57

take that portion of the debt whose interest rates are above the
going interest rates, refinance that with the full faith and credit of
the Federal Government. Again, that would save us some money in
1995 and to the year 2013.

I indicated earlier we are asking the Congress for budget author-
ity of $3,521 million. That is the $3,254 million added on to the
$267 million that will give us that budget authority.

Finally, as I conclude in this direction, let me say that I am com-
mitted, and we have at this table and this administration some of
the best talent in America in public service committed to doing our
share in this equation. We are prepared to make the tough deci-
sions to reduce this budget, as I said earlier, by $224 million in
service cuts. Our employees are being asked to do $70 million, and
the Congress is being asked to do $267 million. And we will talk
about the Medicaid budget in a few minutes.

I would like to ask Mr. Pohlman to talk about that, and then
after I conclude this—but the view has been that home rule for the
District established a clean financial slate for DC residents. The re-
ality is that when audits were finally possible in 1979, it was found
that more than $279 million in unpaid bills were carried over from
the Federal Government.

In addition, as I documented earlier in this testimony, unfunded
pension responsibilities for Federal employees were transferred to
future District taxpayers. As I said earlier, it is time for the Fed-
eral Government, starting October 1 to begin to address its share
of this $295 million pay-as-you-go system.

The view that DC has a large and prosperous tax base is not
true. As we have seen, we can only tax 43 percent of the property.
We can still negotiate shared responsibilities. We also have to work
at how we become more efficient in our own operation. We also
have to move toward transferring a significant number of State
functions to the Federal Government with the DC government
doing the rest.

The view also is we are not responsible managers. Let me sa:
that we have a financial management system that is antiquated.
It was the state-of-the-art in 1980-81. But I am here to tell you
that we need reinvestments in it. We need technology improve-
ments in it. We need to look around and find out who has a state-
of-the-art financial management system that can give us on-time,
on-line information.

Someone told me the other day, last night, one staff member
said, if the script is badly written, you can have the best managers
in the world and we guarantee you the page is going to turn out
bad. The same is true of our financial management system. It is
not adequate to meet our needs in 1995-1996. On the other hand,
it does give us some basic information about our obligations and
our spending. We need to invest in infrastructure in that.

Also, there has been some discussion about the relationship be-
tween our citizens. We are forging a new relationship with our citi-
zens in the sense that a number of people are coming forth to vol-
unteer to help out. In fact, my wife heads a group called the Wish
Foundation, which has forged a new partnership between citizens
and the recreation department and they have donated over


121
Exhibit 6—Annual Rea! Revenue Growth 1988-93—Continued

Prjcted
Percent soe 2000

Property tox. 52 07
Total... -01  -18

Source Oistret of Columbia Government

None of this is surprising. All American cities are facing dwindling populations
and revenues. The District is no different. But the impact of population loss hits
the District’s finances much harder (han it hits other cities’ finances.

The District is quite different from other American cities in how it gets its reve-
nues (Exhibit 7). The District receives one-half of its revenues directly from income,
property, and sales taxes. The average city we examined receives only 15 percent
of its revenues from these three sources. Other cities get the majority of their fund-
ing for the same services that the District provides fom other governmental enti-
ties—Federal, state, and county. The loss of their middle class population is cush-
ioned by these intergovermnental transfers. The District feels the effect of popu-
lation and taxpayer loss immediately and without the potential of offsetting funds
from other governmental entities.

Exhibit 7
REVENUE SOURCES FOR COMPARABLE ACTIVITIES 1993
Percent
100% —
Federal
externa | payment Significance
funding? [732-9 + District aver 3 imes more
feliant on local taxation
Other city 19 7 + Other cities can tap wider
revenues \ base through state and
Saies taxes “4 \ county funding
Income tax 16
ule
Property tax 18 = | 15% vs, 49%
oc Average of
other cities**

+ Extemal funding includes direct, indirect and transfer payments by federal, state, county and
other local jurisdictions,
“Other cities = Batimore, Boston, Cloveland and Seattle

Let’s look at the District’s three sources of tax revenue a little more closely, start-
ing with income taxes. As is well known, the District’s population has been in de-
cline for the past quarter century, losing out to the city’s suburbs (Exhibit 8). While
the District had 55 percent of the area’s residents in 1950, today less than 20 per-
cent live in the District. Much of this decline has been due to the exit of the middle
class, and the resulting decline in residents with jobs has been dramatic, approxi-
mately 68,000 residents from 1988 to 1993. Interestingly, however, the District con-
tinues to be the chief source of jobs for the area’s workers, and over the past 5 years
it has held its own as an employer (Exhibit 9). As a result of these two trends in
residence and employment, the District has the second greatest imbalance in the na-
tion between the share of the area’s people working in the city and the share living
in the city (Appendix E). Not surprisin; if , the District leads the nation in the per-
centage of income earned in the city by nonresidents (Exhibit 10). Two of every
three dollars earned in the District are earned by a nonresident.


23

The District’s future financial situation continues to be bleak. As I will explain
in more detail later, the District has abandoned its earlier plans to close the spend-
ing gap on its own and now secks substantial federal assistance. According to the
District's own estimates, fiscal rer 1995 expenditures could be nearly $3.9 billion,
$631 million above the $3.25 billion congressionally-mandated spending cap. The
District has proposed to reduce this gap through its own efforts by $224 million and
has indicated that the remaining $407 million be closed by $267 million in addi-
tional federal funds and the lifting of the $140 million congressionally mandated
spending cut.

The District's cash position is especially precarious. Given the continued spendin;
levels above budgeted amounts, it is now clear that the District will run out of casl
this summer. In fact, today the District is insolvent—it does not have enough cash
to pay all of its bills.

My written statement today addresses the following areas:

(1) the evolution of the District’s crisis,

(2) congressional actions related to the fiscal year 1995 budget,

(3) our analysis of the District's fiscal year 1995 first quarter financial report,

(4) the District’s recent actions to address the financial crisis, and

(5) the District's cash situation.

To develop information for this testimony, we met with various District officials,
including extensive meetings with the District’s Office of Financial Management.
We also met with officials of the accounting firms, Bert Smith and Company and
Coopers & Lybrand, who audited the fiscal year 1994 financial statements. We are
currently evaluating the results of that audit. We began this current phase of our
work in October 1994 and our work on both the District’s financial situation and
the fiscal year 1994 financial statement audit is continuing.

We did this work in accordance with generally accepted government auditing
standards; however we did not verify the accuracy of information obtained from the
District's financial and management information systems. We have attempted to en-
sure that data we use in this testimony is accurate, but because of the poor state
of the District’s information systems, some data may need to be adjusted as we con-
tinue our work.

Included in attachment I of my statement is a time line of major events that have
occurred since we issued our report last summer. As I go through my statement,
it may be useful to refer to this timeline. First, 1 want to briefly discuss the evo-
lution of the District’s financial cri

THE EVOLUTION OF THE DISTRICT'S FISCAL CRISIS.

The District of Columbia is a unique entity, being the only governmental unit
with responsibilities traditionally executed by state and county, as well as city, gov-
ernments. As such, it provides a variety of services and programs for its residents
and visitors, including police and fire protection, local transportation, Medicaid, hos-
pital care, sanitation, employment assistance, education, and housing. The District
currently provides these services with a total budget of $4.4 billion in general fund
revenues. The Congress appropriates a proximatel y $3.3 billion of this total. These
appropriated revenues include a federal payment of about $650 million and $2.7 bil-
lion of locally generated income taxes, property taxes, sales taxes, and other local
sources of revenue. In addition, the District receives approximately $1.1 billion in
non-appropriated funds that include federal grants, as well as reimbursements for
services. The largest of these non-appropriated funds are the federal portions of the
Medicaid and Aid for Families with Dependent Children programs. The District’s
annual federal payment is intended to compensate the District for nonreimbursed.
services provided to the federal government and deficiencies in the District’s tax
base resulting from federally imposed limitations on the District's ability to raise
certain tax revenues.

Total District revenues have increased by 27 percent since fiscal year 1989. The
largest percent: wth has occurred in the non-appropriated funds and the fed-
eral payment Which grew at 68 percent and 43 percent, respectively. During the
same period, the District’s local sources of revenue grew by 13 percent.

The District of Columbia Self-Government and Governmental Reorganization Act
(Home Rule Act), Public Law 93-198, confers limited autonomy to the District and
provides for congressional oversight. For example, the act requires the District to
aubmit balanced budgets to the gress and precludes the District from obligating
or expending funds unless approved by the Congress. The District annually prepares
budgets that include appropriated general fund revenues and expenditures, a capital
projects plan for the next 5 years, and a five year financial plan.



COMMITTEE ON GOVERNMENT REFORM AND OVERSIGHT

WILLIAM F. CLINGER, JR., Pennsylvania, Chairman

BENJAMIN A. GILMAN, New York CARDISS COLLINS, tlinois
DAN BURTON, Indiana HENRY A. WAXMAN, California
CONSTANCE A. MORELLA, Maryland TOM LANTOS, California
CHRISTOPHER SHAYS, Connecticut ROBERT E. WISE, Jn., West Virginia
STEVEN SCHIFF, New Mexico MAJOR R. OWENS, New York
ILEANA ROS-LEHTINEN, Florida EDOLPHUS TOWNS, New York
WILLIAM H. ZELIFF, Jk, New Hampshire JOHN M. SPRATT, JR., South Carolina
JOHN M. MCHUGH, New York LOUISE McINTOSH SLAUGHTER, New
STEPHEN HORN, California York
JOHN 1. MICA, Florida PAUL E. KANJORSKI, Pennsylvania
PETER BLUTE, Massachusetts GARY A. CONDIT, California
THOMAS M. DAVIS, Virginia COLLIN C. PETERSON, Minnesota
DAVID M. MCINTOSH, Indiana KAREN L. THURMAN, Flonda
JON D. FOX, Penneylvania CAROLYN B. MALONEY, New York
RANDY TATE, Washington THOMAS M. BARRETT, Wisconsin
DICK CHRYSLER, Michigan GENE TAYLOR, Mississippi
GIL GUTKNECHT, Minnesota BARBARA-ROSE COLLINS, Michigan
MARK E. SOUDER, Indiana ELEANOR HOLMES NORTON, District of
WILLIAM J. MARTINI, New Jersey Columbia
JOE SCARBOROUGH, Florida JAMES P. MORAN, Virginia
JOHN B. SHADEGG, Arizona GENE GREEN, Texas
MICHAEL PATRICK FLANAGAN, Illinois CARRIE P. MEEK, Florida
CHARLES F. BASS, New Hampehire FRANK MASCARA, Pennsylvania
STEVEN C. LATOURETTE, Ohio CHAKA FATTAH, Pennsylvania
MARSHALL “MARK” SANFORD, South

Carolina BERNARD SANDERS, Vermont
ROBERT L. EHRLICH, JR., Maryland (independent)

JAMES L. CLARKE, Stuff Director
KEVIN SABO, General Counsel
JUDITH McCoy, Chief Clerk
Bup MYERS, Minority Staff Director

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

GIL GUTKNECHT, Minnesota ELEANOR HOLMES NORTON, District of
JOHN M. McHUGH, New York Columbia
STEVEN C. LATOURETTE, Ohio CHAKA FATTAH, Pennsylvania

MICHAEL PATRICK FLANAGAN, Illinois. BARBARA-ROSE COLLINS, Michigan

Ex OFFicio

WILLIAM F. CLINGER, JR., Pennsylvania CARDISS COLLINS, Ilinois
RON HAMM, Stoff Director
ROLAND GUNN, Professional Sta/f Member
AL FELZENBERG, Professional Staff Member
ELLEN BROWN, Clerk
‘CepRic HENDRICKS, Minority Professional Staff

ab


117

ASSESSING THE DISTRICT OF COLUMBIA'S FINANCIAL FUTURE—A REPORT TO THE
FEDERAL Crry COUNCIL

COLEADERS: MCKINSEY & COMPANY, INC.; URBAN INSTITUTE—OCTOBER 1994
Preface

The Federal City Council requested this report on the financial problems facin,
the District of Columbia. The Council's intent is to provide an objective and factu
assessment of:

« What will happen to the District’s financial position over the next several

years if recent trends continue unaddressed

‘* Why the District is in such a poor financial position

« The illustrative major elements of a program to “fix” the city’s financial prob-

lems.

The Council intends to use this report to provide context and focus for the devel-
opment of an “action program” to improve the economic and social health of the Dis-
trict of Columbia. We now plan to engage in broad consultations with the stakehold-
ers through focus groups, community meetings and public opinion surveys. The
opinions and suggestions from the community consultation effort will be incor-
porated into a consensus-driven action plan.

‘The Council greatly appreciates the pro bono contributions of the professional and
nonprofit institutions that prepared this report. They worked under the leadership
of Larry Kanarek and Les Silverman of McKinsey & Company and Jim Gibson of
the Urban Institute. The following people were on the project team.

McKinsey & Company, Inc.—Thomas W. Jansen, Larry S. Kanarek, Lester P.
Silverman
Urban Institute—Alan J. Abramson, James O. Gibson, Matt Vandergoot
Arthur Andersen—Rachelle Bures
Deloitte & Touche—Ravi Ruparel
“ANN MCLAUGHLIN
President, Federal City Council.
October 7, 1994

ASSESSING THE DISTRICT OF COLUMBIA'S FINANCIAL FUTURE,

This report is an attempt to identify and assess the macro demographic and eco-
nomic forces causing the financial crisis that the District of Columbia now faces. We
have been guided not by opinions, anecdotes, or preferred solutions, but by facts.
Most of these facts will not be new; almost all of them have been repo in the
press at some length. We have attempted, however, to organize them in such a way
that they tell an inarguable story about what has brought the District to financial
distress and about what steps must be taken to put the city on a firm financial foot-
ing. We hope that this objective assessment will help those involved in bringing
about long-term solutions to the District’s problems.

We should also note what this report docs not try to do. First, we have avoided
the political questions about the District's governance structure that are being ac-
tively debated by others. That topic is simply outside our scope. We view such gov-
ernance options (e.g., statehood, annexation) as means to the end of dealing with
the financial facts presented here.

Second, we discuss the flight of the middle class from the District to the surround-
ing suburbs and the critical role that it is playing in the erosion of the District’s
tax base. Since our report is a financial one, however, we do not analyze the causes
of this trend or put forth recommendations to reverse it. But we caution that with-
out stabilizing or increasing its middle-class population there is little hope of put-
ting the District on a long-term stable financial footing.

‘inally, we have not attempted to update or replicate the excellent work of the
Rivlin Commission (Financing the Nation’s Capital, November 1990) and its analy-
sis of the District’s budget. Rather, we have accepted this work and have simply
tried to place it in the larger context of the city’s overall financial position.
Summary

The District’s financial plight presents an apparent paradox. Not only is the
Washington metropolitan area one of the richest regions in the United States, the
District itself is among the better-off cities, with a large, stable employer (the Fed-
eral government) and attractions that draw considerable business and tourist activ-
ity. Nevertheless, the District has been struggling to balance its budget in recent
years and is projecting a growing shortfall. What explains this paradox of a finan-
cially-distressed city amidst relative prosperity?


66
District ot Columbia Current Appropriated FTE Count—Continued

Current
Neen a, ar
‘Advisory Neighborhood Committee
Office of the Mayor
Office of the Secretary
Office of the Inspector General
Office of Communications
Office of Intergovernment
fice of the City Administrator
Depertment of Administrative Serwces
Contract Appeals Board .....
Office of the Dep't. Mayor for Finance
Office of the Budget
Office of Financial Management ....
Department of Fin. & Revenue
Board of Elections & Ethics
Off. of Campaign Finance
Public Employee Relations
Office of Employee Appeals
Office of Grants Mgmt .....
Tota os 1us 38
EOONOMIC DEVELOPMENT AND REGULATION:
Off. of Dep't. Mayor for Econ. Development 10
Office of Banking & Financial Institutions 6
Office of International Business .. 1s
Office of Tourism & Promotion 4
Office of Planning 40
Office of Zoning .. 7
Department of Housing and Community Development. 13
Department of Public & Assisted Housing 3
Board of Appeals & Review 2
Board of Real Prop. Assessments & App 2
Department of Consumer & Regulatory Af 482
Public Service Commission vs 81
Office of the People’s Council 36
Total m 22
HUMAN RESOURCES ‘DEVELOPME!
Office of the Assist. City Administrator for Human Resource Deveepment ry
DC Office of Personne - ns
Department of Employment Services 233
Education Lic. Commission 2
Total. m5
PUBLIC SAFETY & JUSTICE
Metropolitan Police Department ... 4,820
Fire and Emergency Medical Services Department i 5
Police and Fire Retirement System
Judges’ Retirement System .. 0
District of Columbia Court of Appeals. 82
‘Superior Ct. of the District of Columbia .. 1,200
District of Columbia Court System 103
Office of the Corp, Counsel 23
‘Settlements & Judgments va 0
Public Defender Service 0
Pretrial Services Agency 5
Department of Corrections 3,785
Parole Board .. 7
District of Columbia National Guard 31
Office of Emergency Preparedness a
‘Commission on Judicial Disabilities 2
Judicial Nomination Commission o



17

then the population of the District has decreased dramatically, as
has the tax base, so commensurate reductions in employment are
required.

I thought it was very interesting that the issue of the Syracuse
area was used. I use that all the time because that is my experi-
ence. And, Mayor, I congratulate you. You come well prepared. We
had your testimony about 10 minutes before the hearing, and you
had GAO’s 2 days before. You are very good at this. I would like
to raise my hat to you.

Syracuse’s tax base is about 47 percent tax exempt. The District
of Columbia is 42 percent, something like that. Most major Amer-
ican cities have the same problem. Even though they are not the
seat of the Federal Government, they are the seat of city, county,
sometimes State government, with churches and parks and colleges
and hospitals and all the things that the District has, so it is not
unusual in that sense.

Another problem that was not mentioned in the Mayor’s state-
ment this morning but was mentioned by the Mayor’s transition
team back in November is a structural problem. The District of Co-
lumbia pays extremely high amounts for public assistance. That is
not an entitlement. That is a discretionary spending decision by the
District, and recently the Mayor used the figure of about $30,000
as the average public wage in this city. That is a high amount of
money for a public employee.

McKinsey report was cited, and it is very clear that there
is a tremendous burden upon the District to perform these other
functions, but if you buy the McKinsey report, which says that two-
thirds of these financial obligations should be the Federal Govern-
ment’s and only one-third should be the city’s, the question is why
should there be home rule if two-thirds of the responsibility is
ours? I ask that rhetorically.

Regarding the previous administration, even though the Barry
administration presented balanced budgets most of the time during
its administration, the cash suppiy dwindled year after year after
year. No money was spent on school maintenance. They are full of
fire code and housing code violations that are dangerous to kids.
Even city hall, a magnificent building we visited the other day, is
in such bad shape that the prior Mayor moved out. The council, to
their credit is still there. As a former city councilor, I empathize.
There are problems with the financial management systems. My
question is why weren’t they reinvested in prior administrations?
My mother, God have mercy on her soul, when I would complain
about how things were, she would say to me, “Jim, you made your
bed, now you have to lie in it,” and that is exactly what is happen-

ing.

Fhe last year of the Barry administration there was a $118 mil-
lion deficit. The last year of the Kelly administration there was a
$335 million deficit. It is pretty obvious that what has happened
is both administrations masked the problem, and when there was
a change in administrations, it became clear. No surprise.

Regarding the work force issue, the GAO says that the cuts have
not been made, and I am hopeful that we can fet a list of the indi-
viduals who have left city employ, names, addresses, and former
positions. It looks like Mr. Pohlman has that list. Great. We will


13

If no city has ever climbed out of a crisis this deep by itself, let
us bring on the board, help structure it ourselves, and get past this
painful moment.

Let me close with a confession. To tell the truth, I want to do
what it takes to banish this crisis quickly, not only to reduce the
deficit, or to save home rule, or even to save the children. Like
many of my constituents, I want this crisis gone to reclaim the full
measure of civic pride in my birthplace and hometown.

Washingtonians have heard me speak about my great grand-
father Richard Holmes, the ancestor who laid down our family
roots in Washington before the Civil War. Richard was no heroic
runaway slave. I think of him as a walk-away slave. He just
walked away from a Virginia plantation to freedom in the District.
Great Grandfather Richard did not walk here to freedom only to
have his family surrender a century later to the bondage of insol-
vency. Richard figured out how to pick himself up and move on. We
in the District must be ready to do no less.

Thank you, Mr. Chairman.

Mr. Davis. Thank you very much.

Chair now recognizes the chairman of our full committee Hon.
William Clinger.

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

I just want to very briefly commend you and Mr. Walsh and the
members of your committee, subcommittees, for holding this hear-
ing in_a very expeditious way. We clear! have a crisis of monu-
mental proportions, and the quicker we begin to deal with it the
better for us all.

I have had an opportunity to review the GAO report, which we
are going to hear about this morning. It is indeed a chilling docu-
ment, in my view, and one that calls for very, very rapid action.

I do not view this hearing this morning as a time for finger
pointing or laying of blame. That may come later when we review

ow we got here, but certainly the issue before us today is how do
we deal with this immediate crushing crisis that we have in the
city. And that is what I hope that we are going to hear addressed
by the Mayor and by the council.

Mr. Walsh indicated that Washington is not alone, that many
cities are having extremely difficult financial problems, but we are
unique because it is the Capital City and, therefore, it gets a great-
er degree of national attention when the city gets into a fiscal cri-
sis. It is also unique in that it is the only city where there is this
Federal presence and the Federal partnership.

I just want to assure you, Mr. Davis, that as chairman of the full
committee, I want to pledge you my full support and cooperation
as you and Mr. Walsh work toward resolving these problems and
coming up with both a short-term solution as rapidly as possible,
but also addressing the longer-term problems that we are going to
have to deal with down the road.

Thank you very much.

Mr. Davis. Thank you, Chairman Clinger.

Ms. Norton.

Ms. Norton. Mr. Chairman, I ask unanimous consent that the
statement of the member of the full committee, Representative
Cardiss Collins be included in the record.


126

tailed recommendations about specific government functions, we believe that cost

improvements of this order of magnitude are confirmed by two separate analyses.
« Reducing per recipient Medicaid expenditures by 7 percent to Maryland levels
(Exhibit 4), reducing per pupil expenditures by 8 percent (to Montgomery Coun-
ty levels) (Exhibit ), and slowing the rate of growth in all other budget items
by 1 to 2 percent would result in expenditure cuts of $240 million to $390 mil-
lion. (Slowing the rate of growth by I percent would bring budget growth rough-
ly in line with inflation; slowing the rate of growth by 2 percent would keep
it to the 1988-to-1993 growth rate.)
« The 1990 Rivlin Report paints a similar picture. It listed over $700 million
in efficiency improvement and cost-reduction opportunities to be achieved by
1995. Rough indications suggest that approximately half the opportunity, or ap-
proximately $300 million to $350 million still remains.

Leaning much harder than this on the District to solve its own financial prob-
lems through higher taxes or degraded services—will, we believe, risk exacerbating
the loss of both the middle class and commercial activity. However, without the
credibility borne of real cuts in expenditures and improvement in safety, education,
and other vital government services, the District will not convince other parties to
do their share. This point must be emphasized.

But it is also not enough. The revenue side of the equation must be addressed.
We believe that the District should be able to tap the income generated within its
borders. Right now, nonresidents pay all of their local taxes to the state and county
governments of Maryland and Virginia, While these people should not be expected
to pay more taxes, a portion of the taxes nonresidents are now paying should be
captured by the District and credited against taxes paid to Virginia and Maryland
on a reciprocal basis. (This would result in a reduction of Virginia and Maryland
revenues, but it would be a small reduction—about 1.5 percent of these states’ budg-
ets.) If some form of nonresident taxation is not part of the solution, the Federal
government will have to contribute even more (e.g. by making an additional Federal
payment or exempting District residents from Federal taxation). The taxpayers of
Ohio, Texas, and the other states, instead of the state and county governments of
Vinginia and Maryland, would then bear an additional cost

e Federal payment would also have to increase, perhaps to the level floated by
Representative Pete Stark—to 30 percent of District-raised revenues. We'd prefer to
see it tied to the District’s budget or be calculated to fairly compensate the District
for revenues foregone and the cost of providing services to the Federal government.
In either case, this would represent about an additional $200 million above what
the current formula indicates. Finally, the Federal government will need to fund the
unfunded pension liability it left for the District in 1974.

Collectively, these steps can close the $1 billion shortfall (Exhibit 17). Without
any one of them, the gap becomes very difficult to close.

Exhibit 17—Ampact of Potential Cost Reduction and Revenue Generation in FY 2000
{Preliminary}

Dollars ia
millions

Projected operating shortfall 1,100

Expenditure reduction. 250-400
Taxing nonresident workers .... 425
Federal payment 200-300
Reduced contribution to pension: 228
Possible operating surplus/shortfall 0-250

Sour: Team anabsia

Any “deal” to save the city must, of course, be shaped by the political process. Ev-
eryone will be better off if that deal is put together soon.

Such a deal is crucial, but it is only the beginning of a long-term solution to the
city’s problems. As we noted at the outset, the District must ultimately rebuild ite
middle class population. Perhaps the experience gained working on the District’s fi-
nancial situation can pave the way to a collaborative regional solution to broader
economic and social problems.


72

sults, I must tell you that as a friend of labor our decision to roll back employee
wages was one of the most difficult decisions I have ever made,
jong the other actions the Council has taken to address the immediate fiscal
problem are:
« Easy-out and early-out retirement programs and a voluntary severance pro-
gram for FY 1995 to reduce staffing levels.
* FY 95 Supplemental Budget, which included a reallocated $278.9 million in
cuts and a net increase of $39 million in revenues.
¢ In the FY 95 Supplemental Budget, the Council first budgeted $140 million
a8 a reserve, in response to the Congressional directive, and also budgeted an-
other $79 million as cash reserve.
* A tax amnesty program for FY 1995 that is expected to generate $12 million
making a total cash reserve of $91 million.

In accord with its oversight mission, the Council’s Committee of the Whole held
and oversight hearing on February 8 in order to receive testimony from the adminis-
tration on their progress toward meeting the budget cuts and reallocations of the
FY 95 supplemental. I am providing you and your committee members with a tran-
script of that hearing, at which we went over the status of each cut we had made.
As you will note from’the transcript, we asked tough questions that got to the criti-
cal issues of actual implementation of the budget directives. In addition, the Council
Committees on Human Services and on the Judiciary—together responsible for over-
sight of 55% of the appropriated Budget—have held further oversight hearings on
these matters, I have asked our Committee Chairs to regularly review the financial
reports agencies under their oversight.

would like to note that we were pleased with the Administration’s report on the
employee buy-out programs—early-out, easy-out and voluntary-severance. We were
told that 1921 positions have been vacated, with no back-filling.

We have examined the Mayor’s plans for $224 million in reductions. We are
pleased that our FY 1995 Supplemental laid much of the foundation for his plans,
and we look forward to working with him as he proceeds.

Compounding the immediate fiscal crisis we face in the District of Columbia, are
major structural problems. These include the inability to tax income at its source,
an unfunded pension liability inherited from the federal government, and the re-
sponsibility for carrying out state, county and municipal functions. As noted in the
Rivlin Commission Report (1990) and the McKinsey Report (October 1994) the ex-
cess tax burden of DC residents and business is caused to a large extent by the limi-
tations in the Home Rule Charter that prevent us from taxing 60% of the income
earned in the District of Columbia, and the 55% of our property—much of it fed-
eral—that is tax exempt.

As the Mayor and the several studies have noted, our assumption of state func-
tions is quite costly. In the Department of Human Services alone the costs for med-
icaid, IC. and eater care are over $414 million.

Meanwhile we are building our future, and here we need your assistance as well.
We have begun planning for an expanded convention center, for a new arena to
bring professional sports back to our city, and for a municipal parking authority like
those of our neighboring Prince George’s and Montgomery Counties. Congressional
legislation is needed to proceed.

fe have reduced the franchise, gasoline, and sales taxes thereby reducing some
of the tax burden on business to stimulate job creation.

As we have plowed through these grounds, we are seeing many areas where the
Congress can help us in our journey:

¢ For instance, although we are not a state, the Constitutional injunction
against state laws impairing the obligation of contracts may well stop some of
the efforts we are undertaking to review our contracts. That provision does not
apply to the Congress,

« We are prohibited by the Home Rule Act from treating any employee hired
before 1980 any differently now that we would have treated him or er then.
For instance, if we wanted to furlough on a holiday, we would have to cull per-
sonnel records to see how to treat each employee.

e We are not only interested in looking at employment contracts but at con-
tracts for goods and services. Our Court of Appeals has said that we must be
authorized by Congress to review contracts made by the executive. A provision
to allow us to do that is included in the FY Supplemental Budget request.

* Indeed, while we respect that the Congress may want to look at our budget
requests more carefully under the current conditions, I respectfully submit that
it would help if it did 30 more quickly. It is very difficult to question and admin-
istrator regarding spending plans for a budget which has not taken effect.


30

WIIEN WILL THE DISTRICT RUN OUT OF CASH?

As we noted earlier, the District has had cash problems over the last few years.
The overspending outlined above and the District’s own admission that additional
federal revenues are nceded to balance the budget demonstrate that the District will
run out of cash unless additional funds are obtained.

¢ District’s most recent cash flow projections for fiscal year 1995 were included
as part of the quarterly Tinancial report, The slalement projeged that the ending
cash balance for the fiscal year on September 30, 1995, will be $50 million. But this
projection is based on many unapproved actions, double counting of some items, and
other uanupported financial dats. When taken together, hese questionable item re
sult in a cash projection of negative $400 million at the end of the fiscal year. The
chart also includes the impact on cash of the $224 million in additional overspend.
ing identified by the Mayor on February 1. Because some of this overspending i
volves revised budget procedures, approximately $72 million of this overspendiny
could affect cash, thus increasing’ the projected year-end cash deficit to nearly hel
a billion dollars. These analyses are shown in table 6.

Table 6: Analysis of Cash Flow Projections
{dollars in millions)

DECEMBER 12, 1994
Cash balance projected at 9/30/95 .... se soenenecaninncenee — $80
Cash ftow assumptions at risk
Congressionally mandated cuts
Federal payment reduction
‘Transition initiatives" sees
Additional unallocated cost reductions
Less: Errors in forecast?
Total reductions not made _
Net assumptions at risk that could reduce C8SM ssn
‘Adjusted cash balance based on December 12, 1994 actions ....
FEBRUARY 1, 1995

‘Additional overspending ...00-nsunernnnn $224
Portion of spending not affecting CASH cou. (152)
‘Total overspending affecting cash in fiscal year 1995 12
Potential cash balance at September 30, 1995 (464)

“Transtion initiatives are actions and cost reductions reported and counted in the District's cash flow protons but District officals
have acknowledged that these inflates have not been appoved for implementation. These initiatives included such ems 2s wage adjust-
ments, agency consolidations, and employee tuloughs.

Represents amounts used in transtion estates that decrease agency spending estimates (disbursements). Some of these decreases were
included twice inthe District's cash forcast

Source: GAO analysis of District's cash thw forecasts

In summary, Mr. Chairman, the District is facing an enormous financial crisis
which has increased since our report in June. District spending is significantly
above approved budgets, and the District only has cash now because the District is
not paying hundreds of millions in bills. The District's plans to address its current
financial situation does not include any major structural and management changes
even though the District faces even greater revenue-expenditure gaps in the future.

We are continuing to monitor the District of Columbia’s finances as the District
addresses these financial challenges. That concludes my statement, my colleagues
and I will be glad to answer any questions that you or other Members of the Sub-
committee may have at this time.

KEY DISTRICT EVENTS SINCE JUNE 1994

June 24, 1994—GAO Report

duly 14, 1994—Fiscal Year 95 appropriations bill introduced to House

September 7, 1994—District mayoral primary

September 30, 1994—Appropriations Act requires cuts of $140 million

October 19, 1994—1996 federal payment authorized

October 29, 1994—Incumbent mayor submits budget to Council with $140 million

cuts
November 8, 1994—District mayoral election

November 15, 1994—District accelerates plan to borrow $250 million
December 12, 1994—“Consensus” plan to Wall Street with transition team cuts
December 21, 1994—Council passes separate set of budget cuts

January 3, 1995—District borrows $250 million

January 17, 1995—District first quarter financial report



101

can be cut. I think Metro needs to be trimmed. I support the re-
gional authority, and you do, too, but it needs to be trimmed itself.

Mr. Davis. OK. That’s refreshing, and it makes me feel com-
fortable to hear that, because, as you know, for the last several
years, payments have constantly been in arrears, and at this point,
are stacked up more than at any time in the authority’s history.

You have heard discussions and you spoke briefly today about
the concept of a control board coming over on a temporary basis for
the city to start giving Congress, or whomever, the authority that
we would bring that budget into line. Can you share your feelings
about what circumstance you feel you could support this, or oppose
this, or just kind of sketch——

Mr. Barry. Mr. Chairman, as I said earlier, I have been in office
1 month, 21 days. I have done nothing. My administration has not
overspent, has not kept its word, has not done all the things we
have been talking about all day today about the DC government.
There is no justification for me, as a new Mayor here, to suggest
any kind of control board, but the history and the structure of the
District si sts one.

We have had these structural relationships. We have had credi-
bility problems about our budget. We are asking the Congress do
its share of $267 million. And if everything is going to be put on
the table, both the structural relationships of what ought to be the
legitimate role of the Federal Government and the District govern-
ment, whether or not we should have a reciprocal income tax or
not, as well as investments in our infrastructure for financial man-
agement, as well as a way of getting us some additional revenues,
I would be for the Congress mandating such a board with an un-
derstanding that it is a helping situation, it is not——

Mr. Davis. It is a first step toward resolving a number of things.

Mr. BaRRY. We can come back next year, not having us sit at this
table talking about the structural—we still may talk about them,
but we may have solutions to them and not be under a budget cri-
sis.

Under those circumstances, if everything is on the table and up
for consideration for the people to make recommendations to the
Congress on what they ought to do, I would be for it. But I would
not be for one whose mere task was to take the existing money we
have and tell us how to spend it.

Mr. Davis. Right. I think the problem comes in because we are
taking money that you don’t have that you are getting from the
Congress.

Mr. Barry. Right.

Mr. Davis. And I want to tell you—but as we have indicated ——

Mr. Barry. If everything is on the table, as I said yesterday, we
could be supportive. I want to be in the room when this is dis-
cussed. I don’t want to be outside the room throwing sticks at it.

Mr. Davis. Sure. OK, I appreciate that.

Let me just ask Chairman Clarke just a quick question. Going
back through the auditors reports of November 22 that placed the
city’s cash-flow difficulties in a multimillion dollar range, I think
about $500 million, can you tell us what specific actions the council
took to save that money? I understand the actions taken on Decem-


37

Mr. Hitt. I would recommend that the nonappropriated budget
also be included with the appropriated budget. The District is
somewhat unique in terms of having so much of its budget outside
of the appropriation, at least that the Congress would look at, so
I would recommend that the two be included together and espe-
cially, certainly because of the size, it is a very large portion of the
activity that the District undertakes.

Mr. Dixon. I believe the appropriated budget deficit for 1994 was
$117 million; is that correct?

Mr. HILL. Yes.

Mr. Dixon. In your professional opinion do you believe that this
overspending violated the Antideficiency Act?

Mr. HILL. We are currently looking into that, and one of the rea-
sons that it is very difficult to tell is because with the
Antideficiency Act you have to consider whether or not the pay-
ments were made for programs that would be considered entitle-
ment-type programs, and so a definition of entitlement programs as
it relates to the District, we would have to first come to grips with
that definition, and then apply that to the District, so we have not
determined that, although clearly with the magnitude of the over-
spending it appears that there may have been violations.

Mr. Dixon. In the main, those entitlement programs would be in
the nonappropriated budget, would they not?

Mr. HILL. Yes, some of them.

Mr. Dixon. Are you familiar with the statement on page 24,
paragraph D, the third section of the CAFR?

Mr. HILL. Yes.

Mr. Drxon. Assuming that it is in violation of the Antideficiency
Act, would you say that this would warrant a qualified audit opin-
ion?

Mr. HILL. In terms of the opinion on the financial statement, I
can only speak in terms of what GAO would have done on that
opinion, and GAO would have brought that information up to the
opinion. We would have certainly had a middle paragraph in the
opinion stating that the District was under severe cash constraints,
and we would have considered qualifying the opinion.

Mr. Dixon. And in past years have there been such opinions
written?

Mr. HILL. Yes, there was. There was an opinion that was written
on the 1990 financial statement by Peat Marwick and a number of
other CPA firms that were part of that that it was not a qualified
opinion, but it did have a middle paragraph that indicated that the
District was under severe cash constraints. At that time the deficit
was smaller than the deficit is right now, and the cash problems
were less severe than the cash problems are now.

Mr. Dixon. Representative Norton has raised the issue of the un-
funded liability in the pension plan, and I agree with her that Con-

ess has to do a better job of funding that. I believe there is $2.7

illion in the fund at the present time. Did your report. indicate
that it was unfunded?

Mr. HILL. Which report?

Mr. Dixon. She asked you about whether you had examined the
pension plan, and you said you had, in fact, written a report. She
used the term, “unfunded”, and I just-——


62

The opportunity is that it is not too late to clear the slate and remove these 90-
year-old federal responsibilities from our plate.

‘The view is that DC has a large and prosperous tax base supported by the federal
Presence.

The reality is that only 43 percent of our property can be taxed at all. In addition
though 45 states legally mandate taxing income at its source, we are prohibited
from taxing two thirds of the income generated in DC.

The opportunity is that we can still negotiate shared responsibility for shared ben-
efits in the District, in the region, and in the nation.

The view is that Washington, D.C., performs comparable services to other munici-
palities, but at hugely higher costs.

The reality is that less than haif of our budget goes to typically municipal func-
tions, with the rest going to pay for functions normally performed by county, state,
or federal governments.

I am attaching a report which specifically outlines the municipal and non-munici-
pal functions we perform. I have picked Syracuse, New York, as a typical municipal-
ity for comparison, Like many urban arcas, you will find that 74% of Onondaga
County's poor residents live within Syracuse, Yet most, services for the poor are as-
sumed by Onondaga County and the State of New York, as well as the federal gov-
ernment.

The opportunity is for DC and the Congress to review these functions realistically
and to make new determinations about who should perform these tasks and who
should pay for them.

The view is that DC created a huge workforce and bloated payroll.

The reality is that when the federal government turned DC government over to
us, there were nearly 43,000 appropriated and non-appropriated workers.

In 1980, they turned over tmost 4,000 additional workers associated with St.
Elizabeth’s Hospital. Today, we have less than 43,000 workers, over 10,000 of whom
are grant-supported (non-appropriated).

The opportunity is that we are committed to not only lowering the number of
workers, but to redefining work, implementing data driven management, and
privatizing appropriate functions.

e view is that we have not been responsible managers.

The reality is that while we have a structural imbalance between our resources
and our obligations, we have the tools, the skills and the will to balance budgets,
change direction, decentralize control, and dramatically improvement management.

But another reality is that we have not faced bad times well at all. As Mayor in
1980s, [ used our prosperity to develop innovative and in many cases nationally rec-
ognized programs to help young people and seniors. I remain proud of many of these
accomplishments, but with the benefit of hindsight, I also Wish Thad taken @ longer
term view into these harder times.

After many gears of surpluses, I did leave a deficit in my last year. As revenues
continued to drop and costs escalated in the 90s, our city continued to spend, not
seeing the trends that were shaking up business and government throughout Amer-
ica,

The opportunity is that we are a strong community, a vital partner in the nation’s
life, and we have the will and the determination to put our house in order. I have
put in place a leadership team of experience and excellence that will lead our city
to prosperity.

e View is also that DC government cares too much, is too generous, and helps
too many.

The reality is that we do emphasize people services. Like many of you, I have car-
ried a calling to serve “the last, the lost, and the least.” Our compassion in times
of prosperity, however, has turned into a double-edge sword in times of hardship.

fe are out of step with our neig bors in terms of eligibility and benefits. We not
only pay out more than we should, we attract many from other areas who should
not be our responsibility.

The o portunity js that we will get in step with other jurisdictions, and find better
ways of helping than through cash payments and high cost services.

low do we make the most of our opportunities?

I believe we are making a step in that direction today, working as partners in
a new way to constructively face our realities and build a new future for a solvent,
healthy Capital City.

On the table is our new commitment to manage government functions within au-
thorized limits.

On the table is a review of county and state functions we now perform that per-
haps should be performed or.paid for in some other way.

in the table is the issue of old liabilities, inherited from before home rule.



33

Mr. Davis. I will yield to Mr. Walsh, recognize the gentleman
from New York.

Mr. WALSH. Thank you, Mr. Chairman. I would like to thank the
GAO for their testimony and for the work they have done. I know
it is not fun to be coming up with this kind of information, but you
have done an excellent job, and it has helped us enormously.

I would like to ask a rather obvious question to me, but the an-
swer I think is obvious. In any event I would like to ask it ‘in,
Has the District government met its commitments to the Federal
Government based on the 1995 Appropriations Act, which called for
a cut of $140 million, a reduction of 2,000 full-time filled positions
and submission of quarterly financial reports, those three?

Mr. HILL. We would see—we see no plans that indicate that the
District will only spend $3.2 billion this year. In fact, the plans in-
dicate that they will go over, so in that regard, no, they have not
met that commitment, and we saw some deficiencies, a number of
deficiencies in the report, the first quarter report, and so we do
have problems with them having met that requirement as well.

Mr. WALSH. So it is clear to you based on your analysis that the
District has not met its commitments to the Federal Government
that are required by the 1995 Appropriations Act?

Mr. HILL. Yes, and I think it should be pointed out as well that
the budget that the Congress started with was a budget that was
the request from the District, so that the Congress cut what was
requested only by $140 million, so, but that starting point was an
amount given from the District.

Mr. WALSH. That is not a cut in the Federal payment. That is
a cut in the total appropriations since we appropriate both Federal
and local revenues.

Mr. HILL. Yes, that is true.

Mr. WALSH. I would like to focus just for a second, since the time
is so limited, on one issue, and that is on page 5 of your statement,
regarding the escrow requirement. The more I look at your state-
ment, the more I believe that this is what has brought us to this
point.

As I understand it, assuming the Federal payment would be
$660 million, the District would be required to put in escrow 20
percent of that amount in order to cover any overage in spending
that they would be penalized for in 1995. So, in fact, referring to
the chart on page 6, if the District were to overspend by $100 mil-
lion, the total penalty is actually closer to $200 million.

Based on your projections, if there is no Federal intervention and
we make it through the end of the year without a bankruptcy of
the District, what would you estimate the penalty on the District
would be, including the escrow in order for us to process an FY
1996 appropriation?

Mr. HILL. It would be the last item on that chart, $631 million
overspending. It would be $771 million, which is in excess of the
Federal payment.

