time, redundancy is a problem, and lead-
ership is required in times of approaching crises.

APPENDIX A

STANDARD & POOR'S RATING OF NYC GO BONDS

1974: A rating
April 75: rating suspended

arch 81: suspended rating went to BBB
mid-year 85: BBB went to BBB+
Oct. 87: BBB+ went to A—
rating 1995: A—
The rating today stays at A—. But there have been a couple of close calls;
Oct 1990: “credit watch negative,” S&P saying there was potential for a downgrad-
ing in the short run
Feb 1991: rating confirmed without downgrading, but S&P said the outlook for the
rating remained negative with a chance that rating would go down
June-July 1993: fairly well publicized that the rating, while not downgraded, was
in difficulty.
Today the negative outlook remains. S&P is taking a hard look at the financial plan
right now. While there is no reason to think Mayor Giuliani won't stay the course,
the city is now going on four years of “negative outlook.”

MOODY'S INVESTORS SERVICES RATINGS OF NYC GO BONDS

7/16/65 A to Baa
5/3/68 Baa to Baal
12/18/72 Baal to A
10/2/75 A to Ba
10/29/75 Ba to Caa
5/24/77 Caa to B
11/19/81 B to Bal
11/9/83 Bal to Baa
12/17/85 Baa to Baal
5/3/88 Baal to A
2/11/91 A to Baal

Mr. Davis. Mr. Regan, thank you very much.

We are going to go now to questions, and I'll start by first of all
thanking you both very much for coming here. Once again you give
a lot of encouragement to the process, which may look very dark
right now, but New York came out of it very well, and you probably


30

sector demands that today, demands it, and the work force has got
to understand that they have got to be part of the solution and not
the problem, and I say those words in all due respect because I
don’t know what the situation is here in terms of the work force
here; they may be the most efficient in the world. So if they are,
God bless.

Ms. Norton. Thank you, Governor Voinovich.

Mr. Davis. Thank you very much.

I would now like to recognize the chairman of our full committee,
the gentleman from Pennsylvania, Mr. Clinger.

Mr. CLINGER. Thank you, Mr. Chairman, and, Governor. It’s al-
ways a delight to have you here and to give me the opportunity to
commend you on the marvelous job you did in Cleveland and are
doing in Ohio.

It wasn’t that long ago, I can remember one of the standard gag
lines was, “The last one out of Cleveland please turn out the
lights,” and I think you perhaps as much as anybody made that
sort of an obsolete line and no longer operative.

I thought I'd use this opportunity also to report to you as one of
the great country’s leaders on the question of unfunded mandates
that we are coming close, I believe, and hopefully today we might
actually see an agreement between the two bodies on that issue,
and that would lead me to the question was that, in terms of your
stewardship in the city of Cleveland, were unfunded mandates im-
posed by either the State or the Federal Government as part of the
problem that you had to deal with?

Governor VoINovIcu. First of all, Mr. Chairman, I want to thank
you very much for your leadership on unfunded mandates. Without
your work this last year and this year, we wouldn’t be where we
are today. I really appreciate that.

The interesting thing in those days was the money that we were
getting that was cutoff. What happened was, as the deficit became
larger, Congress became more creative in how they were going to
fund some of these mandates, and, as you well know, lay that
has grown, at least in Ohio, to about 12% cents of every $1 spent
for mandates, and if you don’t do something about the current
mandates cities have—and I’m urging you to do that after you get.
this done. We want to go back. Your regulatory bill that you passed
in the House I think is great, and I’ve talked to Senator Dole about
doing the same thing. But get back and look at some of this stuff.
As I say, by 1998 it will be 25 percent.

The fact is that that wasn’t a real—the problem that it is today
for the cities, but—and I have no idea of what impact mandates are
having on the District. Somebody might be interested to look at
that to see. Maybe there’s an area where you might let up on some
stuff that might make some money available to them.

In fact, one of the things that you really ought to look at from
a big picture point of view is that, if we are talking about cutting
back—and I know you are going to cut back on programs for State
and local governments, we know that’s going to happen, but one of
the ways that you can help free up some of the resources is, first,
don’t pass more unfunded mandates; and, second of all, get rid of
some of the stuff that’s there that would free up some of those dol-
lars so that we can deal with some of the—have some more flexibil-


39

agement. I can go into those names, but, candidly, everyone in New
York with those names has gone forth to the private sector, and I
can encourage you, when you go to the private sector, they are all
in the six and seven-figure earnings capacity now. It didn’t hurt
them, they learned a lot, and they went forth to make their for-
tunes.

