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42–315 CC 1997

MEDICAID AND TREASURY BORROWING SECTIONS

OF THE PRESIDENT’S NATIONAL CAPITAL

REVITALIZATION AND SELF-GOVERNMENT IMPROVEMENT PLAN

HEARING

BEFORE THE

SUBCOMMITTEE ON THE

DISTRICT OF COLUMBIA

OF THE

COMMITTEE ON

GOVERNMENT REFORM

AND OVERSIGHT

HOUSE OF REPRESENTATIVES

ONE HUNDRED FIFTH CONGRESS

FIRST SESSION

APRIL 25, 1997

Serial No. 105–25

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

(

(II)

COMMITTEE ON GOVERNMENT REFORM AND OVERSIGHT

DAN BURTON, Indiana, Chairman

BENJAMIN A. GILMAN, New York

J. DENNIS HASTERT, Illinois

CONSTANCE A. MORELLA, Maryland

CHRISTOPHER SHAYS, Connecticut

STEVEN H. SCHIFF, New Mexico

CHRISTOPHER COX, California

ILEANA ROS-LEHTINEN, Florida

JOHN M. MCHUGH, New York

STEPHEN HORN, California

JOHN L. MICA, Florida

THOMAS M. DAVIS, Virginia

DAVID M. MCINTOSH, Indiana

MARK E. SOUDER, Indiana

JOE SCARBOROUGH, Florida

JOHN SHADEGG, Arizona

STEVEN C. LATOURETTE, Ohio

MARSHALL ‘‘MARK’’ SANFORD, South

Carolina

JOHN E. SUNUNU, New Hampshire

PETE SESSIONS, Texas

MIKE PAPPAS, New Jersey

VINCE SNOWBARGER, Kansas

BOB BARR, Georgia

ROB PORTMAN, Ohio

HENRY A. WAXMAN, California

TOM LANTOS, California

ROBERT E. WISE, JR., West Virginia

MAJOR R. OWENS, New York

EDOLPHUS TOWNS, New York

PAUL E. KANJORSKI, Pennsylvania

GARY A. CONDIT, California

CAROLYN B. MALONEY, New York

THOMAS M. BARRETT, Wisconsin

ELEANOR HOLMES NORTON, Washington,

DC

CHAKA FATTAH, Pennsylvania

ELIJAH E. CUMMINGS, Maryland

DENNIS KUCINICH, Ohio

ROD R. BLAGOJEVICH, Illinois

DANNY K. DAVIS, Illinois

JOHN F. TIERNEY, Massachusetts

JIM TURNER, Texas

THOMAS H. ALLEN, Maine

HAROLD E. FORD, JR., Tennessee

———

BERNARD SANDERS, Vermont

(Independent)

KEVIN BINGER, Staff Director

DANIEL R. MOLL, Deputy Staff Director

JUDITH MCCOY, Chief Clerk

PHIL SCHILIRO, Minority Staff Director

SUBCOMMITTEE ON THE DISTRICT OF COLUMBIA

THOMAS M. DAVIS, Virginia, Chairman

CONSTANCE A. MORELLA, Maryland

ILEANA ROS-LEHTINEN, Florida

STEPHEN HORN, California

ELEANOR HOLMES NORTON, District of

Columbia

THOMAS H. ALLEN, Maine

EX OFFICIO

DAN BURTON, Indiana HENRY A. WAXMAN, California

RON HAMM, Staff Director

ANNE MACK, Professional Staff Member

ROLAND GUNN, Professional Staff Member

ELLEN BROWN, Clerk

CEDRIC HENDRICKS, Minority Professional Staff Member

(III)

C O N T E N T S

Page

Hearing held on April 25, 1997 .............................................................................. 1

Statement of:

DeSeve, Edward, Controller, Office of Management and Budget; Debbie

I. Chang, Director, Legislative and Intergovernmental Affairs/HCFA,

Health and Human Services; and Mozelle Thompson, Principal Deputy

Assistant Secretary, Treasury Department ................................................ 4

Rogers, Michael, city administrator, District of Columbia; Jalal Greene,

deputy CFO/Budget and Planning, District of Columbia; Paul Offner,

commissioner, Commission on Health Care Finance, DC Department

of Health; Linda Cropp, chairwoman, Committee on Human Services,

city council; and Mark Goldstein, deputy director, Financial Responsibility and Management Assistance Authority ............................................ 25

Huestis, Thomas, deputy CFO/Finance and Treasurer, District of Columbia; Frank Smith, chairman, Finance and Revenue Committee, District

of Columbia City Council; and Dexter Lockamy, chief financial officer,

Financial Responsibility and Management Assistance Authority ............ 73

Letters, statements, etc., submitted for the record by:

Chang, Debbie I., Director, Legislative and Intergovernmental Affairs/

HCFA, Health and Human Services, prepared statement of .................... 7

Cropp, Linda, chairwoman, Committee on Human Services, city council:

Information concerning identification cards ........................................... 71

Prepared statement of ............................................................................... 50

Goldstein, Mark, deputy director, Financial Responsibility and Management Assistance Authority, prepared statement of ................................... 59

Greene, Jalal, deputy CFO/Budget and Planning, District of Columbia,

prepared statement of ................................................................................... 36

Huestis, Thomas, deputy CFO/Finance and Treasurer, District of Columbia, prepared statement of ........................................................................... 76

Lockamy, Dexter, chief financial officer, Financial Responsibility and

Management Assistance Authority, prepared statement of ...................... 91

Offner, Paul, commissioner, Commission on Health Care Finance, DC

Department of Health, prepared statement of ........................................... 42

Rogers, Michael, city administrator, District of Columbia, prepared statement of ........................................................................................................... 27

Smith, Frank, chairman, Finance and Revenue Committee, District of

Columbia City Council, prepared statement of .......................................... 81

Thompson, Mozelle, Principal Deputy Assistant Secretary, Treasury Department, prepared statement of ................................................................. 12

(1)

MEDICAID AND TREASURY BORROWING SECTIONS OF THE PRESIDENT’S NATIONAL

CAPITAL REVITALIZATION AND SELF-GOVERNMENT IMPROVEMENT PLAN

FRIDAY, APRIL 25, 1997

HOUSE OF REPRESENTATIVES,

SUBCOMMITTEE ON THE DISTRICT OF COLUMBIA,

COMMITTEE ON GOVERNMENT REFORM AND OVERSIGHT,

Washington, DC.