Mr. WALSH. Coincidentally, that is the same number that the
Mayor presented to us several weeks ago as the deficit, but they
are totally different numbers, are they not?

Mr. HILL. The $631 million or the $771 million?

Mr. WALSH. I believe it was $722 million.


65

County of Onondaga Source of Revenue 1995—Continued
{in thousands}

‘Amount — Percentage
270,125 37.2
$727,562 100

GOVERNMENT FUNCTIONS IN WASHINGTON, DC
by typical governmental level responsibility (draft)

‘ATE:

Health & Welfare: Medicaid; St. Elizabeth's Psychiatric Institution; Mental Retar-
dation/Developmental Disabilities; Health Policy, Standards and Education; Other
Health Services; AFDC; Emergency Assistance; General Public Assistance; Supple-
mental Security; Paternity and Child Support Enforcement; Energy Assistance;
Other Income Maintenance; Foster Care and Adoption Services; Day Care; Other
Child & Family Services; Homeless & Emergency Shelters; Services to The Aging;
Other Social Services

Education & Culture: University of the District of Columbia; District of Columbia
Law School; State Educational Services (Student Loans, Certification, etc.); Edu-
cational Institution Licensure; Teachers’ Pensions; Arts & Humanities

Public Safety: Juvenile Services; Prisons; Parole; Pretrial Services; Public De-
fender Services; DC Court System; Judicial Nominations; Judicial Pensions; Law
Revision Commission; Human Rights; National Guard; Emergency Preparedness

Employment Security & Business Regulation: Unemployment Compensation;
Workers Compensation: Disability Compensation; Occupational Safety & Health,
Wage Hour Enforcement; Labor Standards; Employee Appeals; Apprenticeship Pro-

ms; Job Training & Development; Placement & Employer Services; Insurance,
rporations & Occupational Licensing; Banking & Financial Institutions; Public
Service Commission; Environmental Regulation; Other State Economic Development

Miscellaneous: Motor Vehicle Registration; Environmental Regulation; Sales & In-

come Tax Collection

COUNTY:

DC General Hospital; Nursing Homes; Ambulatory Health Care; Community Men-
tal Health; Alcohol & Drug Abuse Services; Preventive Health/Social Services; Other
County Health Services; DC Jail; Public Libraries

SPECIAL-DISTRICT:
DC Public Schools; Mass Transit (WMATA/WMATC); Water & Sewer Services;
Council of Governments

CITY FUNCTIONS:

Public Safety: Police; Fire & Emergency Mcdical Services; Police & Fire Retire-
ment; Civilian Complaint Review Board

Community Development: Public & Assisted Housing; Housing & Community De-
yelapment; Building/Business Permits & Inspections; Planning & Zoning; Recreation
& Parks; Convention Center; Tenant Assistance; Minority Business Development;
Diversity Programs; Job Development; Other Community Development Services

blic Works: Solid Waste; Engineering & Construction; Streets & Bridges; Park-

ing; Traffic Operations; Traffic Adjudications; Fleet Maintenance; Facility Manage-
ment; Taxi Regulation; Other Public Works Services

General Government: Mayor & City Administrator; Administrative Services; Ad-
ministrative Oversight; Finance & Budget; Personnel; Corporation Counsel; Settle-
ments & Judgements; Real Property Tax Collection; Other Support Services; Debt
Service; Optical & Dental Benefits; Pay Adjustment; DC Council; DC Auditor

District of Columbia Current Appropriated FTE Count

Cure parent

Agency
Count 8h

GOVERNMENT DIRECTION AND SUPPORT:
‘Council of the District of Columbia
Office of the District of Columbia Au

155
ou)



102

ber 21, that there was new spending that was authorized at that
meeting, too, and if you could give us the context of that?

Mr. CLARKE. Yes, sir. On December 21, we analyzed the problem
as being $447 million. That was consistent with what the Mayor
had seen it as being on December 12, and between that time the
calculated rate, a rate of property taxation provided for by congres-
sional act, on an automatic basis went into effect on December 15.

0 the revenue estimates changed, and that is what accorded the
difference between the $447 and the $492 that we were talking
about in New York.

We went through the budget. We cut, in allocated cuts, $279.6
million. We provided for revenue increases of $41.5 million, and
there was—the Mayor’s pending revenue legislation was $3.5 mil-
lion. So total revenue increases for $45 million. That was not in-
cluding that calculated property tax rate that I had spoken of.

So we saw capability of $321.6 million to address to what we had
identified as being a number of the problems in the city, and that
is a little bit of what I addressed earlier when I spoke of the con-
versation at the staff level between my staff and the congressional
staff, about the use of moneys for addressing problems. The first
thing that we did was provide that $140 million would be budgeted
as set-aside for the $140 million that you told us to not spend for
anything, to cut from our expenditures. We also budgeted the $79
million, which I spoke about before when I had the opportunity.

We budgeted $10.1 million for a problem that we saw with
Metro, and you just addressed some of that problem, Congressman.
We provided $58 million for what had been at that point discovered
to be the Medicaid problem; $11 million for the DPW, Department
of Public Works; $10 million for the hospital; and $10 million for
the police department. All to underbudgeted problems that we had
seen previously thereto. And that is what we did.

Mr. Davis. Thank you. That answers my question.

Mr. CLARKE. OK.

Mr. Davis. Chairman Walsh.

Mr. WALSH. Thank you, Mr. Chairman.

Mayor Barry, when Congressman Gutknecht made the point that
someone should be held accountable for these decisions, you made
the point that really what we have here are revenue problems not
management problems. And yet, consistently the Medicaid budget
has been underfunded, not just in the Kelly administration, but in
yours. There are five deficits recorded in the years of your adminis-
tration in Medicaid. Not as large as the Kelly administration, but
deficits nonetheless.

Overtime has been severely underbudgeted. Revenues have been
overestimated. In fact, according to the GAO, local revenues have
grown by 13 percent since 1989 and spending has outpaced that by
5 percent. So is it revenues or is it spending that is the problem?
And if it is spending, is it management?

Mr. Barry. Chairman Walsh, all of that, if you take the Medicaid
budget—in the Medicaid budget, it is a matter of both
underbudgeting and management. The audit contracts for 1991,
1992, 1993, 1994 was a management decision not do them. I didn’t
make it, but——

Mr. WALSH. There were no audits done.


124
Exhibit 13—Tax Status of District Real Estate 1993

Pate Doles
Land Area (100% = 30,000 acres):
Taxable 43
DC government. 5
Other * 10
Federal government a2
Potential Annual Revenue (100%
52 $762
5 7
12 168
a M9

OC government, Other, and Federal government entries are tax exempU/evenve forgone

Other inches fonign , i hospitals,

Sours: Distt ot Columbo; team analysis,

The District's third major source of tax revenue is sales taxes. As Exhibit 14
shows, sales tax revenue is in free fall and, despite the District’s forecast that this
decline will level off, we think that it is likely to continue. The factors underlying
the precipitous decline in District sales tax revenue include the recession that has
affected the entire region and the loss of the middle class population. Another im-
portant factor is the explosion of retail developments on the city’s borders. These
developments provide safe, attractive shopping with adequate parking and, some:
times, public transportation (Exhibit 15). This trend is continuing. In 1992 and
1993, District. added just 29,000 square feet of new retail space. The Virginia
suburbs added 5.8 million are feet, and the Maryland suburbs added 2.6 million
square feet (according to COO), This retail development, complicated by middle class
flight, makes it very difficult to see the decline in the District’s sales tax revenues
being reversed anytime soon. Finally, the District is unable to collect what it be-
lieves to be about $70 million of sales tax from diplomatic and military customers
who, by law, are exempted from paying sales tax.

Exhibit 14
TAXABLE SALES IN THE DISTRICT
1993 $ Billions

8 Actual >t Projection >

J

1988 89 90 91 92 93 94 95 96 97 98 99 2000

Source: Distinct of Columbia Government


43

actual cash that the District would have to pay out in fiscal year
1995? For example, we talked about some of the Medicaid numbers
and the $85 million from the hospital; is that included in there?

Mr. HILL. Yes. If we would go, on page 14, and part of the spend-
ing plan that comes up with the $3.8 billion includes $550 million
expected from Medicaid, and if we just take a look at that alone,
we can see that $82 million plus the $30 million in cost savin;
and the $40 million, so at least $152 million of that would not be
cash that was needed in 1995. There are some other amounts also
that are in there that we are currently looking at and going
through the spending plans.

Mr. Davis. OK. Could you tell us on a cash or accrual basis what
you believe the actual deficit is today as we look at it, and the pro-
jected deficit in 1995 in real numbers?

Mr. HILL. In terms of the potential cash balance problem, and
the reason I have to say potential problem is because there are a
number of initiatives that are out there that we don’t know wheth-
er they are going to be successful or not.

If you go to page 16 of the testimony, on a cash basis the poten-
tial problem would be $464 million, a deficit on a cash basis at the
end of fiscal year 1995. On an accrual basis, that number would
be somewhat higher because of expenditures that would be re-
corded in the year that wouldn’t result in cash in that year.

Mr. Davis. Let me turn for a moment to the subject of the down-
town arena and the projected convention center which, as I under-
stand it, you are familiar with it. It would require an added tax
to pay for these projects. Given the current status of the city’s bond
ratings, is there any way to finance that at this point without some
kind of intervening help from the Congress?

Mr. HILL. Well, it is really hard to say. Certainly, the District’s
bond rating will be a major factor in any financial package that
might be put together on the arena. However, I think that they will
also look to how solid the projections are of revenues for that arena
and whether or not there are pieces of it that can be self-financed,
so it is really hard to say right now.

Mr. Davis. So that revenue stream standing alone may be able
to carry the day?

Mr. HILL. We don’t know because the reason why is, that many
of those projects are so early on, that they don’t have the total cost
associated with the actually building of those projects as a result
of not having done some of the major studies, like engineering and
architectural studies.

Mr. Davis. I guess, conceivably what you are saying is because
of additional revenues that could be generated, and if it equaled
the carrying costs for the cost of the convention center, then, fi-
nancing would be available outside of the Federal Government?

Mr. HILb. That is certainly a possibility.

Mr. Davis. OK. I yield back. Mr. Dixon, do you have additional
questions?

Mr. Dixon. Just one. Mr. Hill, in your June 1994 report, you

oirited out, I believe, I have been searching for the exact figures,

ut I think you pointed out that Medicaid was running at a rate
of $51 million per month, but the District, in fact, was budgetin;
at somewhere, as I recall, around $40 million. And then I aske:


85

the independent agencies, and I suspect that those are not inde-
pendent, have consistently come before Congress and when you get.
to the bottom line, they don’t care what the budget says. They
think their program is good and they are Boing to run it the way
they are going to run it, and at the end of the year it is not their
problem because they are running that part of the ship, and they
will go over budget or under budget, whatever it is, and coming
here and appearing before the city council is just a formality.

Let’s get that past us and then I am going to spend what I am
going to spend, and so I am sure that the message has got to get
through to management, Mr. Pohlman, that this is very serious
and it is their problem. And one of the concerns is that when every-
one says, well, nobody is going to be cut, then everybody says it is
going to be business as usual.

Now, I don’t say that this is Mayor Barry’s fault. I don’t say it
is Mayor Kelly’s fault, but there is clearly a malaise within ‘middle
management of this District. It is like calling them in and sayin;
there is only going to be one coffee break a day instead of two, ani
after you walk out the door, I have been here 30 years, I am taking
two coffee breaks, I don’t care what they say.

Now, I have had my say on this. Mr. Mayor and Mr. Clarke, if
you want to respond.

Mr. Barry. Mr. Chairman, could I take a few minutes?

Mr. Davis. Mr. Mayor, you may.

Mr. Barry. Mr. Dixon, in terms of the home rule discussion, and
I thought I made it clear, but I will try to make it clear again, and
I was here, during that debate, a lot of us were here during that
debate. I said earlier that we were given State responsibility with-
out State authority.

It was my view that after the political deal had been made that
we couldn’t tax income at its source, which was the deal they had
to make to get this through, just as we had a 2-year period in
which we could not enact anything in the District Criminal Code,
I was led to believe, falsely, so I guess that over time we would be
able to get the nonresident income tax due.

My plea is very simple. If you want us to keep all these State
responsibilities, then give us the State authority and let us tax in-
come at its source. That is get the $700 million, which is about a
4 percent from those who work here and don’t live here. If you
don’t give us the authority to tax income at its source, then take
some of these responsibilities back. That is my real hard plea. Sec-
ond, my understanding, very quickly—do we have to go?

Mr. Davis. Mr. Mayor, what I would like to do is cut you off and
give you a chance later. Miss Collins has a few questions she wants
to put to you. Then we will recess and come back at 1:30. You won't
have time to answer it now. That will give everybody a break to
allow Members to go over and vote.

Miss Collins.

Miss CoL.ins, Thank you very much, Mr. Chairman.

Mr. Mayor, I have three questions. The one question is like this.
The District’s interim chief financial officer said last Friday that
there is now a financial monitoring team of senior officials in place
under the direction of the city administrator which will constantly
oversee the implementation of new spending reductions. And what


6

the federal executive or the Congress. Why have more emergency actions not been
taken or even spoken of at this point? I hope to find out some answers today.

most important item in the transition report was—no new revenues. This rec-
ommendation was made for two reasons. 1) The District not only already levies suf-
ficient taxes and fees to Poy, for any reasonable level of services and conspicuously
fails to collect millions of dollars owed to it; but also because 2) there is no more
blood left in the turnip to squeeze. District receipts from some taxes have already
begun to fall because business and residents are being taxed right out of town. Any
further increases in taxes would be even more subject to the law of diminishing re-
turns.

Even though GAO will tell us chapter and verse of how the District goverament
deliberately under-budgeted known expenses in recent years, the District does not
have a budget problem in the classic sense. Medicaid and AFDC budgets were
passed that had no basis in reality. On top of that, these budgets were justified by
claims that “unallocated management initiatives” would accomplish the needed re-
ductions in spending to meet the budgets.

too often “unallocated management initiatives” meant that there was no plan
to implement. When there was a proposal it was not implemented, When some type
of implementation was tried no savings were realized. In effect, “unallocated man-
agement initiatives” too often have meant “nonexistent management initiatives.”

e FY 1995 budget and proposals made so far continue to include these nonexist-
ent savings. This activity will no longer be tolerated. If savings are claimed we want
to see a detailed proposal whose implementation can be monitored. We want to sce
an implementation plan. And, we want to see results,

In addition to nonexistent savings plans there are many instances of under-budg-
eting by completely ignoring known expenses. The FY 1995 budget contains no dol
lars to pay the federal Bureau of Prisons for housing District inmates. The District
already owes BOP more than $3 million from 1994 and is expected to owe at least
$3 million more for 1995, but you can’t find it in the budget.

Similarly, the District is being fined for contempt of court for exceeding residen
limits at its youth facility. The judge was charging $1,000 per day, but when no el-
fort seemed to be made by the District government to improve the facility or reduce
the overcrowding; the fine was increased to $1,000 per day per violation. In 1995
these fines are expected to amount to $21 million but you won't find it in the budg-

et.

Mayor Kelly’s documents on the 1994 deficit cite overspending by every depart-
ment of the District government. This is in spite of the fact that the District budgets
vel nerous amounts for almost all of its functions. Budget levels in the District
of Columbia, whether measured by total population, population served, or employees
providing the service are far in excess of what other cities provide. It is not the

udgeted spending that is too low or inadequate—it is the spending over the limits
that is breaking the District.

What, simply put, must happen now is for the District government and the fed-
eral government to work to; er in good faith and with complete honesty. Phony
budgets and exaggerated deficits are of no help to anyone, Inflated rhetoric about
“taking over” the city or “repealing home rule” are equally unhelpful. This crisis is
real and it is not just a short-term problem. The only way to solve it is by working
together.
am also disturbed at reports I have read that the city may be targeting what-
ever modest cuts it makes at some of its most vulnerable residents and organiza-
tions. Last week, this subcommittee’s staff was flooded with calls from DC residents
angry at reports that the city was curtailing police protection in wards represented
by Council members who voted to rescind recent Property tax increases. ell find
ways to put pressure on. . . . You cannot cut $40
police officers,” the Mayor was quoted as saying.

The Mayor now says he was misunderstood. But I remind all who speak for this
city’s government that any administration that is seen as willing to hold residents,
commuters, and tourists hostage to political bickering will never rebuild the con-
fidence of either Congress or Wall Street.

The two subcommittees are beginning this process together. We will finish this
process the same way. In conjunction with our counterpart subcommittees in the

nate and with the federal executive we will embark upon individual hearings and
investigations. In the end, we will carefully examine the reality of District of Colum-
bia finances and budgeting, what the city government has actually done about these
problems, and then decide what the federal response needs to be. I have not pre-
judged any final action. I know that my colleagues have not, prejudged either.

it we know is that the games are over. No more smoke and mirrors. No more
under-budgeting. No more “unspecified management initiatives.” No more phantom

lion and not expect me to cut



CONTENTS

Hearing held on February 22, 1995 ..
Statement of:
Barry, Marion, mayor of the District of Columbia; David A. Clarke,
chairman, council of the District. of Columbia and Robert Pohlman,
ting chet financial officer, District. of Columbia
Hill, John W., Jr,, Director, Financial ‘Manny ment Polici
‘Accounting “and Information Management Division, U.S. General Ac-
counting Office, accompanied by Edward Stephenson, Assistant Direc-
tor; Terry Carnahan, Assistant Director; and Laura Triggs
Nunn, Peter, Coopers & Lybrand ...
Letters, statements, etc., submitted for the record by:
Barry, Marion, mayor of the District of Columbia, prepared statement
of...
Clarke, David
statement of
Collins, Hon. Cardiss,"a Representative in Congress from the State of
Mincis, prepared statement of ..
Dav omas M. II, a Representative in Congress from the State
inane, prepared statement of ..
an, Hon. Michael P., a Representative in Congress from the State
watt inci, prepa ared statement of .
Director, Financial Manage
FN cauhtiny “and Information Management Divis
counting Office:
Information concerning pension costs
Prepared statement of.
LaTourette, Hon, Steven C., a Representative in Congress from the State
of Ohio, prepared statement of ..
Walsh, Hon. James T., a Representative in Congress from nthe State
of New York, prepared statement of ....

nd issues,

‘chairman, council of the District of Columbia, prepared

t Policies and Issues,
ion, U.S. General Ac-

W)

49

16
104
58
71
14

16

35
22

15


40

to follow up on some of the observations you made the last time,
if I could, and then ask you about a prospective rather than what
is wrong maybe what could be done to fix the problem.

When you were here on February 3, I believe, you made an indi-
cation that some of the difficulty you were having in the audit pro-
cedure was that documents that had been requested were not
forthcoming from the District. Has that situation been rectified
since your last appearance?

Mr. HILL. There has been an improvement in the speed with
which we are getting those documents. We met directly with the
Mayor and the Mayor has made it a priority with his staff to get
us documents. However, we still have documents that we have not
received yet, and we provide a listing and a status report to the
District on a regular basis on the status of whether we have re-
ceived documents that we have asked for, but there has been some
improvement.

Mr. LaTourETTE. Thank you. I think also last time you were
here and briefing this committee there was a suggestion that in
spite of the fact that the District had been required to trim $140
million and make close to $140 million in spending cuts, the Dis-
trict agencies were still operating on budgets and spending plans
that gave no indication that those spending cuts were going to be
implemented.

Is that still the case?

Mr. HILL. That is still the case.

Mr. LaTouretTTe. During your testimony today, unless I mis-
understood you, did I hear you say that your review of the records
of the District, based upon that review you are not able to deter-
mine how many people are employed by the District?

Mr. HILL. As in fact, it might be good to have Ed Stephenson
answer that question because he is the person that did a lot of the
work on FTEs.

Mr. STEPHENSON. The data the District has is payroll data. It
has budget data. We will take a look at FTEs, which is the full-
time equivalent that is used in the Federal Government. They also
have personnel records that we have tried to get. We have gotten
some data from them on FTEs to et an indication of actually how
many people were on board, and that is why we believe there
hasn’t been the kinds of reductions that they pointed out there
have been. That is basically what we looked at.

We looked at the number of FTEs during various periods over
the last 3 years. Frankly we didn’t see the kinds of cuts they were
pointing, out. We still are pursuing that issue because we don’t
know. The personnel office has said there has been 1,850 people
leave the District of Columbia from appropriated funds, but we
only identified 1,145 cuts in FTEs. There is obviously some kind of
difference there and we are just trying to work on that right now
as we continue to look at the personnel issues.

Mr. LaToureTTE. Thank you. I think last in the few moments
that I have remaining, there have been some questions already in-
dicating that perhaps the unfunded pension liability is a contribut-
ing cause, but one of the solutions that have been suggested in doc-
uments that we have had the opportunity to review, may take a
multifaceted approach. One, the spending cuts which are envi-


71

respectfully, and I do it respectfully, submit that it would help if
it did so more quickly. It is very difficult to question administrators
regarding spending plans for a budget that has not yet taken effect.

‘here has been a lot of references here to the pension problem,
and there has been a lot of references to Medicaid, there has been
a lot of references to what other States do. One thing different
about the pension problem. There is clearly a role in which the
Congress can help. It is not something that every other State is
having a problem with.

It is not one that if you came to our assistance you might have
to say, explain how you did not come to some other State’s assist-
ance, This is one, which by the General Accounting Office’s own
analyses, is based upon what the Congress did or did not do going
back to the beginning of the century.

Congressman Dixon asked whether the amount of the District’s
annual payment to the pension fund might be some source of relief.
And it may be that that would be the way that your relief could
be help given to us rather than some other hook upon which you
might want to hang that. But it is clearly one where I think that
you maintain some responsibility.

We may be coming to you with further information with respect
to something that we are going to hold a hearing on in the city
council tomorrow, nine Members have cosponsored a resolution to
ask you—we have not voted on this yet—but to ask you to look at
the corporate property tax exemptions of organizations that are
federally related in their home jurisdictions. These do not exist
across the Nation, but we have one here and I believe there is one
over in Virginia, and there are some other places where they pay
no corporate tax funds. We will be looking at that and sending you
our advice on that as well.

Congressman, you were asking about the schools. They do come
to the city council for their funding, but under a provision that the
Congress wrote that is in the congressional law, we cannot have
any line-item review of their expenditures. That has been a matter
of intense frustration.

We get to do the taxing and they get to do the spending. We have
the political dichotomy in this city where I get one job and they get
another. And I don’t want to tax and they sure want to spend, and
so it builds that tension in there and sometime somebody some-
where is going to have to look at that problem.

I thank you very much and am available for questions.

[The prepared statement of Mr. Clarke follows:]

PREPARED STATEMENT OF DaviD A. CLARKE, CHAIRMAN, COUNCIL OF THE DISTRICT
OF COLUMBIA

Good morning Chairman Davis, Chairman Walsh and members of the Committee.
I appreciate the opportunity to testify before your joint hearing today. The Districts
figcal crisis presents tremendous opportunity for change, growth and development
of our nations capital city. The Council recognizes the full dimension of the crisis
we now face. We have an immediate problem and we have a long term challenge.

Just yesterday, the Council took action to reduce the base wage rate for all Dis-
trict employees. We expect this will result in $70 million in savings for FY 95. It
also began a process for an elimination of 1200 positions beyond the 2705 positions
we cut in the FY 95 Supplemental. The Council had cut the personal line by $30
million in anticipation that the Mayor would renegotiate the contracts with collec-
tive bargaining units. The negotiations were proceeding but with no concrete re-


80

balanced in the program that is now existent, which does include
the two COLAs. We have laid out together with the delegate a new
program that had another a roach, and it did have associated
with it the repeal of the two COLAs. If we were to go with the two
COLAs and eliminate them alone, which I do believe is in our juris-
diction to do, that would further aggravate the unfunded liability
in that pension program.

Mr. Davis. Thank you very much.

Mr. Dixon. Mr. Chairman.

Mr. Davis. Yes, Mr. Dixon.

Mr. Drxon. It is my understanding that that is not totally accu-
rate, either. If I could Mr. Clarke, isn’t it true that the Toll back
in the COLAs would not take effect until such time as the Congress
acted and enacted into law a 30-year extension of 5 percent? So
when you say that it was understood that the delegate was moving
legislation, it was more than any understanding, it wouldn’t take
effect until such time.

Mr. CLARKE. That is my point, sir. My point is that it wasn’t like
any kind of running from that point—we have been saying that all
along. My point to you, sir, is we have been saying that all along,
that that would be part of the program.

If we were to go and stop the COLAs now ourselves without
waiting for the congressional act, that would have a more serious
aggravating effect upon the pension fund because that is part of
how it gets its moneys now or, excuse me, no, I am sorry. That is
not going to be the case. Let me turn that around. The point is if
we go start making changes in there now, then it would not be—

ir, Dixon. In other words, if you took one COLA away, it would
exacerbate the problem rather than help solve it?

Mr. CLARKE. I retract that statement. Let me just go back and
say this part, that we have been forthright all the way along, that
what we were doing was a program to try to at the municipal level
and the congressional level deal with this pension problem, so
thank you.

Mr. Dixon. I can’t argue with that.

Mr. Barry. Mr. Dixon, I was speaking of the locally introduced
legislation to take care of future employees which we had. I wasn’t
getting into the complexities of these other things. I don’t think it
goes far enough.

Mr. Davis. I think you have clarified it. Clearly, this is a subject
of interest to the committee, and I hope to the council in the future.
We will have further discussions and hearings on that issue.

Ms. Norton.

Ms. Norton. Thank you, Mr. Chairman.

dust for the record, the Delegate did introduce that bill. The bill
did not move forward, and I am hoping that the Delegate will have
better luck this year. It also should be said that the retirees and
the employees and the council and Mayor Kelly deserve a lot of
credit for having worked with the Congress for over a year in order
to get an agreement that would have rolled back COLAs, would
have, or at least one COLA and would have increased the contribu-
tion of employees, and I do want to say for the record that I asked
a search to be done to see whether or not any existing pensioners
had ever been asked to do that, and no one could find an instance


OVERSIGHT HEARING ON DC FINANCES

JOINT HEARING

BEFORE THE

SUBCOMMITTEE ON THE
DISTRICT OF COLUMBIA

OF THE

COMMITTEE ON GOVERNMENT
REFORM AND OVERSIGHT

AND THE

SUBCOMMITTEE ON THE
DISTRICT OF COLUMBIA

OF THE

COMMITTEE ON APPROPRIATIONS
HOUSE OF REPRESENTATIVES

ONE HUNDRED FOURTH CONGRESS
FIRST SESSION

FEBRUARY 22, 1995

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

a

U.S. GOVERNMENT PRINTING OFFICE
88-701 CC WASHINGTON : 1995

For sale by the U.S. Government Printing Office
Superintendent of Documents, Congressional Sales Office, Washington, DC 20402

ISBN 0-16-047486-8
a



106

So the sum of those three numbers—66, 4, and 33—give you the
$103 million which is discussed everywhere.

Mr. Watsn. Thank you for taking us on that journey. But it
looks like my time has run out.

Mr. Barry. Mr. Chairman, let me just say on that——

Mr. WALsH. I will stay with it if you will, Mayor.

Mr. Barry. Actually, there is a chart we would like to submit to
you that indicates just fiscal year 1994 alone. These are services
provided in 1994, and a payment in progress went to the providers
and the cost reports came. Indicates—and Peter can help me with
this—that in 1994 alone we are talking about an accrual of $207
million—increase in the accrual. Prior to 1994, the accrual was
$54,000,289.

Also, the way you count this Medicaid is the year in which the
service is provided. So, you see, from a management point of view,
these audit contracts should have been signed earlier, and they
should have been done.

Similar to 1995—as we get into 1995, my view would be that an
audit contract should be in place to very soon start auditing 1995
so we can reconcile the payments in progress with the cost reports
and audit report so we don’t have this big lag.

The hospitals sued the District of Columbia government in 1993
for their payments in 1992 and 1993. You can see why when you
have these big numbers out there. Somebody is carrying this cost.

Mr. WALSH. Let me just wrap up then, because I have far ex-
ceeded my time. And I thank Mr. Nunn for coming to the witness
table, at Mayor Barry’s request on such short notice to respond to
our questions.

Let me just finish by saying that there are a lot of numbers here
on Medicaid costs, and I know Congress is not going to be willing
to come up with any dollar figure to pay for Medicaid or anythin;
else because they aren’t solid numbers. They shift constantly. ‘And
before Congress entertains any action we need to have solid num-
bers. Mayor, you said early on you know how much cash you have
got; you know how many bills you owe. Can you tell us right now?

Mr. Barry. Congressman, in terms of the Medicaid problem, it
would not be difficult for the GAO auditors——

Mr. WALSH. I’m talking about the whole budget.

Mr. Barry. I will get to that in a few seconds—the GAO, the DC
government and the auditors to figure out a real number as to how
much cash is needed for 1995 and how much of this is accrual.
That is not hard to do. Just a question of going through the cost
reports and making a decision.

In terms of the DC government, as of yesterday, I indicated ear-
lier we had ending cash investments of $383 milton, we had out-
standing checks of $93 million, net available balance of $299. We
have an escrow of $70,000 for the note. The bottom line, we have
$70 million. We have $123 million of moneys available to be spent
on DC government payables. We have a checklist by agencies and
by dates that come up to $42 million. And the last date we have
was the February 17. We had a need of $2 million. So we owe $42
muhon.

Mr. WALSH. So you have cash on hand of less than $100 million.

Mr. Barry. $123 million yesterday.


129

Appendix D—Comparison of 25 Largest U.S, Cities—Continued
[Percent}

Pow ‘Unem pioy- Population

wes a ss
Phoenix .. at 5 70 ra
‘San Diego 13 6 69 a
Nashvilie-L 13 8 69 0
Jacksonville ., 1 NA 69 oO
San Francisco 13 6 7 7
Indianapolis .. Ya 9 n 0
Seattle 12 5 68 4
San Jose 9 6 B 4

‘rThe unemphyment rate is calculated forthe civiian labor force 16 years of age or older
**Covers persons 16 years and older in civilian lbor force and US Armed Far

ores
Saute, Buran of Ceaos daa contin! on Slater and Hal 1983 Cy and Coon Extra, Pages 36,37, 1990 Census of Population. So
rable I

cial and Economic Characteristics Unted States, 1990 CP-2-1. T

Appendix E—Employment Locale vs. Residence
{14 largest US. metro areas, 1990)

Percent ot
smetio rsi-

‘dents
working in
central city

Ratk and Area less per

cant of
setts resi-
eats kv

ing in
central city
1 Houston 187
206 183
3 Atlanta. wa
4 Boston-Lawrence-Salem ray
5 Minneapolis-St. Paut 16
6 St. Louis 105
7 Dallas 97
8 San Diego 9.2
9 Riverside-San Bernardino 34
10 Los Angeles-Long Beach 24
11 Philadelpt ~02
12 Chicago -13
13 Detroit -15
14 New York -37

‘Note: The Washington DC metro area includes the centeal cities of the Distrct of Columbia, Frederick, MO; and Adington, VA
Source: 1990 Census




107

Mr. WALsu. I have taken enough time. Thank you.

Mr. CLARKE. Could I follow up?

Mr. Davis. Sure, Chairman Clarke.

Mr. CLARKE. To Congressman Walsh. You mentioned
underbudgeting.

Mr. WALSH. Yes.

Mr. CLARKE. In fact, it had been a problem and may still be a
problem. We recognized the possibility of some underbudgeting
when we put through the fiscal year 1995 budget originally, espe-
cially in the Medicaid and AFDC area.

The Kelly administration said to us, well, they had some man-
agement reforms in place; and we made a legislative decision in the
budget posture, as things come to us, that we would not put money
in there even though we thought she would have a problem, to let
her go ahead with her managerial reforms. Because if we put the
money in there the tendency would be for the administrators to
spend it.

Instead, we created a rainy day fund. And the rainy day fund
was in the report that we put into that budget premised upon the
notion that there may be underbudgeting and would be available
for reprogramming by a Mayor, through the council, and transmit-
ted to the Congress to spend for those purposes. Then the Congress
later went and put the $140 million limit upon us.

As I explained earlier, we thought, based upon staff-level con-
versations, that if we came up with cash savings other than the
$140 million, if we came up with budget savings other than the
$140 million, our additional revenues we could use to apply to
underbudgeted problems.

And I am not clear now, I am afraid, on what the rules of the
game are with respect to that because that is what we understood.

'e were still going to need that $140 million.

Second, the problems that we thought might occur with respect
to Medicaid and AFDC did, in fact, occur. But another one of your
restrictions was that the rainy day fund could not be used during
this period of time, and if I recall the wordage of it, it could not
be used for any of that $140 million worth of reductions.

Now, I would like, if I could, to get a bit more clarity. Can the
$140 million in the rainy day fund, some of which has been loaned
out to come back this year for the convention center, what is left,
can that money be used for what it was originally intended for,
which was those underbudgeted items of Medicaid and AFDC,
without impacting upon that restriction that is there?

Mr. WALSH. Mr. Chairman, I will—if you would like, I will defer
to the ranking member who was chairman at the time the lan-
guage on the $140 million cut was crafted.

Mr. Davis. Without objection.

Mr. Dixon. Mr. Clarke, as I understand the press reports, at the
end of 1995 you are going to be $722 million in a deficit position,
give or take something. The city council bracketed $20 million. I
assumed at the time it was to give the city council, in fact, some
control over the spending. I don’t understand the relevance of talk-
ing about $20 million that you don’t have when you're going to
have a $700 million deficit and you ask can we spend this money.


28

budget on December 21 that included (1) expenditure reductions and revenue in-

creases of $448 million and (2) increased agency allocations and reprogrammings of

$309 million. The net reduction of $139 million included only $99 million in expendi-

ture cuts and $40 million in additional revenue. The net amount essentially equaled

the $140 million congressional mandate; but the Congress had ordered that all of

the $140 million be in expenditure cuts.? Table 3 outlines the Council’s actions last
jecember.

Table 3: Summary of DC Council Actions
[dollars in mations)

‘Council actions:
Counell cuts spss $273
Net revenue mereases 40
Unallocated budget reductions 129
Total actions saa
Councit reallacations:
Additional cash needs $79
Increased agency budge 10
Repragrammings . 129
Total reallecations $309

$139

Net impact of council actions .......
Source: GAO anahysis of data from the OC. Coane

Although, the net result of Council actions has been $99 million in cuts, these re-
ductions have not been allocated to approved spending plans. As a result, District
agencies are still operating on “pre-$140 million cut” spending plans.

The District government also adopted an apportionment procedure in an attempt
to control spending; but this process does not appear to be reducing expenditures.
The District directed agencies ‘to limit spending to 25 percent of their appropriation
in the first quarter and 15 percent in the second quarter. However, those apportion:
ments were also based on the originally submitted “pre-$140 million cut” budget.
In addition, the apportionment process could only be delaying rather than reducing
expenditures.

eral District agency officials told us that personnel expenditures alone in the
second quarter would exceed the 15 percent apportionment. For example, D.C. Gen-
eral Hospital officials said that payroll costs in the second quarter would consume
all of the apportionment, and Fire and Emergency Medical Service officials said that
the February 17 firefighter payroll put them over their allocation. D.C. Schools said
that all of their allocation would be expended when they pay the March 1 teacher

payroll.

Although, the District is continuing to process payroll even though the apportion-
ments are being exceeded, agency offciale told us that the result 1s that they have
no funds to purchase any supplies, Fire and Emergency Medical Services officials
said that thelr inability to purchase supplies could be extremely serious, The appor.
tionment process also does not apply to entitlement payments (e.g. Medicaid) as
any entitlement payment is approved regardless of the agency's spportionment
limit.

THE $722 MILLION PROBLEM

On February 1, 1995, the Mayor announced that overspending in District agencies
could result in $3.89 billion in expenditures or $631 million over the $3.25 billion
expenditure limit established by the Congress. The District said that this deficit was
comprised of Medicaid cost settlements and adjustments, agency overexpenditures,
und the required $140 million in congressionally mandated cuts. In, addition, the
Mayor explained that there was a $91 million cash shortage, making the total short-
fall $722 million.

To address the $631 million in agency overspending, the District has proposed
that $267 million of the shortfall be covered by additional cash from the federal gov-
ernment and that the Congress rescind the $140 million in budget cuts. Rescinding
the $140 million would allow the District to use the surplus budget authority built

20n February 7, 1995, the D.C. Council rescinded the $40 million revenue increase, reducing
the net Council actions on the fiscal year 1995 budget to $99 million.


87

Mr. Davis. I think you have clarified that adequately for the
record. I don’t know how other Members feel, but you think you
clarified that, the $79 million.

Mr. CLARKE. So you are treating the $79 million, although it is
budgeted as really a cut?

ir. Davis. I think we can call it that way. It may take a formal
designation by counsel. I am satisfied it is cash available for deficit
reduction or for paying bills which you may end up using it for any-
way.

Mr. CLARKE. But I don’t want our fiscal year 1996 Federal pay-
ment being embargoed because——

Mr. Davis. Mr. Walsh will make that call, but I think you put
on the record the availability of that money.

Mr. Wats. I am sorry I missed the point. Could you restate it?

Mr. CLarKE. Congressman Walsh, I wanted a little bit of guid-
ance with respect to the $79 million that we budgeted for cash re-
serve,

Mr. WALSH. Yes.

Mr. CLARKE. If it is going to be treated as a budget item, as an
expenditure item, as apparently GAO has done that, and therefore
we fall out of compliance with the $140 million and we get a fine,
so to speak, in the fiscal year 1996 budget, I can simply in the next
supplemental take out that appropriation for the cash reserve. I
did it as a matter of discipline in there. But it is like the act of
discipline to set it aside has become, in the way things are working
out, a deficiency on our part.

Mr. WALSH. Well, I am not sure exactly how it would be handled,
but certainly I applaud the efforts to set some cash aside for a
rainy day.

Mr. CLARKE. Not a rainy day fund.

Mr. WALSH. Well.

Mr. CLARKE. Cash reserve.

Mr. WALSH. Pardon.

Mr. CLARKE. Rainy day is to spend for things needed; a cash re-
serve is not to spend.

Mr. Wats. I can’t speak for Congressman Dixon, but the prob-
lem is you are nct at the $140 million level. Part of Sour proposal
is revenues that were raised, and that was not part of the deal.

Mr. CLARKE. That’s right. That's right, but if you count the $79
million as a cut, then we are at the $140 million level and we are
under the $3.2 level. That is why I am concerned, because we are

‘oing to have another budget and I have been very diligent in what
the council does in meeting that $140 million requirement you have
set.

Mr. Watsu. Even that aside, you are still over the authorized
level of spending for this year.

Mr. CLarkE. Not if you do not treat that as an expenditure we
are not, sir.

Mr. Davis. Because you still have the Medicaid issue.

Mr. CLARKE. If I read page 12 of the GAO correctly, they——

Mr. WaLsH. I think in a statement you made earlier, you ma’
have misspoken. You talked about the X3'39 billion level of spend-
ing and then you talked about the $79 million you set aside for a
cash reserve and somehow you got to $3.1 billion from $3.89 billion,


82

It occurs to me that is far easier to do than what we have done
to our own employees and our own retirees because we are talking
about people who are not even in existence now. We are talking
about new employees. It is the kind of thing that when we get to
hearings and we go to the floor, that is what is going to smack us
right in the face unless we have that to show for it, and I am sorry
that in an area where I think the city has really performed and the
Congress has been slow te act, I am sorry that this issue could, in-
deed, stand in the way, but I believe it could.

I encourage you to proceed, as you are, to try to move forward
with that program. I do want to take note of something that Mr.
Walsh has said in his testimony because I want to certify what he
said and to say how dangerous it is to the city. I have proposed an
oversight board which could take any form that we decided at this
time, and I am pleased that the Mayor has indicated some support
for the idea.

You know that I had extensive discussions with both of you be-
fore coming forward with the idea, but Mr. Walsh just said, as he
completed his testimony, that he could not get an appropriation
through the House of Representatives. Now, I indicated that the
two major reasons that I came forward publicly and urgently with
the notion of a control board were, one, we can’t borrow, so we
won’t exist in a few months unless there is some intermediary to
help us get to the Treasury. The Treasury will not lend us money
without putting the most severe restraints on us.

They will be at least as severe as the market and probably more
so. Then there was a second that you can’t do it in the remaining
months, not when you compare what the GAO says you have to do.

Now, there is a third notion on the table, and that one is true
death to the District, and that is we don’t control these 435 Mem-
bers and their votes. We cannot deliver those Members, and yes,
we delivered the appropriation last time in the most amazing way.
I have never heard of an appropriation getting through here only
with three votes because every Member knows that the appropria-
tions have to get through. There are 13 of them, so you just as well
fess up and get them through. We now have three reasons that in-
dicate that the District has no choice.

I want to say how much I appreciate the discussions I have had
with Mayor Barry and Council Chairman Clarke and how much I
appreciate the accelerated action of both branches, but I want to
reemphasize the danger and to say that I think this simply has to
be done immediately to save the city.

Mr. Davis. Thank you, Ms. Norton.

Chairman Walsh.

Mr. WALSH. I would like to recognize our distinguished ranking
member, Mr. Dixon.

Mr. Barry. Could I take a couple minutes to comment on Ms.
Norton’s statement?

Mr. Davis. No objection. Go ahead, please.

Mr. Barry. What we have tried to do, both the council and the
Mayor, is to lay out the problem and some suggested solution. My
solution goes not counter to the council, it is just in addition to
that, but let me just say, Ms. Norton, that it is clear that we can’t
solve this problem in 1 year even if we wanted to.


10

window to by-pass the personnel regulations and selectively reduce the workforce.
That same bill also gave the Mayor the authority to reduce the budgets of independ-
ent agencies.

‘All the tools that were requested were provided.

Four years later, the District is technically insolvent—their current liabilities ex-
ceed their current assets.

And the District is out of cash.

One of our objectives is to find where the money has gone and why the District
is where it is today.

After this joint Nearing today, our two subcommittees will begin having separate
hearings on the District’s finances and structure. So while this hearing is intended
to shed some light on what we have been reading in the press, we will be addressing
these issues in greater detail in future hearings.

It saddens me to see the District in the condition it is in and I would rather be
focusing my attention on other issues. But the Congress has a constitutional respon-
sibility for the District of Columbia. And we as Members cannot lose sight of that
fact. That is why we are here this morning.

While I would rather the District’s financial situation were different, I welcome
the challenges that are ahead of us.

All of our actions thus far have been bipartisan. This is an issue that requires
total cooperation from among the District government, the Congress, and the Execu-
tive Branch of the Federal government.

This is our city—This is the people’s city and we cannot afford to fail.

Thank you.

Mr. Davis. Thank you, Chairman Walsh.