I have even spoken to the longest-serving member of that board,
Mr. Stan Shuman, who is still on the board after these 20 years,
and he has agreed if you want him to come as an expert and tell
you what it’s like to serve on the board for 20 years.

I don’t expect this board will last that long. I hope not. Indeed,
we are planning for a reunion of our group in April. In the course
of our discussions they have all agreed that if you want them to
help, they will be here to do it. They do not mind coming to the
District. of Columbia. They have other reasons to be here, and
that’s the kind of support that I'd like to see this committee get.

Let me state what I think is a proper metaphor for a control
board, and I looked to the cerebral regions to come up with this
metaphor. I think it should be looked upon as a “guardian angel.”
Critics may look upon the control board as an intrusion on home
tule and may suggest a guardian angel is more like Lucifer, but I
see the board as more resembling the Archangel Michael with his
sword in his scabbard ready to smite waste and inefficiency, to
safeguard the security of the residents and save the children and
needy from hardship caused by lack of resources at this time.
That's the job of the control board.

In no case, in no case in 20 years, in New York has any mayor
ever raised a complaint or charge of intrusion on the conduct of the
city. In fact, as I heard Mayor Giuliani, he said he only wished that
his predecessor had used the board more. But access to the board
to safeguard the financial plan from those excesses that began to
creep into the plan because times were rather good, and payrolls
began to edge upward, and—if the control board had taken a closer
look, perhaps New York would not have the difficulty that Mayor
Giuliani faced.

So the control board is a good watchdog, a good guardian. It does
not—does not come forcing its way into city hall but is there to
help, and the principal feature of that board is such. I don’t know
how any mayor, I don’t know how Mayor Barry or any mayor that
is in today’s complex situation can evolve a city budget in 1 year
or for 1 year ahead.

The beauty of a control board is that it sets up a financial plan,
and in that board plan not 1 year, but in 1975, in September, the
financial control board, with the Municipal Assistance Corp., laid
out a plan of financing for the city of New York through 1978, actu-
ally a 4-year plan. en that plan is there, this is what happens.
The mayor can see the resources he is going to get 3, 4 years ahead
and can therefore plan more effectively for the use of those re-
sources. In addition, the mentor, whoever it may be, in this case
the executive branch, once he puts those resources in the financial
plan, once that agency puts the resources in the financial plan,
they must be delivered, you can’t cut back. So it’s a dual obligation,
one to perform proper planning, the other one for the renderin,
agency, whoever it may be, on the advice of this committee, to bin


25

plan and established the criteria that had to be met in order for it to terminate its
work. I chose to keep the Commission in tact as long as I could, because it provided
a buffer between me and our city council.

It is imperative that the mayor cooperate fully with advisory boards of this na-
ture. My positive, working relationship with city council was crucial in moving for-
ward with our collective agenda. We put the city first. An example of this unity in-
volved a policy we instituted requiring the stamp of approval by our Commission
on any new piece of legislation that dealt with Cleveland’s finances. This kept all
of the players “on the same page.”

Let me briefly touch on the major public-private partnerships we put in place in
Cleveland. The Operations Improvement Task Force was an all-volunteer organiza-
tion of 89 full-time Cleveland executives, loaned by 62 companies, to determine how
city services could be provided in a more efficient, economical manner. The Task
Force was funded by two of Cleveland’s major foundations and by the business com-
munity. Aller some $5,000 houra of pro bone work, the O.[.T. made 650, rec-
ommendations, of which approximately 75 percent were ultimately implemented.

We formed an urban coalition called the Cleveland Roundtable to address commu-
nity issues. The roundtable’s major areas of focus have included housing, employ-
ment, minority business development, police-community relations, racism, and edu-
cation. It empowered people who normally lacked “clout,” to sit at the table with
community leadership as decisions were made about their quality of life. The round-
table made a positive difference in all of these areas, with the possible exception
of education. But just last week, a federal judge placed the Cleveland schools under
state control—a long-overdue move that should help put the last piece of the puzzle
in place.

ir business community created Cleveland Tomorrow to lend their expertise to
addressing our long-term economic challenges. This group commissioned two studies
to identify critical baseline data, and then proceeded with a three-part strategy to

ster economic development, focus city government resources on job-creation, and
rebuild the central city and Cleveland's neighborhoods. Cleveland Tomorrow is still
regarded as, perhaps, the best public-private partnership of its kind in the nation.

ver the years, other public-private partnerships were created to address specific
needs or problems. For example, Build Up Greater Cleveland was a coalition of pub-
lic officials and civic leaders whose sole mission was identifying ways to rebuild the
city’s old and crumbling infrastructure.

e story of Cleveland's comeback is much more involved than I could possibly
impart in these few minutes. Therefore, I am Jeaving with you some materials that
should fill in more of the details. I urge you to travel to Cleveland and spend a day
with the people who helped make it happen. I would be honored to personally assist
the members of this Subcommittee in seeing, firsthand, the Cleveland miracle.