The subcommittee met, pursuant to notice, at 2 p.m., in room

2154, Rayburn House Office Building, Hon. Thomas M. Davis

(chairman of the subcommittee) presiding.

Present: Representatives Davis, Morella, Horn and Norton.

Staff present: Ron Hamm, staff director; Howard Denis, counsel;

Anne Mack, and Roland Gunn, professional staff members; Ellen

Brown, clerk; and Cedric Hendricks, minority professional staff

member.

Mr. DAVIS. Would the first panel be seated. Thank you.

Good afternoon and welcome. This is the fifth hearing for this

subcommittee as we continue our review of the administration’s

National Capital Revitalization and Self-Government Plan. Today,

we will focus on two of the most significant aspects of that plan,

those sections dealing with Medicaid and Treasury borrowing. We

are combining two subjects in this hearing in an effort to accelerate

consideration and facilitate what I hope will be the timely emergence of consensus legislation.

We are most definitely at a critical junction in this process. This

subcommittee has invested considerable time and effort to get as

many stakeholders as possible moving in the same direction. The

President has put down his marker, and it has been appropriate

for us to use his initiatives as a starting point. But while we are

all in general agreement that something significant must be done

to revitalize the Nation’s Capital, as well as the areas in which innovation is necessary, we are in danger of losing the momentum

created by this rare environment.

I share the administration’s goal of restructuring the relationship

between the District of Columbia and the Federal Government. But

I also agree with those responsible individuals and groups, some of

whom have been witnesses at previous hearings, that the administration’s proposals do not fully address concerns about tax relief,

economic development, and fall short in other areas as well. So

while I’m grateful to the administration for helping provide us with

an opportunity to enact necessary reforms, there are also many

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issues about which we differ. And I am grateful for this opportunity to work together with all the stakeholders to craft a plan

which moves up along the path to a revitalized city.

It is understandable that the administration desires that a

Memorandum of Understanding be signed among the District government, the Control Board, and the Office of Management and

Budget. Such a document would certainly help to facilitate the legislative process. But I must make it absolutely clear that neither

Congress nor this subcommittee is a rubber stamp. We cannot be

expected to blindly pass a proposal simply because it is reflected

in a signed memorandum among only these interested parties.

That is not the way the legislative process works, and that is not

the way it is supposed to work.

In the final analysis, Congress is the branch of Government that

passes the laws and supplies the resources. So we have not only

the intention, but an obligation to do what we think best. In the

meantime, we encourage the city and the administration to help us

narrow the issues in the very limited amount of time remaining.

Today, we will explore the Medicaid and Treasury borrowing sections of the President’s proposals. The proposed 70–30 Medicaid

split would result in around $917 million in increased payments to

the city over 5 years. In return, the city is expected to enact many

reforms. I look forward to hearing from our witnesses today about

the specifics and any connection that may exist between the formula changes and the implementation of reforms.

As to the critical Treasury borrowing section, the subcommittee

is interested in the terms, conditions and window of availability the

District would have. We also want to explore any impact on the

city’s overall cash position and any offset due to the suggested

elimination of the Federal payment.

So we are continuing our review of the President’s proposals in

a serious way and will continue to do so.

Permit me to emphasize that time is now of the essence. This

subcommittee and Congress are proceeding to keep momentum

going. But there is just so far that we can go without the city and

the White House. To the extent that they are absorbed with each

other, they can’t very well be engaged with us in a productive way.

So, we encourage the move ahead on the Memorandum of Understanding and the other issues so we can more fully work with you

to address the issues. We appreciate the initiative the administration is sharing.

The Chair now recognizes Ms. Norton.

Ms. NORTON. Thank you.

I want to thank Chairman Davis for calling this hearing today

on the President’s National Capital Revitalization and Self-Government Improvement Plan, and for his continuing cooperation in

moving hearings on President Clinton’s plan. A systematic and

rapid schedule is necessary so that we can meet the timeframes

necessary to have the changes in place by the next fiscal year beginning this October 1st.

Except for pensions, the two issues that are the subject matter

of today’s hearing are probably the most important in the President’s plan, Medicaid because its escalating annual cost alone is

3

enough to defeat the District’s recovery, and a Treasury borrowing

because its absence alone would preclude solvency.

The District’s over $400 million projected Medicaid costs for fiscal year 1997, along with the city’s $5 billion unfunded pension liability were the chief villains taking the city into inevitable insolvency. Medicaid ranks with pensions not only because of its annual

cost, but because it presents a special case of unfairness. Cities

don’t pay for Medicaid; States do. Even New York City, the only

city that contributes to Medicaid funding, pays for only 25 percent

of the total city cost, while the plan before the subcommittee would

leave the District with 30 percent of its Medicaid costs. Astonishingly, 39 States have a better Medicaid match than the District.

The second subject of our hearing is the sine qua non of solvency.