I now recognize the Delegate from the District of Columbia, who
I think has courageously opened a public discussion of this situa-
tion. This hearing is not about policy debates or initiatives, but I
cannot help acknowledge her leadership in taking up the gauntlet.

Ms. Norton.

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

Chairman Jim Walsh and Chairman Tom Davis deserve both
thanks and praise for convening this unusual joint hearing to help
meet the demands of these unusual times. I welcome the testimony
of Mayor Marion Barry and Council Chairman David Clarke, who
are working with indefatigable enerey to resolve a mounting crisis.
I welcome also John Hill and his colleagues at GAO whose indis-
pensable service to both committees and to the District has been
thoroughly professional.

The District’s problems are both a replay of serious and similar
problems confronting many large cities and a unique version of the
urban crisis of the 1990’s. With its unique disabilities, however, the
wonder is that the District followed rather than led the way to the
serious fiscal calamity that overtook cities such as New York and
Cleveland as early as the 1970's.

The reason the District did not come earlier to this crossroad of
crisis, ironically, is because of self-help. Congress froze the Federal
payment between 1985 and 1990. It was not the Federal Govern-
ment but the District's own taxpayers who made up for the absence
of a State and county to share the increasing cost of functions
borne by no other city.

The District drew from its own resources, especially its middle-
income and business tax base, until it used some up and sent oth-
ers scurrying. The city did not foresee an act early to avoid the cri-
sis, a myopia common for jurisdictions that live close to the people.
In the process, however, the District grew and overgrew its govern-
ment.


52

Syracuse, the State provides about 40 percent of it and the prop-
erty taxes about 53 percent. The rest of it is Federal grants.

e only point I am making is that to drive this home, we have
over 54 functions that we outlined that are State functions, that no
other city in America has to deal with. Not to mention the county
functions.

You say, well, how does this affect our situation here? It affects
our situation here, when you look at our employees, the great ma-
jority of the employees, with the exception of the school district, are
performing State functions, and if we did not have those State
functions to perform, we would not need all those employees or to
spend this money.

The other issue which I am sure Mr. Davis can appreciate, the
District is the only State in America, with State functions, that was
not able to tax income at its source. If we were able to tax income
at its source, let me demonstrate what we mean by that—in 1996,
Maryland residents will earn $12.6 billion in the District, while
Virginia residents will earn $9 billion. DC residents are will earn
$3.1 billion by working in either Maryland or Virginia. In other
words, $18.5 billion will be earned in the District, yet 70 percent
of that income will not be taxable by the DC government.

If the DC government were to tax this nonresident income at 2
percent, we would get in $370 million, or we would do it at 4 per-
cent, we would get in over $720 million. Again, $720 million would
go a long ways in helping us to balance our budget.

The other area, and we are moving rather rapidly, is the prop:
erty. The DC government can only tax about 43 percent of all the
land in Washington; 43 percent. The Federal Government owns
over 50 percent of that land. I estimate that the property, its
worth, and our finest revenue officers estimates over $1 billion.
Which means the Federal payment is only about 60 percent of
what it ought to be in terms of the land.

The other area, Mr. Chairman, I want to introduce for the record
is the McKinsey report. Here is an outstanding financial consultant
group that did a report for the city. It came to the conclusion that
if the District government did everything everybody asks us to do,
even be it draconian in our cuts, if we cut to the bone, the District
government could only solve one-third of this problem.

This report says that the District government could only solve
one-third of its problem, which means that two-thirds of this prob-
lem has to be solved by the Federal Government. This is an inde-
pendent accounting firm, independent consultant and I would like
to introduce into the record the McKinsey report which says if you
did all you ask us to do or we want to do ourselves, this would not
solve our problem.

One of the Congress people asked the question about whether or
not we could solve all our problems. I know Ms. Norton has asked
that question repeatedly, so for the record, I want to indicate that
we cannot solve this problem by ourselves because of the structural
inequities.

Now, recapping the first question, we have talked about what the
problems are and how we got there. Let me also say in listening
to the GAO report, this report, when you read it and look at it, it
covers—99 percent of this report covers the years 1991, 1992, 1993,


94

For instance, something as simple as answering the telephone in
a very courteous, responsive way. We have tackled that problem by
training over 1,500 people in the last month merely on how to say,
“May I help you, my name is Marion Barry.” They are doing that.
That is just a simple area, but there are much larger ones the gov-
ernment has not been as responsive as it ought to be.

So you will find in me, a Mayor that is going to insist we be more
responsive, and as we become more responsive, I think Members of
the Congress will see that. And as we solve this budget problen—
we are going to solve this problem. No one in this room is going
preside over the demise of the District of Columbia government or
the Nation’s Capital. We are going to solve it. The only question
is how we solve it. We are going to solve it.

Mr. BonILLa. I know my time is up, but just my closing comment
is, being a Member of the majority party here, we have a lot of
tough battles but there may not be one tougher than passing the
appropriations bill for the District of Columbia. So we need all the
help we can get.

Mr. Barry. Your Nation’s Capital has to be one of the major pri-
orities. We cannot preside over the demise of the Nation’s Capital.

Mr. BoniLta. I agree.

Mr. Davis. Mr. Gutknecht.

Mr. GUTKNECHT. I would start by saying I am not a faultfinder.
I know people like looking for fault, like there is a reward for it.
I do not happen to be one of them. I do happen to believe in the
whole idea of actions and consequences.

I was curious, and perhaps first maybe I should state part of my
education process has been to reread as much as I can of the Home
Rule Act, and I would encourage Members on both sides of this
desk here to at least read or reread what the responsibilities are
of the city council, the Mayor’s office, particularly as relates to the
financial duties of the Mayor as well as the authority and the re-
sponsibilities of the Members of Congress. It has been interesting
reading for me.

But I want to get to a point here, and you just, Mr. Mayor, sort
of recited a list of departments and department heads that over-
spent their budget last year. I am just curious. What was the con-
sequence to those department heads? Are they still all employed?
Did they get pay raises? Did they get a bonus last year? There has
to be a consequence for what some would describe as mismanage-
ment. Are they all still on the payroll?

Mr. Barry. Some are, some are not. I can give you an example
of something, Congressman, that is not the fault of any manager.
Take the area of settlement judgments. This is a line where citi-
zens sue the District of Columbia government and get awards from
judges or injuries or settlements. That line was overspent by
$6,589,000. That was not a management problem, that was a budg-
et problem. It was underbudgeted in the first place.

it seems to me there has to be a different kind of budgeting sys-
tem which says we don’t know what settlement judgments are
going to be. We can predict what they were last year, when some-
one gets a $5 million settlement because somebody did not sew
somebody up right at DC General. That is not a management prob-


73

In August, 1994, the Council made the following requests of the Congress which
Twill take the opportunity to repeat here:
* Allow the government of the District of Columbia to tax sales at the Smithso-
nian;
* Increase the Federal Medicaid match tc 66 5% (from 50%);
+ Allow prison industry sales to non-profits;
+ Amend the charter to permit us to enter into lease-purchase contracts.

We have enjoyed your sharing your perspective on our financial conditions on a
annual or semi-annual basis as budgets and supplementals go through, but we in-
vite you now during this period of special attention to walk through trying to do
a long-term plan, plotting both the revenues and the expenditures. ‘The experience
will give you a great insight into the infirmities of our financial structure.

‘The Council and the Mayor look forward to working with the Congress to resolve
the immediate and long term problems. We are resolved to face the difficult issues,
make the tough choices create a city we can all be proud of. We believe the District
of Columbia can be the premier capital city in the world.

Mr. Davis. Thank you, Chairman Clarke.

Mr. Pohlman, we would like to call on you now. You are goin
to shed some light on the Medicaid situation. Please take as muc!
time as you need.

Mr. Barry. Mr. Davis, before that, let me add one point about
our money and our accounting.

Someone asked the question about insolvency, and we could de-
fine it different. But let me just say to the Congress and to the citi-
zens of Washington, we know how much money we have in the
bank and how many bills are outstanding.

I will just give you an example. As of February 21, which was
yesterday, we had almost $125 million of available money. We had
almost $400 million of funds, but some are in escrow, et cetera, as
you very well know. We had bills of $42 million. Which means that
we have enough money in this bank and will have it until the mid-
dle of May to pay our bills on a regular basis.

Mr. Davis. OK, we will have some questions on that, but I appre-
ciate that clarification.

Mr. Pohlman.

Mr. PoHLMAN. Thank you very much.

My name is Robert Pohlman. I am interim chief financial officer
for the District of Columbia. I want to make a few comments on
the Medicaid program because it is such a major factor, both in the
audit results for 1994 and in the increase in the District’s budget
problem in 1995.

Between 1990 and 1994, there was a 93 percent growth in ex-
penditures and a 36 percent growth in the number of recipients
who utilized medical services paid for by Medicaid. Hospital ex-
penditures have increased by 50 percent between 1992 and 1995;
expenditures for nursing facilities increased by 13 percent between
1992 and 1994; and expenditures for intermediate care facilities in-
creased by 24 percent between 1992 and 1994.

Costs have been rising rapidly in this program due to inflation
in medical services area; increased utilization; more people coming
on to the rolls; and greater utilization by the facilities the hospitals
involved. And so we have been playing catch-up, as it were, with
the Medicaid program for some time now.

Original budgets submitted or developed some 12 months in ad-
vance for Medicaid, rarely end up being the budgets that have to
be used, or rarely end up being adequate to cover the actual ex-
penditures that result.


34

Mr. HILL. The $722 million, yes, they are different numbers.

Mr. WALSH. Very different numbers.

You have said several times that the District is, for all intents
and purposes, insolvent and the cash shortfall is severe. Do you be-
lieve that the District—can you tell us right now how much you be-
lieve, how much cash you believe the District has on hand today?

Mr. HILL. No, I don’t have that number. One of the issues with
respect to the amounts that the District has on hand is the actual
cash system that they use in order to determine what their cash
is. The District certainly knows the amounts that are in their bank
accounts, They do know that information.

However, they have some difficulties in determining the out-
standing checks, so it would be hard to get an exact number. They
basically get a ballpark number. Also, you would have to look at
the payables that are outstanding, and we have asked, but have
not received a total amount of the payables that are outstanding
as of a given day.

Mr. WALSH. Several weeks ago, when we met with Mr. Pohlman,
I asked him if he knew how much money the District owes to ven-
dors—how many bills have been held to maintain whatever positive
cash-flow there is. And he said he could not answer that question.

Based on your assessment, should the District be able to answer
that question?

Mr. HILL. Yes, I think that someone should be able to answer
that question. That is an important question to answer. However,
because of the systems that the District is using and also because
of the fact that basically the Controller's office really would not
know the bills that have come in until they are sent from the agen-
cy, it would be very difficult for them to find out exactly how much
is there unless they go into each individual agency and then really
do a search for these bills.

Mr. Watsu. Thank you, Mr. Hill. I am going to run out of time
real fast. We will have another opportunity to ask more questions
on Friday when our subcommittee meets, and I thank you for your
testimony and for all four of you being here today.

Mr. Davis. Thank you. I now recognize Ms. Norton for questions.

Ms. Norton. Thank you, Mr. Chairman.

Mr. Hill, your team also did a report on the District and un-
funded pension liability, did it not?

Mr. HILL. Yes.

Ms. Norton. Do you know of any city which is operating at the
moment with a pension fund that is totally unfunded?

Mr. HILL. No, I am not aware of any that is.

Ms. Norton. So that is unique in the United States for the Dis-
trict. How much of the $5 billion or so unfunded liability is due to
costs that go straight to retirees?

Ms. Triccs. As you know, the District funds the payments every
year that go directly to retirees on an annual basis. The accumula-
tion of the fund balance, the unfunded portion of the fund balance
is the estimated payments going forward, and I think that approxi-
mates about $3 billion. The current payments have been between
$290 million and $310 million a year for the last few years.

Ms. NorToN. What amount does the Federal Government put
into this te reduce this unfunded pension liability?


46

Mr. HILL. It can be done, but, again, it would have a tremendous
impact on the cash-flow of the District.

_ Ms. Norton. It can be done, given the city’s present cash posi-

tion.
Mr. Hinu. If the money before or that relates to that before it
goes to other purposes is put aside, yes, that could be done. How-
ever, the cash position of the District is such that it would have
a tremendous impact.

Ms. Norton. Is there any way that the District could corral
spending in areas that have been unbudgeted perhaps because they
are virtually mandated areas such as corrections, Medicaid, ex-
penditures, police overtime?

Mr. HILL. We haven't specifically looked at that issue, but we
will be glad to if you would like us.

Ms. Norton. Well, these are where the real burdens in the budg-
et, of course, are with spending that must occur, and essentially my
question, I suppose, for you when you can get back to me is given
spending that must occur of this kind, what steps could the District
take to rein in that mandated spending.

Mr. HILL. Yes, there is a small amount in terms of the percent-
age of the budget that either isn’t personnel or related to some type
of entitlement-type program, and if you were to concentrate all of
the cuts in that area, that small piece of the budget, you would not.
come up with $631 million clearly.

Ms. Norton. So this becomes something close to impossible to do
without some kind of long-term plan to try to get that mandated
spending under control?

Mr. HILL. Well, I think probably one way to look at this is that
certainly this is a financial crisis for the District, but I think the
solutions are beyond financial solutions. I think that there are po-
litical solutions that have to

Ms. Norton. There are what?

Mr. HILL. Political solutions that have to be looked at as well.

Ms. Norton. What do you mean by that?

Mr. HILL. Such as some things that have been put on the table
already about the possibility of restructuring. One thing that we
have seen is that through the Rivlin report and a lot of the other
reports that the changes that have to be made in the future con-
cerning the District’s expenditures are such that next year the
problem gets worse than it is this year. The year after that it gets
even worse, and the year after that it gets even worse.

In terms of the gap between revenues and expenditures as they
are projected out, so that any solutions that are put in place now
certainly have to be solutions that address the current problem, but
also solutions that will provide changes in the projections out in
the future because the problems get worse in the future.

Ms. Norton. But you don’t think that the District could rein in
that spending by cuts in its budget alone?

Mr. HILL. Wwe haven’t made that assessment at this point. I will
tell you that it is a very, very large piece of the District’s budget,
obviously, and that it would be impossible to do that without a
large change in the employee costs and other costs because there
isn’t a large enough portion of the budget that is outside of those
areas,


115

he reduced more than we said to reduce. I think we’re working on
it in a concerted way. I am not seeing this great difference.

I mean press sometimes goes and says, well, the Mayor’s at 795
and the council is at 1,200. They are at war with each other. I don’t
see that right now.

But the council has said if it doesn’t get done it’s going to go on
and do it. It is just self-discipline, really.

Mr. Barry. Ms. Norton, I think that the way—I read what you
probably read, and it should not reflect the majority of the council.

There are some members of the council who have a different view
of some of these matters than me. For instance, there are some
members of the council, for whatever reason or another, who want
to fire more people. But the majority of the members of the council
and I are—we are very close together on the goals in reducing this

udget.

's. NORTON. Finally, let me ask a question on your own person-
nel authority, Mr. Mayor. What proportion of the District’s person-
nel authority is under your direct control?

Mr. Barry. While we are Belting it, I can give you some—Ms.
Norton, let me get that to you, but Jet me give you generally where
we are in terms of the big items.

One-third of the 32,000 FTEs we talked about is in public
schools, not under my authority; the university not under my au-
thority; the courts are not under my authority; the pretrial, public
defender, DC school of law. But let me give you a list of it. But a
number of the big agencies are not under my authority.

My staff is saying about 55 percent, but I don’t want to be held
to that number. Let me just take the agencies and send them to
you tomorrow as to the FTEs and those not under my authority.

The big one is the schools. One-third of our FTEs is in the
schools where I have no authority.

Ms. NorTOon. Well, you do have bottom line authority.

Mr. Barry, What you have, Ms. Norton, is that, for instance, the
council and myself agreed to reduce the school’s budget by $31 mil-
lion, and we had recommended that most of those cuts come out
of central administration, not out of the classroom, but what the
schools did is take more out of the classroom than out of central
administration, which means when you—and we had the language
you should do it this way. They did it another way.

Ms. Norton. By the way, I can’t believe that there would not be
some way to indirectly get at that problem by saying to, for exam-
ple, to the school board if you take it out of teachers we will take
retribution on your budget for next year. It seems to me that with-
out invading their budget, since their budget has to go through the
council and has to be approved by you and by the council, there
would be ways to have an effect upon where they decide to cut and
where they don’t cut.

Mr. Barry. What happens, Ms. Norton, you tell them that for
1995 you say we are going to reduce you further in 1996 because
you didn’t cut in central administration in 1995 and then in 1996
they are going to do it and it becomes a never-ending battle.

Ms. Norton. But it might get them to do what you want them
to do.

Mr. Barry. in 2 or 3 years maybe.


51

And if we had the $295 million that the District is paying for
these retirees, 99 percent of whom retired under the Federal con-
gressionally mandated system, that $295 million could be used to
either reduce the property taxes on our commercial property, re-
duce our income taxes, or reduce spending in other areas, and
thereby not being required to have that burden on our backs. That
is $295 million.

You say, well how does that relate? Since 1980, the DC govern-
ment has paid over $2 billion—$2 billion of our hard-earned tax-
payers’ money—into our pay-as-you-go system.

at the end of iy, testimony, one of the things I am going to
ask that the Federal Government do, is beginning October 1, 1996,
to begin to pick up its share of this pension bill, which means if
we are not required to pay the $341 million in 1996 that gives the
DC government some latitude and some cash availability, because
our revenues will remain the same as though we were going to pay
that out.

The third situation, which we all talk a lot about, is that the Dis-
trict was given State functions without conferring State authori-
ties. Let me pass out to you a list of what we call State functions.
And I am not going to read them all but I will read a few of them.

Medicaid, Saint Elizabeth Psychiatric Institution, AFDC, emer-
gency assistance, general public assistance, supplemental income,
energy assistance, day care, foster care, service to the aging, Uni-
versity of the District of Columbia, State educationa services,
teachers pensions, arts and humanities, State prisons. No other
city in America operates a State prison with 9,000 sentenced pris-
oners, parole system, pretrial services, public defender system, DC
court system, unemployment compensation. This list goes on and

on.

I have not added it up, but I suspect—somebody add this up
while I am talking about this, Bob.

There are about 50-odd functions here that are truly State func-
tions without State authority. And I don’t—in order to bring this
home a little bit, let me suggest, and Congressman Walsh was
president of a city council in Syracuse, and I am told you were an
outstanding president of the council while you were there, but let
me just use Syracuse’s budget.

It is typical of Trenton, it is typical of New Orleans, it is typical
of Chicago, it is typical of most cities. And when we add up the
functions of the Syracuse district, they have police, fire, public
works, parks and recreation, law, finance, community services, en-
gineering, community development, development, executive elec-
tions, employee benefits, police and fire, and capital probations and
school districts, I think the budget comes to about $376 million.

But when you look at the county functions, which are also a part
of what happens in Syracuse, you find that—I hope I pronounce
this right, Mr. Walsh, Gnondaga County. It is an Indian name.

Mr. WALSH. Onondaga.

Mr. Barry. Onondaga County. You find that the county is pick-
ing up aging and youth, mental health, health department, depart-
ment of corrections, district attorney's share, parks and recreation,
transportation, probation, library, long-term care, community care,
et cetera. When you look at the source of funding for the city of


AT

Ms. Norton. Thank you, Mr. Chairman.

Mr. Davis. Thank you very much,

The gentleman from Minnesota, Mr. Gutknecht.

Mr. GUTKNECHT. Thank you, Mr. Chairman. As a new member
of this committee, I have had a difficult time sort of getting my
arms around what really Washington, DC is because in many re-
spects, I understand now that it has some elements that many of
the States have. It delivers services that many counties, for exam-
ple, in Minnesota do. It also has a relationship with the school dis-
trict. I am trying to sort all this out.

One of the things that I am having difficulties, I think, and I
would like to focus for a minute or two on the school district. The
first question I have is exactly how independent are the Washing-
ton, DC schools relative to the city? Do they have their own levy,
for example?

Mr. STEPHENSON. No, they do not have their own authority to
borrow.

Mr. GUTKNECHT. They have their own levy for property taxes?

Mr. STEPHENSON. No.

Mr. GUTKNECHT. Do they have to go to the city council to get
their money?

Mr. STEPHENSON. That is correct.

Mr. GUTKNECHT. The other question I have, and I am havin;
trouble sorting this out, exactly how much money they really spen
per pupil unit. According to some published reports, it is as much
as $9,549 per pupil unit. I think according to your report from last
summer it is $7,383 per pupil unit. I am wondering if anybody on
the panel can sort of rectify those two numbers.

Mr. HILL. One of the differences is that when you compare the
amount of moneys that the District is spending as compared to
other jurisdictions, you have to consider the fact that the District,
unlike some other jurisdictions, would incur most of the curricula
development expenditures, and so in making those comparisons,
and I am not sure where the other numbers are coming from, so
it is hard to know what the other—what is included in those other
numbers, but it may be the types of activities that they are com-
paring to comparable jurisdictions.

For instance, in some jurisdictions there are, the development of
curricula is a State function and not a county function, and so they
may have pulled out the cost associated with the District’s curric-
ula development. That is only speculation on my part since I don’t
know what went into the other numbers.

Mr. GUTKNECHT. Well, the real question I want to get at, and
somehow I want to ultimately sort that out, exactly what the ex-
penditures are per-pupil unit compared to a school district, for ex-
ample, in Minnesota or Montana or somewhere else?

Mr. HILL. Sure.

Mr. GUTKNECHT. But I also want to know—one of the most trou-
bling things in your report is on page 9, relative to the school dis-
tricts. On one hand, the announcement showed 90 staff departures,
but the actual FTE data that you report shows an increase of 404
full-time equivalents. Can you put a little more flesh on that?

Mr. STEPHENSON. Yes. The fiscal year for the schools is the same
as the fiscal year for the District, and it begins on October 1. That


76

Mr. Barry. Mr. Chairman, our approach to that is we are going
to submit a supplemental budget to the city council on March 8
with these numbers in there. The U.S. Government has a supple-
mental, as it does in this cycle or as in 1991, there can always be
emergency legislation that would seem to me originate maybe in
your committee, because it is authorizing and up in the appropria-
tion part of it, so I think the Congress and the Federal Government.
have the mechanisms to technically and legally solve this problem
if it desires to do so because the fiscal year doesn’t end until Sep-
tember 30, that is when the penalty starts.

Mr. Davis. 1 only get 5 minutes. Right now under your current
projections, either you or Mr. Pohlman can answer, when do you
see the District literally running out of cash?

Mr. POHLMAN. Our projections are that if we don’t get assistance
we are going to have severe cash problems in May. I want to indi-
cate that we are paying bills with a 30-day lag time from date of
acceptance right now. We would need to continue that kind of pol-
icy. We could not simply pay all of our bills off quickly, but if we
maintain the current cash management policies, we believe that we
can continue having adequate cash until May.

Mr. Davis. OK. I have other questions, bat I will get them on
the next round. Thank you very much, I will turn it over to Chair-
man Walsh.

Mr. WaLsH. Thank you, Chairman Davis. I would like to thank
the Mayor and the council chairman as well as the members of the
District government for coming here today and expressing very
forthrightly their concerns.

We, too, are deeply concerned. I applaud the actions that you all
have taken thus far. Hopefully, we will be able to go around again
for questions because there is a lot of ground to cover.

I would like to take my first 5 minutes to respond or comment
on some of the things the Mayor said in his opening statement that
I think were important. First, the Mayor mentioned that in 1975
when Mayor Washington became Mayor, an audit was requested
and the books couldn’t be audited.

I would suggest that based on what the GAO told us today some
things just haven't changed in 20 years. The books still can’t be au-

ited.

Regarding the pension situation, the Federal Government’s com-
mitment to the pension program was $52 million a year for 25
years. That totals $1.3 billion. That is a substantial commitment,
and part of the problem, the structural problem that hasn’t even
been mentioned today is the fact that this is probably the only pen-
sion that I know of where two cost-of-living allowances a year are
provided. That is not affordable.

The District fought for home rule, and fought the good fight and
won. It made commitments when they got home rule, and now
those commitments, quite clearly, have not been met. We are told
the Congress has not met our commitments. It is pretty clear that
the District has not met theirs.

Part of home rule was presenting balanced budgets, and the
GAO has shown us that at least in the last 4 years balanced budg-
ets have not been presented. The Mayor mentioned that 44,000 po-
sitions were authorized in that home rule bill 20 years ago. Since


86

I would like you to answer is, one, exactly how will this team ac-
complish this task and whether or not the team is going to be a
temporary one or a permanent fixture?

The second question I have is whether you are prepared to de-
velop a multiyear spending plan for the District, if there is no addi-
tional funds provided by the District, by the Congress this year,
how long do you think it is going to take before the Congress can
produce a truly balanced budget? And my final question is do you
believe that a change in the method of caleulating the Federal pay-
ment to the District ought to be—is warranted and ought to be in-
creased or decreased?

Well, I know it is not going to be decreased, but certainly in-
creased. I thank the gentleman for allowing me to put my ques-
tions on the record.

Mr. Mayor, I hope you will answer those questions when we re-
turn.

Mr. Davis. Thank you. We will declare a recess and reconvene
at 1:30 p.m.

[Recess taken.]

Mr. Davis. The meeting will reconvene.

Mr. Clarke, I apologize. We were in such a hurry to get out of
here with the vote and everything else, I know you wanted to re-
spond to a couple of questions. I want to give you some opportunity
now to make more comments. And if the Mayor would like to either
address Miss Collins’ comments or any of the other questions that
were made before we proceed with the questioning, I want to give
you ample opportunity do so, and we appreciate your being back
here with us.

Mr. CLARKE. Well, I did want to respond to Congressman Dixon’s
points. When we were putting the fiscal year 1994-95 supple-
mental together, at a staff level, we made an inquiry to try to get
into some interpretation of the $140 million requirement.

It was clear that it was not to be taken out of revenues. And it
was clear, it had to be taken out of expenditures. But we inquired
as to whether, if additional revenues came in, was there latitude
to use them as well as expenditure cuts beyond the $140 million,
to address what had been noted, at the same time as the Congress
voted the fiscal year 1995 budget itself, or understood budgeted
problems.

That is the course that we went upon in the council. We did pro-
vide for the $140 million nonexpenditure, and then we took the dif-
ferences plus the increased revenues and applied them to the prob-
lems that we had noted. So I guess I put that point on the record
as to why we did that that way, and to get any further guidance
from the Congress as to what to do in the future about that be-
cause we intend to meet that.

Second, Congressman Dixon raised again the point that the GAO
said that we had come under—we were $99 million. And I had ref-
erenced that in my opening statement about the $79 million.
Again, if I can get some guidance, there is no problem to go
through the next supplemental and just withdraw that budget item
for the $79 million. Then it will just be there, hopefully, it will not

e spent.


4l

sioned by Congress that the District should engage in; two, some
type of scheme to permit the District to recapture nonresidents’
taxes as the individuals who work in the District go back to Vir-
inia or Maryland; and, three, that there be a realignment of the
‘ederal payment to compensate the District, for instance, military
personnel that don’t pay sales tax and things of that nature.

Has there been any part of your charter to do, other than to ana-
lyze the books, but to look prospectively as to whether or not some
of the solutions, for instance, floated in the McKinsey report of Oc-
tober 1994, would solve or move toward solving the dilemmas.

Mr. HILL. What we have been asked to do is to look at what
other cities who were involved in financial crisis have done in order
to solve their financial problems. One of the difficulties, however,
when you take that information and translate it into the District
or to the District of Columbia is that the District is certainly a
unique entity and so currently we are assisting the Congress in its
decisionmaking as to what solutions might have an impact on the
problem, but we have not come up with a solution ourselves to this
problem at this point.

Mr. LaTourRETTE. Have you reviewed or had made available to
you the McKinsey report of October 1994?

Mr. HILL. Yes.

Mr. LaTourETTE. Would it be possible, if asked, to make some
comments on their suggested solutions?

pot. HILL. Yes, we would be more than happy to comment on
that.

Mr. LaToureTre. Thank you, Mr. Hill. Thank you, Mr. Chair-

man.

Mr. Davis. Thank you very much.

Mr. Chrysler, the gentleman from Michigan.

Mr. CHRYSLER. Mr. Hill, do you know how many people are em-
ployed by the District of Columbia in all capacities?

Mr. HILt. No, I do not.

Mr. CHRYSLER. Anybody?

Mr. STEPHENSON. No, we really do not, but we could tell you how
many FTEs we think there are, and that is some 44,000. Of those,
10,000, the difference in numbers I mentioned before, 10,000 are
funded by nonappropriated funds, mainly Federal grants.

Mr. CHRYSLER. So, then, the District has almost one employee for
every 10 residents; is that right?

Mr. STEPHENSON. That is what the math would work out to, yes.

Mr. CHRYSLER. Well, the almost 20,000 employees paid from the
nonappropriated funds, they are still paid with DC checks, and
they still receive DC benefits and pensions?

Mr. STEPHENSON. It is 10,000, but we think it is 10,000, yes.
They are still paid through the same payroll systems. That is true,
most of them, most of them. There are different payroll systems in
the District, but I believe most of them are paid through the same
payroll system.

Mr. CHRYSLER. To your knowledge, do the Federal pri ms and
other grants that are used to pay these employees come from man-
datory hiring programs or do Federal education grants or housing
grants require the District to hire a certain number of employees
with the money?


127
APPENDICES.

Appendix A—Comparison of 15 Largest U.S. Metro Areas

ot
So

ee
VTS, completing —prtes- —_Pevert of
fain 2h years mont 1981,

tmousanas
Washington, D.C. $24 BS ASR 45
Nassau-Suffo 08 = 65 BL 60
Boston-Lawrence-Salem .. 186 308-392 a2
New York 14 re) al
Atlant 169 68306 47
Minneapolis-St. Paul . 801A 46
Chicago 15 A323 69
Dallas 164 2716 33.5 6.0
Philadelphia 3 2B 386 64
$90 DiPgO eo rennn 2 0 53S 61
las Angeles-Long Beach 123309 80
Detroit - 157 77300 93
Houston 151 Bl 3B 56
St Louis . rx) 27 31S. 68
Riverside-San Bernadino : 139 M8 86 32

Source: Bureau ot Census data contained in Slater and Hall, 1993 City and Council Extra, Table B, col. 60, 53, and &3; page 28

Appendix B—Population Growth for 15 Largest U.S. Metro Areas 1980-90

Percent
change in
population

Riverside-San Bernadino 66.1
Son Diego 342
Manta . 325
Dallas 304
Houston 207
ss Angeles-Long Beach 185
Washington, D.C. 165
Minneapolis-St. Paul 15.3
Boston-Lawrence-Satem .. 33

33

3.0

28

02
Nassau-Sutfolk .. ol
Detroit .. -24

Source: Bureau of Census data contained in Stater and Hall, 1993 City and Council Extra, Page 23


111

the hospital and seeing to it that it was repaid and eliminated over
a 5-year period.

It was our belief that, under accounting rules, that having
worked out or set out on a program to establish that plan, we
would give them more time. The District retained the assistance of
a consultant in that particular area. They submitted their report
sometime in January 1994—or maybe February. The Mayor at that
time submitted a plan in approximately June with a description of
how they were going to make changes at the hospital.

As I got to reviewing the documents at the end of fiscal 1994 and
on into the end of the year, having mentioned it in advance if there
was not. progress toward that we would no longer along with
carrying that as a loan, it became clear to me there was not
progress being made. Therefore, I recommended to the city that
they write—set up a reserve to cover that amount.

ir. DIXON. And, as a result, Mayor Barry did, in fact, do that.

Mr. NUNN. That is correct. That is reflected in the 1994 state-
ments.

Mr. Dixon. If I could, Mr. Chairman, I just want to pursue this
one issue?

Mr. Davis. Yes.

Mr. Dixon. Now, you went through with me the things that were
done after 1993 about the Mayor getting some consultants and
doing all those things and submitting a plan. But what was it in
1990 that made you think that this was a loan and that there was
a scheme to repay?

You see, on the tail end we did start making it look like we are
doing something. In fact, Mayor Kelly came and testified that she
had hopes that when it became a public-private corporation that
they would be able to pay back this money. And then someone even
suggested that maybe this hospital authority could float some
bonds to pay off this loan to the city.

But what was it in 1990 that made you think that this was a—
I mean, you realize this was all the same people, right? It would
be like me loaning myself some money. What was it then that—
did you ask them questions about it then?

ir. NUNN. I was not the auditor in 1990 or 1991, so there was
2 years of experience of that. I became the auditor in 1992. We did
raise that question in both discussions and through the manage-
ment letter as to whether that was appropriate.

Mr. Drxon. So are you saying you weren’t or Coopers was not.

Mr. NuNN. Coopers were not the auditors in 1990 or 1991.

Mr. Drxon. So, then, if I wanted to pursue this, we should go
back to the people at that point in time.

Mr. NuNN. If you are considering 1990 and 1991, yes, I would
say you would have to.

ir, DIXON. Right. Well, was it in 1992 you took over?

Mr. Nunn. In 1992——

Mr. DIXON. Ms. Kelly pursued this by way of a consultant, it is
my recollection, at the beginning of 1993.

ir. NUNN. That is correct.

Mr. DIxon. Now, what was it—when you took over, you looked
at this loan, and what was it that made you think it was, in fact,
a loan——


120

of this reduction has been realized. Today, there are about 45,000 workers on the
District payroll.

Exhibit 4—Top 10 Per-Recipient Expenditures on Medicaid 1992

Rank and State

US. average .. se
Source. Federal Government (Green Book)

Exhibit 5—Top 10 Public School Districts

bend
Rank and School district pit

1990-91

1 DC pubite schools

2 New York City, NY

3 Montgomery Cou

4 Fairfax Courty, VA

5 Milwaukee, WI

6 Cleveland City,

7 hos Angeles Uni
8 Dade County, FL.
9 Palm Beach County,
10 Philadelphia City, PA...

‘Average of 40 largest school districts
Average of top 10 eon n

“Some state administrative costs are not included:

‘Source: GAD (Education Digest)

A final observation on the expenditure side of the ledger: the District continues
to be burdened by a substantial unfunded pension liability inherited from the Fed-
eral government, The District spends about $225 million annually on the now $3.3
billion unfunded pension liability (which has grown from $2 billion since Home
Rule). (Arother $75 million is due to the District’s underfunding of pensions since

fome Rule.

Let’s turn to the less well-known facts on the revenue side. Over the past few
years, real growth in District government revenue has been flat, even counting an
increase in the Federal payment and the accounting modification in 1993 that boost-
ed property taxes. This is because income and sales tax revenues have plummeted
(Exhibit 6). Looking forward, the District itself acknowledges that real revenues will
decline. Our own view is that the situation is likely to be noticeably worse, as it
is unlikely that income and sales tax revenues will rise as forecast.

Exhibit 6—Annwal Real Revenue Growth 1988-93

Projected
Percent 1993-2000



125
Exhibit 15—Largest Metro Area Retail Developments *

Milo
square fet
Suburban:
1960s—Tyson's Corner, Montgomery Mall, Wheaton Plaza, Beltway Plaza, Prince Georges Plaza 65
1970s—Springfeld Mall, Landover Mall, Lakeforest Mall, Mall in Columbia, Manassas Mall, White Flint 65
1980s—Pentagon City, Potomac Mills, Fair Oaks, Landmark Center, Tyson's I 64
District:
1960-90—Chevy Chase Pevilion, Georgetown Park 07

300,000 24 Ht or mor
Sourea: Washington Business lovrmal, Book of Lists, 1993-94

From a tex perspective, the District is more directly and significantly affected
than other American cities by the demographic and economic trends that ail all
cities. As middle class residents leave the District, the tax loss is complete—there
is no state income tax that can be recycled or nonresident tax to mitigate the loss.
In addition, the District’s commercial property base is severely hamstrung by Fed-
eral ownership, and its proximity to the suburbs allows for easy access out, both
to live and to shop.

e District cannot expect to be successful in raising revenues by raising taxes.
The District’s total tax burden is already as high as in the surrounding suburbs (Ex-
hibit 16). (Interestingly, unlike many cities, the District’s total tax burden is not
higher than in its surrounding areas.)

Exhibit 16—Comparison of Tax Burden in the Washington DC Metro Area*

Percent of
income
Washington. 93
Feirax County 93
Nesandria 93
Prince George's County 90
Montgomery County 85
‘Adlington County 85

* Based on family of four eaming $50,000 per yeat; major taxes include income, property, sales a

Source: District of Columbia Government

The District’s final major source of revenue—the Federal payment—has proved to
be somewhat unstable and in our opinion has an important calculation flaw. The
current formula is set (although it is not binding on Congress) at 24 percent of the
District’s internally-generated revenue 2 years prior. This formula has the perverse
effect of generating less revenue for the city as its own tax receipts decline. It
serves, therefore, not as a brake on the District’s failing finances, but as an accel-
erator. And the recent $660 million payment is, arguably, inadequate to compensate
for foregone property taxes, lost sales taxes on the military and diplomatic corps,
and the cost of providing services to the Federal government. By our calculation
these could add to over $900 million.

To summarize, there are three main causes of the District’s worsening financial
problems. First,’ the city government remains bloated and needs to considerably
tighten its belt—-even as demand for some services increase, and it must greatly im-
prove service delivery. Second, the District is uniquely constrained, when compared
with other cities, in recapturing lost tax revenues as the middle class moves to the
suburbs. Finally, the Federal payment appears inadequate to compensate the Dis-
trict for revenues foregone and for the cost of services it receives. Any solution must
be derived from these basic causes; it will take all the parties to save this city.
Solution: Must be Comprehensive and Cooperative

In our view, rational steps to prevent the District’s impending financial calamity
can and should be taken now, in a noncrisis atmosphere, to head off more draconian
steps that would otherwise be necded later.

Any solution to its financial problems must start with the District government.
The District government should immediately take steps to reduce the projected year
2000 budgetary shortfall by at least $250 million to Bao0 million and, at the same
time, improve the quality of government services. The cost reduction is needed for
the District to remain solvent’ and it is.a prerequisite to soliciting support from the
federal and regional governments on other initiatives. While we have not made de-


COMMITTEE ON APPROPRIATIONS
BOB LIVINGSTON, Louisiana, Chairman

JOSEPH M. McDADE, Pennsylvania DAVID R. OBEY, Wisconsin

JOHN T. MYERS, Indiana SIDNEY R. YATES, Mlinois

C.W. BILL YOUNG, Florida LOUIS STOKES, Ohio

RALPH REGULA, Ohio TOM BEVILL, Alabama

JERRY LEWIS, California JOHN P. MURTHA, Pennsylvania
JOHN EDWARD PORTER, Minoia CHARLES WILSON, Texas

HAROLD ROGERS, Kentucky NORMAN D. DICKS, Washington

JOE SKEEN, New Mex MARTIN OLAV SABO, Minnesota
FRANK R. WOLF, Virginia JULIAN C. DIXON, California

TOM DELAY, Texas VIC FAZIO, California

JIM KOLBE, Arizona W. G. (BILL) HEFNER, North Carolina
BARBARA F. VUCANOVICH, Nevada STENY H. HOYER, Maryland

JIM LIGHTFOOT, Iowa RICHARD J. DURBIN, Miinois

RON PACKARD, California RONALD D. COLEMAN, Texas
SONNY CALLAHAN, Alabama ALAN B. MOLLOHAN, West Virginia
JAMES T. WALSH, New York JIM CHAPMAN, Texas

CHARLES H. TAYLOR, North Carolina MARCY KAPTUR, Ohio

DAVID L. HOBSON, Ohio DAVID E. SKAGGS, Colorado
ERNEST J. ISTOOK, JR. Oklahoma NANCY PELOSI, California

HENRY BONILLA, Texas PETER J. VISCLOSKY, Indiana

JOE KNOLLENBERG, Michigan THOMAS M. FOGLIETTA, Pennsylvania
DAN MILLER, Florida ESTEBAN EDWARD TORRES, California
JAY DICKEY, Arkansas NITA M. LOWEY, New York

JACK KINGSTON, Georgia RAY THORNTON, Arkansas

FRANK RIGGS, California

RODNEY P. FRELINGHUYSEN, New Jersey
ROGER F. WICKER, Missiseippi

MICHAEL P. FORBES, New York

GEORGE R. NETHERCUTT, JR., Washington
JIM BUNN, Oregon

MARK W. NEUMANN, Wisconsin

James W. DYER, Clerk and Staff Director

SUBCOMMITTEE ON THE DistRICT OF COLUMBIA

JAMES T, WALSH, New York, Chairman

HENRY BONILLA, Texas JULIAN C. DIXON, California
JACK KINGSTON, Georgia RICHARD J. DURBIN, Illinois
RODNEY P. FRELINGHUYSEN, New Jersey MARCY KAPTUR, Ohio
MARK W. NEUMANN, Wisconsin

AMERICO 8. MICONI, Sto/f Assistant
a)


104

Mr. Davis. No.

Mr. WALSH. Fine.

Mr. Dixon. Well, Mr. Chairman, I think Mr. Nunn, should he
testify here, be sworn in, if he, in fact, is going to testify.

Mr. Davis. We would be happy to have you. If you are going to
testify, this goes with the job.

Please raise your right hand.

{Witness sworn.]

STATEMENT OF PETER NUNN, COOPERS & LYBRAND

Mr. Nunn. Yes, I do.

Mr. Davis. Thank you.

Please proceed.

Mr. WALSH. Mr. Nunn, the Mayor began by saying there were no
audits of Medicaid in 1991, 1992, 1993, 1994. Then I believe stood
corrected, and said there were audits.

Could you tell us specifically if the District's Medicaid program
was audited for the fiscal years 1992 and 1993?

Mr. NUNN. The individual audits which are auditing of the cost
reports at each of the individual providers, which are hospitals,
nursing homes and the like, the contracts for the 1992 and 1993
audits were let in early 1994, and an effort was made during the
year 1994, all of 1992 were done, 1993 are substantially done, and
they are working on the final numbers.

Mr. WALSH. So, in fact, they are in the process of being audited;
the audits have not yet been completed?

Mr. NUNN. That is correct. The 1994 cost reports, of course, are
just being submitted current time. And some hospitals, based on
what their year end is, have turned in their cost reports. Others
are yet due to the District, and there are estimates for the amount
of their cost reports included in the accrual at the end of the 1994
fiscal year.

Mr. WALSH. All right, then perhaps you can clarify something
that was attributed to you in a Washington Post article dated Feb-
ruary 19, 1995. It says: “In announcing the $103 million deficit”—
and this comes from the Mayor’s statement on the District’s fi-
nances and its deficit—‘in announcing the $103 million deficit,
Barry officials attributed that sum largely to the Kelly administra-
tion’s failure to conduct Medicaid audits for 1992 and 1993. But un-
resolved bills from that year account for only $4 million of the
problem, according to Peter Nunn, a partner in Coopers &
Lybrand, the accounting company that recently analyzed the city’s
overall finances.”