The members of this Subcommittee have undertaken a challenge that, perhaps,
comes along only once in the lifetime of a city. | submit that the surest’ means to
success will be a civic architecture that unites all elements of this community and
forges a public-private partnership dedicated solely to transforming the District of
Columbia into the “shining city on the hill” we all want it to be.

Mr. Davis. Governor, thank you very much.

You know, as you go back to the deep dark days of 1979 and take
a look at what has transpired in Cleveland since that time, with
the partnerships that were created and people working together, I
guess it’s got to give some hope to the people of the District right
now who are hearing only bad news. You didn’t know at that point
how it was going to turn out either—I’m sure there was a lot of
uncertainty with you—do you have any comment on that for the
citizens of the District who are looking now, with nothing but bad
news ahead of them, and it appears the debt goes higher and the
layoffs are upon us and eve: fing else?

Governor VoINovicu. Well, I think that, you know, the problems
that we have are created by people and people can solve the prob-
lems, and I think that one of the things that we were able to do,
because of gathering everyone together and understanding that we
had a crisis and that if we were going to be successful that we had
to work together, I think that they had—they understood that, un-
less they intervened and got involved, it was going to get worse,



9

only downsizing but taking the money you save from that and put-
ting it back into the private economy so that you keep jobs, retain
jobs, and have a good argument for people bringing businesses to
your city because they can make and see the possibility of making
a profit.

Bo these are some of the things that we have done that I think
have worked well so far.

Starting on January 1st of this year, we began taking on the sec-
ond part of New York City’s budget that helped to create the struc-
tural deficit, which is the enormous expenditures on entitlement
programs which are out of line with the rest of the country, some-
times by factors of 3 and 4 to 1, sometimes as high as 6 to 1.

On January 1, we initiated a Workfare Program, the first really
in New York City, where we now hire able-bodied individuals to
work 20 hours a week in exchange for their benefits. That again
was also negotiated with the municipal labor unions because, what
we had to do given the very extensive collective bargaining agree-
ments that we have, we had to convince them that we were going
to assign people who were on welfare to jobs that wouldn’t other-
wise be available for union workers, jobs that actually weren’t
being done by the city any longer. We found those jobs in the
Transportation Department in dealing with roads and _ public
spaces, we found those jobs in the Sanitation Department dealing
with snow removal and trash removal, we found those jobs in the
Parks Department in cleaning and maintaining the parks of the
city, and in many, many other areas, so that when a person applied
for welfare benefits, unless that person was isabled or there was
some other reason, if the person was an able-bodied person who
could work, the person would be assigned to a work assignment the
next day, and that work assignment would be for about 20 or 23
hours a week, which is the limit that is imposed by State law. This
is the largest Workfare Program in the United States, ongoing
Workfare Program in the United States, and although it has only
been in operation for a few months we are already seeing very,
very dramatic results as a result of it.

We are also very confident that if we can demonstrate that
workfare can work in New York, workfare can work anywhere,
given the climate in New York and the difficulty in people accept-
ing it to start with.

Nothing is more fundamental to the philosophy of my adminis-
tration than the goal of providing jobs for people because I think
jobs are the only—is really the only social program that ultimately
really works to complete someone’s life, and T think that a city has
to understand that, in the way you make choices, with the size of
your government, you can either retard or expand the possibilities
of jobs.

inally, maybe the most important area in which we have made
a good deal of change is in convincing the bureaucracies in the city
and the commissioners who run those bureaucracies that they in
fact can manage more effectively with considerably less people,
that the notion that you could not reduce the number of govern-
ment employees and maintain services or even improve services is
a notion that ignores the fact that city government is inefficient.


61

On receipt of the quarterly reports, the Authority must review and publicly report
on the City’s progress in managing ita fiscal affairs. In addition, the Authority is
required to issue an annual report on its operations to the Governor and to leaders
of the State legislature, The public scrutiny to which the Authority’s operations are
subjected, together with its public reporta on the City’s efforts to manage its finan-
cial affairs Places great pressure on City officials to adhere to the terms of the finan-
cial plan.

meetings of the Authority are announced in advance, and are open to the pub-
lic. The Authority's operations are closely covered by the press, and widely reported
throughout the Philadelphia region.