Without a Treasury borrowing, the District cannot liquidate its almost $500 million accumulated deficit. The debate in the District

and in our own appropriation committees here over progress in decreasing the city’s annual deficit has failed to discuss or to produce

a strategy for eliminating the large accumulated deficit. We ignore

the debt we have been rolling over for 2 years at our peril. Even

after a balanced budget is achieved on an annual basis, the large

accumulated deficit could still block credit worthiness and access to

the market.

While Congress may still make changes, President Clinton deserves great credit and praise for his proposals on Medicaid and a

Treasury borrowing for deficit elimination in particular because of

the significance of these two matters in achieving anything close to

permanent financial stability for the city. These are just two more

elements in the President’s innovative package that the city did not

entirely expect, but that give the plan the comprehensiveness that

alone can assure the city’s financial health.

It is necessary for the subcommittee to keep pace if we are to

meet House and Senate timeframes beyond our control. The chairman and his staff have our appreciation for the attention they are

giving to achieving this goal. I welcome today’s witnesses and look

forward to their testimony. Thank you, Mr. Chairman.

Mr. DAVIS. Thank you very much.

I also recognize our colleague from California, Mr. Horn.

Mr. Horn, any opening comment?

Mr. HORN. No.

Mr. DAVIS. Thank you very much.

At this point, I would call our first panel to testify: Edward

DeSeve, Controller of Office of Management and Budget; Deborah

Chang, Director of Legislative and Intergovernmental Affairs,

Health and Human Services; and the Honorable Mozelle Thompson, Principal Deputy Assistant Secretary for Government Financial Policy, Department of Treasury.

As you know, it is the policy of this committee that all witnesses

be sworn before they testify. Would you please rise and raise your

right hand.

[Witnesses sworn.]

Mr. DAVIS. I ask your comments be made part of the written

record, as I request that in the interest of time you limit your oral

statements to 5 minutes. We have read the statements, and we inVerDate 11-MAY-2000 09:11 Jul 08, 2002 Jkt 079474 PO 00000 Frm 00007 Fmt 6633 Sfmt 6633 W:\DISC\42315 pfrm12 PsN: 42315
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vite questions. I also want to thank you for addressing some of the

questions in your opening statements. That will save us time.

Miss Chang, we will start with you, or we can start with Mr.

DeSeve, if you prefer.

STATEMENTS OF EDWARD DeSEVE, CONTROLLER, OFFICE OF

MANAGEMENT AND BUDGET; DEBBIE I. CHANG, DIRECTOR,

LEGISLATIVE AND INTERGOVERNMENTAL AFFAIRS/HCFA,

HEALTH AND HUMAN SERVICES; AND MOZELLE THOMPSON,

PRINCIPAL DEPUTY ASSISTANT SECRETARY, TREASURY DEPARTMENT

Mr. DESEVE. I would like to briefly thank the committee for

again having a hearing on these important items and indicate

three things. One, this is a continuation of work we have done

jointly with the committee for more than 2 years. The people with

me today have also been working as part of the Presidential Task

Force on the District of Columbia. We know that we are on a tight

timetable with you to try to craft legislation, and we are anxious

to do so. We think the continued cooperation that we have had

with you is terribly important, and we look forward to continued

cooperation with the District. You have indicated we have a long

way to go, and I and my colleagues and my boss Frank Raines are

committed and dedicated to getting that done.

We are delighted to have Debbie Chang and Mozelle Thompson

with us today. I will be happy to answer any questions as well

after they finish.

Mr. DAVIS. Thank you very much.

Ms. CHANG. Thank you, Mr. Chairman and members of the subcommittee. I am pleased to be here to talk about the Medicaid provisions in the President’s plan for DC, as this is a vital aspect of

the President’s plan to reconfigure the obligations between the District and the Federal Government in terms of providing for a better

financial situation and better management of the DC programs.

The committee has expressly asked about the link between the

Medicaid legislative proposal and the Memorandum of Understanding, and I will speak directly to that. The way we have designed this is that the enhanced Federal match of 70–30, that has

been discussed previously would not take effect until October 1,

1997, this year, or, when the Secretary has approved the management plans that are required in the Memorandum of Understanding, whichever is later. So, we have a direct link between the

enhanced Federal match and the Memorandum of Understanding

for the Medicaid provisions.

Now let me go to the logic of the Medicaid matching rate. As you

may know, under the current law, the District has 50 percent of

its program paid for by the Federal Government. In addition, under

current law, a State can have localities contribute up to 60 percent

of the State’s share. Now DC, of course, is in a very unique position. It is not a State, but it is treated as a State under current

law, and it is not a State in the sense that it cannot get contributions from other places either surrounding the District, and it can’t

use the State’s economic base to help with the burden of the Medicaid costs.

5

So what we would do in the President’s plan is we would basically change the current formula for DC, so that the matching rate

is equal to the maximum amount a local government can be required to contribute under law, and what that means is you take

the 60 percent that is permitted under Federal law and you apply

that to the current States’ 50 percent, and that results in 30 percent that the District would pay under the President’s plan.

I want to stress that we think this is a good way to go for equity

reasons, and that under this plan the Federal Government would

pay 70 percent, and the District would pay 30 percent. But, in addition to this, we thought it was important to link this enhanced

Federal match with other provisions in the Memorandum of Understanding, which I will now go through.

The first thing we would do is we would have the District develop an ongoing internal system to identify and collect moneys

owed by third parties. Right now under Medicaid law, Medicaid is

the payer of last resort; therefore, Medicare or other private payers

pay first, Medicaid should pay last, and we would require the District to identify and collect moneys owed by these third parties.

In addition, we would want the District to address its current

backlog in cost reports and unaudited cost reports for institutional

providers, including hospitals, nursing facilities, and facilities for

the mentally retarded.