Could you tell us how you get from $4 million to $103 million?

Mr. NuNN. Let me describe that for you.

The District, throughout the year, records cash payments, which
are normally Teferred’ to as PIPs, a partial payment, to the various
providers. In addition, they record the payments for any settle-
ments of prior years, and they finally closed and settled years prior
to 1990, in the current year.

Mr. WALSH. In the current year, meaning fiscal year 1995.

Mr. Nunn. I am sorry, 1994. At the end of 1994, in the normal
closing process for the District of their financial statements, they


64

City of Syracuse Budget 7/1/94-6/30/95—Continued
Tin thousands)

Category ‘Amount Percentage

Total City (Without Special Districts) ..

$121,931 37.36

Total (City + Special Districts) ... $326,135 100

City of Syracuse Source of Revenue 1994-1995

{im thousands}

Source ‘Amount Percentage
State Aid $127,824 39.2
52757 16.18
City Propetty Tax 18,878 5.19
Payments in Lieu of Taxes 9,031 277
Tax Fees and Penalties .. 1,770 0.54
‘Sales Tax ... 49,232 15.10
Utilities Gross Receipts Tax 2,405, O74
Other Revenues .. 64,237 19.7
Total... sononeane $326,134 100

County of Onondaga Budget 1995
includes only tems which benelt the residents of Syracuse]

catego Aus i

Social Services Dept. include: Medicaid, Public Assistance, CENTRO, As-
Siered Counsel Hspitalzatn, Eéueation of Phsely Hardeapred,
‘and other social services program:

‘Aging and Youth

Mental Health 198466926. 4,505 .

Health Dept _ 36.982 12907 «8.395 27,367

— ~ 1509252673426 11.168

$227,920 $79,544 $51,738 $168,661
1,684 588 382. -

District Attorney 5,726 1,998 1,300
Sheriff... 41664 14,541 9,458
Parks and Recreation 9021 3,148 2,088

Transportation Dept 35,282 (12,313 8,009
tic 5,767 2.013 1,309
10685 3,729 2,425
27,909 9,740 6,335

38,652 13,490 8774
$476,230 $166,204 $108,104

Long Term Care Services Dept.
Community College

Functional Total ..
Government Support (

lectons) and

Others (Water, Sanitation, a) 250,517
Grand Total... $726,147
County of Onondaga Source of Revenue 1995
fin thousands}
Source ‘Amount Parcentage
Property Tax . $170,304 BA
Special District Taxes . 42,478 57
112,376 15.5
77,983 107

54,300 15


50

historic references as well as the current facts of our situation:
Why are District finances so fragile; what is precisely the financial
condition of the District government at this moment; what are we
in government doing to restore control and rebuild credibility in
our fiscal affairs; how can and how must Congress participate in
this recovery; and what needs to be addressed in our partnership
with Congress to ensure that a year from now we are not sitting
at this same table trying to wrestle with these same kinds of prob-
lems, or 2 or 3 years from now.

I know that you are anxious to get on with where we are today.
While I appreciate that, we must look at some historical chro-
nology. It was only in 1973 that the citizens of the District of Co-
lumbia were given some measure of self-government. I want to con-
gratulate Congressman Diggs and others, who worked awfully hard
to get us to that point, but tl ey had no model to go on.

Washington, DC is the only city that is constitutionally con-
structed so that the Congress has a bottom-line role in our legisla-
tion and in our budget. They put together what they thought to be
the best deal that they could, but fooking some 20 years later, it
is clear to me that that charter, which was imposed upon us by the
Congress, was flawed. It was not a perfect union. In fact, it was
an imperfect union.

First of all, what should have happened? Our books should have
been audited prior to the 1974 election. January 2, 1975, Walter
Washington took office as Mayor as did many of us as members of
the council. In 1975, the then Mayor Walter Washington attempted
such an audit. Arthur Andersen indicated that the books could not
be audited in 1975. It was with the help of a financial oversight
commission appointed by the Congress that we were able to over-
come the financial challenge.

The Congress appropriated over $60 million to help us build
what was then called the financial management system, which, at
that time, was one of the finest financial management systems in
the country. Also in 1974—let me just make this point very, very
clearly, that the Congress had managed the District prior to that
time—we were given 44,000 positions; 44,000 positions with the
authorized budget strength of the 1994 budget.

Also, when we finally were able to audit the books in 1979, my
first year as Mayor of our great city, we found that there was a
$279 million deficit. In other words, $279 million in bills that the
Federal Government should have paid before we took over. And
that $279 million is still due us from the Federal Government be-
cause it was that that we inherited.

The second problem with our charter, and Mr. Dixon spoke a lit-
tle bit to this earlier, was our pension funds. We have 11,700 fire-
fighters, police officers, judges, and teachers in a pension fund that
is a pay-as-you-go system. All of you know that, actuarially, a pay-
as-you-go system is a flawed system.

You say, well, how does that affect us now? It affects us very spe-
cifically because this very year the DC government, the taxpayers
of the District of Columbia are paying $295 million of hard-earned
taxpayers’ money into a pension system that only pays those retir-
ees. It does not get at the unfunded liability.


99

discussed and necessarily taken back in October, November, and
December 1994 relative to this impending crisis prior to the May-
or’s arrival then in the month of January?

And, specifically, did the council get together and launch upon a
program of reform that would bring the expenditures for Medicaid

jown to a level more in accordance with Maryland and educational
spending more in accordance with levels being spent in Montgom-
‘ounty.
ir. CLARKE. Yes, we did. Yes, we did, Congressman.

We did take a cut to the Medicaid budget premised upon the
change in the options, and we did pattern that along the case of
Maryland. As a matter of fact, we got the list of what Maryland,
Virginia, and the District of Columbia have and we went for only
those, to leave only those that we all three had. So if we stood in
the company of one with them, we cut that option.

Now, that was in the budget. It still has to be gone through. The
invitation process is part of what we are watching. But, yes, we did

lo that,

Mr. LaToureTTE. What about as to the issue of the educational
spending for the school district?

Mr. CLARKE. The educational spending, yes, we have taken
many, many looks at it, Congressman. As 1 sai earlier, maybe I
think to your neighbor on your right there, the Congressman from
Minnesota, we only budget the bottom-line expenditure of the
schools. That is in the charter written by the Congress. We cannot
go to the line items of the schools.

It is a matter of intensive frustration. We have found expendi-
tures in the schools that we simply do not like. Traveling con-
ferences is one of them I focused upon, and I could fuss, I could
fume, and do other things that begin with “F,” but I could not do
anything about it, because all I could do is write a memorandum,
file a report, and say cut the bottom line based upon if they cut
back that expenditure they could save the money, other than apply-
ing it to a classroom. And we have done that kind of thing.

in fact, we did cut $31 million from the schools’ overall budget,
premising $14 million on furloughs, if they wanted to take them;
and also premising the remainder on things that we identified in
a report that could be done in the schools to save those moneys.
We did not, however, have the line-item authority to enforce that.

And certainly in any restructural examinations that anybody
might make, getting more responsibility on the part of those who
have now only the authority to spend, no responsibility to raise the
moneys, would be helpful or give us the capability to do line-item
examinations and budgeting.

Mr. LaToureTTe. It sounds like line-item veto is something you
are in favor of, is that right?

Mr. CLARKE. Yes.

Mr. LaTouretTTE. Thank you very much.

I yield back, Mr. Chairman.

r. DAvis. Thank you very much.

Let the Chair start the second round of questioning, if I may.

With regard to cash payments right now to some of the vendors,
Mr. Mayor, I think you had said you try to pay things within 30
days after getting logged in. Is that approximately correct?


24

In the 1980's the District’s general fund operated with revenues in excess of ex-
penditures in most years. From 1991 through 1993, the District submitted budgets
to the Congress that showed expenditures and receipts in balance. However, even
though the budgets were balanced and despite receiving cash from a $331 million
general obligation bond in 1991, the city's cash position declined substantially. Dur-

ing this period, various factors helped the District balance ite budget, includit
nearly $400 million in increased federal Payments and $225 million in additional
budgetary authority from other measures. These other measures included transfer-
ring funds from the Water and Sewer Fund, not recording a Washington Metropoli-
tan Area Transit Authority payment when due against appropriated expenditures,
and changing the legal definition of the property tax year.

After 3 years of positive general fund balances, the District recorded a $335 mil-
lion deficiency in fiscal year 1994. Of this total deficiency, $116.8 million was in ay
propriated funds. Deficiencies were recorded in most appropriated expenditure func-
tions and subfunctions, including Health and Welfare (primarily Medicaid), $71 mil-
lion; Schools, $14 million; Fire, $13 million; Police, $12 million; and Public Works,
$21 million. The remaining $218.6 million resulted primarily from adjustments re-
lated to Medicaid and D.C. General Hospital. The Medicaid increase relates to cost
settlements of prior year Medicaid program costs that the District will be required
to repay to the federal government during fiscal year 1995, The $85 million adjust-
ment for the D.C. General Hospital receivable recognizes that the D.C. General Hos-
pital loans may be uncollectible since the hospital continues to operate at a loss.

Although between fiscal years 1991 and 1993, the District's general fund has
shown small surpluses, the District’s cosh position steadily deterisrated. At the end
of each year the District has increasingly relied on the federal payment, which is
usually received in the first month of the fiscal year, to cover bills from the previous
fiscal year. Figure 1 compares the federal payment amount with the bills held over
from the previous fiscal year.

FIGURE 1 PORTION OF CURRENT FEDERAL PAYMENT USED TO PAY PRIOR BILLS.

Dostars {mitions)
600
$00
400
300
200
100
o
1082 1903 ro) 1008 1008 (oat) A
Fiacel Your
Federal Payment
Prot Your Bits

A. 1996 Federal Payment inckuctes $132 escrow
‘Source, GAO analysis of Disinct Finencial Statements and Budget

As is shown in figure 1, in fiscal year 1992 the previous year’s bills were about
39 percent of the federal payment. Last fall at the end of fiscal year 1994, the fiscal
year 1994 bills were 80 percent of the fiscal year 1995 federal payment. Current
trends indicate that the situation could be worse at the end of this fiscal year.


20

first part of fiscal year 1995, the District’s attention was almost en-
tirely on efforts to obtain the $250 million in short-term borrowing.

The key action during this period of time was a consensus agree-
ment among the DC council chairmen and then Mayor and Mayor-
elect, that included management actions and initiatives to reduce

tential overspending and cut costs, a budget that would show
$140 million in budget cuts mandated by the Congress and a posi-
tive cash forecast.

Table 3, on page 11 of my statement, outlines the council actions
from last December. The DC council passed a revised budget on
December 21 that included expenditures reductions and revenue
increases of $448 million and increased agency allocations and
Teprogrammin of $309 million. The net reduction of $139 million
included only $90 million in expenditure cuts and $40 million in
additional revenue. The net amount essentially equaled $140 mil-
lion congressional mandate, but the Congress had ordered that all
of the $140 million in expenditure—in cuts from expenditures.

On February 7, the council rescinded the $40 million revenue in-
crease, reducing the net council actions on the fiscal year 1995
budget to $99 million. Although the net result of the council action
has been $99 million in cuts, these reductions have not been allo-
cated to approve spending plans.

The District government also adopted an apportionment proce-
dure in an attempt to control spending, but this process does not.
appear to be reducing spending either. The District directed agen-
cies to limit spending to 25 percent of their appropriation in the
first quarter and 15 percent in the second quarter. However, these
apportionments were also based on the originally submitted “pre-
$140 million cut” budget. In addition, the apportionment process
could only be delaying rather than reducing expenditures.

Several district agency officials have told us that personnel ex-
penditures alone in the second quarter would exceed the 15 percent.
apportionment. For example, DC General Hospital officials said
that payroll costs in the second quarter would consume all of their
apportionment, and fire and emergency medical services officials
said that the February 17 firefighter payroll put them over their
allocation. DC schools said that all of ther allocation would be ex-
pended when they pay the March 1 teacher payroll.

Although the District is continuing to process payroll even
though the apportionments are being exceeded, agency officials told
us that the result is that they have no funds to Surchase supplies.
Fire and emergency medical services officials said that their inabil-
ity to purchase supplies could be an extremely serious condition.

The apportionment process also does not apply to entitlement
payments such as Medicaid, as any entitlement in payment is ap-
proved regardless of the agency’s apportionment limit.

On February 1, 1995, the Mayor announced overspending in the
District agencies could result in a $3.89 billion in expenditures or
$631 million over the $3.25 billion expenditure limit established by
the Congress. The District said that this deficiency was comprised
of Medicaid cost settlements and adjustments, agency
overexpenditures, and the required $140 million in congressionally
mandated cuts. In addition, the Mayor explained that there was a


103

Mr. Barry. There were no audits—wait a minute, let me make
sure.

Mr. WALSH. On Medicaid can—

Mr. Barry. The 1992 and 1993 audits were not started until
1994 on the previous administration. That was a management deci-
sion that shouldn’t have been made.

ot, WALSH. So you are saying there were no audits in 1992 and
1993?

Mr. Barry. They are now, but I am saying prior to the latter
part of 1994. There were no audits of 1992 and 1993, because
someone made the decision not to sign the management—not to
sign the audit contract. That was a management decision.

rr. WALSH. Let me ask a question about that, if I may, since you
brought up Medicaid. The $103 million Medicaid accrual that was
made in fiscal year 1994 is said to be due to unaudited Medicaid
costs from 1992 and 1993; is that correct?

Mr. Barry. Yes, sir.

Can I explain it?

Mr. WALSH. Sure.

Mr. BARRY. What happens in the Medicaid program, there is
something called “payments in progress.” So as a provider sends
the District their bill for, say, Bob Pohlman, being in the hospital,
the District pays what is called a payment in progress. The pay-
ment in progress is usually less than the cost that the provider
said he wants.

And the District government has an auditor go down and sit with
Ms. Smith and company to see whether or not she will charge, be-
cause we are a reasonable-cost State, what is reasonable, and you
make the adjustments. You make the settlements.

So the $103 million represents the years of 1992, 1993, and 1994,
where the cost reports had been sent in but the audits had not
been done. Once the audits are done, there will be a settlement
with the providers for the years that they had the cost reports,
1992, 1993, and 1994.

Mr. WALSH. Coopers & Lybrand billed the District for over half
a million dollars for auditing Medicaid in those 2 years; is that not
true?

Mr. Barry. Mr. Chairman, these are prior year audits. Again, I
am going on what—as I said, it is a management problem. Some-
body should have been hired for these audits.

ir. WALSH. Well, if they audited, then we should know that. If
they didn’t, they should not have been paid.

ir. BARRY. It is my understanding, Mr. Chairman, that they
were auditing prior years to 1991.

Mr. WALSH. We are talking 1992 and 1993.

Mr. Barry. The other part of it—come up here. I understand
that Bert Smith—Mr. Nunn ought to come up here and explain
this because I don’t want to do this.

Mr. WALSH. Well, we are going to have Coopers & Lybrand be-
fore our committee on Friday.

Mr. Barry. I think it is important we get at least a minute of
how that happened, so I can——

Mr. WALSH. All right, fine.

Do you have any objection to that, Mr. Chairman?


32

Mr. Davis. The fiscal year 1994 deficit, as it actually impacts
1995 spending, would be reduced to $250 million because $85 mil-
lion would be taken out of it.

Mr. HILL. It would be reduced if you took the $85 million out of
it.

Mr. Davis. The $103 billion in Medicaid costs added to the 1994
deficit, are those real numbers that have a cash impact on 1995
spending?

Mr. HILL. Yes.

Mr. Davis. OK, what is the fiscal year 1994 deficit carryover that
actually impacts on fiscal year 1995 spending? Do you have a ball-
park figure?

Mr. HILL. It would pretty much be some of the allowances and
accruals that they are making. In fact, we have referred to the
total amount on one of the charts, and it might be a good idea to
go back to the Medicaid chart, which is included in the testimony.

Mr. Davis. I guess the other question is how do you run deficits
in nonappropriated accounts?

Mr. HILL. Well, one of the ways that you run a deficit in a
Nonappropriated account is by actually recording the accrual in
that account in lieu of recording that accrual in the appropriated
funds, If they had actually budgeted for those amounts in the ap-
propriated funds, then those would be recorded in the appropriated
funds. The $85 million is a very Food example.

Since we view those as basically amounts that should have been
considered subsidies to the hospital, those amounts, we feel, should
have been included in the appropriated funds.

Mr. Davis. Are you going to go back to the deficit carryover, im-
pact on the fiscal year 1995 spending.

Mr. HILL. Yes, I am going to let, Laura, could you? On the Medic-
aid spending.

Ms. Triccs. The $103 million that you see in the $335 is the
amount estimated to be paid in 1995. The difference between what.
is here on the deficit and 1995 budget is there is an additional $82
million added into the 1995 expenditure budget that may or may
not affect cash, so the number that you see in the 1994 statements
could affect cash in 1994, but it is an additional piece that is added
to the budget for 1995. Basically, you have 2 years in 1995, and
it is this additional piece that may not affect cash in 1995.

Mr. Davis. OK. My last question has to do with what you alluded
to it in your remarks. I wondered if you could clarify it. Right now,
under the Appropriations Act that Congress passed in the last ses-
sion and was signed by the President, the extent to which the Dis-
trict spends over $3.25 billion, the District must return back to the
Federal Treasury dollar for dollar for every dollar they are over-
spending.

Mr. HILL. Well, certainly it is a return dollar for dollar, but it
is also a cut—and it could very well, at the rates that we are look-
ing at now, it could very well eat up the entire Federal payment
for 1996.

Mr. Davis. OK. That is the current state of the law. Any change
in that, would have to come from DC appropriations committee.

Mr. HILt. Exactly.


113

So these management letters should be put in there. Otherwise,
you are right. This audit is not as useful to us—to me and you and
the community—as it ought to be.

Mr. Dixon. I was going to ask about the management letter, but
I thought we would reserve that for Friday’s meeting. You do in-
tend to attend, Mr. Nunn?

Mr. NUNN. I will be here. Yes. Thank you.

Mr. Dixon. Thank you.

Mr. Davis. Ms. Norton, may I ask one quick question?

Mr. Nunn, how many management letters have you written dur-
ing your time at Coopers & Lybrand or other accounting firms?
How many management letters have you had a hand in writing?

Mr. Nunn. Probably hundreds.

Mr. Davis. Just looking at the September 1993, District of Co-
lumbia report to management, looking at the number of items in
this, I count 142 different items pinpointed. I could go through
them, although I think you are familiar with it—implement ver-
ification procedures for bank deposits. Matured securities should be
reinvested or converted in cash. The District was losing money on
those items. And it is page after page of these.

Does that indicate a revenue problem or a management problem
with the District, from your professional viewpoint?

Mr. Nunn. As you can see in that letter, it is written to a num-
ber of agency level—divided up by agency levels. And I think there
are a lot of issues that the agencies have to address. Part of it is
a matter of housekeeping. Part of it is a matter of management.

Mr. Davis. So a lot of management issues. Have you ever written
a letter with this many —

Mr. NuNN. I have never written one that long, no.

Mr. Davis. Thank you.

Ms. Norton.

Ms, Norton. Thank you, Mr. Chairman.

Mayor Barry and Chairman Clarke, I wonder if you could clarify
an issue that appears to have just arisen between you. What ac-
counts for the differences between the two branches on how deep
the cuts should be—the differences that emerged within the last
day or two?

Mr. Barry. Ms. Norton, I was on the council and participated in
the council vote on December 21. And when you Took at what the
council did, they carried over a number of the personnel actions
that had been recommended by Mayor Kelly. And the council voted
to implement in terms of easy out, early out, et cetera. There were
very little cuts in the council’s budget in other than personal serv-
ice. So I have been trying to find it in contracts and others to cut.

Moreover, because the system is not set up to give the council,
I guess, instant information on how many people left the payroll,
I guess we want to do it to them on a quarterly basis. I suspect
some members of the council were reacting, from pressure from
their peers, to some extent. And, also, they didn’t see any real signs
that money was being saved. And I kept saying we have to get peo-
ple off the ayroll.

So I don’t think there is that much of a difference as it appears.
I think the council, as I do, wants to see real savings in a way that
you can measure.


56

these are human beings, too, and that we ought to be very careful
about doing it that way. They have mortgages to pay and people
to take care of. What we need to do is to do it in an orderly fashion.
That is why it has taken from January 2 to March 1 to put it to-
gether, so we can do it the right way. So we can do it in a way
so you can prepare, if you can ever prepare to fire; for these people
to get additional moneys.

We are doing all kinds of things; limiting emergency services.
You have this in your testimony. We are closing one of our two
drug-alcohol centers. We are closing five public health clinics. I es-
timate at this point, Mr. Chairman, members of the committee,
with our program actions, with our personnel actions, we have,
from a bottom-line point of view, reduced this $224 million part of
the problem, which I think we can do by $70 million.

We sent legislation to the council yesterday. We have been work-
ing with our unions on this to get an additional $70 million out of
our employee wages. So if you add the $70 million which we want
to start April 1 of this year for 6 months, we have more than met
the $140 million situation. Then you add our specific spending
plans. When we came in on January 2, there were no spending
plans, no ideas as to how to do this.

We are confident that the executive branch of this government,
unless a court stops us or the council does not cooperate with us,
can reduce this budget in 1995 by $224 million. That is an incred-
ible amount to do in about 7, 8 months. I don’t think any other
city, county, or State could come to the table and do that in 7 or
8 months, reducing the budget by $224 million; service cuts.

Our other proposal is to restructure our debt to give us an addi-
tional $70 million. We have $224 million, $70 million from our em-
ployees contributing their fair share, $70 million of restructured
debts. That then leaves us with a problem of $267 million. That is
the area we are asking the Congress to look at.

We ought to begin in 1995, the transformation of our government
where the Federal Government takes over the complete manage-
ment and funding of Medicaid by 1998. $267 million in 1995, $141
million for the growth, for 1996. $141 for growth in 1997. So by
1998, we are proposing that District government no longer funds
or manages our Medicaid program. We need to focus on the State
functions being transferred to the Federal Government.

Second, we are proposing that we begin a 5-year phaseout of the
State’s responsibility for the funding and control of our State pris-
oners. We wani the Federal Government starting October 1, 1995,
to begin to manage and fund a portion of our 9,000 State prisoners.

Third, we would like for the Federal Government to look at our
debt. We have over $3.2 billion of capital debt. In 1983, we were
able to get an “A” rating for our debt. The reason we could not get
a higher rating was the unfunded pension liabilities—by that time,
almost $3 billion, the uncertainty of the Federal payment, the nar-
row economic base of the District, and our inability to tax the in-
come at its source.

Our view is that there is a portion of the $3.2 billion capital debt,
if it were backed by the full credit and faith of the Federal Govern-
ment, which would get us a low interest rate. I am in the process
now of getting numbers on what it would look like if we were to


110

Lybrand—that you tell them that you have conducted an audit and
that the 1993 financial statements reflect an account—an amount
currently due to the District of Columbia of 58—this deals with the
hospital. Does that ring any bells with you?

Mr. NuNN. Yes, that is in the 1993.

Mr. Dixon. Right. Now, they started on this path in 1990, in
writing off $9 million something. And then it increased to $58 mil-
lion. And then in the last year there was another 21 or something,
and it jumped up to about 80. Is that just generally correct?

Mr. Nunn. That is generally correct, yes.

Mr. Dixon. What—and you probably noticed this asset in the
first year?

Mr. NuNN. That is correct.

Mr. Dixon. And what is it that changed your mind about it to
write them in 1994 saying, well, you have to start writing this
thing down, if I understand the letter? What facts had changed?

Mr. Nunn. As you are aware—

Mr. Dixon. First, let me ask you. Did you understand the cir-
cumstance surrounding this loan to the general hospital that was
carried as an asset?

Mr. NUNN. Yes.

Mr. Drxon. OK. Then what changed to make you say we better
start writing this thing off?

I mean, you understood that it was an entity that was owned
and operated by the District, that they had a legal responsibility
for it, that they had appropriated money. And the money that was
loaned to them was the difference between the appropriated money
and the actual money spent and you thought it was proper to call
it a loan. And then I’m asking you what happened that made you
change your mind or say you better start writing this thing down?

Mr. Nunn. Yes, I understand. As you know, it started in 1990.
It goes on for a number of years.

Mr. Dixon. Yes.

Mr. Nunn. In the beginning, in the initial years, there was some
discussion. In 1992, for instance, in our management letter, we
pointed out to them that that item probably should be expensed if
they were not going to develop a plan for repayment. At that same
time, we did not-—while we mentioned it in the management letter
we did not think it was sufficient to insist on its write-off in 1992.

During 1993, that continued to grow. It is in accordance with
generally accepted accounting principles that it is possible to have

loans between different funds and that in the circumstance where
you have and develop a plan for elimination and reduction of that
loan it is appropriate to continue to carry it until it is repaid.

During and at the end of 1993, with legislation that took effect
on October 1, 1994——

Mr. Dixon. Right.

Mr. Nunn [continuing]. At the beginning of the current year——

Mr. Dixon. Yes.

Mr. NUNN [continuing]. The manager of the oversight of the hos-
pital, which had been vested in a board, was removed from the
board, put back directly under the control of the Mayor with a di-
rective that the Mayor establish a plan for reducing the deficit at


74

One of the things that we tried to do in January, besides go
through the audit reports that were supplied to us by the auditors
for nursing homes, intermediate-care facilities and hospitals, was
to total up all of the costs, $260 million from accrued costs from
settlements or from estimated settlements from 1991 through 1994.

And then we turned that into looking at the 1995 budget prob-
lem, adding that to our 1995 budget problem. And we did one other
thing, and this is an important change in our approach toward
looking at Medicaid, we added in an estimate for 1995 of what we
called an accrual for $82 million. And when we presented the prob-
lem on February 1, we put an asterisk next to that $82 million and
said that the cash effect would be uncertain.

But what is important is that we really, by doing that, said that
we need to put our budget on an accrual basis for Medicaid; that
when the auditors get done looking at the Medicaid results each
and every year, they book a charge against us based on an accrual,
based on an estimate of how much more we might have to pay out
for Medicaid costs.

And so in doing our 1995 projection, we went to an accrual basis
budget estimate and added an accrual in the budget itself, because
if we do not have that kind of budget authority, and if we don’t pro-
vide for that, at the end of the year when we get audits and a large
charge is booked against the District, we are going to have operat-
ing deficits like we had in 1994.

'o prevent that, we want to get ahead of the curve, put that esti-
mate out in advance, put it in the budget, not have it as a
nonappropriated charge after the end of the year, not find out
about it later when the auditors do an audit. So that is a fun-
damental change in approach that we have made to try to get
ahead of the rising Medicaid cost curve.

Thank you.

Mr. Davis. Thank you very much. We will start with questions
at this point.

Let me just start by thanking everyone for coming here. I know
this has been a difficult period for the District but, as ve know,
we have a constitutional oversight responsibility, and in these
tough times we want to work with you every way we can to try to
help bring the city back. We are not going to agree on everything,
but we are going to sit down and work through these problems to-
gether.

Let me address quickly the State functions, county functions
issue that the Mayor brought up and that pension liability—I think
you make some good points. I think these are issues we have said
we will revisit with you.

This is not any desire on the part of Congress to take over the
city, but maybe basically to restructure the relationship in a way
that is compatible for both of us. And I will just say publicly, I
think these are on the table and we are going to look at these is-
sues through time. But that is not the fundamental problem that
brings us here today, the problem that brings us here today is par-
ticularly over the last couple of years looking at what the District
has proposed to Congress and then how they have gone ahead and
spent their money. Therein lies the difficulty for many of us on
these panels.


26

Both acts also require several periodic nancial and performance reports, For ex-
ample, the Federal Payment Reauthorization Act of 1994 requires the Mayor is to
submit to the Congress:
3qin, annual performance accountability plan (beginning March 1, 1996) forall
departments, agencies and programs, including the performance goals;
—an annual performance accountability report (beginning March 1, 1997) that
discusses actual performance achieved compared to the goal and the status of
any court orders applicable during the year and actions taken to comply;
—an annual 5-year financial plan for the District (beginning March 1, 1995)
that describes the steps to eliminate any differences between expenditures from,
and revenues attributable to, each fund of the District during the first 5 fiscal
yeare beginning after the submission of the plan; and
[GiB Annual financial plan report (beginning March 1, 1997) on the extent, to
which the District was in compliance during the preceding year with applicable
requirements of the financial plan.

‘THE LIMITED USEFULNESS OF THE QUARTERLY REPORT

The 1995 Appropriation Act of 1995 and the Federal Payment Reauthorization
Act of 1994 require that the Mayor submit a quarterly financial report beginning
January 17, 1995 on the financial and budgetary status of the District. The reports
are to include:

—a cash flow statement that includes comparisons of actual to forecasted cash
receipts and disbursements for each month and a cash forecast for the remain-
der of the fiscal year,

—explanations of the differences between actual and forecasted amounts and
the impact on cash and the budget,

—an aging of accounts receivable and accounts payable, and

—a report showing full-time equivalent (PTE) positions by type of position and
funding source.

To respond to this requirement, on January 17, 1995, the District submitted more
than 500 pages of documents. Although some valuable information was included in
this data, for the most part, the information is not in a form that is useful to mon-
itor the District’s financial situation. A critical part of the report was a revised cash
flow statement. We will comment on this cash flow statement later in thie testi-

mony.

Another part of the quarterly financial report included a report from the District’s
financia] management system to show first quarter expenditures. The report neither
included summaries or analysis of the data, nor projections of expenditures for the
remainder of the fiscal year. This makes it impossible to use this report to compare
actual first quarter expenditures with budgeted amounts or to project year-end ex-
penditures.

Other parts of the quarterly financial report also did not provide useful informa-
tion. The lists of unpaid vouchers (payables) and accounts receivable also were not
summarized in the report. The legislation called for an aging of payables and receiv-
ables. The lists of payables included a date for each line item, but this date is the
date the voucher was entered in the Districts’s financial management system and
not the date of the voucher. This date is even more meaningless for this listing, be-
cause in the first quarter, as a part of the District’s efforts to control cash, vouchers
were held for extended periods before being entered in the system.

‘The quarterly financial report also included some data on the District’s number
of FTE personnel for various periods. However, the District did not submit several
categories of required information on personnel, including information on the actual

r of full-time, part-time, and temporary employees, and the source of funding
for these employees.

‘We have agreed to assist the District in developing a more useful format for fu-
ture quarterly financial reports.

DISTRICT DATA ON PERSONNEL IS CONFUSING

Information on the exact number of District personnel is difficult to verify. Dif-
ferent sources of funding compounded by the lack of integration among the payroll,
personnel, and budgeting systems makes it very difficult to establish the exact num-

er of personnel on board: District personnel positions are financed by both appro-
priated and non-a: propriated funds. The District reports personnel data in a variety
of ways including FTEs, the number of personnel receiving paychecks, and full-time
on-board staff. An FTE is used to measure the number o} equivalent positions and
takes into account how many hours are actually being worked. For example, two
employees working half-time would be counted as one FTE.


92

But the point I am making is it is kind of baffling to sit here and
look at everyone who cares so much about the District of Columbia,
as every member on this committee cares as well, but yet stil
there is a crisis that seems to be almost never-ending. My history
on this committee has been one of trying to be helpful in the com-
mittee’s—in the District of Columbia’s interest to solve problems,
and I want to continue to do that.

I want to make a suggestion here and some comments that I
have, because there have been a lot of discussions lately about ev-
erything from taking over the control of the District of Columbia,
which I do not support and, frankly, I don’t think a majority of
Members on either side of the aisle support anything like that, be-
cause I think the last thing we want to to is to try to micromanage
your business, because you know your community better than any-
one here. I wouldn’t want to micromanage your business any more
than you would want to micromanage the business of Hondo, TX.
It is just not practical.

Many have had suggestions, former HUD Secretary Kemp and
my colleague Representative Norton have proposed some very in-
teresting ideas that could revitalize the economy, and I think it is
helpful to have these ideas and that we all share them. I have a
proposal, an idea, that I would like to have considered because I

ave seen it work in so many communities, including my home-
town of San Antonio, TX. I ask that we all consider the council-
manager form of municipal government. In this form of govern-
ment, as you probably looked at this system in trying to look at dif-
ferent alternatives to solve your problems, day-to-day operations
are transferred to a hired professional, a city manager.

A city manager would be responsible for the bureaucratic struc-
ture presently controlled by the Mayor. The manager would be
hired and accountable to the city council, with approval of the ap-
pointment to be granted by the DC authorizing subcommittee. Ap-
pointing a professional to run the city would increase the likelihood
that congressionally mandated cuts and reforms would be insti-
tuted. A city manager would professionalize the District’s govern-
ment, improving the delivery of services and quality of life for resi-

ents.

Presently, elected officials in DC address only short-term political
problems without regard for long-term financial planning. Today,
we are hearing about the problems that were created perhaps in
previous administrations. So it always seems to be short-term, and
with the changing of the guard, that could go on forever. This must.
change. The concepts of a city manager would be consistent with
Delegate Norton’s fiscal and management oversight board or the
emergency oversight board, or whatever we choose to call it.

My colleague, Mr. Dixon, earlier had a word to describe some of
the problems in management, mid-management levels, and I think
the word was malaise. Perhaps a city manager system could ad-
dress and streamline some of these operations without political
fears, and knowing that the city manager is employed long term,
transcending administrations and mayoral administrations that
come and go, and it has worked in communities.

So I will continue to study this effort. And also the Kemp and
Norton plans. And I urge my colleagues to do the same.


7

revenues which are not collected or bring no cash with them. No more exaggerating
the problem to avoid dealing with the hard choices and taking the only real actions
that can have a lasting impact.

Today is the beginning of a process. The road will be long and parts of it will be
hard. In the end [ am confident that we will still be together and we will have em-
barked on the journey out of the morass. That journey, too, will be long and dif-
ficult, No one should be under any illusion that the District’s problems will be
solved this year or next. The first task is to get control of the overspending and im-
prove management. Then the budget must be balanced in a real sense rather than
some mystical fantasy way. Then renewed access to the bond market must be pur-
sued. As each of these steps occurs we can mark down another accomplishment, but
the crisis will only go away completely after years of hard work, tough decisions and
wate is heated holding this heari: the birthday of George Washi:

is ironic that we are aring on the of ing-
ton, for whom our nation’s capital is named, and whose vision determined its Toes.
tion and shaped its early destiny. The intensity with which he immersed himself
in planning the District of Columbia, prompted a Georgia Congressman to observe
that the federal city had become “the hobby-horse of, perhaps, the most illustrious
man who ever lived.”

Washington, ‘and the other Founding Fathers wanted Congress’ relationship with
the capital city to be special. Article 1, Section 8, clause 17 of the Constitution of
the United States, granted Congress the power to “exercise exclusive Legislation in
all Cases whatsoever, over such District . . . that may .. . become the Seat of
Government.” Over time, the relationship has evolved into that which exists today
under the Home Rule Act of 1973, as amended. Nothing in the Home Rule Act re-
lieved Congress of its ultimate responsibility for the well being of this city and all
who visit and inhabit it.

As a Representative of the state which produced George Washington and of a
county that he made so celebrated, I look forward to the day when the nations cap-
ital city, like the man who gave it life, wil] once again be first in the hearts of the
people of America.

Mr. WALSH. Thank you very much, Tom.

And good morning, colleagues.

Allow me to also welcome our witnesses here this morning. This
is our subcommittee’s first hearing for this historic 104th Congress,
and I am very pleased it is a joint hearing with both House com-
mittees that are directly involved with the District of Columbia—
the Committee on Government Reform and Oversight, their Sub-
committee for the District, and the Appropriations Committee’s
Subcommittee on the District of Columbia. Our subcommittee is re-
sponsible for financial oversight and for appropriating the proper
gums to meet our constitutional responsibility to the District of Co-

jumbia.

I want to thank my colleague from Virginia, Tom Davis, for
hosting this joint hearing today. We have a big job ahead of us and
it is going to take all of us pulling together and in the same direc-
tion if we are to be successful and make our Nation’s Capital the
jewel that it should be in the eyes of the world.

Let me take a moment to introduce the members of the Sub-
committee on District of Columbia Appropriations. Many of them
are not yet here because we are all engaged in markups in other
subcommittees this morning. Mr. Bonilla of Texas was on this sub-
committee the last 2 years; Mr. Kingston of Georgia; Mr.
Frelinghuysen of New Jersey who has just joined us, and Mr. Neu-
mann of Wisconsin. On the minority side Mr. Dixon of California
is here with us. He is our ranking member, and was the chairman
of this subcommittee in prior years. Our roles have been reversed,
but our relationship remains strong. Mr. Durbin of Illinois, and Ms.
Kaptur of Ohio are also former members of the subcommittee.


xi)

We talked earlier about the $140 million in cuts that was last
year, the Appropriations Committee and the Congress passed on to
the Mayor and the council. They also, though, I think probably be-
cause they were a little suspicious of what the actual numbers
were coming from the District, put a cap of $3.25 billion in terms
of the city’s spending. That is the current law in the land today,
that to the extent you exceed that your future payments may be
deducted.

And we, at this point, are facing that. As I understand your pro-
posed solution to that, if you are saying to us it is basically do not
penalize the city by deducting future payments and, in addition to
that, we want you to pick up $267-odd million in the Medicaid pay-
ments that the District cannot afford to make; is that fair?

Mr. Barry. Mr. Chairman, again to reiterate, the Congress was
acting on the basis of what it considered accurate information. The
Congress and the council is acting the same way. But we now know
that information was not accurate; that the previous administra-
tion had not been forthcoming with accurate information.

And so since we now know what the truth is, I think GAO, the
General Accounting Office, has agreed with us that this—they dis-
agree on the accrual and the cash part, but they agree the Medic-
aid budget has an accrual of $261 million, and so it is accurate to
say we are asking for budget authority to take us up to $3,521 mil-
ion.

Also, I know why the Congress put the penalty in it, because
they did not believe the District was disciplined enough to cut it-
self. Therefore, when you do that, you put people in a penalty box.
It is a two-way sword.

If we overspend by $40 million, it means our cash is $40 million
less; then we get $40 million of reduced Federal payment, we have
an $80 million penalty as opposed to $40 million. So we are asking
that the limits be looked at and that we revisit the penalty part
of this.

We are convinced, Mr. Chairman, that the General Accountin
Office will be getting these reports if we, on the short-term, deal
with the District government in reducing this budget, as I say we
are going to have to do and will do, and if the Congress steps up
to the plate on the authorization of $267 million.

We do not need $267 million of cash for 1995. We can work out
what that means in terms of cash. Then we can begin to look at
the structural relationship. So you are right, what brought us here
is the fact that we were spending in 1994 far above what the Con-
gress thought, far above what the city council thought was happen-
ing, and, second, the penalty box that we will be in.

e took the opportunity to talk about the larger issues we would
like to work on that are more structural in nature. But the imme-
diacy is the $267 million.

Mr. Davis. Well, that falls under Mr. Walsh’s committee jurisdic-
tion. It actually came from them and they are going to have to ex-
plore that a little bit further as we move forward. It was based on
numbers given to us by the city and not by you as I understand.
Those numbers were based on that and now it puts the Congress
in a very difficult light of where the existing law is right now which
penalizes the District even further.


81

of where people who thought their rights were accrued had been
asked to make those kinds of sacrifices, and our retirees and our
employees did agree and out of respect for them, it seems to me,
we really should move forward.

I do want to clarify something, Council Chairman Clarke. Could
the District move with a new plan? Let me preface this by sayin;
when we had our hearing on my bill last year, not only did all of
you testify, but my good friends from the police and the firefighters
‘unions testified and we had a very interesting conversation. And I
said to them, hey, fellows, you have got enough of a problem. Now,
you seem to be defending against employees you don’t even rep-
resent because their initial notion was that there should not be a
different plan for new employees who, of course, were not their
members, and we had an interesting discussion back and forth.

Let me ask you this. Does the District have the authority with-
out additional congressional action to put in place right now a new
plan for new employees in those four categories?

Mr. CLARKE. Yes, ma’am. The answer is, yes. We did have legis-
lation introduced last year. The legislation was essentially to apply
to the new employees in those four categories: teachers, police, fire,
and judges. Well, no, we couldn’t go to judges. By Congress’ prohi-
bition, we couldn’t go to judges, but teachers, fire, and police. The
same standards that we apply to our regular work force.

As expected, the testimony came back that you can’t really apply
the same standards as are applied to a clerk or a secretary or a
carpenter or a city councilman, that you can to the police and fire
because the police and fire tend to retire earlier because of the
strenuous activity. You have got to have different standards.

So what we put to work, Mr. Pohlman was working for the prior
administration and Mr. Pohlman did a very good job of bringing to-

ether the experts from all those resources to get to the agreements
that we had in what we talked about about the past program, and
they have been working to try to work on a new program for the
ture.

Most of the testimony seemed to say, well, if we just had to do
something, just go with the rogram we have now with a cap on
the COLAs, you know, the COLAs could only grow at a certain
rate, not just the number of COLAs, but a cap on them, that is
what most of the testimony said.

The council has just retained the services of a new budget person
who has come to us from Peat Marwick, and as I have indicated,
he came last week and I indicated one of his first assignments is
to meet with GAO to get their views as to the proficiency of this
kind of idea of a cap on COLAs for a new program, but we are in-
tending to move that forward this spring.

Ms. Norton. How soon do you think that could move?

Mr. CLARKE. I hope we can get another round of hearings maybe
the first of the spring. We still have our budget.

Ms. Norton. There was some discussion in our countless meet-
ings that perhaps to move forward after the unions had already

en a hit on the existing employees, then to pile on top of that

new employees was to ask for a lot and we put that off. Frankly,

all of us agreed, all right, let’s put that off and deal with what is
ere.


3

dust so that everyone understands what faces the District of Co-
lumbia, it is neither_a revenue problem nor a budget problem, rath-
er the District of Columbia faces a spending problem of monu-
mental proportions and a management failure to enforce controls
or implement reductions. These spending and management prob-
Jems are so severe that the District’s government cannot deliver
the basic services needed by its citizens.

GAO will testify that 43 percent of the District spending goes to
personnel costs. By contrast, only 39 percent of total spending goes
to social services. Blaming almost all this crisis on social service
spending alone is not correct. or acceptable.

Five years ago, the Rivlin Commission stated the District govern-
ment, even considering its county and state activities, had about 40
percent more employees per 10,000 residents than comparable
cities. Program costs can change from year to year because of out-
side actions, including eligibility rules and benefit levels, but per-
sonnel costs are permanent and will only go up over time.

This is where the permanent solution has to come. Serious and
real personnel reductions of a magnitude not yet contemplated sim-
ply must enter into the equation.