City officials have a strong incentive to cooperate with the Authority because of
the need for access to financial markets. But the PICA statute provided additional

wer by authorizing the board to withhold State funds and selective bond proceeds

from the City if City officials failed to comply with the financial plan.

PICA OPERATING PHILOSOPHY

From the beginning, PICA board members chose @ path that emphasized coopera-
tion rather than confrontation with City officials, While preserving all powers, au-
thority, and independence granted by the enabling statute, board members viewed
their role as helping City officials to help themselves to restore fiscal stability and
adopt sound fiscal practices. No effort was made to substitute the board’s judgement
on priorities of public spending or levels of taxes for the judgement of elected offi-
cials on such issues. The main objective was to see that the financial plan provided
for a balanced budget and that City officials adhered strictly to the plan.

‘A major device for promoting sound fiscal practices was the board's requirement
to examine, and if necessary question the accuracy of financial data and the as-
sumptions on which revenue and spending projections were based in the financial
plan. The plan was expected to be based on reasonable estimates of revenue and

nding, While the board did not set priorities in budget allocations, it could, and
did, suggest areas in which expenditures did not seem consistent with sound fiscal
practices and the protection of health and safety.

Board members worked hard to achieve consensus among themselves on all the
major decisions regarding the review and approval of the five-year financial plan
and the quarterly reporte on progress. During the thirty months { chaired the board,
all our decisions were made with a unanimous vote.

THE FIVE-YEAR FINANCIAL PLAN

The first five-year plan developed by Mayor Rendell and adopted by the City
Council chose not to raise taxes, or to reduce services in pursuit of a decline in the
deficit. Instead, the plan was designed to reduce the cost of providing public serv-
ices, This was accomplished by seeking $353 million in reduced labor costs, and
$658 million in savings from productivity and management reform over the five year
duration of the first financial plan. Labor savings were expected to comprise 60 per-
cent of the total cost reductions in the first year of the plan and declining to 30 per-
cent of savings in the fifth year as management savings phased in over time. The
labor savings were to be achieved by workforce reductions through attrition, the
adoption of new work rules, and the negotiation of a new labor management agree-
ment after the expiration’ of the existing contract during the first year of the
Authority's operation.

Management and productivity savings were to be achieved through the adoption
of a broad range of management initiatives in virtually every department of City
government. To assist in identifying potentia) cost savings opportunities, the Mayor
Organized a private sector task foree headed by one of the City’s leading, corporate
executives, The task force conducted reviews of City operations, and made rec-
ommendations that were implemented with the urging of the Mayor and his senior
st

With adoption of the Intergovernmental Cooperation Agreement and the Five-
Year Financial Plan, PICA moved forward toward its first borrowing on the City’s
behalf. The bond issue was for $475 million, with proceeds allocated as follows:
Deficit Reduction
Capital Projects.
Productivity Bank
Issue Costs

Total

..$457 million


77

a long-time Republican member of the city council and—I will men-
tion him, Thatcher Longstrat—whom I had known for many years.
He is a grand old man of the Republican Party. He is not so old.
What is he, 73 now? He is in his 70’s now, but a great guy, really.
He is a wonderful man. .

Thatcher said, look, you are crazy. He said, no member of city
council is going to buck the unions and vote for this with an elec-
tion coming up. And they didn’t. This was in October. There was
a period of time when we could do nothing. We were absolutely un-
able to move forward with that agreement until after the election.

When the election ended, then the city council came back 2
weeks later and put the clause in and agreed to it, and the inter-
governmental cooperation agreement went forward. So what I am
saying is, when you have resistance, it means that it becomes far
more difficult to get the information that the board needs to do its
job.

Let me mention something else. When we went into office in
June 1991, at the very first meeting we had with the city, we were
asked to extend to Philadelphia a short-term loan to help them
through a cash crisis instead of them issuing a tax anticipation
note and paying usurious rates of interest on it. They wanted us
to come in and use our authority despite the fact that the statute
mentioned very clearly that we had to have an intergovernmental
cooperation agreement and a 5-year plan.

ere was a period of time, I should say, when we could have
extended financial assistance to the District without a plan and
without an agreement in place, a very short window of opportunity.
We took the position that we should not do that for the reasons
that Ron Henry referred to in part of his testimony. Because once
you extend the money without having the agreement in place, with-
out, having the plan in place, then the heat is off. So we said, no,
we want the 5-year plan before we will extend any financial assist-
ance.