Third, we would ask that the District develop and implement a

comprehensive data system for management information requirements, and our rationale behind that is that we want a system

where we can verify eligibility across programs, we can identify

what services our beneficiaries are getting, we can monitor claims

processing, and we can basically assess the overall quality of services and the quality of the program under the Medicaid program,

under the—for the District of Columbia. So this is an essential part

of what we think is a tool for the District to better manage its program.

Last, we would work with the District to develop a comprehensive behavioral managed health care system, and we have already

begun discussions with the District on this. The purpose of this is

to coordinate the services that are currently provided with respect

to mental health, to both coordinate and provide a better set of

services to beneficiaries.

You have asked in your request about the—what we feel about

the capacity of DC, to implement this, in these areas. We feel that

these conditions are reasonable and practical, and it is in the selfinterest of the District to do these, and as you will hear later from

the head of the Medicaid program and others, they too believe that

the elements identified for the Medicaid program are reasonable

and a good step toward really helping the District in improving its

program.

Let me also mention before I close that we think there are a lot

of signs that under its current new leadership, the Medicaid program has really improved, and, in fact, in terms of services, we

have recently approved several different waivers where the District

will provide home care to the mentally ill or mentally retarded, and

that the District is providing comprehensive services to children

with special needs. They have also taken steps to improve their eliVerDate 11-MAY-2000 09:11 Jul 08, 2002 Jkt 079474 PO 00000 Frm 00009 Fmt 6633 Sfmt 6633 W:\DISC\42315 pfrm12 PsN: 42315
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gibility verification system because, as you may know, they recently found there were about 19,000 people who were actually on

the Medicaid program but were not actually eligible. So they have

taken a lot of steps to improve the program.

We think what we have presented represents a set of tools that

they can buildupon to improve the program further. With that, I

will stop, and I will be happy to take any questions.

Mr. DAVIS. Thank you very much.

[The prepared statement of Ms. Chang follows:]

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Mr. DAVIS. Mr. Thompson.

Mr. THOMPSON. Chairman Davis, Congresswoman Norton and

distinguished members of the subcommittee, I am pleased to appear before you today to discuss an important part of the President’s National Capital Revitalization and Self-Government Improvement Plan—the financing of the District of Columbia’s accumulated deficit.

As you know, the President’s plan is a broad-based proposal to

change the existing relationship between the Federal Government

and the District of Columbia. It recognizes the District’s unique

needs and how the Federal Government can help to address them.

A critical element for restoring the fiscal health of the District is

providing some method of addressing the District’s years of accumulated deficits. My testimony provides some background about

borrowing issues and how the Treasury financing will provide an

important tool to enable the District to better manage its debt and

cash-flow needs.

In the past, Congress authorized the Treasury to provide the District with long-term financing for certain capital projects on a

project-by-project basis. It also authorized the Treasury to make

short-term advances for seasonal cash-flow purposes. Right now of

those old loans, $50 million in long-term capital loans remains outstanding.

In 1981, the District obtained the authority to go to private fi- nancial markets to borrow. It borrowed about $6 billion, and about

$3 billion remains outstanding. By the early 1990’s, however, the

District began to experience financial difficulties and accumulated

operating deficits, and this deficit is now approximately $500 million.

Two years ago, when Congress enacted the District of Columbia

Financial Responsibility and Management Assistance Act, Treasury

was authorized to provide the District with two different kinds of

loans. It was able to provide short-term loans to help the District

finance its growing operating deficit on a temporary basis until a

long-range solution was developed. Since 1995, Treasury has provided the District with $689 million in ‘‘transitional’’ short-term

loans. Most of these loans were repaid from the Federal payment,

but $223 million remains outstanding. Treasury’s authority to provide this kind of loan expires on September 30, 1997.

The act also authorized the Treasury to make seasonal shortterm cash-flow loans to the District. The terms of the loans are up

to 11 months and those loans can cross fiscal years. That cash-flow

lending window does not expire in September with the ‘‘transitional’’ loan authority. The District has yet to use the seasonal

cash-flow window, and all of its borrowing instead has been done

under the ‘‘transitional’’ facility.

The President’s plan presents a blueprint for satisfying the District’s long-standing, yet unaddressed, need for deficit financing. It

would authorize the Secretary of the Treasury to make new loans

with terms of up to 15 years to assist in financing the accumulating operating deficit. The interest rate on such loans would be

based on Treasury rates and be subject to the Credit Reform Act

of 1990, and must be scored as part of the budget in the year in

which the loans are authorized. At the same time, the Secretary’s

11

authority under the 1995 act to make short-term cash-flow loans

would continue to be available.

Providing the District with deficit financing would provide substantial benefits for the District and its residents.

First, it would allow the District to better manage its financing

by breaking a pattern of annual rollovers of millions of dollars of

deficit.

Second, it would allow the District to reduce its debt service costs

by being able to repay its deficit over a longer time, utilizing

longer-term interest rates.

Third, it would enable the District to more quickly rebuild access

to credit markets to the extent that this vehicle provides the District with a stable and responsible means for eliminating the deficit.

The administration believes that any legislation that provides a

deficit financing mechanism should have sufficient flexibility for

the Treasury to work with the District and the DC Financial Responsibility and Management Assistance Authority to structure an

appropriate loan. Our plan contemplates such flexibility. However,

the Treasury also believes any deficit financing will only be successful if it also encourages appropriate accountability and management of District finances. Accordingly, the plan contemplates

any deficit financing will contain the following elements.

First, the authority to make deficit loans will be available for

only a limited time, and for a limited amount. By limiting the

amount and timing of such borrowing, we will avoid creating a financing structure that could encourage the accumulation of new

deficits.

Second, the District will continue to be required to demonstrate

that it is unable to obtain credit from the private market on reasonable terms. The Treasury continues to believe the District benefits from using and maintaining its own access to credit markets.