GAO will tell us that so far in fiscal year 1995, which is now al-
most half over, the District has conspicuously failed to implement
the type of dramatic spending reductions and financial controls
that are the only avenue left to deal with this situation. In fact,
the spending rates remain the same as before the Mayor's transi-
tion team delivered a report of the city’s finances on November 22,
which included numerous proposals for resolving the city’s crisis.
The most important recommendation was that no new revenues are
necessary.

This recommendation was made for two reasons: The District not
only levies sufficient taxes to pay for any reasonable levels of serv-
ices and conspicuously fails to collect millions of dollars owed to it;
but also there is really no more blood left in the turnip to squeeze.
The District receipts from some taxes have already begun to fall
because business and residents are being taxed right out of town.

The District is important to all Americans as our Nation’s Cap-
ital. As such, it has a special claim on all our affections, but it has
added importance to the people of the metropolitan-Washin;
area. We know that without an economically vibrant and healthy
central city, the strength of the suburbs will be dissipated. We can-
not allow this to happen. We all must remember the city and the
suburbs have the same interests.

The citizens and Representatives of this entire region have a
vital stake in the solution to the short- and long-range problems of
the District. We must all work together so that we do not all fail
together. America’s Capital deserves no less.

The two subcommittees are beginning this process together. We
will finish this process the same way. In conjunction with our coun-
terpart subcommittees in the Senate and with the Federal Execu-
tive we will embark upon individual hearings and investigati S.

In the end, we will carefully examine the reality of the District
of Columbia finances and budgeting, what the city government has
said it will do and what it has actually done about these problems
and then decide what the Federal response needs to be.


109

Mr. Dixon. Right. Now I want to ask you about a couple of
things. Did you give an opinion in your 1994 audit?

Mr. NunN. Yes, we did.

Mr. Dixon. And what was that opinion?

Mr. NunNN. It is an unqualified opinion, which means we be-
lieve—

Mr. Dixon. Explain that to me.

Mr. NUNN. We believe the financial statements, based on our
audit of the financial records, were in accordance with generally ac-
cepted accounting principles and that they included the appropriate
disclosures.

Mr. Dixon. Right. I am not an accountant or auditor. You will
find that out by my questions. So, then, generally, you would say
that your audit could not reflect the financial condition of an en-
tity, and in particular the District of Columbia? In other words,
looking at your audit and your opinion would not tell you whether
the patient was well, slipping in health or dead. It would just say
that all these numbers seem to add up and that there is some doc-
umentation from them.

The reason I say that is because we have been wondering—or I
have been wondering—if you look at the Mayor’s letter, he opens
up by saying there is a financial crisis. Your letter doesn’t say any-
thing about any crisis at any time. And, as I hear you—and I will

ive you an opportunity to respond—generally you are saying, well,
that is not the purpose of it. And so I am asking, should your let-
ter—should a lay person be able to pick it up and tell if there are
any problems with the District?

Me. Nunn. I think our letter, as it says, has to be read in con-
junction with reading the financial statements. I believe they clear-
ly point out the results of operations for the year, the fact there is
an excess of liabilities over assets in the current fund and the gen-
eral fund, that the general fund had a loss of approximately $335
million for the year, that type of information.

And when you read through the footnotes ——

Mr. Dixon. That is in the financial statement?

Mr. NUNN. That is correct.

Mr. Dixon. Then explain to me—and I am really trying to get in-
formation for the hearing on Thursday. What is the purpose of the
letter? I mean, if the audit speaks for itself, how does the letter en-
hance it or detract from the audit statement? Why the letter?

Mr. NUNN. It says, as an independent person, separate from the
organization that prepared the financial statements, that having
reviewed the documentation, performed appropriate audit tests,
that the financial statements are in accordance with generally ac-
cepted Becounting principles.

ir. DIXON. OK. Now, how long have you had this capacity with
the District?

Mr. Nunn. The District puts out a contract for auditors for a 4-
year period. This is the 3rd year of the 4-year period. And following
the completion of the 4-year period we are not permitted to follow
ourselves.

Mr. Dixon. OK, then you either prepared or were aware of a let-
ter of January 11, 1994, that I asked them about at a subsequent
hearing where I think the thrust of it—it is signed by Coopers &


79

I think that is very important that that be looked at; the District

vernment needs relief in the pension area. It will be more dif-

icult probably because it is such a la: amount, but certainly
philosophically the DC government should not be paying for those
retirees. They deserve to be paid, but not by us. The other part of
this is that——

Mr. Davis. Excuse me, Mr. Mayor. I want to give you time to re-
spond. If I could, with regard to the pension issue, for current em-
ployees before they become pensioners and for new employees it is
within your purview to pass a law, could you not?

Mr. Barry. Yes, Mr. Clarke had introduced a law last year. I
supported it. I hope we can try to work on getting it throt the
Congress where new employees will have a defined contribution
and it will be much more manageable without all these other
things. I just want to continue to say that those 11,700 that are
now there and retired ought not to be the financial responsibility
of the DC government.

Mr. CLARKE. Thank you, Chairman Davis and Chairman Walsh.
Yes, I did introduce legislation——

Mr. Drxon. My concern at this hearing is that the information
that is disseminated be totally accurate. Mr. Clarke’s bill provided
for a roll back on condition, a condition precedent that Congress do
certain things: Extend the pension program for 30 years, and in-
crease it at 5 percent each year after the 25th year, as I recall.

I think if we are going to resolve these problems, we have to be
totally accurate as to what the facts are, and I am not criticizing
you Mr. Mayor, but I notice that a lot of conversation here has

een very loose and general which are not the facts, and so when
we say that we have to do something, it isn’t totally accurate, and
it is not fair to Congress. It is not fair to the District to—so I would
just say let’s slow down here and get the total accurate facts.

That is one of the problems around here as it relates to the rela-
tionship between the Federal Government and DC. You know, it
depends on how deep you have your oar in the water as to how
hard you want to pull, and I mean I have noticed the conflict this
morning, if I may just take a minute, between the things that the
council chairman has said and the conflict between the executive
branch here.

I just think enough of this is enough. This is very serious. I am
referring to your opening statements which said well, you know, we
are doing a good job. We made the cuts. I am sorry, I don’t—I will
amplify on it when it is my time.

ir. Davis. Mr. Clarke, you wanted to respond.

Mr. CLARKE. On the pension question, I think it is in the line,
not saying that there was any inaccuracy, but in the line of clari-
fication that I wanted to say the council did pass legislation. It did
address the COLAs and it did provide that there would be only one
COLA. It also provided that our employees would go from 6 percent
contribution to 7 percent contribution each year, excuse me, from
7 to 8 each year. The city has to match that, of course.

It was presented and all the time understood there, that collat-
erally, the delegate in Congress would be introducing legislation in
the Congress. It was a program always presented as a joint pro-
gram. The point is that the receiving of the money that we get is


105

accumulate the information relating to all amounts that are due
but unpaid. That number is referred to the Medicaid accrual.

At the end of 1994, the accounting department for DHS would
normally collect the information together and prepare that accrual.
As of carly January, the accounting department for DHS had not
collected that information together to make the entries that com-
plete the accrual accounting for the financial statements.

Working with them, the accounting department, auditors from
Coopers & Lybrand and Bert Smith, accumulated the information
and came to the total amount due to all providers for all open
years, which includes 1990 through 1994.

Mr. WALSH. So this goes back to 1990?

Mr. Nunn. That is the amounts that are due. The sum of that—
sum of that amount is equivalent to $261 million. That is the gross
amount. Upon payment, there will be a reimbursement for half of
that under the Medicaid program.

Mr. WALSH. $260 million?

Mr. Nunn. $261 million.

Mr. WALSH. That is owing to whom? To the providers?

Mr. Nunn. The health care providers in the District—hospitals,
nursing homes and ICMFRs.

Mr. WALSH. Can you tell us how much of this is attributable to
the year 1990 and how much to 1991? Because those costs would
have been incurred in 1989 and 1990, would they not?

Mr. NuNN. Let me finish the story, and I think you will see the
answer.

Mr. WALsz. All right.

Mr. NuNN. At the end of 1994, the accrual totaled $261 million.
At the beginning of the year, the accrual totaled $54 million. The
accounting records——

Mr. WALSH. Beginning of what year?

Mr. NUNN. Beginning of the 1994 fiscal year—October 1, 1993.

Mr. WALSH, Al! righ

Mr. NuNN. The difference—and there is the change in the ac-
crual which is recorded—was $207 million, of which, at the same
time, there is accrual for the receivable from the Federal Medicaid

rogram. Therefore, the net cost to the District for that change is
$108 million. That is half of it.

That $103 million, using that as the reference, $66 million—or
two-thirds of it—represents the difference between the amounts for
1994 service for the health care providers, the difference between
the amount that is either recorded on the cost reports or is esti-
mated on those cost reports which had not been received.

Also, in the year 1994 there were a number of regulatory or rule
changes. Two of them that I can best describe to yu are the State
plan, which is the plan that determines how the Medicaid program
works, had changes that were approved final in 1994 that were ret-
roactive to 1990.

Our belief is, looking at the documents, that out of the $103, $33
million represented changes, though they related to prior years,
were determined in 1994 only after the State program was—State
plan was approved. In addition, in the whole process, which is an
estimating process, we believe there were another $4 million of just
differences in estimates because better information was known.


90

cause Congress was not satisfied with the baseline number from
the District. Just to make sure that the numbers that the city, at
that point, swore were true, they put in the bottom-line number.
That is the dilemma we face, and now it is your problem. I just
wanted to put it in perspective.

Mr. Barry. Mr. Davis, every year the Congress puts in an au-
thorized budget. You cannot exceed on everybody's budget. It has
now become complicated and difficult because the original numbers
that you all thought you were starting with were not accurate. It
is not your fault. It is the fact the District gave you a number that
was not accurate and you started with what you thought was an
accurate number and went down.

What we are saying now is, we know it is not accurate. So, we
are going to ask the Congress, who certainly has the authority, to
increase that number from $3.254 to $3.521.

Mr. Davis. I understand. I think.

Mr. Barry. Yes, we have that straight on that.

Mr. Davis. Mayor, I would like to move on to other committee
members and allow them an opportunity to speak.

Miss Collins had asked the last questions. I don’t know if you
want to answer those.

Mr. Barry. Yes, sir, Mr. Chairman, let me answer those ques-
tions.

One question, as the District’s interim chief financial officer said
last Friday, there are now senior officials in place under the direc-
tion of the city administrator which will constantly oversee the im-
plementation of new spending reduction. Exactly how this team ac-
complishes this task—David Domenici—where is David?

Stand up. Mr. Chairman—stand up so everybody can see you,
David. You are the czar here on this thing; knows every agency’s

udget.

I have sat down and personally gone through each of these budg-
ets with each of these agencies, and I would just give police as an
example. That is a rather easy one. Their budget is $230 million
for fiscal year 1995. Chief Thomas knows that is his budget. Then
it is divided up into a plan to stay within the budget. For instance,
we are freezing police officers hiring for the rest of this year. There
will be attrition of other officers as they go out. It would still be

,900.

So on a weekly basis, David sits with the chief and his financial
people and says: How close are you to your plan? I will tell you how
it works. The police department's budget for overtime for 1995 was
$7, say $7.1, $7.5 million. The chief got his report and saw they
spent almost $5 million already. He cut out the ability to have any
discretional overtime, the ability to even question like this, to go
to court on your days off.

So the way it is implemented when you get close to what your
mark is, there is a flag that goes up and you can’t exceed it. Ifyou
do, you have to come see me and the city administrator about why
you are doing that. So it is in place, it is working at that time. So
it is a way of controlling spending in line with our spending plans.

I will give you another example how it works. The Department
of Corrections wanted to reduce its budget by $25 million. We told
them to do that. They had to do it to come to $240 million as op-



58

$200,000 of money and time and other things to what we are doing
and we encourage our citizens to step forward.

But with all of that, with the citizens stepping forward, with the
DC government doing its share, we still need two-thirds of this
problem be to be solved by structural reform, by transferring func-
tions from the DC government to the Federal Government, and
also by becoming a more efficient government.

And in closing on my part of this, before I ask Mr. Pohlman to
talk a little bit about Medicaid, we come together today seeing
Washington, DC as both a national problem and a national treas-
ure. Our city has some of our Nation’s cruelest challenges; home-
less mothers with babies, drug trafficking, illiteracy and teenage
hopelessness. We also carry our Nation’s greatest hopes, personal
prosperity, freedom of spirit and a right to self-determination.

Members of the committee, we have a theme in our government,
the theme is simply that everyone matters. This theme is more
than articulating care for each other, as important as that may be.
It states the belief that everyone has value, everyone has some-
thing to give, everyone is responsible and everyone contributes to
the whole.

I have a vision for Washington. I see a city where children are
born healthy, and grow up healthy, and in safe conditions. I see a
city where young people go to college and older people also continue
to learn.

I see a city of thriving industries of tomorrow, including health
care, music, tourism, publishing, as well as government. I see a city
where service in the public and private sector is considered honor-
able. And I see a city where faith abounds and where faith is re-
warded. I think that gives you a little bit about my philosophy. We
talked about that yesterday with the Speaker.

And finally let me take about 4 or 5 minutes to ask Bob Pohlman
to talk about Medicaid and then we are ready for questions.

[The prepared statement of Mr. Barry follows:]

PREPARED STATEMENT OF MARION Barry, JR., MAYOR OF THE DISTRICT OF
COLUMBIA

Good morn' ing.

On behalf of the city of Washington, D.C., and its residents, I want to thank
Chairman Jim Walsh, Chairman Tom Davis, the committee members, and other
members of Congress for this special opportunity to share information and seek new
ways to insure the financial stability and healthy future of our Capital City.

‘ashington, D.C., does not just belong to those of us who live here. ti belongs
to all Americans.

As partners in responsibility for the District of Columbia, we are at a new place
in our relationship—a place I believe that is full of opportunity.

Aldous Huxley wrote that:

“Experience is not what happens to you;

“It is what you do with what happens to you.”

T come today as a new, yet experienced Mayor dedicated to new opportunities, rec-
ognizing that old views must be changed, and current realities embraced. We must
and we will meet our challenge.

I am sure we are all anxious to move past our present challenge. We would all
rather put our energy into transforming our educational system, insuring the public
safety of our citizens, building a vibrant business community, and making our gov-
ernment more responsive and more responsible.

In other words, we'd all like to Ret on with building a city we can all be proud
of. And we will. This financial challenge will be conquered. Today is an important
turning point. We are at a doorway of opportunity.


54

On the question of whether or not we have met the congressional
mandate, it is my interpretation that what the Congress wanted us
to do was start at the city’s requested appropriation of $3 billion—
the Congress was working on a figure of $3,394 million request
from the city. If you reduce that by $140, the Congress came to a
point where we had an authorized budget of $3,254 million. $3,254
million, But what is clear now, members of the committee, is that
the city was spending considerably above that in 1994.

In fact, in 1994, the city overspent its operating budget by $154
million. $154 million of Moneys were being spent in 1994 by the
previous administration, and we thought the budget had been cut
to the $3,394 millioin figure. Moreover, I was a member of the city
council, and with Mr. Clarke’s leadership, and others of us, we re-
duced the 1994 budget by $130 million.

Only the Mayor can really cut the budget. The council can urge
it, can put it into law, the Congress can put it into law, but only
the Mayor can actually say stop spending this money. And we
found out in 1994 that the budget was not reduced. I will give you
an example. The Alcohol and Drug Abuse Administration was a
$30 million budget; cut to $27 million. Not 1 cent had been cut in
1994.

So one of the things we are going to ask the Congress to do is
to increase our budget authority to be in line with the reality of
spending in 1994 that will carry on in 1995.

The other thing we found when we came in office in January 2,
was that over $70 million of bills that were due in 1994 had not
been paid. Mr. Hawkins just informed me a few minutes ago that
he went into their files in looking at the bills when he got there
on January 2, and found $5 million of bills that had not been paid
in the last 9 months prior to October 1. That is why these vendors
are screaming.

T have ordered them all put in the system now and paid. Another
$20 million of unpaid bills. So we had $70 million of unpaid bills,
pension payments carried over should have been paid in 1994; $63
million in escrow carried over. And so we found that we were fac-
inga cash crunch because of the carryover.

little later on I will share with you our actual cash-flow for
1995, which I would like to do.

Does the committee have this? What it shows, in actual spending
for October, November, December, and January—I would Tike for
the committee to look at this and I will just give you the bottom
line numbers.

In October, we had total receipts of $935.6 million; in Novem-
ber—no, in October, $935.6 million, and we disbursed $743 million,
leaving a cash balance of $235 million. And to give you an example
of how serious the problem was, members of the committee, that
was left over from the previous administration, we disbursed $192
million in October. Many of those were these overdo bills we are
talking about, compared to disbursing $62 million in November and
$38 million in December, and $88 million in January. That is more
normal in terms of our cash-flow, but we had to put in almost $100
million of expenditures in October for carryover bills.

0, Mr. Chairman, and members of the committee, let me just
indicate to you that the District of Columbia government knows


16

PREPARED STATEMENT OF HON. MICHAEL P. FLANAGAN, A REPRESENTATIVE IN
CONGRESS FROM THE STATE OF ILLINOIS

1 would like to take this opportunity to comment on the financial crisis facing the
District of Columbia and the challenges that Congress, and specifically these two
subcommittees, can expect to deal with during this session.

I am encouraged by the vast amount of recommendations, studies, audits, com-
mission reports and spending plans that have been published over the last few
years, At the same time, I am very discouraged by the minimal action that has been
taken in response to these efforts to help lead the nation’s capital to economic
health. Representing Chicago, I am familiar with the problems urban areas are
forced to contend with and I look forward to bringing to the District some of the
solutions that have worked for Chicago.

It is hard for me to believe that there is one District employee for every thirteen
District residents yet no one in this enormous bureaucracy claims to have knowl-
edge or responsibility for the financial problems that have escalated to alarming lev-
els. I think the time has come for solutions as well as defining the roles of D.C. gov-
ernment officials and their responsibilities for the future. Hopefully, in the coming
years we can be a society that encourages responsibility and pride in their work,
not a society of passing the buck. Congress is taking it’s share of the responsibility
and wil] ultimately be held accountable for getting the District back on track. At
some point, District officials, be it the Mayor's Office or the City Council, will need
to take over this obligation and we need to work together to define this shift in re-
sponsibility, Fortunately, along with responsibility comes the reward of a job well
done. We all hope to share in the success of the District as it reclaims financial
soundness.

My hope is that our subcommittees, in conjunction with Mayor Barry and the City
Council, can be part of the beginning of the economic healing process that will lead
the District into the twenty-first century a safe and prosperous community.

Mr. Davis. Mr. Walsh.

Mr. WALSH. Mr. Frelinghuysen, do you have an opening state-
ment?

Mr. FRELINGHUYSEN. No statement, Mr. Chairman, thank you.

Mr. Davis. Thank you.

This subcommittee is in receipt of a letter from the chairman of
the Government Reform and Oversight Committee, requiring that
all witnesses appearing before this subcommittee must be sworn.

So Mr, Hill, if that is all right with you and your colleagues if
you could stand and raise your right hand.

[Witnesses sworn.]

Mr. Davis. Thank you. .

Thank you for being here today, Mr. Hill. You may introduce the
Members with you.

Let me start by saying how thankful we are for the work you and
the other folks have done. I think in the long run, the District gov-
ernment will thank you as well, because without your past and fu-
ture efforts, there is no question that the District of Columbia
would be in more dire shape than they are now.

You may proceed.

STATEMENT OF JOHN W. HILL, JR., DIRECTOR, FINANCIAL
MANAGEMENT POLICIES AND ISSUES, ACCOUNTING AND IN-
FORMATION MANAGEMENT DIVISION, U.S. GENERAL AC-
COUNTING OFFICE, ACCOMPANIED BY EDWARD STEPHEN-
SON, ASSISTANT DIRECTOR; TERRY CARNAHAN, ASSISTANT
DIRECTOR; AND LAURA TRIGGS
Mr. Hitt. Chairman Davis, Chairman Walsh, ranking minority

members and members of the subcommittees. Accompanying me at.
the table are Terry Carnahan, Ed Stephenson, and Laura Triggs.


45

Mr. CARNAHAN. We received the report on January 17 and began
work on it immediately.

Ms. Norron. So you began work on it only after the new admin-
istration?

Mr. CaRNAHAN. That is correct, as soon as they had it available,
yes.

Ms. Norton. Had any work been done on the report before the
new administration came into office?

Mr. CARNAHAN. By GAO, no.

Ms. Norton. No, by the city.

Mr. CARNAHAN. In discussions with District officials, what was
indicated to us was that there had been a minimal amount of work
performed in developing that quarterly report up until the new ad-
ministration had come into office.

Ms. Norton. So in getting information to you, they had essen-
tially to start from scratch?

Mr. HILL. Well, I don’t know if it is accurate to say they had to
start from scratch. There was a transition team that was in place.
There was a significant amount of information that they had access
to prior to the time that they took office, so someone could have
been working on the report at that point in time.

Ms. Norton. Let me ask you about the required escrow amounts
the District must collect. You discuss in your report the mandate
of our Appropriation Act for the District to escrow 20 percent of the
fiscal year 1996 Federal payment or $132 million.

Are you satisfied that the District is able to do that and is doing
it or will do it?

Mr. HILL. I don’t know what the District will do, I mean, in
terms of that. It is a requirement. Clearly because a large portion
and an increasingly large portion of the Federal payment is used
to pay prior year bills, it will create a tremendous financial stress
on the District to have to escrow that money.

Ms. NorTONn. With the cash position of the District now, is it con-
ceivable that they could pull out $132 million to set aside in that
way?

Mr. HILL. Well, it is possible that in terms of giving that particu-
lar Federal payment, that amount could be withheld from the Dis-
trict. I mean, it conceivably ——

Ms. Norton. If it did not escrow it?

Mr. HILL. It could be conceivably put into place. It would cer-
tainly have a tremendous impact.

Ms. Norton. Could you explain the requirements of the District
to begin setting aside repayment of the $250 million it borrowed re-
cently?

Mr HILL. Yes. Laura.

Ms. Triccs. The $250 million borrowing has some specific provi-
sions for repayment. I believe it is August 1, we can get you the
exact dates, they have to start escrowing property tax or any of the
tax payments that come in to the extent they have not already
escrowed money for that $250 million.

Ms. Norton. Let me put the same question to you, then. Is it
conceivable that the District can simply put aside $250 million be-
ginning in August to assure repayment?


49

We have had our photo-ops. It looks like we will not have a vote,
although you never know. What I want to do is ask the Mayor,
Chairman Clarke, and Mr. Pohlman, if you would all please stand
and raise your right hands, so I can swear you in.

[Witnesses sworn.]

Mr. Davis. Thank you.

Be seated.

Let me get some order, Mr. Mayor, before I call on you. I want
to get some order in the room. May we please have order in the
back. If we can close the doors and please have order.

Mr. Mayor, it is a distinct pleasure to welcome you here before
this committee. You have been kind enough to meet informally
with the committee a couple of weeks ago to share some of your
thoughts and comments, and we have had a continuing dialog. It
is in that spirit that we welcome you here today. If you want to
introduce your staff with you, we would be happy to have you in-
troduce them to committee. We welcome you and thank you for
being with us.

STATEMENT OF MARION BARRY, MAYOR OF THE DISTRICT OF
COLUMBIA; DAVID A. CLARKE, CHAIRMAN, COUNCIL OF THE
DISTRICT OF COLUMBIA; AND ROBERT POHLMAN, ACTING
CHIEF FINANCIAL OFFICER, DISTRICT OF COLUMBIA

Mr. Barry. Mr. Chairman, members of the committee, let me
first of all say, good morning, and on behalf of the citizens of the
District of Columbia, Washington, DC, and its residents, I want to
thank Chairman Jim Walsh and Chairman Tom Davis, the com-
mittee members and other Members of Congress for this special op-
portunity to share information and seek new ways to ensure the fi-
nancial stability and healthy future of our Capital City.

Mr. Chairman, members of the committee, Washington, DC does
not just belong to those of us who live here, it belongs to all Ameri-
cans. As partners in responsibility for the District of Columbia, wi
are in a new place in our relationship, a place I believe is full of
opportunity as well as challenge.

Mr. Chairman, I am going to take a considerable amount of time
to talk about our city because I think it is important that we look
at the opportunity for new opportunities, recognizing that old views
must change ani currently realities embraced. And I am confident
working with you and with the citizens of Washington and the city
council that we will meet this challenge.

Also, I am sure that we are all anxious to move past our present
challenge. Our challenge of the budget is important, but we would
rather put all of our energy into transforming our educational sys-
tem, making it work for our children, ensuring the public safety of
our citizens, building a vibrant business community and making
our government more responsive and more responsible. In other
words, we would all like to get on with building a city that we can
all be proud of. We will meet this challenge, and I am confident
with a lot of work and a lot of sacrifices, this challenge can be con-
quered.

Today is a turning point in the life of our city. We are at the
doorway of opportunity. Mr. Chairman, members of the committee,
my testimony this morning will address five questions providing


78

review that because it will be interesting to see where those cuts
were made and what sort of planning went into those layoffs.

Part of the city’s commitment to resolve this fiscal problem was
a requirement to cut $140 million. GAO says that has not been
done. In fact, about $99 million in cuts have been implemented.
The transition team headed by, I believe, Mr. Elijah Rogers, the
former city administrator, suggested in November 1994 that the
District needed to come up with not only $140 million in cuts, but
an additional $260 million in cuts.

They saw the train wreck coming back in November, yet the cuts
haven't been made. Am I out of time here? All right. Let me just
wrap ne and then I will come back for questions.

1 will not bring an appropriations bill to give the District more
money this year to the Congress. I can’t do it, it won’t pass. Even
if I wanted to, I couldn’t get it done without structural changes in
the way the District government operates.

We will not remove the escrow account and the penalty require-
ment, because I think that is what has brought us to the table
today and I can’t speak for anybody else on the subcommittee, but
it would be next to impossible for us to accomplish that task. I will
leave it at that, and give somebody else an opportunity to speak.

Mr. Davis. Ms. Norton.

Mr. Barry. Mr. Chairman, could I comment at some point?

Mr. Davis. We will give you an opportunity.

Mr. WALSH. I have no objection.

Mr. Davis. We will give you an opportunity to comment now and
not take it out of Ms. Norton’s time.

Mr. Barry. I appreciate Mr. Walsh’s observations. Let me just
make a couple of points. I said to everyone who would listen that
in 1990, the last year of my administration, I had lost control of
the government because of my personal difficulties, so that $118
was forecast early in March, couldn’t get the council to act to re-
duce, but anyway, that was then, but the big issue I think, Mr.
Walsh, is these pensions.

The two COLAs and anything else that goes with it were set into
law by the Congress, and the Congress has to change that benefit
for those who came under that law prior to 1980. Second, the
11,000—

Mr. Davis. Mr. Mayor, would you support those changes?

Mr. Barry. Absolutely I would support that. This pension situa-
tion was generous in America. You could be a fine firefighter or po-
lice officer, which we certainly admire and respect, you come on the
force at age 21, retire at 41, 20 years, about 60 or 70 percent of
our pension for another 25 or 30 years of life, it is very generous,
ut if you take the 11,700 retirees, 99 percent of them came on the
force under the federally mandated system, and what is missin,
here is that the Federal Government actuarially should pick up a
of that.

The District should pick up any new people coming on after
1980, and the point we were making here is that even the $52 mil-
lion just scratches the surface, so if the District didn’t have to pay
the retirees, which we shouldn’t have to pay for, we would have
about $295 million of taxpayers’ cash to be used either to cut our
tax rates or to balance our budget.


ll

Yet, only a city with underlying strength could have held on for
so long. Even today, most cities would envy the District’s popu-
lation. Among the 25 largest cities, most would not mind being first
in percentage of residents employed in the top-tier jobs, those in
the professional, managerial, and technical categories; third in per-
centage of residents with college degrees; and fifth in per capita in-
come. As recently as the 1980's, the District had the greatest de-
cline in the poverty rate among the top 25.

I recite these hopeful statistics to document the optimism that I
believe is fully justified even as the crisis saps the city’s strength.
But I am no starry-eyed optimist. The District’s potential will be
lost unless the city and the Congress are willing to look straight
into the eye of this crisis, refuse to blink, stare it down, and dis-
pose of it.

The city’s able leaders are hard at work, but the time has come
to rise above the false hope that day-to-day crisis management can
get us out of this deep hole. We are pretending as if our message
to anxious District residents is that we should keep doing what
we're doing, only harder and faster. There is no expenditure of ef-
fort or speed of action by which the District, using the single strat-
egy of downsizing, can cut its way out of this problem in a single
fiscal year. The prospect of damage to vital services makes it irre-
sponsible even to try.

By saying the obvious, my message is surely not that the Mayor
or the city council should slow down. For the sake of the city’s
credibility and their own, they must indeed continue to work hard-
er and faster. That is what they are now doing, and I want to ap-
plaud them publicly for their efforts.

It is easy enough to underestimate the personal and political dif-
ficulty of their task from on high in the Congress or from the side-
lines of the press. The Mayor and the city council live within shout-
ing distance of the people whose jobs they are taking, whose medi-
cal services they are withdrawing, and whose programs they are
eliminating.

The Mayor and the city council are also motivated, however, by
the desire to assure that the crisis does not damage home rule.
Thus, they continue to wrestle with a problem that has grown larg-
er than they ever imagined and has ballooned far too big to handle.
It is time for the Congress to join with the District to take the next
inevitable step.

With the District’s loss of its credit last week, an oversight board
is now the only way for the city to borrow in order to stay in busi-
ness. Either such a board will ease the way to the Treasury or the
Congress will dictate terms of borrowing that will have obvious and
painful home rule implications. I prefer a board designed by the
Congress in conjunction with the District to waiting for the Con-
gress to act alone if the city goes bankrupt.

1 prefer to join the action now rather than to be acted upon later.
The District must not be a voyeur watching itself go down.

An oversight board can bring another vital element of relief.
Only with a board will we be able to convince this Congress that
the District must not be made to eat a deficit that keeps rising like
yeast, in a single fiscal year. This necessity goes beyond the impos-


53

and 1994. I was not Mayor during those years. I have only been
in office 1 month and 21 days. And I think when you look at the
report, you will see not only spending habits but spending patterns
started in 1992. But, on the other hand, we are forced to deal with
them in 1995. I think it is important.

So in 1994, an audit showing a deficit of $335 million was in a
report I gave on February 1, but it was not during the years that
the Barry administration was in office.

You say, why do you say that? We have a strong mayoral form
of government, where the Mayor keeps all of his spending books,
keeps all the checkbooks, keeps all of the contract authority, and
those of us on the council only get reports when we can find out
what happens from the executive.

Mrs. Smith and I were trying last fall to find out the extent of
this 1994 deficit. We were told all along, this deficit probably was
no more than $140 million.

If you look at either the November 2 letter, which I want to in-
troduce from Mayor Kelly to the council, it indicated that—Novem-
ber 2, 1994, indicates that the basic problem is $140 million. We
all thought the problem was $140 million. The council thought so.
I was a member of the council. I thought so.

So on November 9, when Mrs. Smith and members of my transi-
tion team sat down with members of Mayor Kelly’s team and
Mayor Kelly, and we were told we had a $291 million potential
overspending problem in 1995, we were shocked. Because we had
never heard that number before. We thought we were dealing with
$140 million that the Congress had asked us to cut. That is man-
ageable.

So we came to the conclusion we had a $431 million problem, if
we kept spending. So on October 1, 1995, on to November; then on
January 2, when the Barry administration took over, and I asked
Bob Pohlman to be my interim financial chief financial officer, we
found ourselves in a mess. For instance, the GAO had asked for 55
reports from October 1 to December 31. Only 9 reports had been
completed during that time; 46 reports were outstanding.

The GAO asked us, the General Accounting Office asked us on
January 3 to February 17, for 93 reports; 139. We are happy to re-
port to you that as of February 17, all due dates were met except
three items for which we were informed of on February 16.

And so we found ourselves in a situation where nothing had been
done on this report which was due, you all, January 17 until Janu-
ary 2, when Bob Pohlman under my instruction was asked to get
this information and bring it forth and give it to the Congress on
January 17.

We also started digging into the Medicaid reports and found an-
other mess of a situation, in the sense that audits had not been
done in 1991, 1992, 1993, and 1994. The hospital association had
sued the city for payments owed for 1992 and 1993. And so our
Medicaid problem came to be a $261 million problem of past due
bills on an accrual basis. Mr. Nunn, from Coopers & Lybrand, gave
us a report on that in our audit. I have a copy which I would like
to share with you that shows we were behind $261 million in the
Medicaid budget; $261 in the Medicaid budget.




70

a larger reduction than us. So we are working together with our
Mayor. We have already laid the budget basis for some of what he
says he is going to be doing now.

‘ompounding the immediate fiscal crisis we face in the District
of Columbia are major structural problems. Much reference has
been made to the McKinsey report. We would commend that to
your attention as well. These include the inability to tax income at
its source and unfunded pension liability inherited from the Fed-
eral Government, and the responsibilities for carrying out State,
county, and municipal functions.

As is noted in the Rivlin Commission report in 1990 and in the
McKinsey report in 1994, the excess tax burden of DC residents
and businesses is caused, to a large extent, by the limitations in
the home rule charter that prevent us from taxing 60 percent of
the income earned in the District of Columbia and 55 percent of
our property, much of it that is Federal that is tax exempt.

the Mayor and several studies have noted, our assumption of
State functions is quite costly. In the District of Columbia Depart-
ment of Human Services alone, the costs for Medicaid, AFDC, and
foster care are over $414 million. Meanwhile, however, we are
building for our future, and here we need your assistance as well.

We have begun planning for expanded convention structures for
a new arena to bring professiona sports back to our city and for
a municipal parking authority like those of our neighboring Prince
George’s and. Montgomery Counties. Congressional legislation is
needed to proceed.

We have reduced the franchise, gasoline, and sales taxes thereby
reducing some of the tax burden on business to stimulate job cre-
ation.

Now, as we have plowed through these grounds, we are seeing
many areas where Congress can be of help in our journey. For in-
stance, although we are not a State, the Constitutional injunction
against State laws impairing the obligation of contracts may well
stop some of the efforts that we are undertaking to review our con-
tracts. That provision does not apply to the Congress.

We are prohibited by the Home Rule Act from treating any em-
ployee hired before 1980 differently now, 15 years later, than we
would have treated him then. That, for instance, if we wanted to
furlough on a holiday, we would have to cull the personnel records
for each employee to see whether that employee came on before
1980 because of this provision, a 15-year-old provision.

We are not only interested in looking at employment contracts,
but at contracts for goods and services. Our Court of Appeals has
said that we must be authorized by Congress to review contracts
made by the executive, as it is part of the determination of the sep-
aration of powers.

We have, in the fiscal year 1995 supplemental pending before
Congressman Davis’ subcommittee, a section, which if enacted by
the Congress as part of the Budget Act, would give us the ability
to review contracts worth over $1 million and get some of the infor-
mation that we have not always been able to have and would like
to see.

Indeed, while we respect that the Congress may want to look at
our budget request more carefully under the current conditions, I


25

The District has always submitted optimistic cash flow forecasts. As figure 2
shows, forecasted amounts have nearly always exceeded actual amounts in some
months by amounts exceeding $200 million.

Figure 2 Comparison of Actual and Forecasted Cash Balances

ean tne at irs ~~
4 [rm n,

a ee ee
LOEEEEE TEL STS

Source: GAO anew of Dict Tranny cata

CONGRESSIONAL ACTIONS RELATED TO FISCAL YEAR 1996 BUDGET

‘The Congress passed the District of Columbia Fiscal Year 1995 Appropriation Act
and the Federal Payment Reauthorization Act of 1994 which required a number of
actions. Specifically, the 1995 Appropriation Act capped the amount of expenditures
for figcal year 1995 at $3.25 billion, $140 million below the budget that the District
submitted to the Congress. It stipulates that total disbursements can not exceed
total receipts, and mandates penalties for enforcement of the spending caps. It also
limits the total number of full-time equivalent (FTE) positions to 33,588,

quired several periodic financial reports.

The potential penalties for overspending contained in the 1995 Appropriation Act
are substantial. Assuming that the authorized federal payment for Recal year 1996
of $660 million is appropriated, the fiscal year 1995 Appropriation Act would require
the District to escrow twenty’ percent of the fiscal year 1996 federal payment. or
$122 million. The Congress required the eacrow wo encourage the District to make
the spending cuts mandated by the Act and also required the District to pay certain
“penalties” to the U.S. Treasury if the fiscal year 1995 spending reductions Were not
made. As the Act’s conference report explains, the District is to pay from the escrow
and, if necessary, other District funds (1) the amount that actual expenditures were
not ‘reduced by the $140 million, and (2) the amount, if any, actual disbursements
and net payables exceeded actusl receipts. Table 1, illustrates the amounte of the
“penalties” given various possible spending levels.

and re-

Table 1: Potential Fiscal Year 1995 Spending Cap Penalties
Lvlions of altars}

Hypothetical Examples: Amount that actual expenditures exceed
payables exceed receints*

et and disbursements and nd S40 mE ents over Total Por:
rs fon budget ‘tly,
cat penalty

0 0 0
$100 ‘$100 $200
140 267 407

140 631 TMm

‘These hypothetical examples assume that the amoust actual expenditures exceed the budget and disbursements exceed mceipts are
‘equal, In actual practice, these amounts should probably be different
Source: GAO eatculations.



68

Yesterday, the council took action to reduce the base wage rate
for all District employees. We expect that this will result in a $70
million savings for this fiscal year. It also began a process for an
elimination of 1,200 positions beyond the 2,705 positions the coun-
cil cut in the fiscal year 1995 supplemental. The council had cut
the personnel line by $30 million in anticipation that the Mayor
would renegotiate the contracts with collective bargaining units.
The negotiations were proceeding but with no concrete results.

I must tell you that as a friend of labor, our decision to roll back
employee wages was one of the most difficult decisions I have ever
made, I have ever had to make. Among the other actions the coun-
cil has taken to address the immediate fiscal problem are: to pro-
vide for early easy-out and early out retirement Programs and a
voluntary severance program for fiscal year 1995. The early out
and easy-out have been extended, and as of our emergency legisla-
tion yesterday, if the Mayor signs it, the voluntary severance is to
be extended as well.

We adopted the fiscal year 1995 supplemental budget, which cut
and reallocated $278.9 million in appropriations and 2,705 posi-
tions cut. We went into very difficult areas. Areas of entitlement;
Aid to Families of Dependent Children; to some extent into Medic-
aid. We took away the supplement that the District of Columbia
was giving to recipients of special security income, SSI. We elimi-
nated much of our emergency assistance program.

We took away the stipends that members of our boards and com-
missions receive unless they are in a full-time board or commission.
We eliminated the funding for the Commission on Women. We had
already eliminated the funding for the Commission on Men. I guess
we have at least been consistent with the Equal Rights Act there.
We reduced substantially the Commission on Latino Development.
We eliminated funding for the Commission on Arts and Humanities
to that which would be necessary to match with Federal funds.

In the fiscal year supplemental budget, we did something with
those funds that we had to cut. The first thing that we did was we
budgeted. A budget item. We budgeted $140 million not to be spent
on anything, but to be reserved to meet what we understood to be
your—the requirement in the fiscal year 1995 Budget Act and its
report.

We also budgeted, and this becomes important, very important in
understanding what we did and in reading the GAO report, be-
cause I would like to make this reference, particularly here in rec-
ognition of what the GAO has reported. We budgeted $79 million
not to spend for anything but as a cash reserve. If you look on page
11 of the GAO report, it shows that. But it shows it as an expendi-
ture. As an additional cash need.

If you read the language of the fiscal year 1995 supplemental we
sent up, it is a budgeted item not to spend. And if you add that
to the $139 there at the bottom of page 11, you come up with $200
and some million.

Similarly, if you look on page 12, it says that on February 1,
1995, the Mayor announced that overspending in his agencies could
result in $3.89 billion in expenditures or $631 million over the
$3.25 billion expenditure. Recognize again that we budgeted $79


61

+ At DC General Hospital, where 240 workers have left the rolls since October,
90 physicians and 170 others will leave their jobs in April. A total restructuring
will reduce care to trauma, pediatrics, OB/GYN, and other epecialties

+ We are eliminating AFDC benefits to 19 and 20-year-olds, as well as women

in their first and second trimesters of pregnancy.

+ We are placing a limit on emergency assistance payments, and burial assist-

ance.

+ We are increasing charges for city-provided day care.

+ Over 100 correction officers have been redeployed and other work changes

have reduced overtime by nearly $300,000 per pay period.

+ Rotating fire enging companies out of service is also saving overtime at the

rate of approximately $200,000 per pay period.

+ We have closed five public health clinics.

+ More than 40 contracts with health service vendors are being cancelled or re-

negotiated, cutting more than $5 million ia FY 96,

+ We are closing one of our two drug and alcohol detoxification centers.

+ We are eliminating manual street cleaning and reduced bulk trash collection.

We estimate that FY ’95 savings due to employee departures to date, vacant posi-
tions remaining unfilled, and actions to curtail spending that has already taken
place, such as eliminating contracts, reducing program funding, and curtailing over-
time, amount to more than $70 million.

This amount does not include many actions in progress, and cuts in services and
contracts that will be completed in the near term. I will continue to implement and
monitor our spending reduction plans. I know that it is only through credible cost
cutting and management changes that I can earn your confidence to seek and nego-
tiate systemic change. And I earnestly ask that you look at what I am doing—not
just at what I say.

In addition, my plan for this year inchides a $70 million savings in wages. Our
first furlough day is next Monday, and another is scheduled for March 13. I would
prefer across the board salary adjustments which would be fairer to all workers; and

am working with DC Council to achieve savings through that method instead fur-
loughs. But we will achieve the $70 million one way or the other.

Thave been specifically encouraged to report on behalf of our various employee
representatives that our workers are prepared to be cooperative during this period
of financial crisis,

Our long range capitol debt of more than $3.2 billion is unusually front loaded
and given normal credit considerations I believe $70 million could be cut from this
years spending through restructuring our capito) debt. Obviously there are some
concerns with this approach due to our rating in the market, but this avenue ia fis-
cally sound and I plan to pursue it with your help.

1 of these actions will bring our spending to within $267 million of the Congres-
sional spending authority. This amount relates directly to our increased Medicaid
costs—costs accumulated due to lack of timely audits, but costs which are deter-
mined by entitlement, not by budget authorizations.

This suggests the third question, “What participation do we need from Congress
to meet our financial needs?”

We need for Congress to assume responsibility either through increased appro-
priation, or direct payment of $267 million in Medicaid expenses in FY '95, and $141
million for these costs in each of FY ’96 and FY '97.

In addition, I would propose that the federal government furnish the faith and
credit backing for our capitol debt as is done for many enterprise budgets. Yes, our
credit in the market place is fragile.