That spurred the city, then, to start working on developing the
plan rather than asking us for our assistance in extending money
to deal with the short-term financial crisis.

So to answer your question, without cooperation, it makes the job
very difficult. It makes—there is a pulling and a hauling and an
arguing and court suits and all the rest about our authority versus
the city’s authority and you can’t do the job.

Mr. Davis. Thank you very much. But that, I guess, goes back
to the question, you need to have good board members who will
force those issues, too, on the control board.

Mr. ANDERSON. Oh, absolutely. You need board members who are
absolutely fearless. Listen, I—the mayor was a friend of mine. We
were in high school together. Wilson Goode. And, incidentally, he
never met with the board. I met with him over dinner and we came
to a meeting of the minds about this. And I said, Wilson, we are
here. You might not want us here, but we are here, and you are
there. I respect your position as the mayor of the city of Philadel-
phia.

You have got to respect our position and I never spoke of me as
an individual, but the board itself. You have got to respect what
we have to do and that the people of Philadelphia can reasonably—


AT

got some liaison and some cooperation between groups that had
never been there before that process.

Governor, let me ask you, you had probably the most varied con-
trol board of all of the ones we have looked at because you had
wide representation on it. When the final decisions were made,
were they often split decisions? Were they four to three? Did they
come down along any lines? Would you care to share any com-
ments?

Mr. Carey. No, As Comptroller Regan says, there is a consensus
that develops, and I could go down a list of tough decisions: The
ceiling on the city budget, a moratorium on additional taxes, dis-
missals of thousands of municipal workers, elimination of positions,
the city budget, and freeze on new hiring, a suspension of wage in-
creases, an increase in the transit fare, the imposition of tuition at
the City University for the first time in the history of the city and
State, significant reduction in the capital budget, appointment of a
special mayoral deputy for finance, a professional came in to help
the mayor. Big tough decisions for everybody.

Every one of those passed without a dissenting vote because, as
the comptroller said, you thrash these things out in a political at-
mosphere, but you Took at the future of the body which you are try-
ing to govern. You say for the long pull we have got to take care
of this city, we have got to take care of the District of Columbia,
and I suggest to you it’s is very—it’s a very, I'd say, trying process,
but as mayor—as Governor Voinovich said and as Mayor Giuliani
says, you are surrounded by a private sector that wants to help you
come in and help that decision process.

It's extremely important to bring in those business heads, and I
mention them in passing. Over the course of years, every one of
those individuals were helpful in urging the right decision on the
people in the political system. So the political system works better
when you have this consensus, and it can be achieved. As I said,
we had Democrats, Republicans, we had labor leaders sitting there,
and the labor leaders will challenge the business people to come up
with the right answers. It is a very good thrashing process in
which the truth comes forth, and the truth is what governs the
process.

The benefit to the city is, the local unit of government, it gets
the resource it needs, and they are pledged, and they are delivered.
That isn’t the way it is now. Year to year I don’t think the District
knows what its emolument is going to be and never did. That’s one
of the most difficult things, to run a railroad where you don’t know
where the coal is coming from at the next stop.

Mr. Davis. Great.

Governor Carey has given over a number of his public papers
and addresses on this issue that will be included in the record. I
very much appreciate your doing that because by both of you giving
us some of the substance behind these decisions over the years, it
will add to our record as we draft this legislation and move it
through the Congress.

{The information referred to is on file in the subcommittee.]

Mr. Davis. I just want to quote something. I was just thumbing
through this, having received it this morning, from some testimony


49

your staff. You just can’t let it go on and force future generations
to pay for something that should have been stopped 5 or 10 years
back, That’s unfair, and that we have talked about elections here—
terribly distorts the whole election process, and it distorts what we
believe in in a democracy, that—and I’ve run for office, the Gov-
ernor has—that you distribute services here, and you tax for them
there, and then you run for office, and you go to the electorate, and
they have the services and the taxes to equal. But if a situation ex-
ists where you can deliver more services here and tax less there,
then the democratic process is distorted, and 5 or 10 years from
now somebody faces just the opposite. So of course stop it now,
draw the line in the sand, which is why you are here, and your
committee, and impose the solution, and it will be easier on every-

ody. .

Mr. Davis. Governor, you have balanced eight budgets. Can you
comment?