Consistent with this principle, any deficit loan mechanism would

also allow the Treasury to require the District to refinance deficit

loans in the private market if the Treasury determines the District

is able to do so without adversely affecting its financial stability.

Third, any intermediate-term loans would be no longer than 15

years. We are aware the District believes it may benefit from some

short-term borrowing on an ‘‘inter-year’’ basis, and our plan is flexible enough to permit such borrowing. However, we believe such

loans should be made under conditions that would not lead to ‘‘rollover’’ financing of new deficits.

Fourth, we would continue to require the same kind of certificates and supporting materials that we have required in the past.

We believe this is precisely the kind of initiative and deficit financing vehicle that is worthy of the Nation’s Capital. Mr. Chairman and Congresswoman Norton, this concludes my testimony.

Mr. DAVIS. Thank you very much.

[The prepared statement of Mr. Thompson follows:]

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Mr. DAVIS. Let me just try to—explain to me in layman’s terms

the scoring provisions of the Treasury borrowing.

Mr. DESEVE. Under the Credit Reform Act, any borrowing has to

be scored. You don’t know how it will score or what the amount is

until the terms and conditions of the borrowing are presented.

So let’s use an FHA loan as an example. We have a history of

FHA loans—any FHA loan, and they are bundled together each

year. You look at the potential loss rate on that loan, and in the

first year, the year in which it is authorized, you set aside enough

money to pay for that loan. We have been working with the credit

rating agencies and the District to try to get our scores in OMB

comfortable with the nature of that set-aside, that requirement.

Mr. Horn is very familiar with this process, he has been working

with us in other areas of debt collection and credit reform with

that. CBO will provide scoring as well. When we did the Financial

Responsibility and Management Assistance Authority Act, we

looked at the Federal payment as a source of security. With that

as a source of security, there was no scoring implication that was

scored, but it was scored at zero by OMB because of the existence

of the Federal payment.

Mr. DAVIS. Does this proposal replace the Treasury borrowings?

Mr. DESEVE. It extends them because they expire, and it also

adds the 15-year intermediate term as well.

Mr. THOMPSON. It also changes it in one way. To the extent it

provides an express provision for deficit financing over a longer

term, it is different from what is contained in the act. What does

remain from the act, though, is the continued authority to borrow

on a short-term basis for seasonal cash-flow purposes.

Mr. DAVIS. Miss Chang, let me ask a question. How many other

cities operate their Medicaid programs?

Ms. CHANG. Under current Medicaid law, the counties can operate their Medicaid programs, and it is really based on the States;

the States decide.

Mr. DAVIS. Are there a lot of them?

Ms. CHANG. Yes, there are. There are at least 10 States where

they have the counties operate and contribute financing for the

Medicaid program.

Mr. DAVIS. How about cities; I know L.A. does it, and, I guess,

New York.

Ms. CHANG. Again, it depends on the State, and in those States

that I mentioned, they do in those States provide for the county to

provide both money as well as administering the program.

Mr. DAVIS. Is it a 70–30 match? Is that a reasonable match, or

is that a low end or a high end for a city and county operating;

from the city’s perspective, take the State out of it?

Ms. CHANG. Right now States can contribute ranging from 20 to

50 percent in terms of the program, and as I mentioned to you earlier, up to 60 percent of the State’s share can be used by the counties. So it can take 60 percent. It’s a range of about 12 percent to

30 percent, so in that sense, DC is on the high end of what a district would contribute.

Mr. DAVIS. Thinking of the city as a city, then, the share is on

the high end. Thinking of the city as a State, makes it very good,

so it depends on the perspective.

17

Ms. CHANG. That is true.

Mr. DAVIS. OK. How well do you think the city is doing managing a Medicaid program today?

Ms. CHANG. As I said earlier, I think the city has made a lot of

improvements in managing the program under its new leadership,

but clearly there are areas of improvement we have outlined in the

Memorandum of Understanding. One of the key things is that the

city needs to build an infrastructure of both information and accountability, financial accountability, and that is why the data system I mentioned, dealing with the cost reports, dealing with making sure that we—that the city collects all the third-party liability,

all those things are very important for the city to move forward in

improving its program.

Mr. DAVIS. Well, let me ask, assuming, say, Maryland or Virginia

wanted to contract collections, is there anything to prohibit the city

from contracting out collections to Maryland or Virginia if they

wanted to do that?

Ms. CHANG. That is a complex issue, and there are legal issues

as well as capacity issues. I don’t really know the answer to that

question.

Mr. DAVIS. And do you have any thought on that?

Mr. DESEVE. I don’t. We would like to get back to you with a

written response.

Mr. DAVIS. Or privatized. But say Maryland is next door and

does a pretty good job and will, for a fee, do that as opposed to taking it.

Mr. DESEVE. Pennsylvania take over Delaware, something like

that. Let us take a look and get that for you.

Mr. DAVIS. Is that feasible; is it easier than trying to reinvent

the wheel? And I don’t have any particular thoughts on it, but it

is something that has been suggested up here, so I wanted to get

your thoughts on that.

Well, let me ask this: Will the Treasury loans be at reduced rates

or in terms of below the private market?

Mr. THOMPSON. The Treasury loans will be based on what the

Treasury rates are, plus if that is where we have structured them

now because of our cost of borrowing, we have to go out and borrow. Also, subject to whatever the credit story has to be, we are not

looking to provide a subsidized rate here because that would have

a substantial credit scoring impact.

Mr. DAVIS. I guess my last question I would like to ask all panelists—we will send you some other questions. We have two other

panels here. The private bond markets, especially holders or insurers of outstanding District general obligation debt, have been concerned about the Treasury using Federal payment as collateral and

having first called that funding source. How does this proposal and

the elimination of the Federal payment affect future bond rates?