But by Congress insuring our debt, millions in debt service will be saved for tax-
payers in the District and throughout the nation.

estion Four addresses the chronic imbalance of our relationship with Congress.
And I am extremely grateful for the leadership here today that is willing to put our
whole relationship on the table for discussion.

‘Again, I believe it will be instructive for me to take a moment to describe the con-
text of this relationship as it has developed over time.

The view has been that home rule for the District established a clean financial
slate for DC residents.

‘The reality is that when audits were finally possible in 1979, it was found that
more than $279 million in unpaid bills were cerried over from period of federal con-
trol.

In addition, as I documented earlier in this testimony, unfunded pension respon-
sibilities for federal employees were transferred in whole to fature District tax-
payers—costs which today take $260 million every year from our treasury.


18

Our efforts to obtain accurate and reliable data have been ham-
pered by the poor state of the District’s financial systems. Some
data may need to be adjusted as we continue our work. Included
as attachment 1 of my statement and on the chart that is shown
on the side here, is a time line of major events that have occurred
since we issued our report last summer. As I go through my state-
ment, it may be useful to refer to this time line.

In the 1980's, the District’s general fund operated with revenues
in excess of expenditures in most years. From 1991 through 1993,
the District submitted budgets to the Congress that showed ex-
penditures and receipts in balance.

However, even though the budgets were balanced and despite re-
ceiving cash from a $331 million general obligation borrowing in
1991, the city’s cash position continued to decline. During that pe-
riod, various factors helped the District to balance its budget, in-
cluding nearly $400 million in increased Federal payments and
$225 million in additional budgetary authority from transferring
money from water and sewer funds, not recording Washington-Met-
ropolitan Area Transit Authority payments when due, and chang-
ing the legal definition of the property tax year.

After 3 years of positive general fund balances, the District re-
corded a $335 million deficiency for fiscal year 1994. Of this total
deficiency, $116.8 million was in appropriated funds where defi-
ciencies were recorded in most appropriated expenditures functions
and subfunctions, including the schools, Medicaid, fire, police and
public works.

The remaining amount resulted primarily from adjustments re-
lated to Medicaid and DC General Hospital. The Medicaid increase
relates to cost settlements of prior year Medicaid program costs
that the District will be required to repay during fiscal year 1995.

The $85 million adjustments for the DC General Hospital receiv-
able recognizes that the DC General Hospital loans from the gen-
eral fund may be uncollectible since the hospital continues to oper-
ate at a substantial loss.

Figure 1 on page 4 of my written statement that is also repro-
duced in a chart, illustrates the cash problem the District faces at
the end of each fiscal year. As you can see, each year a larger por-
tion of the Federal payment is being used to pay the prior year’s

ills.

Both the Appropriation Act of 1995 and the Federal Payment Re-
authorization Act required that the Mayor submit a quarterly fi-
nancial report. To respond to this requirement, on January 17, the
District submitted more than 500 pages of documents.

Although some valuable information was included in this data,
for the most part, the information was not in a form that is useful
to monitor the District’s finances. The quarterly report included a
computer run to show first quarter expenditures.

This run did not contain summaries or analyses of data and
there were no projections of expenditures for the remainder of the
fiscal year. This makes it impossible to use this report to compare
actual first-quarter expenditures with budgeted amounts or to
project the year-end expenditures.

The legislation called for an aging of payables and an aging of
receivables. The list of payables, included the date the voucher was


35

Ms. Triccs. They are putting in $52 million a year, which rep-
resents the present value of a certain portion of the payment when
the pension plan was set up at the beginning of home rule.

Ms. NorTON. What is the total amount that the District has put
to reduce this liability as compared with the Federal Government
since the matter was transferred to the District?

Ms. Triccs. Well, the actual computation for the District is that
they are not reducing the unfunded liability, but they are paying
the current portion plus some interest on it, so in actuarial terms
the unfunded portion stays even, but they have paid what we con-
sidered interest over the last 10 years.

Ms. Norton. Has the District taken what steps it can in order
to rasolve this unfunded pension problem?

Mr. HILL. I am not aware of all of the steps that the District has
takeh to resolve the unfunded pension liability problem.

Ms. Norton. You are not aware of the bill that the District has
enacted?

Mr. HILL. Yes, I am aware of the legislation that has been en-
acted, but you had_asked has the District done everything they
could in order to solve the problem, and I have not reviewed that
specifically.

Ms. Norton. How much has the District paid out in pension
costs that it would not have paid out had the pension plan been
fully funded when it was transferred to the District by the Con-

Ss?

Mr. HILL. I don’t have that information.

Ms. Norton. I wish you would provide that information for the
record.

Mr. HILL. Sure, we would be more than happy to.

[The information referred to follows:]

How much has the District paid out in pension costs that it would not have paid
ot had the pension been fully funded when it was transferred to the District by

longress?

‘The District's annual pension expenditure for police officers and fire fighters,
teachers, and judges included in the District’s annual appropriation does not include
any costs that affect the unfunded liability for that pension lan. As we reported
in 1992 (GAO/HRD-93-32) and in 1994(GAO/HE! 5-40), the District is paying

costs noeded to pay retirees expenses in the current year (pay-as-you-go),

e District of Columbia Retirement Reform Act, passed in November 1979, out-
lines the portion of the unfunded liability of these three plans deemed to be the fed-
eral share. The administration indicated at the time the act was passed that a larg-
er payment by the federal government to the fire, police, judges and teachers plan
was not warranted because it:

— would overstate the federal government’s liability due to abuses in the dis-

ability retirement statutes and

=— ad not take into account federal contributions for District employees covered
by the Civil Service Retirement System (CSRS).

In other words, the federal share was considered to be less than 100% of the pro-
jected liability because other District employees receive retirement benefits that are
subsidized by the federal government.

Since the passage of the act, the portion paid by the District for police officers
and fire fighters, teachers, and judges has been comparable to subsidy received for
District employees covered under CSRS, Therefore, the District may not have paid
out any pension costs that it would not have paid out if it were Yunding its own
pension plans.

Ms. NorTon. Your report does not speak in any detail to court
orders. How much of the District’s budget is tied up in court or-
ders?


55

how much money we have in the bank on a daily basis. I get a re-
port every morning which tells me exactly our investment balance,
our book balance, number of outstanding checks, number of checks
cleared the day before, how much we collected the day before. So
we know on a daily basis what our cash position is.

What GAO, the General Accounting Office, was speaking of is we
do not know the total amount of cash—I mean, of accounts payable.
We will talk about that a little bit later.

So now we are at a point of what are we doing to solve this prob-
lem? In conjunction with the DC council we are moving dramati-
cally to reduce our work force and cut our spending. Since we are
talking about the work force, we have met the congressionally man-
dated reductions to go no higher than 33,588. We are required to
get down by the end of fiscal year 1995 to 33,588 FTEs.

We have more than met that as of last week and this is a num-
ber that the General Accounting Office agreed to. We were down
to 32,580 full-time equivalencies, which is 1,000 lower than re-
quired.

Moreover, we have plans to further reduce the FTEs by a 750-
person reduction-in-force. We have laws which say you have to give
30 days notice before you can terminate anyone. We also have to
make sure our rolls are correct, because too often we do it hastil
and people go to court and sue us and come back on the payroll.
We have now done that, and we are starting March 1 will be our
first round of letters that will go out to these employees.

But since we are talking about the number of employees, let me
call to the committees’ attention where are all these employees are
that people keep talking about. Where do they work? If you take
the 32,530 FTEs, you will find that 36.8 percent of all of our em-
ployees are in public safety, and 37.9 percent are in education. Of
the 32,530 FTEs, over 11,000 is in our——

Mr. Davis. Mayor, excuse me, these are from the appropriated
funds; not nonappropriated?

Mr. Barry. Appropriated, yes. Since we are talking about that,
let me say the District of Columbia government, like any other city,
county, State is entitled to certain Federal funds. We are entitle
to AFDC, Medicaid, Ryan White aid, HIV, all the other funds. And
I maintain that is what we should be getting.

And our problem in the appropriation is not caused by the num-
ber of Federal grants we get. So to cut employees off of the Federal
grants is not solving our problem. In fact, it is discriminatory and
it is unfair to suggest that we are not getting these funds that any
other State, county, and city gets, because we pay $1.6 billion in
Federal income taxes.

And so I would like for the committee to look at ways our em-
ployees are also—you will see we started with 44,000 in 1974, and
we have an additional 12,000 that are on the Federal funded posi-
tions. I can tell you how many people we have on the payroll as
of last week, how many FTEs and how much money we have in the

yank.

So I_am_not going to go through all the pain we are suffering
here. DC General Hospital, where we are firing 240 workers. Let
me say something about the firing of people. They say you ought
to just arbitrarily fire people tomorrow morning. My view is that


21

$91 million cash shortage, making the total shortfall come to $722
million.

Table 4, on page 13 of my written statement, which also has
been re roduced as a chart, should be referred to. To address the
$631 million in agency overspending, the District has proposed that
$267 million of the chortfall be covered by additional funds from
the Federal Government and that the Congress rescind the $140
million in budget cuts.

Rescinding the $140 million would allow the District to use the
surplus bude et authority built into the District budget when the
Congress ordered the cuts and eliminate this portion of the penalty
outlined in the Appropriation Act.

The remaining $204 million would be addressed by the District’s
spending reductions as identified in agency spending plans. How-
ever, many of the cuts in these plans are not specific and, in some
cases, have already been superseded by other events.

The District has informed us it will formally submit a revised
supplemental budget for fiscal 1995 to the District council by
March 8. Adjustments to this basic framework could occur.

Table 5, on page 14, discusses some of the issues related to Med-
icaid spending and budget changes. The largest action in the Dis-
trict’s plan to close the revenue-spending gap in fiscal year 1995,
is receiving $267 million in additional Federal payment ostensibly
because of Medicaid. The District said that the appropriated _por-
tion of Medicaid expenditures would climb to $550 million in fiscal
yer 1995, or $267 million more than the congressionally approved

udget.

The District’s estimate of $260 million includes $152 million that
is not needed in cash for fiscal year 1995. Routine Medicaid cost
adjustments that occur after the fiscal year has ended are not new
and the amount of cost changes have grown.

Until this fiscal year, anticipated costs such as the $82 million,
would not be included in current year budget expenditures. The ex-
penditures resulted from such cost settlements—resulting from
such cost settlements are rolled forward to the next fiscal year and
included in budgets for that year. The net effect of this budget
change is an $82 million increase in budgeted expenditures for fis-
cal year 1995 and a corresponding increase in the projected defi-
ciency.

Fusthermore the $82 million increases the District’s proposed
cash needs to $267 million for the Medicaid program while the re-
lated payments would not be made until sometime in fiscal year
1996 or later.

The District’s estimated needs of $267 million also included $30
million in cost savings planned for fiscal year 1995, and another
$40 million representing Medicaid costs that one District agency
pays to a component of that agency. Accordingly, $152 million of
the $267 million in cash the District plans to ask from the Federal
Government will not be needed to pay for expenditures in fiscal
year 1995 and represents cash that has the risk of being used for
other purposes.

As we noted earlier, the District has had cash problems over the
last few years, The overspending outlined and the District’s own
admission that additional Federal revenues are needed to balance


88

a reduction of $800 million. However, the actual reduction is only
$80 million. You reduced the spending level to $3.811 billion, not
$3.1 billion.

Mr. CLARKE, All right.

Mr. Davis. Let me say I think the question about not being pe-
nalized for the $79 million is put squarely on the record. We recog-
nize that, and I appreciate that clarification.

Mr. CLARKE. OK, thank you.

Mr. Barry. Mr. Chairman.

Mr. Davis. Yes, Mayor.

Mr. BaRRY. Before—well, Mr. Dixon had made a statement about
management. Let me just say that I don’t believe, at least under
my administration, I can’t speak for anybody else’s administration,
every comptroller in the DC government and every director that I
have hired knows that you can’t take this budget situation lightly,
you can’t go around and just spend money. We have several situa-
tions that, in my view, don’t have much to do with management
but it has to do with budget.

We may differ on how much Medicaid money we need, but we all
agree that the Medicaid budget has been underbudgeted compared
to spending. That is not a management issue, that is a budget
issue. If you are adequately budgeted at, say, $406 million for 1994,
you would not have overspent.

The second issue is court orders. If you have a court order which
has a constitutional basis for it, which says that money and budget
is no defense against a court order, you have to then spend that
money. And that is not management, that’s a court order on the
budgeting. My attitude is that all of our managers are committed
to staying within their budget if the budget is a real budget.

So I don’t want anybody to leave thinking we have managers
that say, well, the heck with that, and I’m going to go do what I
can. They cannot do it.

The third point, even as inadequate as our system is, in order
to overspend in your control center area or your budget. area, you
have to get someone to override that system. I can’t just do it by
myself. So, for instance, public works last year overspent by $20,
$25 million. And we looked at that and we found that people at the
very high levels of government overrode the system. That was a de-
cision made, that I wouldn’t have made, to spend money during
this election year. So we do that.

The second part of what we are——

Mr. Davis. Mr. Mayor, with all due respect, didn’t most of the
agencies go over their budget last year?

Mr. Barry. I don’t know about most.

Mr. Davis. Much of this, in fairness, before you took office, but
as I look at even the spending cuts that the council passed in De-
cember, those weren’t implemented until, I don’t know if they are
still implemented, but they weren’t implemented for a couple of
months. To me that is a management problem, not a budget prob-
lem. Maybe I am missing something.

Mr. Barry. I don’t think so, in the sense that the Medicaid budg-
et was overspent, the Department of Human Services overspent by
$70 million.

Mr. Davis. No question, that is a problem.


42

Mr. STEPHENSON. I do not believe they require that, no, but there
are programs where, for example, chapter I programs in the
schools, those are many times positions that are funded out of
chapter I Federal money.

Mr. CHRYSLER. Then would it be correct to say that every em-
ployee paid with grant funds means that less money is actually
going to the people that it is intended to serve by the programs and
is eaten up by the so-called overhead, as I recall it?

Mr. STEPHENSON. I wouldn’t agree totally with that, no. I think
there are valuable programs that are being funded by Federal
grants in the District, and it is a very important component, for ex-
ample, of the schools programs that not only the District gets, but
every school system in the country gets, so that is not unique for
them to have chapter I programs in the schools.

Mr. CHRYSLER. OK, than you.

Mr. Davis. OK. Yield back?

Mr. CHRYSLER. Yes.

Mr. Davis. I would just like to ask a couple questions on the sec-
ond round, if I could. First of all, to go back to the pension obliga-
tions, is the city still paying two COLAs a year or did they move
that to one COLA a year for its pensioners? Anyone know the an-
swer?

Ms. TriGGs. We will have to get that information.

Mr. Davis. Will you get that to us. I will ask the Mayor and the
council the same.

Mr. Davis. Mr. Hill, I want to explore the $722 million that this
city has claimed to be their fiscal year 1995 deficit. Are you famil-
iar with those numbers?

Mr. HILL. Yes.

Mr. Davis. Can you give us a breakdown of how the city comes
up with these figures?

Mr. HILL. The first part that I should point out on the $722 mil-
lion, if you take a look at, we have a chart that would show you
the composition within our testimony.

Mr. Davis. Could you tell me which chart?

Mr. HILe. It would be on page 13.

Mr. Davis. That is table 4?

Mr. Hitt. OK. You have to understand that the way that the
District comes up with the $722 million, first, is to project what
their spending levels currently are, and that, the spending projec-
tions that we saw had a total projected expenditure of $3,885 mil-
lion, and then you would subtract from that the budget approved
by the Congress, and that gives $631 million, and then the District
would add to that or had added to that $91 million in additional
cash that was going to be needed in order for them to fund one of
their reserves.

Mr. Davis. So they have added the $631 million and the $91 mil-
lion together, basically?

Mr. HILL. Right, and that basically gives you $722 million. So
that obviously any problems that exist in the spending plans would
affect the size of that number, any savings that the District expects
to have on its own would affect the size of that number as well.

Mr. Davis. Mr. Hill, my question, then, is when you take a look
at those component parts of the $722 million, how much of that is


83

I don’t think anybody in the Congress wants to preside over the
demise of the District of Columbia government. I interpreted Mr.
Walsh’s statement to mean that without some other kind of things

ing with it, some structural reform and some other things that
in and of itself he couldn’t do that.

On the other hand, if we don’t get some relief this year from the
Federal Government, we are going to be presiding over the demise
of the District government, and I think that is a very clear point
from a cash point of view.

Ms. Norton. Could I just respond?

Mr. Davis. Certainly.

Ms. Norton. I don’t know what you mean by structural changes.
Let me remind you, it is my view that the kinds of structural
changes that need to be made are not going to take place in the
6 months left in this fiscal year and that, in essence, the District
is up against the wall now. And I don’t think you and I have any
basic disagreement because it needs an intermediary to help it get
the time to do what has to be done. If it doesn’t have one when
it goes to the Treasury, the District will have such extraordinary
strings tied to it that, in effect, it will have conceded part of home

tule.

Mr. Barry. I think what has happened, we talked yesterday
about some immediacy of this issue, that everything had to be put
on the table if vou are going to have any kind of board, and, sec-
ond, going to the Treasury in and of itself is no solution to any-
thing. It is like you owe somebody $40,000 and then you get that
money and you have to pay it right back, that is not going to solve
this problem.

Mr. Davis. We will give you time to respond. I want to give Mr.
Dixon a chance to ask some questions.

Mr. Dixon. Well, first of all, to my colleagues here, let me ex-
press the fact that I am very, very supportive of helping the Dis-
trict in this financial crisis, and I personally will do whatever I can
to see that it is resolved, but I do think that we have to be totally
candid, and I think we are only halfway there with our candor. To
your last comment, you know, there is the old joke about if you owe
the bank $100, the bank owns you, but if you owe them $300 mil-
lion, you own the bank, and to be perfectly candid, that is the situ-
ation here.

The District of Columbia, as we have all espoused, the Federal
Government is not going to move and so you have us over a barrel
somewhat and there has always been a Tecopmition of that. It is not
really articulated all the time, but we are all here. Nobody is going
to let the District go down, and so everybody sits back and says you
have got to pony up, and I am willing to personally do that.

Mr. Mayor, one of the things that does concern me, I was not
here in 1973, but I imagine that one of the reasons that Congress:
man Diggs and others structured what I call the Limited Home
Rule Act was to give as much authority as politically practical at
the time to the District of Columbia.

When you really look at cities, they don’t have a lot of control.
It is the State and Federal Governments, particularly in a time of
austerity, and so it does scare me a little bit, but it is real when
you talk about turning back State—certain State functions because


60

eral government. The same report said that DC relies on its local tax base for 49%
of its revenue, compared to only 15° in other cities.

The loss of property tax revenu to embassies is compounded by an estimated loss
of $70 million in sales taxes each year from diplomatic and military customers who,
by law, are exempted from paying sales tax.

Recapping the answer to the first question, I have demonstrated that our fragile
economic condition is due to carry over debt from Federal control, transferred pen-
sion liabilities from Federal control, demands for state services without state au-
thority, the prohibition to tax income at its source, and our severely restricted prop-
erty tax base.

Many experienced professionals in government management looked at the original
home rule document with considerable skepticism.

We were blessed, however, with fet management in an expanding economy. I
take great pride in the financial administration of my earlier service as Mayor. I
truly demonstrated my ability to be fiscally responsible and to balance budgets. In
10 of my 12 years, we managed with surpluses.

The second question, then, is what is our situation today?

The economic fortunes of DC, as well as many other cities, turned sour rapidly
in the late 803, and because my administration was too slow to react, we left a defi-
cit in my last year.

Because Congress advanced money to cover that 1990 deficit, the city once again
began with a clean slate. In 92 and 93, the city appeared to have a balanced budge
but in hindsight we certainly must question that conclusion. The Kelly Admunistr:
tion then transferred $173 million in cash from the first quarter of 1994 to the last
quarter of 1993.

While the Council approved this action as the best of bad choices, a parallel move
to cut expenses did not happen. 1994 pension payments were then delayed to 1995.

Finally, under Congressional pressure, specific limits on spending were ordered,
and the DC Council began to pass legislation demanding reduced personnel and
spending. These initiatives to curtail government were largely ignored by the pre-
vious a istration.

On February 1 of this year, it was my job to deliver the bad news about the city’s
performance under my predecessor, releasing the results of the 1994 audit showing
a deficit of $335 million. I also reported the expenditure ceiling set by this Congress
for FY °95 would be overspent by $631 million without significant spending and
management changes, and that an additional $91 million in cash would be needed
to end the fiscal year with an acceptable cash balance.

The third question is “What are we doing to solve this financial crisis?”

In cooperation with DC Council, we are moving dramatically to reduce our
workforce and cut our spending.

‘You may well ask if we have the technical ability to accomplish reduced spendin,
and to monitor the government actions that will be required to enforce change.
can assure you that our technical ability—though it must be improved—is not the
problem. It is the political resolve that is required, and I and the Council are
pledged to provide that resolve in this crisi

We have already complied with the Congressional mandate to reduce our appro-

riated full-time-equivalent positions from 35,588 to 33,588. In fact, as of today, we
ave 32,530 FTEs, more than 1,000 lower than required—all of this seven months
ahead of the deadline of September 30.

Thave in place, or have committed to, plans for additional personnel actions that
bring this total down to 31,588 by the end of this fiscal year.

I realize that these position counts are confusing at best. The counts here refer
to appropriated positions—not grant funded jobs. But the drop of 4,000 authorized
positions that I have pledged in FY 95 is truly significant.

Tt should be noted however, that these personnel actions do not produce a lot of
immediate savings. Inventive costs, severance pay, and other termination costs pre-
clude savings benefits to this year’s budget. I am committed, however, to bringing
our work force down dramatically, And_—with Council support] am doing it,

To reach the $3,254 billion ceiling Congress has set for FY 1995, I am puttin
in place agency cuts of more than 24, million for the remaining seven months of
FY ’95. Contracts are being cancelled, services terminated, entitlements curtailed,
and purchases cut in every department and agency. These new spending plans are
being monitored for compliance.

There is skepticism I know about whether action to cut spending is underway
right now. I understand why you and others would have doubts about our resolve
to act. Let me share with you the pain occurring at the citizen level right now. Here
are a few samples of the cuts we have made that will effect FY ’95:



84

it doesn’t come both ways. You can’t turn back all these functions
and really say you have home rule, and I am sure that when Mr.
Diggs and others started articulating this, that, in fact, that was
their motivation in having the ability to run their own prisons, in
taking care of their medical, and so just philosophically, I think
that we are at a dilemma and I know that there will be discussion
here with the authorizing committee on that issue.

Very frankly, when I look at and hear the testimony of GAO,
from my perspective, although there is a lot of talk and a lot of fig-
ures on paper, really nothing has been done without blaming any-
body, this administration or the past administration, to comply
with the 1995 budget request.

When it is all boiled down, it hasn’t happened, and I would sa
to you, Chairman Clarke, that even your movement forward witl
the 99 and the 40 did not comply with what has consistently been
a theme up here, and that is cuts.

To add additional revenue, which was ultimately repealed, did
not comply with the law. It said that there would be $140 million
of cuts. If you listened to Mr. Hill, although it was very low key,
he mentioned that. The reports that were, the quarterly reports
that were sent up here, Mr. Pohlman, and we have had a discus-
sion on that, I disagreed with your judgment on it, you said you
thought it was better to send up something than miss the deadline,
but if you listen to GAO, it was not digestible. It was like taking
a yard of paper and saying suck on this a while.

As it relates to the internal audit, he says that I guess that some
edict or order came out that said, in fact, that departments or
agencies would live within a certain budget, and he says they are
not doing that, and by the way, that budget was not based on the
140 cut. It was based on the pre-Congress budget. So all of this
goes in my mind, and maybe we will take a break, as to not how
much involvement there should be on the part of the District in de-
signing a fiscal intermediary, but how much control should be
placed in that fiscal intermediary because there has not, in my
opinion, been a conglomerate good faith used here, and I am won-
dering if someone can respond to it.

Mr. Mayor, I will give you a chance on it.

Mr. Davis. Mr. Clarke, do you want to respond?

Mr. Drxon. No, I just wanted to throw out one other thing.

Mr. CLARKE. Oh, I am sorry.

Mr. Dixon. We are here talking about the fiscal problems of the
District, and I will gladly say that over a period of time I recognize,
along with Ms. Norton and probably Mr. Walsh and many other
Members of Congress on both sides of the aisle that there are some
things that the Federal Government should do and must do, and
I am pledging to work with that. But clearly there is no one that
can deny, no matter what the skill level of the administrators here,
there is a management problem, a management problem in this
District. with a $3.2 billion budget, the corrections is under a court
order, foster care is under a court order, housing is under a court
order, and one would say that the quality of life and the cost of liv-
ing here is in a spin, and that there is a management problem.

am not speaking to the quality of the managers, but there is
some problem within the management system, one of which is that


119

Exhibit 2
PROJECTED DC GENERAL FUND BUDGET 1993-2000
Current $ Billions

Compound
Annual
5 Growth Factors leading to
Rate deficit at high end

‘Expendituies, (CAGR) ‘of range

eof 556.6% + Inability to contro!

7 4 expenditures on
$0.7-1.1 Medicaid and other

‘ tallion entitlement
shortfall Programs

Revenues
0.8-1.7% — * Declining sales
and property tax
revenues
3 a : ,
1995 1996 1997-1998 »=— 1999-2000
FY

Source Distinct of Columbia Gevernmont; toam analysis

Onuses: Largely Unique to the District

y is the picture so bleak when the city and metropolitan area are relatively
well Off? Part of the answer is clearly related to the high levels of District govern-
ment spending that the Rivlin Commission addressed in 1990. Since the Rivlin re-
port, the city has held expenditures, in real dollars, essentially flat bs bye cutting ex-
penditures in discretionary areas to offsct substantial increases in Medicaid, pen-
sions nd debt service—categones that are growing in many cities and states (Ex-

ibit 3).

Exhibit 3—Annual Real Expenditure Growth 1988-93

Percent
Economic Development & HR 94
Pubic Works ~43
Goverment Direction .. -30
Public Education -18

Human Services **

1s pensions
** Excludes Medics
Sean Date 6 Counba Goverment; tam atais

More cutting of District expenditures will be necessary. For example, the District
continues to be among the most costly providers of Medicaid (Exhibit 4) and edu-
cation (Exhibit 5). And while it is true that getting apples-to-apples comparisons of
the District's spending with other cities is virtually impossible (in part, because the
District, provides services that other cities receive from counties and states, such as
Medicaid and corrections), it is clear that the District must become more efficient
and more effective in delivering its services. For example, while the Rivlin Commis-
sion recommended that District workers be reduced from 48,000 to 42,000, only half


122

Exhibit 8
LONG-TERM CHANGES IN DC METRO AREA POPULATION
Thousands of residents

Fairfax County
Montgomery County 3.9
Prince George's County 3.4

District 07

Aslington County 06
Alexandria 15
1993
District's 55% 38 28 23 19°18
share of
regional
population

Source: Greater Washington Research Center; team analysis.

Exhibit 9—Jobs in the OC Metro Area
[At-place employment by jurisdiction 1993)

hangs
“Gee Soe

‘oo
085

670.1 9-04
3813 09
368.8 ~12
2694-06
150.6 05

2-13

City of Alexandria.
‘Source: Washington Council of Governments

Exhibit 10—Nonresident Share of Earnings at Jobs in Central City 1990
{Preliminary}

Baltimore ..
New Orleans.
Cincinatti

Kansas City
‘Source: Bureau ot Economic Analysis; US. Department of Commerce

The District’s unique circumstances cause the income tax loss due to outmigration
to be particularly painful. First, in other cities, the earnings of city workers li
in the suburbs would be taxed by the state (say Georgia for Atlanta) and recycl



29

into the District budget when the Congress ordered the cuts and eliminate this por-
tion of the penelty outlined in the Appropriation Act. The remaining $224 million,
would be addressed by District apending reductions es identified in agency spending
ans. However, many of the cuts in these plans are not specific and in some cases
ave already been superseded by other events. Table 4 shows how the District is
budgeting for fiscal year 1998.

Table 4: How the District Is Budgeting for Fiscal Year 1995
{dolar w mations)

‘The Current Spending Budget:
The District’ for spending ..
Congressionally mandated cuts

Budget appropriated by the Congress

How the District Responded:
Rescinding the congressional cuts
Requesting federal relief for Medicaid

Total federal actions anticipated by the District 407
Additional overspending 204
Total overspending . 631
Total projected expenditures 3,885,
District proposal to reduce spending. 28
Resulting budget ... 3,661

‘Source: GAO anabsis of the District's fiscal year 1995 proposal

The District has informed us that it will formally submit a revised supplemental
budget for fiscal year 1995 to the District Council by March 8, 1995, Adjustments
to the basic framework outlined in table 4 may occur.

MEDICAID SPENDING AND BUDGETING CHANGES:

The largest action in the District’s plan to close the revenue-spending gap in fiscal
year 1995, is receiving $267 million in an additional federal payment ostensibly be-
cause of Medicaid. The District said that the appropriated portion of Medicaid ex:
penditures would climb to $550 million in fiscal year 1995 or $267 million more
than the congressionally approved budget. However, as shown in Table 5 below, the
District’s estimate of $267 million includes $152 million that is not needed in cash
in fiscal year 1995:

Table 5: Analysis of Increase in Medicaid Budget
Total Revised Medicaid budget:

‘Amount before proposed spending cuts . $550
Less: Original Medicaid budget 283
‘Amounts over original budget 267
Portion of revised budget not affecting fiscal year 1995 ca:
1995 estimated cost settlements $82
Cost savings planned during 1995 30
Expenses the District pays itself 40 152

Portion of budget increase that affects cash
‘Source: GAO analysis of District of Columbia Department of Human Services data.

Routine Medicaid cost adjustments that occur after the fiscal year has ended are
not new and the amount of the cost changes have grown. Until this fiscal year, an-
ticipated costs, such as the $82 million mentioned above, would not be included in
current year budget expenditures. The expenditures resulting from such cost settle-
ments are rolled forward to the next fiscal year and included in budgets for that
year. The net effect of this budget change is an $82 million increase in budgeted
‘expenditures for fiscal year 1995 and a corresponding increase in the proj ‘defi-
cit. Furthermore, the $82 million increases the District's proposed cash needs to
$267 million for the Medicaid program while the related payments would not be
made until fiscal year 1996 or later.

The District’s estimated needs of $267 million also included $30 million in cost
savings planned for fiscal year 1995 and another $40 million representing Medicaid
costs that one District agency pays to a component of that agency. Accordingly, $152
million of the $267 million in cash the District plans to ask for from the Federal
government will not be needed to pay for any expenditures in fiscal year 1995 and
Tepresents cash that has the risk of being used for other purposes.



5

The District of Columbia employs more than 60,000 full-time employees, more
than the City of Chicago, which has five times Washington's population. It simply
cannot afford one bureaucrat for every thirteen citizens. And the taxpayers of the
United States should not have to help pay for this excess, Yet, on the February 14
edition of the MeNeil-Lehrer Hour, I'heard the Mayor teil municipal workers that,
there were some members of Congress who want to see him cut 5,000 workers, but
that he would not let that happen. Instead he proposed furloughs, pay reduction,
and other partial and unworkable remedies.

‘The pension plan for police and fire, teachers, and judges has also been cited as

major contributor to the current crisis. That is not correct. The proposed solution
to this iaeue would have the city paying the same amount to the Retirement Board
ae it does now and the total over the past five years has not increased at nearly
the rate that social services or personnel costs have risen. The year-to-year costs of
the pension program are also under the control of the city and not driven by the
unfunded liability. The District should immediately stop its hesitation and pass a
new retirement plan for all new employees. Congress can and will deal with the un-
fanded lability, but that issue did not cause and is not seriously adding to the cri-

sis.

GAO will tell us that so far in FY 1995—which is now almost half over—the Dis-
trict has conspicuously failed to implement the type of dramatic reductions and con-
trols that are the only avenue left to deal with the situation. Back on October 1st
the agencies were allowed to spend at the rate of the District budget as submitted,
even though Congress had ordered a $140 million spending reduction. Even after
the Council action on December 21, which I can only describe as half-hearted at
best, none of the approved actions were actually implemented. The spending rates
remained the same as before.

Now new spending plans have been developed and they seem to ratify a FY 1995
deficit of about $400 million and spending that is hua of millions of dollars
over the Congressionally mandated spending cap of $3.254 billion. This situation is
unacceptable. It is unacceptable from the standpoint that the District does not seem
willing to do those things that must be done. It is also unacceptable because at the
current spending levels the District will overspend its approved budget to a degree
that will virtually wipe out the FY 1996 federal payment to the District. Everyone
should be aware that in the FY 1995 Appropriations Act is a provision that requires
a dollar-for-dollar reduction in the 1996 payment for every dollar over $3.254 billion
that the District spends.

Coming to Congress five months into the fiscal year and asking to be relieved of
that spending cap and that offset in the federal payment simply will not fly. The
103rd Congress was serious when it imposed those conditions on the District and
no one should be under any illusion that the 104th Congress is less serious than
its predecessor. The District government has ignored these mandates at its own
peril and it should not anticipate a great deal o sympathy from a Congress elected
on its desire to end business as usual and stop letting government spend money
that it does not have.

Medicaid is a special problem that will be the subject of future hearings. I would
like to make plain that the Medicaid problem is also largely the fault of city govern:
ment actions, and in this particular case, of city inactions. The failure of the District
to certify patients for medicaid has cost many hospitals in the city ten’s of millions
of dollars. Care has been provided with no reimbursement. The 50% cost share from
the District that hasn’t been paid looks like it saved the District money. The 50%
cost share of the federal government is simply gone. But in the long run the city
has lost by ite own intentional actions in not certifying Medicaid patients because
DC General has run deficits that can no longer be tolerated.

Thave a copy of the Mayor’s Transition Team recommendations. I am greatly im-
pressed with that document and intend to question the Mayor on what he has done
to implement those recommendations. I do not mean what plans he has or how he
might intend to do things—I mean what has been accomplished. That is the bottom
line for all of these issues—not what people have said, not what they plan, not even
what they approved, but plain and simply, what has actually been done. So far it
appears that the bottom line is that far too much has been said and far too little
has been accomplished.

‘The transition team recommended serious efforts to privatize some services. I en-
dorse that action wholeheartedly as well as contracting out services. Both of these
activities must be done with reasonable conditions—even if that means chan;
current District laws and procedures. That is exactly the kind of action that the Dis-
trict desperately needs—revise and reform current impediments, proceed as quickly
as possible, ask for help as you need it whether that comes from the private sector,



44

you to track that for 2 months, and it came out $52 million in each
of those months, and you, I believe, in a private conversation with
me, indicated that since it was not a real figure that, in fact, the
Medicaid would be responsible for a substantial deficit unless other
cuts were made; is that correct?

Mr. HILL. That was correct. One of the things that we have to
consider, though, in terms of the District’s projected Medicaid num-
ber, they project $550 million and then they subtract off the budget
number from last year or from the 1995 budget.

That 1995 budget number is clearly understated, and therefore
that $267 million, which is the result of the two, includes amounts
that are really underbudgeting of current expenditures.

Mr. Dixon. Right. When the Mayor and Ms. O’Connor appeared
before the committee, I pointed out to her that the 1995 number
was lower than the 1994 number, and since they were running in
the current year $10 million over their projection how she could
come up with that, we have been looking for her testimony there.

I think, basically, she said that there was no point in suppress-
ing the number, that she wouldn’t do that because it was an enti-
tlement program that spoke for itself, in essence.

Mr. HILL. I think that she also said that there were some man-
agement initiatives and some savings as a result of reducing some
of the options in the plan that they expected to implement.

Mr. Drxon. So from your perspective, when the new administra-
tion said that a lot of the deficit was due to Medicaid, that came
as no surprise?

Mr. HILL. It came as no surprise that a portion of the amount
was a function of Medicaid; that is true. It does come as a surprise
if we characterize the entire $267 million as an amount that is due
to past Medicaid problems.

Mr. Drxon. I think you went, in testimony when, in explaining
a new accounting procedure at least as relates to the 82?

Mr. Hitt. Right.

Mr. Dixon. Thank you, Mr. Chairman.

Mr. Davis. Thank you very much.

Ms. Norton.

Ms. Norton. Thank you, Mr. Chairman. To follow up on the
chairman’s questions on the arena and the convention center, this
is money that apparently the District is continuing to collect as we
speak.

Is this money being segregated and escrowed for the purposes in-
tended?

Mr. CARNAHAN. Yes, the money is in an escrow and is not avail-
able for other purposes.

Ms. Norton. This money has not been used for any other pur-
pose?

Mr. CARNAHAN, That is correct.

Ms. Norton. If the Congress acts, then the preliminary work
that Mr. Hill just spoke of could proceed because the money would
be there to initiate that work.

Mr. CARNAHAN. Yes, the funds are available.

Ms. Norton. Mr. Hill, when did you begin work on this prelimi-
nary, this quarterly report.


4

I have not prejudged any final action. I know that my colleagues
have not prejudged either.

Once we have gotten past the immediate fiscal crisis, my sub-
committee will be holding hearings to find out more about Yiving,
working, sanitary, health, crime, education and other conditions
that affect the lives of the people of Washington, DC. We will want
to hear from residents, students, parents and other people who
spend much of their time struggling to make this Capital City one
that is truly worthy of a great Nation. By working together, we can
transform this city. It will enable Washington to become the pre-
eminent symbol of the rebirth of urban American civilization.

I now yield to Mr. Walsh for his opening statement.

[The prepared statement of Hon. Thomas M. Davis III follows:]

PREPARED STATEMENT OF THOMAS M. Davis III, A REPRESENTATIVE IN CONGRESS
FROM THE STATE OF VIRGINIA

This joint hearing with the authorizing and appropriating subcommittees on the
District of Columbia is a beginning, not an ending of a critically important process.
The 104th Congress is faced with important questions on many issues. I believe that
few of those issues are more important than how we deal with the nation’s capital.
I mean how we deal with the District of Columbia in every way possible—public
safety, financially, services for the needy, education, and all the others.

Today’s hearing is to set the common parameters of fact and reality. We will also
attempt to divorce from the process of the District of Columbia government and the
federal government’s dealings with the local government the myths and mistrust
that has plagued us for too long.

Just so that everyone understands today what faces the District of Columbia, it
is not a revenue problem, and it is not a budget problem. Rather, the District of
Columbia faces a spending problem of monumental proportions and a management
failure to enforce controls or implement reductions. That is the problem that the
District must deal with.

The GAO has done outstanding service to the Congress and to the people and gov-
ernment of the District in its investigations. The tireless team of auditors probably
has as much work ahead of it as it has already accomplished, but they deserve our
thanks and our praise today.

Separating truth from fiction is not always an easy task. The value of getting be-
hind Thetoric to reality so that everyone begins from the same place cannot be over-
estimated.

GAO will testify today that the potential FY 1995 District cash deficit is not $722
million as has been claimed. The potential cash deficit is not even $631 million as
has also been claimed by some. These exaggerated figures are political numbers de-
signed to scare people. The truth is scary enough, we need no more rhetoric. Exag-
gerating the problem will not get a quicker response from Congress. Congress wi
not allow the city government to throw up its Frands and say “the problem is too
big and we can’t fix it so we choose to do next to nothing.”

‘xaygerating the problem or trying to py, a blame game on someone else will
not get_a more favorable response from the city’s unions. It will not end up in a
windfall of cash from any source. Everyone involved should listen carefully to the
GAO testimony and begin to use those numbers.

GAO will also testify that 43% of District spending goes to personnel costs. By
contrast, 39% of total spending goes to social services. Blaming almost all of this
crisis on social services spending alone is not correct or acceptable. Five years ago
the Rivlin Commission stated that the District government, even considering its
county and state activities, had about 40% more employees per 10,000 residents
than comparable cities.

Very slight reductions in personne} have been made since then while at the same
time thousands of taxpaying citizens have continued to leave. I believe that the ratio
is no better now than it was 5 years ago. This is the main issue on a permanent
basis which has to change. Program costs can change from year to year because of
outside actions including eligibility rules and benefit levels. But personne] costs are
permanent and will only go up over time. This is where the permanent solution has
to come. Serious and real personnel reductions of a magnitude not yet contemplated
simply must enter the equation.



38

Ms. Triccs. There is a portion that is unfunded and there is a
portion that is funded; that is correct.

Mr. Dixon. The question to you, do you know of any jurisdiction,
in fact, that has an unfunded plan, your response was, no. But
would that include Washington? My only point is that we have to
do a lot better job, but I wouldn’t want anyone to go away to think
that the $52 million a year and the $2.7 billion is a totally un-
funded program.

Ms. TricGs. That is correct whether we are talking about any
other city. The total liability is about $5 billion.

Mr. Dixon. Thank you, Ms. Triggs. I am rather fuzzy, and I have
asked this question many times. To what extent is the unfunded
liability, which I think is the Federal Government's responsibility,
causing either the cash problem or the long-term problem of the
District's finances?

Ms. Triccs. Well, it certainly is a contributor since it is about
10 percent of the expenditures every year. There are other cities
that have comparable numbers. 1 dort have all those with me,
but——

Mr. Dixon. I am sorry, Ms. Triggs.

Ms. Triccs. There are other cities that do have large pension
payments that they make on an annual basis. I would have to look
at, get some statistics on that, but it certainly is a contributor,
being such a large percentage.

Mr. Dixon. In other words, if they didn’t have to pay roughly
$300-some-odd million to the pension plan in any given year, that
they could apply that to other parts of the budget, is that——

Ms. Triccs. That is correct.

Mr. Dixon. Thank you, Mr. Chairman.

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

Mr. Gutknecht.

Mr. GUTKNECHT. No questions.

Mr. Davis. Mr. Frelinghuysen, do you have any questions?

Mr. FRELINGHUYSEN. Thank you, Mr. Chairman. What currently
exists in the way of a clearinghouse for debt issuances? Is there
such a clearinghouse?

It seems that the District has been borrowing quite a lot of
money, short-term and long-term borrowing. Is there actually a
central point where all of these borrowings are reviewed?

Ms. Triccs. You mean from the District’s standpoint?

Mr. FRELINGHUYSEN. Yes.

Ms. TriGGs. Well, yes, the Office of Treasury, you could ask the
District exactly how they go about doing that.

Mr. FRELINGHUYSEN. Well, I am asking you. Is there a central
clearinghouse through which all these—~—

Ms. Triccs. Yes.

Mr. FRELINGHUYSEN. There is. To your mind, what is your view
of that operation?

Mr. HILL. We haven't specifically looked at that particular issue.
We would be more than happy to—

Mr. FRELINGHUYSEN. You have in your June 1994 report on the
financial status of the District of Columbia finances, a section on
debt issuance, borrowings. That whole area raises some questions
about the level of debt.