Mr. Carey. Let me suggest something else which I think can
happen in the District which I believe, candidly, should happen.
You have sort of reached the Plims.il Line now because your per-
sonal income tax level in the city is just about 10 percent. That’s
about where it was in New York City when New York City got in
real trouble. So you can’t go much further into those pockets with-
out people leaving. That’s No. 1.

No. 2, when you do this process something else is going to hap-

en. We are talking block grants, and it’s a great principle of, you

now, devolution to get to the spending levels, a more effective way
of handling funds, and the Governor spoke about that. However,
something else has to occur. At every level of government there are
burdens which are properly borne by that level of government, and
there are those which are beyond that level of government. Two
ways you can handle the overburden in a city Tike Washington.
One, you need collaboration and cooperation in the surrounding re-

gion.

In New York we had the Regional Plan Association which looks
at the complex of New York State, Connecticut, Pennsylvania, and
New Jersey and says these things you should work on together. I
don’t know that that’s happening in the District and Delmarva Pe-
ninsula. I don’t see that exchange and collaboration in the sur-
rounding area. Even many of our employees and visitors come from
that area and go home without sharing in the burden that perhaps
they should. That’s one.

The second thing is, in terms of the planning you need besides
the Metro plan, other ways in which you plan for the future of this
district as a region, and that can come out of this too.

Finally, in terms of burden shifting, when the State was forced
to look at the city condition in New York City—and Yonkers, by the
way, another city that had a control board—we had to say Ok the
time has come, we can’t ask the city to pay for the cost of the
courts, so the State assumed the cost of the courts. The State—the
city, for the first time, gave to the State and the State accepted the
funding of the City University as part of a Statewide system. The
State, in turn, picked up the deficit of the transit fare. So some
burdens will shift from the District, and I heartily encourage this
because you had better look at what you are making this inter-



12

Mr. Davis. But the pro-jobs initiatives that you put forward in
the city, is that at the expense of the suburbs, or does that help
the whole region, as you take a look at it?

Mr. GIULIANI. It no doubt helps the whole region. New York City
accounts for 40 percent of the income of people who live in the two
surrounding counties of New York State, Westchester and Nassau
County. So in essence—and we tax it so this is a two-way street—
Nassau County and Westchester County——

Mr. Davis. You didn’t need to mention that. [Laughter.]

Mr. GIuLIANi [continuing]. Benefit, and we—and we get re-
sources from it. But we are in this together, and one of the things
that I did shortly upon being elected is set up a Metropolitan Re-
gional Council. I meet on a regular basis with the county execu-
tives in the surrounding suburban counties—Nassau Suffolk, West-
chester, and Rockland—and what we try to do is have as many
areas of agreement as possible so that we deal with the State gov-
ernment together, very often, for things that are of benefit to all
of us.

Mr. Davis. But the way it has worked out, is that the whole re-
gion in terms of net jobs for the region goes up. You are not just
raiding each other, you are making the region more economically
attractive.

Mr. GIULIANI. Absolutely. If jobs grow in Manhattan it helps the
suburban counties, because many of the people that work in Man-
hattan live in those counties, many live in the city. By the same
token, if jobs grow in Nassau County, even if the people are living
in Nassau County, they come to shows in New York City, the
come to restaurants in New York City; when we have baseball,
hopefully again, real baseball, they come and watch the Mets and
the Yankees play in large numbers. So this is something where we
benefit each other.

Mr. Davis. That’s great. Thank you very much, and I could spend
all day just talking to you. I think it’s great what you are doing
there, and I appreciate your being here.

I am going to yield now to ranking minority member, Ms. Nor-

on.

Ms. Norton, Thank you, Mr. Chairman.

I want to get straight, Mayor Giuliani, about what your relation-
ship is to what I would almost call a post-control board period.
What is the continuing relationship between New York City and
the control board or the Big MAC?

Mr. GIULIANI. I think along with my two predecessors, Mayor
Koch and Mayor Dinkins, I don’t see any need for the financial con-
trol board any longer for the city of New York. The measures that
I just described to you in reducing spending in the city, reducing
jobs in the city, was something that we brought about as part of
my administration. The control board didn’t recommend it, the con-
trol board didn’t bring it about.

There was a control board for 10 or 12 years before I took office,
and they weren’t able to bring about any of those changes and kind
of watched while the city—city spending grew way out of line with
the level of the economy in the city.

So I think the control board performed an enormously valuable
function during the emergency the city faced in the 1970's, but I