Any thought on that?

Mr. THOMPSON. Sure. First of all, we at Treasury believe that we

want to be cautious with someone else’s bonds and obligations.

Mr. DESEVE. We have enough of our own to worry about.

Mr. THOMPSON. The purpose of——

Mr. DAVIS. You also understand you have us down the road.

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Mr. THOMPSON. Sure. The important part about providing deficit

financing on a longer-term basis is that will provide the District

with stability and certainty to the extent that it provides a plan to

provide stability, to the extent it provides certainty, that there is

a mechanism to reduce outstanding obligations, we think both of

those features are things the market looks for as a balance.

Mr. DAVIS. Plus any others; particularly, first call of cash and the

predictability and the certainty of being able to be sure.

Mr. THOMPSON. Sure, but I don’t think anybody is looking at the

Treasury or anywhere else to do anything that threatens the District’s ability to meet its obligations.

Mr. DAVIS. In fact, the whole idea is so the city can meet obligations and take obligations within a framework it can afford.

OK. I may have additional questions, but that covers it. Thank

you very much. Ms. Norton.

Ms. NORTON. Thank you, Mr. Chairman.

Miss Chang, I appreciate that the 70–30 formula is considerably

better than what the city has now. I know you appreciate that. The

Medicaid match you happen to have would bring down some

States, States that are really struggling with Medicaid. Medicaid

costs have remained quite uncontrollable, despite what I will not

call our best efforts, but despite efforts here in the Congress.

Therefore, this is a cost that I look to with some skepticism, particularly since the Congress hasn’t said what in the world it is

going to do with it. Since most of the money goes for nursing

homes, it is in very many ways a middle class entitlement, since

they were the people who were going in and becoming elderly.

The fact is the Federal Government has shares with entire

States that range all the way up to 80 percent. While I understand

the way in which you get to your figures, and it is a rational way,

it is not a figure plucked out of the air, I wonder if it’s possible to

justify the Federal Government picking up an 80 percent share for

a State like Louisiana and only a 70 percent share or a lesser share

for a city which is rapidly losing its middle-income tax base.

Since the District is treated as a State, whenever it is to the advantage of the Federal Government, why was the District not treated as a State and looked at in comparison with other States in this

regard so that we might have had a truer nexus to our own underlying economy, which you still have to cough up a lot of money because it is Medicaid and because of the escalated cost of Medicaid.

Ms. CHANG. You mentioned several things here. Let me try to address all of them.

With respect to the formula under the current program, in fact,

as I think I already indicated, it ranges from 50 percent to 80 percent, and that is the very nature of the program. So there are programs that are getting 80 percent, higher than the 70 percent we

propose for the District, and it is really due to the way the formula

is crafted.

The way the formula is crafted is States with high per capita income basically pay more for their Medicaid program, and that is

why the District pays the minimum amount, which is 50 percent,

and that is just a function of the formula.

Now, with respect to your other point, however, I just want to

underscore that while it is true that the Medicaid program does

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provide some long-term care costs, it is an essential safety net for

low-income people, and, in fact, 50 percent of the recipients under

Medicaid are low-income children who need health care services,

and even the people who spend—who need nursing home

services——

Ms. NORTON. Excuse me, I am talking about the money. I am interested in the money. Two-thirds of the money goes to people in

nursing homes. The District of Columbia cannot control that. The

fact is when people use the figures about poor children, they hide

the real facts, and that is that people spend out their money, and

they can’t help it because it costs $40 to $50,000 a year, and that

is who gets the money. It is true that the children in numbers are

the larger representative, but DC, when it comes to paying out the

money, DC is going to be paying it to nursing homes, and there is

not anything they can do because it remains an entitlement, and

that is what I was speaking to, and I wish you would respond to.

Ms. CHANG. You are asking me to respond why we came up with

the 70–30 match?

Mr. DESEVE. Let me try that.

It is really a political question. We looked at the statutory formula; Congress enacted the formula. We did not invent the formula

in the administration. In looking at the formula, we saw the rationale for city shares and State shares, and we chose the most difficult

rationale for the District. It was a policy choice not done by technicians, but done broadly in the context of a plan. So we said, what

is the most a city could pay? You may argue the proper construction is what is the least the State can pay, and I think that is a

valid argument as well.

Ms. NORTON. Please understand that what you have done leaves

the city very substantially—we are just killing the city. I am up

here where I hear the States come forward on their knees, who are

much richer than the District, and I am posing that question for

that reason.

Let me ask another question. One State function that is very

large that was not transferred, that you did not consider, was welfare. Now, if you insist upon treating the city as a city, then, of

course, I am going to insist that you be consistent. If you insist

upon treating the city as a city, look at the position the city is left

in now, and here there is very clear and present danger, because

if the city doesn’t get 50 percent of its welfare recipients into work

activity by 2002, and 25 percent by the end of this year, it begins

to lose real money. This is the first time this has ever happened

to the city, and it could lose up to 21 percent of its grant.

That could happen, of course, to any State. The difference is that

in trying to put together, let’s say, the 25 percent for this year,

Maryland will not get anything like that number out of Baltimore

because it has the whole State of Maryland with its State demographic base to draw from. And in the same way, Virginia will

probably not get a lot of them from Richmond. In fact, there are

jobs in northern Virginia that will make it easier to get, perhaps,

a disproportionate share from northern Virginia, but the District

has no place to get them from except its own inner city.

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So if you are insisting upon the city formula, I want to ask you

why you are not willing to take over some portion of welfare in the

way you have taken over some portion of Medicaid?

Mr. HORN [presiding]. The question will be answered, and then

we will go to the next panel.