118

We have concluded that the explanation lies with both expenditures and revenues.
‘As has been widely reported, the District's spending is out of line on many fronts.
In addition, the city will have trouble retaining and attracting businesses and resi-
dents if it does not improve the safety of its streets, the quality of its schools, and
the performance of many District services. Expenditures appear to be about one-
third of the financia) problem, and they must be dealt with. Dealing with both the
level and quality of its own spending is critical in and of itself. It is also a crucial
factor in gaining the credibility the District needs to ask others to help.

Two-thirds of the District’s financial problem is on the revenue side. While the
District shares with other cities the loss of taxpaying residents, it is unlike any
other city in that the financial effects of this loss hit the District immediately and
there is no dampening mechanism (e.g., nonresident tax, state transfer payment) to
cushion the blow.

As a result of this expenditure and revenue situation, the District faces a billion
dollar shortfall in the year 2000. It seems clear from our analysis that debate over
whether the solution lies in a leaner city government, a higher Federal payment,
or help from the regional governments is moot. All will be necessary, and all are
appropriate.

the remainder of this report, we discuss the paradox of the District’s financial
problems, the root causes of these problems, and the elements of a potential solu-
tion.
Current Situation: An Apparent Paradox

Let’s start with the paradox. The District is in the heart of one of the richest met-
ropolitan areas in the country. The Washington area ranks first among the 15 larg-
est metropolitan areas on several desirable income, educational, and employment
measures (Exhibit 1). (Appendixes A and B contain additional comparative statistics
on the largest metropolitan areas.)

Exhibit 1—Comparison of 15 Largest U.S. Metro Areas
11990 census]

on gee

Per capita income—$ 1989 21416 16,565

Education—% of population—216 ys. completed rower 385 am
Employment——Percent in professional managerial and technical job 53329
Unemployment rate... st 45 65

Less well known, perhaps, is that the District itself is in many ways in far better
shape than some other cities. It is fifth out of the 25 largest cities in household in-
come; third in terms of the percentage of the population completing college; and first
with regard to employment in professional, managerial, and technical jobs. It had
the greatest decline in the poverty rate among these cities in the 1980s (Appendix
C; Appendix D contains comparative statistics on the largest cities).

‘That’s why we call it an apparent paradox that the District’s financial condition
is 00 perilous in the midst of so much wealth. Only through some accounting mecha
nisms, such as changing the property tax year ($174 million in 1993) and transfer-
ring income from the water and sewer fund ($28 million in 1992), and a one-time
increase in the Federal payment has the District managed to balance its books in
recent years.

Looking forward, the District government itself sees a widening deficit of $700
million by the year 2000, which we believe could easily rise to exceed $1 billion (Ex-
hibit 2). Obviously, such’a deficit will not be allowed to occur, and dramatic steps—
such as the shutdown of “nonessential” government services—will be taken before
it does. It would be far better to address this worsening situation now.



17

As I proceed through my statement, Paul Caban and Chris
Warweg, also of my staff, will point out important information con-
tained on the charts we will be using.

Although it is a pleasure to appear before you today, and I cer-
tainly appreciate the kind words that you have had Mr the work
we have done, I only wish that I could present better news today.

The District’s cash position is especially precarious. Given the
continued spending at current levels it is now clear the District will
run out of cash as early as this summer. In fact, the District could
be considered insolvent since it does not have enough cash to pay
all of its bills and future sources of funds are uncertain.

In our report and testimony of last summer, we explained the
phenomenon of the District’s dwindling cash balances during peri-
ods of balanced budgets. Last fall, in response to the growing finan-
cial crisis, Congress mandated $140 million in reductions of ex-
penditures from those requested by the District for fiscal year

They also reduced the Federal payment by $14 million and took
several actions intended to enforce these provisions and improve
the quality and timeliness of information reported to the Congress.
Despite these actions, the District’s financial situation has contin-
ued to deteriorate and the quality and timeliness of information
provided to the Congress has not improved.

Earlier this month, the District’s annual financial statement for
fiscal year 1994 reported the largest annual deficit since home rule.
The District deferred payment of more than $500 million in bills
at the end of fiscal year 1994. Last December, to meet a critical
cash need, the District had to obtain $250 million in short-term
borrowing months earlier than the cash forecast had shown this
money would be needed.

And just last week, two financial investment services lowered the
District’s bond rating, one of them to below investment grade or
junk bond status. Without decisive and immediate action, prospects
for the District’s future financial condition continue to be bleak.

As I will explain in more detail in a minute, the District has
abandoned its earlier plans to close the spending gap on its own
and now plans to seek substantial Federal assistance. According to
the District's own estimates, fiscal year 1995 expenditures could be
nearly $3.9 billion; $631 million above the $3.25 billion congres-
sionally mandated spending cap. At this spending rate, current ap-
propriations law could reduce the District’s 1996 Federal payment
to zero if the District exceeds its spending caps and its budget au-
thority.

My written statement contains details of the evolution of the Dis-
trict’s financial crisis, congressional action related to the 1995
budget, our analysis of the District’s 1995 first quarter financial re-
port, the District’s recent actions to address the financial crisis,
and the District’s cash situation.

Over the last several months, there have been many different
numbers reported about the size of the District budget and the
cash problem. I will briefly summarize the most significant points
in my written statement and attempt to shed some light on these
numbers.


12

sibility of the short time left to do so much cutting. Cutting is the
least of it.

It is the opportunity for improved services that is the silver lin-
ing in this crisis. We will miss it entirely if we require the District
to slash and burn its government to meet what has become an im-
possible deadline.

As in other cities, an oversight board could help the District di-
vide the deficit into an enforceable multiyear plan to meet twin
als of equal importance: One, reduce the deficit while balancin
the budget; and two, improve the quality of services for school-
children and foster children, for the elderly, and for homeowners,
for the working poor and the homeless, for families and the middle
class. If service improvement is not given equal importance with
downsizing, what is left of our middle class will use the occasion
of this crisis to make their final exit. Only an oversight board can
buy the time and the space to make service improvement and defi-

cit reduction equal parts of the same equation.

Also and ominously, without an oversight board, we are left to
wonder how the District will be able to float long-term bonds for
an arena and convention center, even one that will be paid for by
private parties. These two moneymakers are nothing to fool around
with. Almost alone, they make the case for an oversight board.

Finally, only a board can give a credible voice that the Congress
will hear to the District’s strong case for greater revenues. The
city’s plea that it can no longer carry State and county functions,
falls mostly on deaf congressional ears today. No one over here
wants to hear that the District gets 50 percent of its revenues from
falling, local income, property and sales taxes, while the average
city gets only 15 percent from such city sources.

Th the House, my bill for tax relief for the District waits in line
behind the crisis. And, in the present climate, it has been possible
for the Congress to pass over its part of the present crisis, espe-
cially the 10 percent of our operating budget that goes to pay for
pensions because of a debt created entirely by the Congress and
tossed to the District in an unfunded pension plan.

The District has nothing to fear from an oversight board that it
has had a part in creating; only from an oversight board that will
be inevitably imposed unilaterally if the city suddenly goes bank-
rupt. Councilmember Kevin Chavous, who has worked for months
on his own review board bill, has already shown the way to master
rather than succumb to fate. By coming forward now, we assure
that the Congress will do what must be done with the District, not
to the District.

Throughout this ordeal, my overarching goal has been to help
preserve and expand home rule, a temporary board notwithstand-
ing. If an oversight board is established now, it can be designed so
as to have minimal impact on home rule. I prefer a model that al-
lows the District to retain all of its powers, with the board working
either directly with elected officials or acting as a review body.

We can design a board that leaves home rule entirely intact.
What we need, however, is not the home rule status quo but more
home rule. Yet we all know that increased empowerment for the
District is a lost cause unless we can put this crisis definitively and
permanently behind us.


OVERSIGHT HEARING ON DC FINANCES

WEDNESDAY, FEBRUARY 22, 1995

House oF REPRESENTATIVES, SUBCOMMITTEE ON THE
DIsTRICT OF COLUMBIA, COMMITTEE ON GOVERNMENT
REFORM AND OVERSIGHT, JOINT WITH SUBCOMMITTEE
ON THE DISTRICT OF COLUMBIA, COMMITTEE ON APPRO-

PRIATIONS,
Washington, DC.

The subcommittees met, pursuant to notice, at 9:10 a.m., in room
2154, Rayburn House Office Building, Hon. Thomas M. Davis
(chairman of the subcommittee) presiding.

Representatives from the Government Reform and Oversight
Committee present: Davis, Gutknecht, McHugh, LaTourette, Flana-
gen Norton, Collins of Michigan, Clinger [ex officio], and Chrysler.

presentatives from the Appropriations Committee: ‘alsh,
Bonilla, Kingston, Frelinghuysen, and Dixon.

Staff present: Ron Hamm, staff director; Roland Gunn and Al
Felzenberg, professional staff members; Howard Denis, counsel;
Ellen Brown and Migo Miconi, clerks; and Cedric Hendricks, mi-
nority professional staff.

Mr. Davis. The meeting will come to order.

This is a joint hearing of the Subcommittee of the District of Co-
lumbia of the Government Reform and Oversight Committee, and
the Subcommittee of the District of Columbia on the Appropria-
tions Committee.

The hearing will now come to order.

The format of a joint hearing, even of two small subcommittees,
is a bit awkward. As the host of this hearing, I will preside for the
members over my subcommittee and I woul yield to Mr. Walsh to
recognize the members of his subcommittee. This procedure might
seem convoluted, but we have agreed to it and we will proceed in
the following fashion.

I will say I have announcements to make and if someone is
present, I will then yield to Mr. Walsh to recognize members of his
committee. For example, if Mr. Livingston is present, we will say,
I will yield to Mr. Walsh to recognize Chairman Livingston. After
Mr. Livingston makes any remarks, I will reclaim the Chair, make
my oral statements, and then go back and forth.

will then yield to Mr. Walsh for any statement he wishes to
make, then Ms. Norton will be recognized by me and Mr. Dixon
will be recognized by Mr. Walsh.

If other Members wish to make opening statements, they will be
recognized. If most everyone wants to say something, then I sug-
gest we proceed as usual, going from majority to minority.

qa)


108

This doesn’t make any sense to me. What are you talking about?
Can we spend the rainy day fund?

And, yes, we, in fact, abided by your—or the council’s wishes in
keeping that bracket because we Knew that an executive officer
would go to that money to relieve part of the $140 million cut. But
my point is the deficit is so large that it is not relevant to anything.
You're talking $700 million and you ask is it OK if—what is your
intent with this $20 million? The $20 million isn’t there. Explain
it to me. Maybe I missed the point.

Mr. CLARKE. All right, Congressman. I don’t know whether you
did or not, but my point was not to do what I think you are saying
I am trying to do. My point was to ask how that was operative
when we have an underbudgeting problem and there were moneys
that we put into the budget recognizing that and then this restric-
tion went into place.

And I was asking what the directions of the Congress were. Be-
cause I intend to have the city council follow this body’s directions,
and it was a point of—a notice of a matter of concern we have had.
And I am sorry I have raised it if it caused consternation, but we
are trying to abide by what you have instructed us to do.

Mr. Dixon. Let me tell you why it does with me. Because the
conversations of these hearings historically, except for maybe
today, get way off the track—way off the track. And all I am sug-
gesting is for you to say now what is your intent about this $20
million. When everyone seems to agree you're going to be $700 mil-
lion in the hole, what difference does it make? I mean, literally,
what difference does it make?

Mr. CLARKE. Just asking for guidance from you, sir. That is all
the difference it makes. Thank you.

h Mr. Dixon. Mr. Chairman, could I just pursue a couple of things
ere?

Mr. Davis. Please.

Mr. Dixon. I noticed Mr. Nunn was here, and I know we are
going to have a hearing with Coopers—Mr. Nunn, could you come
‘orward just one more time on some of these issues?

Mr. Nunn, I realize we're goin to have a hearing that will in-
volve Coopers & Lybrand on ida , but I just wanted to ask you
a couple of preliminary questions if I could.

As I understand it, Mr. Nunn, you are the managing partner of
Coopers & Lybrand in the Washington office?

Mr. NUNN. That would become my desire, sir, but I am the audit
partner on the audit of the District of Columbia, yes.

Mr. Dixon. OK. Now, if you could just explain to me what that
means. What direct control do you have over the audits made by
the District—by Coopers & Lybrand for the District.

Mr. NUNN. Bs the partner in charge of engagement, along with
George Willie from Bert Smith and €o., who together we perform
the audit, we have control over the audit plan, audit process, and
the auditing tests and the opinion, which is included in the CAFR.
The financial statements, as it says in the front of the document,
are the responsibility of the District and the District comptroller.

We are in the position of either giving an opinion, statements
conformed to generally accepted accounting principles or that they

lo not.


67
District of Columbia Current Appropriated FTE Count—Continued

368

District of Columbia Public Schools
Teachers’ Retirement System ...

Univesity of the Distt of Columbia. 760
District of Columbia Law Schoo! B
District of Columbia Public Libra 4m
10

12290 37.9
Department of Human Services . 4278

Department of Parks & Recreation
0C Office on Aging ..
Office of Human Rights/Minority Business
Office on Latino Affairs .
DC Commission for Women
DC Energy Office

Tota .. 6
PUBLIC WORKS:
Department of Public Works
0C Taxicab Commission

Total ..... 1,082 33

Total .... - 32,530 100

Mr. Davis. Mr. Mayor, I want to move to Chairman Clarke first
and then Mr. Pohlman. The chairman has a brief statement, then
we will go to Mr. Pohlman, and then we will ask questions.

Mr. Barry. Of course, Mr. Davis. If you say so.

Mr. Davis. We want to follow protocol, Mayor.

Mr. Barry. Mr. Pohlman is part of my testimony.

I was not trying to take your time, Mr. Clarke.

Mr. CLaRKE. I appreciate the Chair people recognizing—

Mr. Davis. You need to turn on your microphone.

Mr. CLarKE. Thank you, Mr. Chairman.

Mr. Chairman, and also Chairman Walsh, and members of the
committee, I do appreciate the opportunity to testify before you,
this joint hearing today. I am not joined at the table by any of m
colleagues, but when last I looked around, I saw five of my col-
leagues, Councilmember Frank Smith, Councilmember Kathleen
Patterson, Councilmember Hilda Mason, Councilmember Charlene
Drew Jarvis and Councilmember Harry Thomas in the audience.
And I am joined by the budget director for any kind of technical
questions that we might have.

The District’s fiscal crisis presents tremendous opportunity for
change, growth and development of our Nation’s Capital. The coun-
cil recognizes the full dimension of the crisis we now have. We have
an immediate problem and we have a long-term challenge, and we
are facing it.


22

the budget, demonstrate that the District will run out of cash un-
less additional funds are obtained.

The chart in front of you is reproduced from table 6, on page 16
of my written statement. The District’s most recent cash flow pro-
jections for fiscal year 1995 were included as a part of the quar-
terly financial report.

e statement projected that the ending cash balance for fiscal
year 1995 will be $50 million, but this projection is based on many
unapproved actions, double counting oF some items and other un-
supported financial data. When taken together, these questionable
items result in a cash projection of negative $400 million at the end
of the fiscal year. The chart also includes the impact on cash of the
$224 million in additional overspending identified by the Mayor on
February 1.

Because some of this overspending involves a change in budget
procedures, approximately $72 million of this overspending could
affect cash, thus increasing the projected year-end cash deficit to
nearly half a billion dollars if these initiatives are not successfully
implemented.

In summary, Mr. Chairman, and I apologize for the length of
time it has taken for me to deliver this oral statement, the District
is facing an enormous financial crisis which has increased since our
report in June. The District’s projected actual spending is signifi-
cantly above the approved budgets, and the District has cash now
only because it is not paying hundreds of millions in bills. The Dis-
trict’s plans to address the current financial situation must include
major structural and management initiatives in order for those
plans to be effective. The District faces even greater revenue and
expenditure gaps in the future, so it is important that action be
taken immediately.

That completes my oral statement. My colleagues and I will be
glad to answer any questions you may have.

[The prepared statement of Mr. Hill follows:]

PREPARED STATEMENT OF JOHN W. HILL, JR., DiRECTOR, FINANCIAL MANAGEMENT
PoLicres AND Issues, ACCOUNTING AND INFORMATION MANAGEMENT DIVISION,
U.S. GENERAL ACCOUNTING OFFICE

Chairman Walsh, Chairman Davis, and Members of the Subcommittees:
Although it is a pleasure to appear before you today to discuss the District of Co-
lumbia’s financial situation, I only wish the news we have to give could be more
positive. Last summer, we issued a report that. discussed the Distric’s cash and
udget situation and concluded that the District is faced with both unresolved long-
term financial issues and continual short term financial crises.1 In that report we
explained how cash balances declined even though budgets were balanced. Last fall,
in response to the growing financial crisis, Congress mandated $140 million in re-
ductions to expenditures for the District’s fiscal year 1995 appropriation and re-
duced the federal payment by $14 million, and took several actions to stre
rting of information to Congress.
ite these actions, the District’s financial situation has continued to deterio-
rate, Earlier thie month the District’s annual financial statements for fiscal year
1994 reported the largest annual budget deficiency since Home Rule. The District
deferred pa; nt of more than $500 million in bills at the end of fiscal year 1994.
Last December to meet critical cash needs, the District had to obtain $250 million
in short-term borrowing, months earlier than the cash forecast had shown, and just
last week two financial investment services lowered the District’s bond ratings, one
of them to below investment grade.

ropginencial Status: District of Columbia Finances (GAOYAIMD/GGD-94-172BR) June 22,


8

I would like to say at the outset that I recognize that the District
is facing very serious financial problems not unlike those in other
jurisdictions in this country. Philadelphia, New York City, and
Cleveland are three cities that have had similar problems and it
required Herculean efforts by the entire community—the political
establishment, the business community, and the residents—to
bring those cities back from the brink.

Mayor Giuliani just last week proposed a budget for New York
City that, according to press reports, includes the largest reduction
in overall spending since the Great Depression and will probably
result in restructuring of the government to become leaner and
more efficient because the revenues are just not there anymore.

We, dealing with the District of Columbia, must make a similar
decision. We cannot continue business as usual. And the first step
is to find out where the District is financially.

The General Accounting Office has been looking into the Dis-
trict’s finances for almost a year now. Their audit of the District’s
books was presented to us last June and helped guide us in the last
appropriations cycle for fiscal year 1995. It was very, very helpful.
I am hopeful that information provided by the General Accounting
Office will continue to guide us in the direction we need to go.

We will hear from them first this morning and then we will hear
from Mayor Barry and Council Chairman Clarke. I cannot over-
emphasize the need for everyone to be honest and forthcoming.
This is the beginning of a long, hard road, that both our sub-
committees are going to be traveling to bring the District back to
fiscal reality.

This is not a speechmaking day, but I feel I have to say loud and
clear that we have to change the way things are done.

The fiscal year 1995 District of Columbia Appropriations Act
passed the House last year by three votes, and that was after the
committee was forced to cut $140 million from the city’s budget re-
quest.

It was only 4 years ago that the new city administration received
an additional $100 million Federal payment from the Congress
plus the authority to borrow $336 million to retire the so-called ac-
cumulated deficit.

In addition, within those first 8 months of her new administra-
tion, Federal legislation was approved to allow the Mayor an 18-
month window to bypass the personnel regulations and selectively
reduce the work force. That same bill also gave the Mayor the au-
thority to reduce the budgets of independent agencies.

All the tools that were requested were provided.

Four years later, the District is technically insolvent. Their cur-
rent liabilities exceed their current assets. And the District is, for
all intents and purposes, out of cash.

One of our objectives is to find where the money has gone and
where the District is today. After this joint hearing today, our two
subcommittees will begin having separate hearings on the District’s
finances and structure. So while this hearing is intended to shed
some light on the District’s financial situation, we will be address-
ing these issues in greater detail in future hearings.

It saddens me to see the District in the condition that it is in,
and I would rather be focusing my attention on other issues. But


27

Reducing the number of District personnel has been a stated management initia-
tive for several years. Based on information from the District, between the first
quarter of fiscal year 1993 and the first quarter of fiscal year 1995, the number of
actual FTEs decreased from 46,422 to 44,438. During this period appropriated posi-
tions decreased from 36,475 to 34,394 and non-appropriated positions increased
from 9,947 to 10,044.

Section 141 of the District of Columbia Fiscal Year 1995 Appropriation Act re-
quired that the total number of FTE positions financed from appropriated funds not
exceed 33,588, which is 2,000 FTEs below the 35,588 contained in the original fiscal
year 1995 budget. On February 17, 1995, the District announced that it had reduced
the number of FTEs by 3,058 to 32,530. This total is below the 33,588 ceiling, but
the number of reductions needs further explanation. Although, the District said it
cut more than 3,000 positions, some of these positions were not filled as of the end
of fiscal ir 1994. Specifically, as of September 1994 there were 33,675 actual
FTEs on board. Therefore, the actual reduction since the beginnii the fiscal year
in actual FTEs is 1,145. Table 2 shows this data and also provides the number of
actual FTEs during the period the fiscal year 1995 budget was being developed.

Table 2: District of Columbia FTEs

ane

Ofiginal Facal Actual FES
Year 195 Gudg- SEEDS Sera of Sap

« Quarter of Fiscal 1994

‘ear 1994)

Total FTEs... 35,588 34,482 33,675
Current FTES. 32,530 32,530 32,530
Ditference 3,058 1952 145,

‘Source: District of Columbia personne data.

In making the announcement on February 17, the District outlined the specific
reductions by agency that had occurred because of incentive retirement. programs
and attrition. However, the number of reductions reported are significantly higher
than the actual decline in FTEs. Several specific examples highlight these seeming
inconsistencies:

—Metropolitan Police Department: the District’s announcement showed 347

staff departures, the actual FTE data showed 162 fewer FTEs;

—Department of Human Services: the District’s announcement showed 713 staff
departures, the actual FTE data showed 464 fewer FTEs; and
.C, Public Schools: the District’s announcement showed 90 staff departures,
the actual FTE data showed an increase of 404 FTEs.

The District explained that some vacant positions would be refilled due to court

orders or other mandates. We are continuing to develop information on District per-
sonnel.

DC HAS NOT ADDRESSED THE SPENDING PROBLEM

Even though mandated by the Congress to cut its spending by $140 million from
ita fiscal yea? 1995 budget submitted to the Congress, the District has not reduced
spending. The Congress mandated that total appropriated expenditures not exceed
$3.25 billion in fiscal year 1995, but according to the District's own estimates, Dis-
trict appro riated expenditures this year could be nearly $3.9 billion. District offi-
cials sald they would reduce this overspending by $224 milion, but planned to ask
the federal government to cover the remaining $407 million. Various actions have
been taken by the previous and current Mayor and the District Council to address
overspending, but very little actual spending reduction has occurred. Even though
the sith month of the fiscal year begins next week, District agencies are still oper-
ating on spending plans based on the originally submitted budget before the con-
gressionally-mandated $140 million in cuts,

INITIAL DISTRICT ACTIONS TO ADDRESS OVERSPENDING

During the first part of fiscal year 1995, the District’s attention was almost en-
tirely on what was necessary to obtain the $260 million in short-term borrowing.
‘The key action during this period was a consensus agreement among the D.C. Coun-
cil Chairman and the current and former Mayor that included management actions
and initiatives to reduce potential overspending and cut costs, a budget that would
ghow $140 million in budget cuts mandated by the Congress, and a positive cash
forecast based on the two aforementioned items. The D.C. Council passed a revised


96

loss of revenue is? Because I understand in certain cities, there are
universities, and so forth, located there that don’t pay property
taxes, yet they are paying something similar, which, although it
might not be 100 percent, it does help put some money in the cof-
fers, which you so desperately need right now.

Mr. Barry. Congressman Kingston, we do have a list of all of the
tax-exempt properties. I just don’t happen to have it here with me.
And we know the value of that property. A number of them are
hospitals as well as universities, but a number of them are cer-
tainly embassies, no embassies pay taxes, then there are other
international organizations that are here that don’t pay taxes, but
we can get that to you.

But my answer is that we ought to redefine the tax relationship
to the city government, the idea of property tax forgiveness and
that that entity offers a service or an activity to a community in
lieu of taxes, that is why you don’t pay it. But we have entities in
Washington that is getting properties taxes that don’t contribute
hardly anything to the well-being of our city, and I will get that
list to you and maybe we can figure out how we can get the Con-
gress to vote on that.

Mr. Kincston. If you can get it to the committee, including me,
and break it down. I don’t know if we could lump embassies in with
universities, necessarily, but there must be a number of things that
we can take a look at and break it down by category.

Let me move on to another question.

[Information is available at the subcommittee’s office.]

Mr. BARRY. One example of that, looking at the book here, the
National Geographic Society, it appears the value of their property
tax, assessed value, is a $160 million, if we taxed it outright. That
would save a lot of money, for example.

Mr. Kincstown. I think that would be very interesting to look into
and it is something we should look into in a time of this crisis.
Now, also your employee benefit plan, your health care and retire-
ment, and so forth. How does that compare, not necessarily to Alex-
andria, but maybe to Baltimore, some of the other cities about the
same size as you, Columbus, OH, and so forth? Is your benefit
package more generous, is it on par, is it less generous?
wi Barry. Mr. Kingston our personnel director, let me just ask

im.

Congressman, a significant number of our health and life pro-
grams are modeled after the Federal Government's plan because
many of our employees come out of that Federal Civil Service Sys-
tem. Those employees are not covered by that, and for those there
are, about 13,000 or 14,000, our health and life benefits are com-
parable to other large cities.

Mr. KINGSTON. They are not overgenerous. Would that be the
same for retirement, too, then?

Mr. Barry. Retirements are in several categories. Those employ-
ees who were on board prior to a certain date, I think it was 1987,
are part of the Civil Service Retirement program. Then those who
came in after 1987, are part of the District’s defined contribution
plan. Then you have the firefighters, police officers, teachers and
judges in another plan.


89

Mr. Barry. Public works for the last 2 or 3 years, as I under-
stood, budgeted, and doing budget things that didn’t make a lot of
sense. Human services overspent, public works overspent, fire, pub-
lic schools, settlements and judgments, police.

Mr. Davis. These are the numbers you showed us informally.

Mr. Barry. The other one, Mr. Chairman, is my understanding,
that in working on the numbers that the Congress had at the time,
which was $3,394 million that the Congress’s mandate was that by
the end of the fiscal year 1995, the DC government had to reduce
its budget by $140 million. That is my understanding of the con-
gressional mandate, and reduces spending and permanent employ-
ees by 2,000.

Assuming we didn’t have these overexpenditures carried over
and we were down to the $3,394 million starting figure, which we
weren’t, everybody knows that, we would still have some time from
October 1, until now, you save “X” amount of money. And then
from this point on until September 30, you say, wait a minute, I
don’t think anybody would Nave expected us to save $140 million
even if we were on budget. Would you? That is, would you say by
the end of the fiscal year——

Mr. Davis. I think there are two issues here, and I don’t want
to dwell on this. But the fact is when Congress was writing the
law, they didn’t just write it as a $140 million reduction. Mr. Walsh
will correct me if 1 am wrong. But they put the number of $3.25
billion in because they probably didn’t trust the numbers they were
given from the city at that time and they wanted to write in a bot-
tom-line figure. That bottom-line figure now is grossly over-
extended and we are stuck in the Congress with legislation that
mandates reductions from that number, not from the $140 million.
That is our dilemma, and I wanted to share that with you.

Mr. Barry. We both agree and know that the $140 million, as-
suming the budget was balanced and the numbers were correct at
the beginning which we now know they were not, they were $3,394
million, we would still have some time in this fiscal year to reduce
it by $140 million. And what we are saying, what I am saying, is
that thus far, we have reduced this budget by approximately $70
million at this point. And we intend to, either through the renegoti-
ations with the council or through legislation, reduce it by another
$70 million or by actual real-hard cash, through wages being re-
duced in our employee base.

Our employee base is $1.4 billion in personal services and 10 per-
cent of that would be $140 million, and 5 percent is $7 million.
Then we will do a number of other service reductions in terms of
closing clinics and rotating fire companies and a lot of other things.

Mr. Davis. All I am telling you is from the congressional perspec-
tive, and this was passed before I was a Member here, but I am
learning quick, there are two sides to it. One is the $140 million
reduction, but you also had the $3.25 billion and you could not ex-
ceed that. Either one of those triggers a downslide in the payment
to the District; assuming you get to the $140 million.

Mr. Barry. Right.

Mr. Davis. Assuming you get there and you make the case you
can get there, you still have a give-back, if you will, because of the
$3.25 billion. The reason that number was put in there was be-


9

the Congress has a constitutional responsibility for the District of
Columbia and we as Members cannot lose sight of that fact. That
is why we are here this morning.

While I would rather the District’s financial situation were dif-
ferent, I welcome the challenges that are ahead of us. All of our
actions thus far have been bipartisan. This is an issue that re-
quires total cooperation among the District government, the Con-

ss, and the executive branch of the Federal Government. This
is our city, this is the people’s city and we cannot afford to fail.

Thank you, Mr. Chairman.

[The prepared statement of Hon. James T. Walsh follows:]

PREPARED STATEMENT OF Hon. JAMES T. WALSH, A REPRESENTATIVE IN CONGRESS
FROM THE STATE OF NEW YORK

‘Thank you, Chairman Davis.

Let me also welcome our witnesses here this morning.

This is the first hearing of our subcommittee for this historic 104th Congress and
I am very pleased that it is a joint hearing with both House committees that are
directly involved with the District of Columbia—the Committee on Government Re-
form and Oversight’s Subcommittee on the District of Columbia and the Committee
on Appropriations’ Subcommittee on District of Columbia Appropriations.

I want to thank my colleague from Virginia, Tom Davis, for hosting this joint
hearing. We have a big job ahead of us and it ie going to take all of us pulling to-

iher‘and in the same direction if wo are to be successful and make our Nation's

apital the jewel that it should be in the eyes of the world.

time teke a moment to introduce the Members of our D.C. Appropriations Sub-

committee.

Mr. Bonilla of Texas who was also with us during the last Congress.

Mr. Kingston of Georgia who is in his second term in Congress but is new to our
subcommittee this year.

Mr. Frelinghuysen of New Jersey who brings a wealth of experience from his serv.
ice in the New Jersey State Assembly.

. Neumann of Wisconsin.

Mr. Dixon of California is our ranking member—he and I have switched chairs—
our roles may be reversed but our friendship remains strong.

Mr. Durbin of Dlinois who served with us during the last Congress, and

Miss Kaptur of Ohio who was also with us during the last Congress.

I would like to say at the outset that I recognize that the District is facing very
serious financial problems, not unlike those faced by other jurisdictions. Philadef-
phia, New York City and Cleveland are three cities that have had similar problems
and it required Herculean efforts by the entire community—the political establish-
ment, the business community, and the residents—to bring those cities back from
the brink. Mayor Giuliani just last week proposed a budget for New York City that
according to the press includes the largest reduction in overall spending since the
Great Depression and will probably result in a restructuring of the government to

me leaner and more efficient because the revenues are just not there.

We, dealing with the District of Columbia, must make a similar decision.

We cannot continue business as usual.

And the first step is to find out where we are financially. The General Accounting
Office has been looking into the District’s finances for almost a year now, and we
will hear from them first this morning and then we will hear from Mayor Barry and
Council chairman Clarke.

Teannot overemphasize the need for everyone to be honest and fortheoming, This
is the beginning of a long, hard road that both of our subcommittees are going to
be traveling to bring the District back to fiscal reality.

This is not a speech-making day but I feel I have to say loud and clear that we
have to change the way things are done.

‘The FY 1995 DC Appropriations Act passed the Houge last year by only 8 votes,
and that was after the Committee was forced to cut $140 million from the city’s
budget request.

It was only 4 years ago that the new city administration received an additional
$100 million Federal payment plus the authority to borrow $336 million to retire
the so-called accumulated deficit, In addition, within those first 8 months of her new
administration, Federal legislation was approved to allow the Mayor an 18-month



95

lem. Or Human Services $7 million because of the Medicaid
underbudgeted. That is not a management problem.

I suspect, though, that in public works—that person is gone. I
can tell you that now. Human Services person is gone. Fire is still
here, police still here. But take police retirement at $7 million.
That is not a management problem.

The police retirement fund was underfunded—underbudgeted.
Look at compensation. This is an area where workers get hurt and
can draw disability for a partial basis for as long as they are cer-
tified by a doctor to be injured. They overspent by $3 million. That
again is a budgeting problem. So with the two or three areas
where, in my view, there are management problems, two of those
three people are gone.

Right now, I can’t speak for the past administration, but my atti-
tude is that once we agree on a budget for an agency and it is a
real budget, not some false accounting kind of budget, I expect
those managers to live within that budget or they won't be a part
of my administration.

Mr. GUTKNECHT. Well, Mr. Chairman and Mr. Mayor, again, I
am not really trying to pick on anybody. But I think, as my grand-
mother used to say, if you always do what you have always done,
you will always get what you have always got.

Taking what Mr. Bonilla said a few moments ago, part of the
tough job will be for us freshman to go to our colleagues in the
freshmen class and say we need some kind of additional appropria-
tion for the city of Washington, DC, because we are going to have
to convince them that everything is being done that is possible to
set a long-term strategy so that this isn’t going to be something
that will happen every year; that we are going to call it a budget-
ing problem rather than a management problem.

0 we have a difficult task. And as the old spiritual says: If you
will be convincing, I will be convinced. We have to be convinced be-
fore we can sell the rest of our colleagues.

Mr. Barry. I agree with you. I hope I can convince you we are
going to do all we can to say what we are going to do and do it.

Mr. GUTKNECHT. Thank you, Mr. Chairman.

1 yield back.

r. Davis. Mr. Walsh.

Mr. WALsH. Thank you, Mr. Chairman.

I yield for questions to Mr. Kingston of Georgia.

Mr. Kincston. Thank you, Mr. Chairman.

Mr. Mayor, you have a lot of nonfederally owned buildings in
Washington, DC that do not pay property taxes. For example,
many of the political-type groups on both sides of the aisle, of dif-
ferent ideologies, and so forth, have some sort of a special charter,
which I understand is a Federal charter not a city charter. Is that,
in your opinion, a problem?

Mr. Barry. Absolutely.

Mr. KincsTon. How many buildings or businesses fall under
such a category?

Mr. Barry. We can get that to you. I don’t have the exact num-
ber at this point.

Mr. KincstTon. Would it not help your situation, if we had an in-
ventory of such businesses or groups and determined what that


100

Mr. Barry. The law allows 45 days. We are just trying to catch
up with some of these payments.

Mr. Davis. OK.

Mr. Barry. Going back to June and July of last year. Over $5
million of Human Services alone last summer. Our present policy
right now is to try to do it in 30 days. Depending on our cash-flow,
we may move back to 45 days.

But the big problem we have is to make sure that when these
obligations are made and the products are delivered that the agen-
cies enter those into their system so it then hits our central system.
And we have tightened up on that. I have said to our managers,
that they have to do this, otherwise they will be doing something
else.

Mr. Davis. Now, that is not an information technology problem
entering into the system, that is a management problem?

Mr. Barry. People problem.

Mr. Davis. Management problem just to make sure that gets——

Mr. BARRY. Which, since January 2, though, we do not have that
problem. Every agency of government now knows it. As I said, Mr.
Hawkins went in January 2 and uncovered in about 7 or 8 days
almost $20 million of obligations that had not been entered into the
system.

Mr. Davis. I only have 5 minutes, so I want to move quickly.

Mr. Barry. I will keep my answers short to you.

Mr. Davis. Federal Bureau of Prisons, what do we owe them
now? It was $12 million first of January. Any idea?

Mr. Barry. $5.4 million. They bill us quarterly.

Mr. Davis. We are trying to get just a ballpark figure. On Metro,
I know on February 17, Larry Reuter wrote to you, Mr. Mayor,
stating the District was $18.3 million in arrears, including interest,
in payments to Metro. This is causing serious cash-flow problems
for the Transit Authority. He listed several actions the District
needs to take in order to avert a termination of Metro bus service
in the District as of April 1.

Do you know how you are going to respond to this letter at this
point?

Mr. Barry. They will get a check tomorrow.

Mr. Davis. All right, thank you.

Can you provide assurances the District will support the $5.2
million in District service and fare changes which were approved
by the city council on December 21?

Mr. Barry. Do I support that?

Mr. Davis. Yes.

Mr. Barry. Council passed it. The answer is yes.

Mr. Davis. OK. How about the past due school subsidy in the
amount of $2.8 million?

Mr. Barry. That is in the $5.2.

Let me just say, Mr. Chairman, and I have said this to the May-
or’s representative on the board, and to Mr. Evans who is council
representative, that our representatives should have insisted on an
overall Metro budget reduction when it was known last year the
city was not going to contribute with so much money to that pot.

jo this year, certainly my representative will accurately re
resent how much the city intends to contribute so that Metro itself


116

Ms. Norton. Thank you, Mr. Chairman. I am through.

Mr. Davis. Thank you.

Mr. Mayor, Chairman Clarke, Mr. Pohlman, Mr. Nunn, all the
council members who have sat here showing their interest, we
want to thank you very much for coming. You can say you have
been saved by the bell because we have another vote.

d I think instead of another round of questioning we will
count this as the beginning of a long dialog. As the saying goes, the
journey of 1,000 miles begins with the first step, and I think we

ave taken some giant steps today.

We will have our differences as we move along. However, one ad-
monition, and that is, to the extent there is downsizing to be done
and the council doesn’t do it, you have somebody else, with prob-
ably less sensitivities, who may make those cuts. So I think you
need to stand up and fulfill your elected obligations as we work
through these numbers, and we will continue to work with you.
These first steps are not the total steps. We are going to be with
the city, I think, every step of the way as we move forward.

Let me turn it over to Chairman Walsh.

Mr. WALSH. Thank you, Mr. Chairman. I enjoyed the better part
of the day with you and with members of the District government
and those of you who have sat through all of this.

I would just end by saying that I really believe there is a fun-
damental difference of opinion here. I certainly can’t speak for the
Congress, but I do know a lot of Members of Congress don’t believe
the District’s financial crisis is being caused by a revenue problem.
They believe it is a management problem.

A city of 550,000 people should be able to keep a $4.5 billion
budget under control and deal with the problems that a thriving
modern American city has. And while it is certain that the revenue
issue is going to be focused upon, for sure, attention is also going
to be directed at the District’s internal management.

Mr. Barry. Mr. Chairman, let me just say I appreciate the dialog
I have had with you and Mr. Walsh and with the Speaker and Ms.
Norton and others, and you have my commitment to hang in here
together and to work together.

I think, Mr. Walsh, as we go down this road together, we are
probably going to meet in the middle, where it is going to be a
management and revenue problem, which I have said. You say
management not revenue, but I think as we examine it carefully,
away from the glamour and glare of these hearing rooms, but in
dialog and discussions, we are going to probably come closer to-
gether than any of us would think about that. Because none of us
wants to do anything that is not going to make our city a better
place to live, work and to do business and make it hospitable for
the Congress.

Mr. Davis. Thank you very much. Thank you. Meeting will be
adjourned.

{Whereupon, at 3:20 p.m., the subcommittees were adjourned.}

[Additional information submitted for the record follows:]


63

On the table is the question of debt guarantees, shared resources, and a realistic
se.

We must jointly work through these issues. That was not done in 1973. As careful
as Chairman Diggs was in negotiating the original home rule charter, there was no
avenue for local input or participation.

‘As Mayor, I pledge to work in concert with the DC Council to make this Congress
our working partner to transform District government. I look to the day when this
transformation moves beyond these discussions on money and budget. ir partner-

hip must be about more than money. It can and muet be about how the nation’s
capital city can overcome the urban challenges of our time, and in fact become @
pilot example on how best to face these challenges.

‘We can use the present mechanisms, or we can create new ones. I have expressed
support for our Congresswoman Eleanor Holmes Norton's idea of an Oversight Con-
trol Board, with resources being included with the oversight.

‘We come together today seeing Washington, D.C., as both a national problem and
a national treasure. Our city has some of our nation’s cruelest challenges: homeless
mothers with babies, drug trafficking, illiteracy, and teenage hopelessness. We also
carry our nation’s greatest hopes: personal prosperity, freedom of spirit, and the
right to self determination.

je have a theme in our government. The theme is simply that “EVERY ONE
MATTERS.”

‘This theme does more than articulate our caring for each person, as important
as that is, It states the belief that every one has value, every one has something
to give, every one is responsible, and every one contributes to the whole.

ave a vision for Washington, D.C.

I see a city where children are born in wedlock.
ye fie? & city where young people go to college, and older people also continue to
learn.

I sce a city of thriving industries of tomorrow, including health care, music, tour-
ism, and publishing—as well as government.

[ser a city where service—in the public and private sectors—is considered honor-
able.

And I see a city where faith abounds . . . and faith is rewarded.

Tcome today not with all the answers, but with a deep desire to partner with you
to see this vision become the new reality for Ameriea’s number one eity—Washing-
ton, D.C.

City of Syracuse Budget 7/1/94-630/95
{in thousands}

Category

Education—City School District we
Water Fund (entirety financed through rents and other revenues) ..
‘Sewer Fund (entirely Financed through rents and other revenues) .
Aviation (completely financed through user fees and aviation revenues)

Total (Special Districts)
Police ..

Parks and Recreation
Law (Corporation Council)

Community Services

Engineering ...
Community Development

zen Review Board

Principal and Interest on Bonds
‘All Other Appropriations ...


69

million not to spend on anything; subtract it from that $3.89 and
we are at $3.1. So I make that point.

We took that task, which I hope those of you who have come
from local and State legislatures might appreciate as a matter of
discipline. If you simply do not budget the money to spend for
something, to set aside in some way, some of my colleagues are all
trying very hard, now somebody might I might catch hell for that,
but somebody might just and spend it. So we budgeted that.
Now, it looks like for that discipline we might be getting a bad re-
port card here, but $79 million of that money that we budgeted was

‘or that specific purpose.

We also provided for a tax amnesty program for fiscal year 1995,
which is expected to generate $12 million. That added to the $79
million that we budgeted not to spend will create a cash reserve
of $91 million.

We did not just stop or hit the gavel with respect to the budget
and transmit it to the President. We went on watching what was
happening. The committees, the council’s Committee of the Whole,
held an oversight hearing on February 8, and was ordered to re-
ceive testimony from the administration on their progress toward
meeting the budget cuts and reallocations of the fiscal year 1995
supplemental.

I am providing you for your record with a copy of the transcript
of that hearing. And the reason I am doing it, and I would like you
to look at it, it might be—you have an awful lot of other things to
do, but if you would glance through it, you will see that the kinds
of questions that my colleagues and I asked in the course of looking
at the implementation of that bu et are much like the questions
that you have asked here today and that which you have asked the
General Accounting Office to look at for you. We are trying to stay
on the case, we are trying to watch what will happen.