Mr. DESEVE. Thank you, Mr. Horn. We are trying to work very

hard in a new environment for laws, as you put it, in welfare reform. And we wanted to allow that new law to begin working. We

are very sensitive to the District’s plight here, and are working

very closely with the District as they try to fashion their response

to the new law. And we will look very, very carefully at it.

Ms. NORTON. Excuse me, that was a two-part question, sir.

Would you consider supporting my bill, which would erase the discrimination the District now faces in having to essentially get its

25 percent and then its 50 percent from the inner-city population,

erase it by allowing the District, with respect to the percentage, to

be compared to cities so that if, for example, Baltimore and Richmond are contributing X percent to the State quota, the District

could contribute approximately the same percent to the quota,

rather than being treated as a State where we don’t have a State

demographic base?

Mr. DESEVE. May we take a look at that and get back to you?

We didn’t come prepared today to do welfare, I am sorry.

We would be delighted to take a look at that and get back to you

with our positions on it.

Ms. NORTON. I appreciate that very much. Thank you, sir.

Mr. HORN. You are quite welcome.

The gentleman from California is recognized for 7 minutes on the

equality of time.

Mr. DESEVE. The normal rule in the Horn subcommittee is only

5 minutes.

Mr. HORN. No, it isn’t. Whenever I go over, I give another Member the extra time, so I am giving myself the 7 minutes this time.

Ms. Norton is pursuing a very interesting idea, and that was

going to be my first question: Whose idea was this? You are saying

it was the administration’s idea. What type of consultation occurred with the District of Columbia government, and were there

other areas you feel would be indeed a better increased Federal

contribution?

Mr. DESEVE. Mr. Horn, the proposal of the President, as you

know, encompasses criminal justice, infrastructure, economic development, pensions, Medicaid, borrowing and tax collection. We listened very carefully and looked very thoughtfully over the last 2

years—before the plan was put in place—at all of the testimony in

this committee and other committees, read a whole series of reports, talked to our counterparts in the District of Columbia. And

then the President and the Director of OMB made a decision that

among the collection of proposals that we had seen put forward by

a variety of the people, that this particular collection was the one

that provided significant and substantial relief to the District; the

collection provided significant and substantial relief to the District.

Mr. HORN. Well, Medicaid, how are you looking at it, is it simply

dealing with consumable services, or is there a capital outlay program in here somewhere?

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Mr. DESEVE. We know of no capital outlay program. All we are

doing is mathematically changing the cash formula as it exists now

to provide fiscal relief for the District at the same time we are asking the District to undertake a series of management reforms. That

was the narrow intent of this particular part of the proposal.

Mr. HORN. Ordinarily when you are using bond money, you

would have some sort of amortization of infrastructure involved,

and this one you really don’t have amortization of infrastructure,

you have consumable services. Do you think it is improper to use

bond money on consumable services?

Mr. DESEVE. This refers, of course, to the borrowing section of

the proposal, and in the borrowing section of the proposal, we had

to recognize that budget crises, as we have known them in municipalities, have two characteristics: One, you have a budget which

you can’t balance, and that is OK; it is not good, but it’s OK for

a city, as long as they have access to the credit, as long as they

have liquidity. On the other hand, it’s OK to have a balanced budget and no liquidity because normally, again, you can access the

credit market in that case.

In the District’s case, we have an unbalanced budget and lack of

liquidity. The unbalanced budget occurred over several years; it

didn’t occur in any 1 year. The accumulated fund balance deficit as it exists now will be this year estimated in excess of $500 million.

The question then is if we were an individual, would we do a debt

consolidation loan, and would we finance that over a period of

years to try to use the tax base as it exists now and savings that

the District must achieve? In order to be able to afford that debt

over time, would we do that kind of debt consolidation loan?

We believe it is the only way to restore liquidity to the District.

As Mr. Thompson testified, we have—they will be holding their own fiscal feet to the fire in achieving a kind of capacity, over $50

million a year, I would guess, to pay off that accumulated deficit.

Do you want to add to that?

Mr. THOMPSON. One thing we also looked at is if you look at

every city that has gotten into some kind of fiscal trouble and had

some accumulated deficit, there was some way provided to buy it

off over time. In the case of New York, there was the Municipal Assistance Corp.; same thing was true in Philadelphia. So, we are

providing a vehicle that in some cases a State would provide as a

financing tool.

Mr. HORN. Basically, though, it isn’t just Medicaid. We are really

talking money expendable.

Mr. DESEVE. Right.

Mr. HORN. It doesn’t matter where the operational deficit comes

from, this is the way to pay for it, and if they fouled that up, I

don’t know what else they would do is what it boils down to.

Mr. DESEVE. That’s correct. The fact is, this hearing combined

Medicaid and borrowing; those were two elements of the President’s plan. You are correct.

Mr. HORN. I personally happen to agree with Ms. Norton, and

many Governors would take this position that maybe the Federal

Government ought to take unto itself the funding of Medicaid because it has been a tremendous burden on the States in terms of

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ment of those services is so low. Very few doctors will take MediCal

in the State of California, and there is no question that the nursing

home example is a good one. That is basically what pays the nursing homes in this country, and it is limited to poor people because

you become rapidly poor if you have to go to a nursing home.

And I guess I am curious here, though, on the example—let’s

take Wyoming, Vermont and New Hampshire, among others, which

is really about the population of the District of Columbia, certainly

Wyoming is, and the degree to which there is a State/Federal proportion there. If you would put in the record at this point, and I

would appreciate it—unless you have it, Ms. Chang?

Ms. CHANG. You said Wyoming?

Mr. HORN. Wyoming, Vermont and New Hampshire.

Ms. CHANG. Wyoming’s Federal matching rate is 59.88; Vermont

is 61.05. And, I am sorry, sir, what was the third one?