Not only has the council’s Committee of the Whole looked at the
whole situation, our council’s Committee on Human Services and
the Judiciary, together responsible for oversight of 55 percent of
the appropriated budget, have held further oversight hearings on
these matters. I have asked all of our committee chairs to regularly
review the financial reports of agencies under their oversight. The
council is on the case and wants to stay on that case.

I would like to note that from what we saw, we were pleased
with the administration’s report on the employee buy-out pro-
grams, early out, easy-out and voluntary severance. We were told
that 1,920 positions had been vacated with no backfill. We continue
to be concerned with respect to some issues, particularly regarding
contracts, and we are going to be watching those very carefully.
And as I will mention in a moment, we may need some of your as-
sistance in that regard.

We have examined the Mayor’s plans for $224 million in reduc-
tions, and we are pleased that our fiscal year 1995 supplemental
laid out much of the foundation for his plans. We look forward to
working with him in this regard.

As a matter of fact, in 23 of the agency lines, the Mayor has the
same reductions, which we already budgeted for on our fiscal year
1995 budget. And in 49 of the agency lines, we have made a larger
reduction than has he. And in 17 of 2 agency lines, he has proposed


14

Mr. Davis. Without objection.
[The prepared statement of Hon. Cardiss Collins follows:]

PREPARED STATEMENT OF Hon. CaRDISS COLLINS, A REPRESENTATIVE IN CONGRESS
FROM THE STATE OF ILLINOIS

I want to thank Rep. Clinger and Rep. Livingston for calling this important joint
hearing on the current financial state of the District of Columbia. I also want to
gommend Delegate Eleanor Holmes Norton and Rep. Tom Davis for their leadership

are?
"Y'share the concerns over the financial plight of the nation’s capital. Scarcely a
day goes by that one does not read and hear distressing accounts of the city’s finan-
cial crisis. Yet I am confident that with the mutual cooperation of Congressional and
City leaders, these problems can be faced and resolved.

’o honestly address this problem will require a full and accurate accounting of
the city’s financial position; a credible, realistic and carefully drafted debt resolution
plan and serious consideration of additional funding with adequate controls which
ensure financial viability without hampering the letter or the spirit of the City’s
Home Rule Charter.

Each of these components will play a role in the solution of the financial crisis
and the ultimate revitalization of the city.

We cannot afford to leave this hearing with a philosophy of punishment and
blame. The critical condition of D.C.’s finances can only be healed through sacrifice
and cooperation.

Our overriding mission must be to brighten the district’s financial picture and
those who live and work in this capital city.

Mr. Davis, Mr. Walsh.

Mr. Watsu. Thank you, Mr. Chairman.

I will at this time yield to our distinguished ranking member,
Mr. Dixon from California, if he has an opening statement.

Mr. Dixon. Mr. Chairman, I have no opening statement.

Mr. Davis. Now, I ask our vice chairman, Mr. Gutknecht, if you
have an opening statement.

Mr. GUTKNECHT. Mr. Chairman, I don’t want to Fe on too long,
but I do want to say a couple of things. First of all, I don’t want
to be redundant either. The city faces, I think, immediate cash
crunch problems, but long term—and I was privileged to have been
in the meeting yesterday with the Speaker, AND he expressed hope
that long term, we can once again turn the city of Washington into
a city that all Americans can be proud of. And so I think that there
will be cooperation from those of us on Capitol Hill as long as there
is open and honest cooperation from those in the city, and I want
to participate in that. I look forward to this hearing and future
hearings to try to get the city back on the right track.

. Davis. Thank you.

Mr. Walsh.

Mr. WatsH. Mr. Chairman, I would like to mention that Mr.
Kingston of Georgia has now joined us, as has Mr. Bonilla of Texas,
who has served on this committee for the last 2 years. I would ask
them if they have any opening statements to make at this time.

Mr. BoniLia. Chairman, thank you. At this time, I have no open-
ing statement, but I will have questions after we hear from the wit-
nesses this morning.

Mr. WALSH. Thank you.

Mr. Kincston. Mr. Chairman, the only thing I have to say I
think has already been said; that Washington is, of course, the U.S.
Capital, but more importantly in the down-home sense, it is Ameri-
ca’s town, and we want it to be great, we want it to be everything
that it can be, and look forward to the process. And thank you.



97

Prior to 1980, I think the firefighters and police and judges had
a very, very generous plan, and they still have a very generous
plan, because there are two COLAs a year in there and some other
things in it. But our regular Civil Service plan is similar to the
Federal Government’s. Our defined pension plan is very modest. It
is probably comparable to other local jurisdictions.

Mr. KINGsTON. Let me ask you this; you had mentioned a second
ago about the DC hospital doing a $5 million award. Do you own
the hospital completely? How is the ownership of the hospital bro-
ken down?

Mr. Barry. The DC General Hospital is controlled, owned and
managed by the DC government.

Mr. KINGSTON. Would it be appropriate to look into spinning that
off to another entity maybe? Because I don’t know how many cities
own hospitals anymore. I don’t know the answer, but it would ap-
pear to me that because of that likelihood of this $5 million mal-
practice liability being incurred, that that could happen to you
again, as well as other unpleasant surprises, and maybe that
should be spun off. Also, for example, you have the law school, is
that correct?

Mr. Barry. Yes, sir.

Mr. KINGSTON. Things like that, should we look at spinning them
off and seeing if they can stand on their own and getting them off
your balance sheet?

Mr. Barry. Well, we are looking at DC General. I agree with

‘ou, we need to, first of all, redefine the mission of our hospital,
Because it has not been redefined in the last 20 years, amid demo-
graphic and medicine changes. So we are looking at a public benefit
corporation.

We are looking at asking local hospitals—they want to manage
the hospital. We are looking at a combination of our health clinics
and the hospital and another hospitals coming together. But we
clearly should change the governance of the hospital.

The present mission is too broad. Besides, Congressman, the hos-
pital is draining the city government out of over $32 million last
year that was underbudgeted. So I would say by the end of this
year, we ought to have a model for the hospital both in governance
and then financially.

Mr. Kincston. OK, Mr. Chairman, I know I am out of time.

Mr. Barry. And the law school controversy, I will just state my
position. We are going to submit to the council in March a proposal
to close the DC law school, starting October.

Mr. KincsTON. Just one last question getting back to the list of
the buildings that aren’t paying propert tax. When can I get that
list from you and who in your office will be handling that?

Mr. BARRY. Ms. Lorraine Britton is the director of our financial
revenue.

Mr. Davis. We would all like that, and I appreciate your bringing
that to our attention.

Mr. BARRY. Tomorrow morning we can have the list and we have
the assessed values and the taxes that will be foregone because of
the fact they are tax exempt.

Mr. KINGSTON. Thank you.


19

entered in the District’s financial management system rather than
the date of the voucher.

Since, in an effort to control cash, vouchers were held for ex-
tended periods before being entered into the system, this date does
not reflect the true age of the payable. The quarterly financial re-

ort included some data on the District’s number of RTE personnel
for various periods. However, the District did not submit informa-
tion on the actual number of full-time, part-time and temporary
employees and the source of funding for these employees as re-
quired by the legislation.

We have agreed going forward that we will assist the District in
developing a more useful format for future quarterly financial re-
ports.

Information on the exact number of District personnel is difficult
to verify. Different sources of funding and the lack of an integra-
tion between the personnel, payroll and budgeting systems makes
it very difficult to establish the exact number of personnel on

joard.

District personnel positions are financed by both appropriated
and nonappropriated funds. The District reports personnel data in
a variety of ways, including FTEs, the number of personnel receiv-
ing paychecks, and full-time, on-board staff. An FTE is used to
measure the number of equivalent positions and takes into account
how many hours are actually being worked. For example, two em-
ployees working half time, would be counted as one FTE.

The DC fiscal year 1995 Appropriation Act required that the
number of FTE positions financed from appropriated funds not ex-
ceed 33,588, which is 2,000 FTEs below the 35,588 contained in the
1995 budget. Table 2, on page 9 of my written statement, shows
information on District FTEs.

On February 17, the District announced that it had reduced the
number of FTEs by 3,585, to 32,530. This total is below the 33,588
required in the legislation, but further explanation is needed.

though the District said it cut more than 3,000 positions, some
of these positions were not filled as of the end of fiscal year 1994.
Specifically, as of September 1994, there were 33,675 actual FTEs
on board. Therefore, the actual reduction since the beginning of the
fiscal year in actual FTEs is 1,145.

In making the announcement of February 17, the District out-
lined specific reductions by agency that had occurred because of in-
centive retirement programs and attrition. However, the number of
reductions reported are significantly higher than the actual decline
in FTEs. Several specific examples might highlight these seeming
inconsistencies.

Metropolitan Police Department, the District announcement
showed 347 staff departures, the actual FTE data showed 162
fewer FTEs. The Department of Human Services, the District’s an-
nouncement showed 713 staff departures, the actual FTE data
showed 464 fewer FTEs. And DC public schools, the District an-
nouncement showed 90 staff departures, the actual FTE data
showed an increase of 404 FTEs.

The District explained that some vacant positions would be re-
filled due to court orders or other mandates. We are continuing to
develop and review information on District personnel. During the


48

is unusual for a school district, to have a fiscal year begin on Octo-
ber 1. Typically, the District does do some hiring at the beginning
of the fiscal year, so there may be positions that were not filled be-
fore that they fill after the beginning of if fiscal year. Where that
accounts for why there are 404 more FTEs on board now than
there were as of the last pay period in fiscal 1994, I don’t know.
But that could be a little bit of it. That is possible.

Mr. HILL. It also could be that the numbers that the District is
using are actual employees versus the FTE change. And that cer-
tainly would be something that we are looking into further because
our work is continuing in the area of FTEs. The have to produce
a report every quarter that would have that information in that,
so certainly we will look into it in a lot more depth when we get
the second quarter report.

Mr. GUTKNECHT. The reason I raise this question, Mr. Chairman,
I think we have to find out where the buck stops, and apparently
the school district is not independent. They have to come to the city
council for their funding, so they should be part of the solution as
well as a part of the problem. And I want to delve into this a little
more. I want to get some backup on exactly what the per-pupil ex-
penditures are, what the staffing levels are and whether or not
they are being as cooperative as they should be.

Mr. HILL. We will do that to you.

Mr. Davis. Thank you very much.

Any other questions?

Mr. LaTourette, would you like to ask additional questions?

Mr. LAToureETTE. No.

Mr. Davis. Mr. Chrysler, additional questions?

Mr. Chairman, everybody has been through a second round ex-
cept for you, if you want to ask any additional questions.

Mr. Watsn. I apologize for having been absent for a few minutes.
It was not for lack of interest, I assure you. We have a markup
going on also in the Agriculture Subcommittee. Rather than pro-
longing this hearing, we will have an opportunity to talk with you
again on Friday and I want to take that opportunity to probe a lit-
tle more deeply. I very much appreciate your testimony today.

Mr. Hivt. Thank you, Mr. Chairman.

Mr. Davis. Mr. Hill, let me just say on behalf of all of us, we ap-
preciate the work you and your staff have done on this. I think it
sheds a lot of light on the District’s financial situation. I know the
District appreciates it as well. We are trying to get to the bottom
line so we can work on it from here. We thank you very much.

Mr. Hit. Thank you for your kind comments.

Mr. Davis. Before we get to the next panel, Mr. Mayor and Mr.
Chairman of the council, we may have a vote right after the bell
rings, at which point, I would recess before you start rather than
interrupt your remarks. So let us give the panels a minute to set
up.

Would Mr. Pohlman please sit with the panel as well.

Mr. Mayor, do you have any objections with Mr. Pohlman sitting
with you, because we may have some questions for him? He is not
going to present testimony, but we want to question him and we
want to have him sworn in, too.


93

I would like to ask the Mayor, if I could, also, first of all, what

is your opinion of the city manager municipal government?

ir. BARRY. Congressman, I think that is an area that whatever
oversight, however we want to call this, this board ought to look
at it. Obviously, there are pluses and minuses for it. We have a city
administrator form of government with the Mayor at the top. Rich-
mond, VA; most of California have a city manager. I would | like to
look at it and see whether or not it would be more applicable for
DC than not.

On the other hand, I know a number of city managers—Mr. Rog-
ers, who I hired as my first city administrator, came from a cit}
manager form of government and they, too, had their budget dif-
ficulties when there is an inadequate revenue base.

I think, Congressman, until we solve this revenue base problem,
where we can tax income at its source or some other vay to broad-
en the DC government’s revenue base or transfer these responsibil-
ities, I am not sure any form of governance will change that prob-
lem. So it is something I would like to look at. I had not thought
about it in great detail until you just asked about it.

Mr. BONILLA. I would certainly acknowledge all forms of munici-
pal governments will have financial problems, but I would venture
to say the ones that have city managers, the city manager form of
government, have had fewer——

Mr. Barry. May have less.

Mr. BoniLta [continuing]. Margins of problems compared with
the huge disaster that is now on the horizon that the District of
Columbia is facing.

T also would ask in following up on some remarks that our Chair-
man Walsh made earlier, and Delegate Norton, it was very difficult
to pass the appropriations bill last time around. And it is going to
be even more difficult this time around.

I would urge you, Mayor, and all of the folks that you can mobi-
lize within the District of Columbia’s governmental structure, to
send a strong message as quickly as you possibly can, that the Dis-
trict is ready to get its house in order. Because if that message is
not clear, it is going to be difficult to pass any bill, even if every
Member sitting in here is for it. And I voted for the bill last year,
it is going to be 10 times more so this time around. So I would urge
all of yee to help us with the perception problem, the real problem,
and the image the city has had for too long now and send a strong
message, that you are ready to change direction.

Mr. Barry. Congressman, I understand the perception problem
and the reality problem that it will make it difficult. I think that
the District of Columbia government has not been as forthcoming
as it ought to be with information about its budget; has not been
perceived as an efficient and effective instrument of government;
has not always told the story in a way that makes people under-
stand why they ought to be supportive.

I intend to do everything I can to, first of all, to be forthcoming
in whatever I know about this situation and any others, and, too,
to get at government. We started on that role to be a much more
responsive and responsible government, and all of our citizens are
frustrated at the District of Columbia government. But I think we
have started that, notwithstanding our Financial situation.


31

February 1, 1995—Comprehensive Annual Financial Statements released
February 14, 1995—Standard & Poor's lowers District bond rating
February 15, 1995—Moody’s lowers bond rating below investment grade
March 8, 19951995 Supplemental Budget and 1996 Budget to Council
April 17, 1995—Second quarter financial report due

Portion of Current Federal Payment Used to Pay Prior Bills
(in Millions of Dollars)
Prior Years Bilis

$700 Tg ederal Payment

$600

$500 }

$400 4

$300 +

$200

1994 1995 1996(est)*
* 1996 Federal Payment includes $132 Escrow

Mr. Davis. Thank you very much for that testimony, Mr. Hill. I
hope every Member here, as well as the District officials, and resi-
dents of the city, listen well, because this may be the first time
they can truly understand how badly off the District of Columbia
is and what actions have to be brought to remedy this situation.

I will start the questioning by having you go over the $335 mil-
lion deficit for fiscal year 1994 reported in the comprehensive an-
nual financial report. Could you break those numbers down and ex-
plain the components of that total?

Mr. HILL. Yes, there are a number of pieces in the $335 million
deficiency. Several of the pieces related specifically to Medicaid ac-
cruals that were being made in order to account for expenditures
that had not been paid yet but that were certainly due to Medicaid
activities in the prior year and for that current year.

Also, there were amounts, there was a reserve for the DC Gen-
eral receivable of $85 million, which was basically loans that were
made to the DC General Hospital. Actually, we consider those
loans to be made in lieu of subsidies given to the hospital.

It became clear to us last year that these amounts were not in-
deed loans, but they were actually subsidies that were being made
to the District—to the General Hospital.


15

Mr. WaLsu. I yield back to you, Mr. Chairman.

Mr. Davis. Thank you.

Mr. McHugh, any opening statement.

Mr. McHucu. Thank you, Mr. Chairman.

I will heed the advice of my good friend and your subcommittee
Chairman Walsh when he said this is not a moment for speech-
making, and will yield my time to you, Mr. Chairman.

Mr. Davis. Thank you.

Mr. LaTourette, any opening statement.

Mr. LaTouretTe. Mr. Chairman, thank you for the opportunity.

In the interest and expediency of time, I would also ask unani-
mous consent to place my opening remarks in the record, and yield
back my time.

Mr. Davis. Without objection.

{The prepared statement of Hon. Steven C. LaTourette follows:]

PREPARED STATEMENT OF Hon. STEVEN C. LATOURETTE, A REPRESENTATIVE IN
CONGRESS FROM THE STATE OF OHIO

Mr. Chairman:

I want to thank you and our esteemed colleagues from the Appropriations Com-
mittee for convening this hearing on the current financial crisis facing our nation's
capital.

T also want to wholeheartedly agree with your opening statement that this hear-
ing is a beginning, not an end to this process. We are not going to leave this com-
mittee with the solutions for solving the city’s financial crisis, but hopefully we will
leave armed with the information we need to develop those solutions that will re-
store stability and confidence in Washington’s economic viability.

We are faced with a daunting task. The solutions will not be easy or popular.
However, they will be necessary. We must find ways to accomplish our goals with-
out sacrificing public health and safety. We must balance the city’s books without
sacrificing education. We will have to issue pink slips to many of the city’s employ-
ees while trying to restructure the city’s tax structure in order to draw new business
into the District.

T believe we will hear testimony about success stories of cities who have been in
similar situations and have managed to pull themselves up by their boot straps and
continue on the path toward fiscal stability. One such city is very near and dear
to my heart: Cleveland, Ohio, Cleveland, a few short years ago, was in such dire
straits both fiscally and environmentally (I'm sure you all remember the famous
Cuyahoga river fire) the city was forced to take some drastic action to avert bank-
ruptcy. However, through a strong private and public partnership, Cleveland has
not only regained its financial footing, it is truly now one of the jewels of the Great
Lakes region.

I would like to work with the members of our two Congressional committees and
with the Mayor and members of the D.C. City Council to develop programs that will
restore Washington D.C. to its rightful place as one of America’s jeweled cities and
make D.C. a model for emulation worldwide.

Thank you Mr. Speaker.

Mr. Davis. Mr. Flanagan, any opening statement?

Mr. FLANAGAN. Thank you, Mr. Chairman.

I also would ask unanimous consent to place my remarks in the
record.

I thank the witnesses for coming today. It should be a very inter-
esting hearing.

Mr. Davis. Without objection.

{The prepared statement of Hon. Michael P. Flanagan follows:]


59

My testimony this morning will address five questions, providing a historical ref-
erence as well as the current facts on our situation:

1. Why are District finances so fragile?

2. What is preciscly the financial condition of the District government at this mo-
ment?

3. What are we in government doing to restore control and rebuild credibility in
our fiscal affairs?

4. How can Congress participate in this recovery?

5. What needs to be addressed in our partnership with Congress to insure our fu-
ture viability?

‘The first question goes to the core of our problem: the lack of clearly defined roles
for the Federal and District government. And the answer can only be developed
from a careful look at the history of our home rule charter.

This charter is the result of negotiations that took place here on the Hill in the
early 1970s. Congressman Diggs and his team had no models to go by. This was
a first time experience for everyone. Those of us in the District were not consulted
in an organized way.

Very early, it became clear that the home rule charter was not workable. It was
flawed in five important ways.

First, to draw a clear line between the old federal responsibility and the new dis-
trict responsibilities, an audit of the books should have ean the process. In 1975,
when Mayor Walter Washington attempted such an audi e Arthur Anderson Co.
determined that a true audit could not be accomplished at that time.

It was with the help of a financial oversight commission appointed by the Con-
gross that we were able to overcome the financial challenge of that time. With a
0 million appropriation from Congress, the commission facilitated the develo;

ment of the current Financial Management System. That commission worked wit
us to produce the first audit of the district. This was done in partnership because
the financial problems of the District were not of its own making. It was a shared
responsibility.

In 1979, my first term as Mayor, we were able to accurately reconstruct our ac-
counting with the help of the special commission, and found that $279 million in
ills should have been paid by the federal government prior to home rule.

nly, with home rule, the Federal government transferred to us an unfunded
liability of $2.2 billion in retirement and pension benefits. Since 1980, the citizens
of the District have paid $1.2 billion out of our tax revenues to replace obligations
which everyone agrees was a federal responsibility.

If the Federal government had fully funded the systems in 1979, the District
could have saved $1.2 billion and the assets would currently total approximately $8
billion instead of the current $2.8 billion.

Equally significant, the charter obligated the District to perform state functions,
without conferring state authority.

Let me give you an idea of what is involved: Public assistance, Medicaid, mental
health, corrections, state courts, higher education, motor vehicle regulation, banking
regulation, insurance regulation, community physical and mental health’ services:
arg only a’ partial list of the state.type services we must perform,

Fourth, we are specifically prohibited from taxing income at its source as is done
in 45 states. Two dollars out of three that are earned in the District leave town
without making any contribution toward our survival. These dollars are taxed, but
not in ways that benefit the city or the region.

Failure to provide logical and traditional revenue authority to match our respon-
sibilities has been a chronic weakness in our financial picture.

Let me illustrate what this means to DC. In 1996, Maryland residents are pro-
jected to earn $12.6 billion in the District while Virginia residents will earn $9.0

illion. DC residents are forecast to earn $3.1 billion by working in either Maryland
or Virginia, leaving a net outflow of earnings from the District of $18.5 billion.

If the District were to tax this non-resident earning at a flat 2% rate, we would
raise about $370 million in FY '96, or about 15% of all tax collections and about
11% of all General Fund revenues expected for the year.

For exampl 2% tax on non-resident income in Cleveland, Ohio, raises about
60% of all taxes; and in Detroit, Michigan, a 1.5% tax raises about 30% of all taxes.

Finally, while DC contains very valuable property, only 43% of it is taxable. Not
only is federal land exempt from our rolls, but hundreds of tracts have been exempt-
ed by specific congressional privilege or categorical exemptions such as non-profit
organizations.

cording to a recent McKinsey & Company study, the District loses an estimated
$450 million in revenue annually due to tax-exempt properties—primarily the Fed-



128
Appendix C—Comparison of 25 Largest U.S. Cities

Poreent
heme
inom
Parca parent mets
ae complet yet. change
cams ing zis SE in por
din 7 a mi ya
cer Bet eat Ss
tech
teal
hs
1380"
3s 4 2B
308 8
35 38 -7
23 30 5
ne ar]
rr er!
B 4 ol
m2 3 2
307
2 31 0
18 ri 0
m4 3 0
a 32 2
ry Hw 4
uo B 6
15 2 -2
16 2B 4
6B 8 Bl
B28 8
ne el)
18 2B 6
1 2 8
. 7 2 4 20
Cleveland . : : 8 20 30
* Covers persons 25 years of age and oer
‘Souree: Bureau of Census data conained in Slater and Hall, 1993 Cty and Coune! Extra, Table C, Col. 63, 4S; Page 34, 35
Appendix D—Comparison of 25 Largest U.S. Cities
[Pereert]
Parent ot
serans 16
Wrenn, parse” Papln
m
rates SST rin 1980-50
Aabor fa
: pois
2 B 15
2 NA 5-1
2 6 5-12
2B u 6 a
23 6 4 -6
2 7 6 19
2 6 64 -1
2 NA 61 -6
2 7 -1
a 6 69 2
F) 3 58 -6
19 9 8 4
19 9 a B
1 8 6 2
B 7 1 n
7 8 6 “5



112

Mr. NUNN. We questioned-———
Mr. Dixon [continuing]. And had a repayment plan? She hadn’t

done anything, yee

Mr. NuNN. We questioned whether it should be as a loan and/
or as written off. However, in considering overall materially its ef-
fect on the financial statements, we concluded we would not either
change our opinion or to insist that they had to write it off because
of its size at that point as opposed to having an actual plan. We
did recommend that they have it, though.

Mr. Dixon. It wouldn’t have changed your opinion, but, in fact,
they would have shown a deficit in those years, wouldn’t they
have? Or were they running a surplus on paper?

Mr. NUNN. 1992 was a very small gain, I believe.

Mr. Dixon. Right.

Mr. Nunn. That’s correct.

Mr. Dixon. And in 1992 it was $20 some odd million.

Mr. NunN. 1992 was about $2 million.

Mr. DIXON. Mr. Miconi points out they showed a plus of about
$1.9. If they owed—if they had an asset of $20 million, it would
have seemed to me they would have shown a deficit. That wouldn’t
have changed your opinion?

Mr. NuNN. Not on the financial statements of the District of a
whole, which runs $4 and $5 billion, no.

Mr. Dixon. Well, Mr. Chairman, I don’t want to take any more
of our time, but it just seems we are getting to a crux of a problem
here that for our purposes—and you probably say, well, I knew this
all along—these audits aren’t worth much for our purposes. They
may have some other value, but these audits aren’t worth very
much to us, are they?

Mr. NUNN. They get you financial statements in accordance with
renerally accepted accounting principles, and I have a very strong
feeling that they were very helpful in getting the numbers together

at the end of 1994.

Mr. Barry. Mr. Chairman, could I just take a minute on that?

Mr. Davis. Yes, you may, Mr. Mayor.

Mr. Barry. Part of my frustration here—and even when I was
on the council I raised questions about the loan being carried that
way. It didn’t make sense to me. And DC General was drowning
in ink, and you are expecting them to pay it back.

But the other problem, I think, whicel T just put on the record
here, and maybe Mr. Nunn and others, who yesterday I visited
with—it seems to me accompanying their audit ought to be the
management letter soon thereafter. And in the management letter
it seems to me these analyses and observations ought to be pointed
out. And the District received the 1993 management letter in Au-
gust of last year.

Now, I have been promised we will get it this year by March 1,
but the management letter ought to have that kind of analysis and
data about it.

For instance, we looked at the accounts payable. That is how we
discovered that the previous administration was carrying over $70
million and the accounts payables had gone from 245 to 310 or
something like that. I asked, well, why? And it was then brought
out it was a carryover from the next year.


114

And, last night, a couple of nights ago, the counci) moved on a
bill to get the unions, I guess, to the table. And I have said all
along they won’t come formally to the table on renegotiation of this
wage decrease.

And I don’t think the difference is that large, quite frankly. 1
think it is a matter of the council being able to see evidence that
we are saving this money so we don’t end up in August or Septem-
ber saying we thought we were going to do it and didn't do it.

Second, I get the impression that—and I was on the council for
2 years—that the previous administration’s credibility was not as
good as it ought to be, and I suspect there was sort of a carryover.

ether or not mine is as good, I don’t know if Mr. Clarke can an-
swer that question or not.

Mr. CLARKE. Congresswoman, | need a bit of a clarification.
What is the difference to which you are making a reference?

Ms. Norton. Mr. Clarke, I only know what I read in the news-
paper and see on the television. There appears to be a difference
between you or the council and the Mayor-—

Mr. CLARKE. Yes.

Ms. NorTON [continuing]. On the depth of the cuts that are need-
ed to be made.

Mr. CLARKE. In the payroll.

Ms. Norton. Such that the council said if certain cuts were not
made the council itself would—if certain savings were not shown,
the council itself would mandate the cuts.

Mr. CLARKE. Yes. What we did, the Mayor had told us—and he
did send correspondence to us yesterday. And he had told us that
he wanted to reduce 790 some, U believe it was, positions—750 posi-
tions. And the council members felt that they would like to have
more positions cut.

So what the council members said was, recognizing the executive
has to provide basic information, was give us the list of the posi-
tions; and if you don’t want to do it then we will by emergency ac-
tion do it. But it was just discipline for ourselves as much as for
the Mayor to just say we're going to do it.

We had extended discussions yesterday amongst ourselves. First,
the suggestion was, well, let’s just do it and put it out there. I said,
we are getting into fiscal year 1996 budget. So we will work it into
the budget so you don’t have a problem with the budget not reflect-
ing what we are doing.

T talked to the Mayor last night. He said he was going to try to
reduce 4,000, and this fits there. Our 1,200 on top of the 2,750 we
already did is within that 4,000. So I don’t see the problem.

The Post—the press looks for problems between us. I think they
know we have been trying to work together closely.

Ms. Norton. So you think this difference that is being assessed
can be reconciled.

Mr. CuarKE. I think so, and we didn’t think it was something
that couldn’t be done. We think that can be done.

I noted earlier that the $244 million worth of reductions that he
said, that it had some basis in—we had already done. I pointed
out—I don’t have it right here now—but that a lot of the reductions
that he was proposing we had already budgeted that reduction.
And some areas he reduced less than we said to reduce; some areas


2

I will switch the order and recognize Appropriations Subcommit-
tee members and then authorization subcommittee members. Be-
cause this hearing may be quite lengthy, I intend to hold my oral
statements to 5 minutes. I have a longer statement for the record
that will be available to any of you. I request that other Members
limit their opening remarks as well in order that we may get to the
important business at hand.

We can each speak directly to the press after the hearing, if that
is any Member’s desire.

Mr. John Hill will testify for GAO. He will have as much time
as he needs to discuss the matters that we have asked the GAO
to look into. We will then take as much time as needed to question
Mr. Hill. I will insist on the 5-minute rule, however, for Members.

If anyone has more questions to ask Mr. Hill, then we can have
multiple rounds, but it would be unfair to let one or two Members
dominate the time while others are waiting. The Mayor and council
chair will make their oral presentations, and then be accompanied
by the Acting Chief Financial Officer, who will not make a presen-
tation.

I have no intention of holding the Mayor and the council to 5
minutes of their opening presentation. I hope they have important
things to tell us. I hope we do not get into a speechmaking mode,
however, because this hearing, essentially a factfinding, is not the
right time to make speeches.

At this point, I would like to introduce some of the Members
present on the authorization side, and I would like to introduce,
first of all, the chairman of the full committee, the Honorable Wil-
liam Clinger from Pennsylvania.

Mr. Clinger, thank you very much for being here.

Ms. Norton is the ranking minority member of the committee.
Mr. McHugh from New York is a member of the authorizing com-
mittee, and Mr. LaTourette from the authorizing committee is here
as well.

Mr. Walsh is here from the appropriations side at this point.

I will proceed now for an opening statement.

This joint hearing with the authorizing and Appropriations Sub-
committees on the District of Columbia is a beginning, not an end
of a critically important process. As a Representative of the State
which produced George Washington, I look forward to the day
when the Nation’s Capital City, like the man who gave it life, will
once again be first in the hearts of the people of America.

No one can doubt that the District faces a serious financial crisis,
but the crisis is more than unfavorable numbers on a balance
sheet. It is a crisis in the lives of the men, women and, above all,
the children who live in the District.

Although we are going to spend much of today looking at the fi-
nancial condition of the city, we must never lose sight of the fact
the financial crisis is important because of the devastation it brings
to the lives of the District’s least powerful residents.

As we work together to solve this crisis, we must be careful that
the needs of the weak and the powerless are met. I challenge the
Mayor and the city council to work with us to make sure this hap-
pens.


91

posed to $265. Part of that plan was to close one of our facilities
called the Modular at Lorton and transfer those 688 people from
Lorton to DC’s Correctional Treatment Facility. The judge stopped
us. So again David found that out, knew more about that, and we
are now devising an alternative plan to do the same thing another

ay.

That is how the process works. It is a very good process and it
is permanent. It wasn’t there when I came in. There was not the
discipline there I think we should have had, so it is permanent. It
has all my authority that goes with it.

Mr. Davis. Mr. Mayor, just to tack on to what Miss Collins had
asked. Do you have the information technology that you need, or
I think you said earlier, you probably needed some updates in that,
that would assist you even more with this kind of thing?

Mr. Barry. We have enough to control the spending now. We
need a different kind of system to give us a whole range of informa-
tion. For instance, we ought to be able to age our accounts payable.
We don’t have the technol on to do that.

We ought to be able to know—we ought to have a system that
we order something, you obligate it, then the moment it comes in,
the day it comes in, there ought to be a way to enter it into the
system saying we have now received it and it is now something we
have to pay, and you start counting the day it came in to the time
it gets paid, as opposed to now when the agencies may hold it for
25 days or 10 days. That is not the way it ought to be. Those are
some of them.

We ought to have a system that can tell us instantly the projec-
tions on personnel by appropriations or by Federal funds. We can
control this spending with what we have, Dut we need an enhanced
system that will give us all the kinds of collective information the

eneral Accounting Office said we ought to have and that we want
to have.

The other question was the Federal payment. You know my view
about that, that the Federal Government, as the President is here,
contributes to over 57 percent of the land being nontaxable where
we ought to have 43 percent of that land we can tax. It ought to
be a Federal payment that is predictable, that we can all count on.

know we had it for the last 3 to 4 years. This year’s Federal
payment of 1996 is fixed. We would hope that the committee would
look at going back to some form of formula so that it would be pre-
dictable as a percentage of our revenues.

Mr. Davis. Thank you very much.

Mr. Walsh.

Mr. Watsu. I would like to recognize Mr. Bonilla for questions.

Mr. Bonilla.

Mr. BONILLA. Thank you, Chairman.

I recall at 9 o'clock this morning just looking around this room
and seeing how it was packed from wall to wall, and there were
people waiting out in the hallway to come in, and Chairman Clarke
investing yet another big chunk of his time trying to deal with this
crisis, and Mayor Barry was here from the beginning, and I notice
Chief’ Thomas sitting in that seat for going on 5 hours now, in
probably one of the most uncomfortable chairs you can find in
Washington.


36

Mr. HILL. Back in our report in June we had actually looked at
the amount of the District’s budget that was tied up in court or-
ders, and it was a significant portion. It was a hard number for us
to come up with because there are several whole programs that are
tied up in court orders, so that we couldn’t really assess the pieces
of the program that were under court order or the actions that had
to be taken if it was the whole program.

Back in our report in June we did have some information on
that. As a matter of fact, we saw that a significant portion of sev-
eral activities within the District are covered under court orders,
such as some of the things that they are doing with corrections cer-
tainly, and, but it was difficult for us to come up with a specific
number on that.

Ms. Norton. So even with the best financial management sys-
tem, it would be difficult to discover that amount? I mean is the
financial management system that keeps you from knowing that
amount or are there other factors.

Mr. HILL. It is the pervasiveness of some of the court orders as
part of the problem because it is hard to determine which portion
of the program is under court order, and generally the actions that
have to be taken to solve the court order in many cases involve the
entire program.

For instance, some of the activities that the District is providin;
under Medicaid right now in terms of optional payments are indeed
under court order, so that any changes in some of those require-
ments would have to be reconciled with the court order in some
way.

Ms. Norton. Can I ask you more about that? These are optional
payments that the District is making to residents on Medicaid, and
those are mandated on the District so it couldn’t get rid of those
optional payments at the moment?

Mr. HILL. It couldn’t by itself get rid of those optional payments.
There would have to be some reconciliation with the court order
and probably some involvement specifically with the court specifi-
cally.

Ms. NorTON. Would there be any way for it to get out of those
payments without, in fact, passing a law to handle the problem in
the future, to withdraw it from those payments in the future?

Mr. HILL. We have specifically requested that information from
the district, and we have not received it yet to take a look at it,
and as soon as we do, though, we will be glad to provide our com-
ments for the record.

Ms. Norton. Thank you, Mr. Chairman. My time has run out.

Mr. Davis. Mr. Walsh.

Mr. WALSH. Mr. Dixon.

Mr. Dixon. Yes, Mr. Hill, I want to join the members of the com-
mittee in congratulating you on the fine work that you have pro-
vided us.

Mr. HILL. Thank you.

Mr. Dixon. You made comments about the nonappropriated
budget, but they were very brief, and I am wondering as we talk
about some kind of financial oversight whether you would rec-
ommend that there be additional controls placed on the
nonappropriated budget.


123

in some fashion to the city (75 percent of other cities’ financing is from external
sources such as state transfers). Second, many other cities whose borders lie close
to neighboring states have imposed nonresident taxes to mitigate the loss of this
revenue. The average tax, in fact, is about 2 percent (Exhibit 11). The District is
unable to rely on either of these two cushioning mechanisms.

Exhibit 11—Nonresident Taxation

Selected Cities Percent

Philadelphia, PA
Toledo, OH
Lexington, KY
Cleveland, OH
Detroit, MI
Wilmington, DE...
Kansas City, MO
Harrisburg, PA
ew York, NY
© ..

Average of sample ..

45 States require withholding on income eamed witha state borders
Source: US. Advisory Commission on latergovernmental Relations; interviews

Property taxes are the second major source of District tax revenue. Looking back,
the District benefited until quite recently from the run-up in real estate values. Be-
cause of the time lag in valuation for tax purposes and because of a one-time ac-
counting change, property taxes actually increased in real terms until 1993, al-
though the real estate “bust” began earlier. While projecting real estate cycles is
hazardous to any forecaster’s health, the recent downward trend in property values
is unlikely to be reversed for the rest of the decade, dragging property tax revenues
down with it (Exhibit 12). In addition, the District is—unique among large cities—
unable to collect property taxes on a large amount of tax-exempt buildings and land,
owned primarily by the Federal government. Our rough analysis indicates that this
represents $450 million of foregone revenue (Exhibit 13). (We will return shortly to
the subject of whether the Federal payment fairly compensates the District for fore-
gone revenue and for the cost of services provided to the Federal government.)

Exhibit 12
ACTUAL AND PROJECTED PROPERTY TAX BASE 1988-2000
1393 $ Billions

60 ¢—— Actua —-—>—<—— Projection ———B>
1

: Others
a Lp! Residential-
Y, Z ‘owner-occupied
(Class 1)
Commercial
(Class 4)

om it (
1988 89 90 91 92 93 94 95 96 97 98 99 2000

Other includes Ciass 2 (resigential-tenamt), Class 3 (hotel and motel) and Class 5 (unimproved land)


98

Mr. Barry. I assume you don’t want to include the federally
owned properties, just the nonfederally owned?

Mr. KInGsTON. Right,

Mr. Barry. Or controlled property where there is a tax situation
to it?

Mr. Kinston. Right.

Mr. Davis. Thank you. And if you will, we will work with you
on that and look at that.

Mr. BARRY. We have a larger problem. We have some managers
in town that the council is going to have a hearing on tomorrow,
one is Fannie Mae, that has huge holdings and don’t pay any cor-
porate income tax.

Mr. Davis. We want to look at the property tax side, though, I
think was the question here. And I think they do pay property. We
will be happy to look at anything else you send up as well.

The gentleman from Ohio, Mr. LaTourette.

Mr. LaTouretTeE. Thank you, Mr. Chairman.

And Mr. Clarke, I need to apologize to you for not being present
during your testimony. I was visited by our mayor, Michael White,
from the city of Cleveland, and, Mayor Barry, I tell you there is
good hope in that the mayor of the city of Cleveland, who had pre-
sided over our city at the time of default, has been elected to our
State Senate. So anything is possible in these times of financial cri-
SIs.

Mr. Barry. I am coming to the Congress.

Mr. LaToureEtTTe. Mr. Clarke, I want to focus on you a minute,
because I have heard Mayor Barry say repeatedly he has been in
office for only 1 month and 21 days. And one of your council mem-
bers was kind enough to give me the McKinsey report yesterday,
so last night it made good bedside reading.

On page 9 of the report, which the Mayor referenced and placed
in the record of this particular committee, it indicates that this
independent agency recommended—and I found the words rather

rophetic—that the District take rational steps now—and now

eing based upon the date of their report, October 1994—in a
noncrisis atmosphere to head off more draconian steps that would
otherwise be required.

Some of the programs or some of the directions, although they
were nonspecific that they asked the District to look at, was the
consideration of reducing per-recipient Medicaid spending by 7 per-
cent, which would bring it down to levels presently expended in the
State of Maryland. Also launching programs to reduce per-pupil ex-
penditures by 8 percent which would bring it in line with Mont-
gomery County educational standards.

The sum and substance of this particular document seems to be
that—and I think it has been stressed here today in this committee
hearing, and I appreciate all of the witnesses and all of the testi-
mony—it seems to be this need to be a two-way street. But even
the accountant hired by the District suggests that the first step of
the journey needs to be made by the District to restore perhaps
some credibility with the U.S. Congress if the Congress is then
asked to meet the District halfway on that trip.

My question is, since the McKinsey folks used words like “taken
now, should be done immediately,” my question is what steps were


39

Could you quantify for me what, on an annual basis, the District
has in the way of short-term borrowings? Putting aside the issue
for which the dollars are used, it seems to me that one of the
things that appears to need some controls is debt issuance. How
much in any given year, for short-term borrowing and how much in
terms of long-term debt?

Mr. HiLu. I don’t have those numbers at my fingertips, and I
would prefer to provide that for the record, if that would be——

Mr. FRELINGHUYSEN. I would be happy to have you provide that
for the record. In your own report it says here, e District’s an-
nual appropriation specifically states that the mayor shall not ex-
pend any moneys borrowed from capital projects for operating ex-
penses of the District of Columbia government.”

It goes on “However, in recent years the District has borrowed
from the capital projects fund.” And then it goes on to detail those
types of borrowings. Is this a problem area and could you expand
on that?

Mr. STEPHENSON. Their own counsel has said that that is appro-
priate as long as the money is paid back before the end of the fiscal
year.

Mr. FRELINGHUYSEN. I saw that statement in this document. Do
you agree with that?

Mr. HILL. It specifically says, “The District corporation counsel
has concluded the District does not violate its appropriation so long
as borrowings from the capital projects fund are repaid before the
end of the fiscal year in which the borrowing is made.” That is in
quotations.

Mr, FRELINGHUYSEN. Now, general practices of good government
are that you don’t borrow money from the debt issuance, especially
from a capital account for operating purposes. The General Ac-
counting Office, I assume, agrees with these general principles.

Mr. HILL. Yes. The thing that we would Fook at and the thing
that we are currently looking at at the request of Mr. Dixon last

ear was what happens in terms of capital borrowing and does that

ave an impact on the ability of the capital fund to actually then
go forward with some of the projects that they have, and we are
still looking at that issue right now, and so I would be more than
happy to provide that information.

Mr. FRELINGHUYSEN. Putting aside, obviously, the fact that the
city still has to run and fund various programs, from my perspec-
tive, coming from a State where a number of cities have gotten into
fiscal trouble, this is one of the areas which most of the people who
do those reviews point to is that there has never been a single

‘oup that reviews these types of bond issuances. But you would
think that that, perhaps, would be incorporated in what may be de-
veloped here?

Mr. HILL. Yes.

Mr. FRELINGHUYSEN. OK. Thank you very much, Mr. Chairman.

Mr. Davis. Thank you very much, Mr. Frelinghuysen. The gen-
tleman from Ohio any questions?

Mr. LaTourette.

Mr. LaTouretTE. Thank you.

Mr. Hill, I want to join my colleagues in thanking ye for not
only your report today, but your previous appearance. I would like