Mr. HORN. New Hampshire.

Ms. CHANG. New Hampshire is 50 percent in terms of the Medicaid matching rate.

Mr. HORN. Now let’s take the Southern State that has the least

State payment and the most Federal payment. Which one would

that be?

Ms. CHANG. Southern State with the—oh, that would be Mississippi.

Mr. HORN. It is usually Mississippi. Nothing has changed in 30

years then.

And then what is that number?

Ms. CHANG. Actually, before I gave you what the Federal Government paid. The Federal Government pays 77.22, so the State pays

about 22.8 percent.

Mr. HORN. Is that the highest Federal payment in the country,

among States?

Ms. CHANG. I believe it is. Yes, it is, sir.

Mr. DAVIS [presiding]. May I ask you to yield for 1 second? What

is Virginia’s Federal matching rate?

Ms. CHANG. I am ready for that one; 51.45.

Mr. HORN. See, they weren’t as poor as you thought they were.

You never should have given it up during the Civil War; the War

between the States, as you say.

Let me ask you, where is the administration of this particular financial aspect going to be controlled, or is the Control Board going

to watch that throughout the life of the loans?

Mr. THOMPSON. First of all, one of the things we would ask for

in this structure is that the money go to the Financial Control

Board, as the loan proceeds do right now. There would continue to

be required certification that any loans that we would make would

be consistent with an approved budget and financial plan. So, there

would be a series of checks and balances that would be required

before the Secretary of the Treasury could make a loan.

Mr. HORN. In other words, the bondholders and the bond providers would be assured of some scrutiny beyond that of the District of Columbia.

Mr. THOMPSON. Well, I can only say with regard to any loan we

would give, it would be subject to close scrutiny because we would

be in charge of looking out for the taxpayers’ interest.

23

Mr. HORN. What is the current life under law of the Control

Board?

Mr. THOMPSON. I think it depends. It is defined in terms of a

control period.

Mr. DESEVE. There are two tests. One is whether the Authority

itself has any debt outstanding, and the second is the number of

years after the city has balanced its budget, and I believe it is 4

years—I could stand corrected, but I believe it was 4 years after

the city achieves a balanced budget, if they then have a budget

that is unbalanced, it springs back into existence.

Mr. HORN. But, in other words, they would not go out of existence until these bonds were repaid.

Mr. DESEVE. If this were the debt of the Authority. The proposal

is to make a debt of the District of Columbia, not of the Authority

at this point, so this would not affect the life of this entity.

Mr. HORN. What is the Treasury’s concerns that those bonds are

not repaid?

Mr. THOMPSON. We always have a concern when any are not repaid, but one of the things that we will seek is assurances. We

have a test called the reasonable assurance of repayment tests. We

would be looking to see that the District would be able to budget

and plan for sufficient debt service to cover any loans that we

would make, the way we would have for any other obligation that

they would incur. To the extent there is a control period during

which the Authority will be in place, we would be looking to it to

provide certifications, and as Mr. DeSeve pointed out, the way the

law works is that after the point the Authority maybe goes out of

business, should the District become out of balance again, the Authority comes back. So, we will be working closely with the District.

Mr. HORN. The last question is, do you see these as solely Federal bonds, as municipal bonds as that term is understood, when

municipalities go on the market and secure funding?

Mr. THOMPSON. We don’t look at them as bonds. We look at them

as direct obligations between the District and the Treasury. So

there would be a notice, and there will be direct debt from the District to us, not bonds. We don’t calculate it that way.

Mr. HORN. How would you define the note versus bond and how

it is typically retired. I mean, you have a payment schedule there?

Mr. THOMPSON. Right.

Mr. HORN. That is what a bond also has.

Mr. THOMPSON. Right. Well, there is no document that represents a bond that can be transferred, for example, in the secondary market or sold. That doesn’t exist. So it would be like what

you would have with any other loan. There would be a security

agreement indicating that we have, a loan agreement with the District, as we have now for the existing debt.

Mr. DESEVE. For example, if a Member of Congress had a note

with another Member of Congress that was not transferable, that

would be a note, where if he had a loan like a mortgage, it would

be sold in a secondary mortgage, that would have a different characteristic.

Mr. HORN. If it was between Members, you might want to turn

it over to the mob for collection.

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I am just wondering if the Treasury will be in that mode in the

District of Columbia. I mean, do you really expect to get the money

back?

Mr. THOMPSON. As I pointed out earlier, one characteristic of the

District is that it has never defaulted on its debt.

Mr. HORN. It just kept getting debt. Is that the way they solved

it? It sounds like the Federal Government to me.

Mr. THOMPSON. And also with respect to the long-term loans it

has had, it has paid us on time or early on every one of those. The

District owes us still about $50 million, but it is current.

Mr. DESEVE. We would never make a loan if we didn’t expect it

to be repaid.

Mr. HORN. I hope you are right.

Mr. DAVIS. Thank you.

Ms. Norton had one other question.

Ms. NORTON. I had one other question, and I have to warn you

before the chairman does, he has to leave here at 4 p.m., so we are

going to have to move more quickly, and I will certainly cooperate

in that.

I do have a question that has to be put on the record. The Treasury drove a very hard bargain when it came to Treasury borrowings. It insisted that the Federal payment be collateral for its

borrowings. Now it wants to take away the Federal payment and

assume that the District will somehow, without collateral, be able

to borrow from the Treasury, and presumably from the market.

Will you tell us why you insisted upon collateral if you think the

District no longer needs collateral?

Mr. THOMPSON. Well, I think the President’s plan anticipates

that with all the elements in place, that over time the District’s

surplus will grow, and I believe it also deals with the issues so the

District will be better able to meet those obligations. We are currently working with the District and the Financial Control Board

to determine an appropriate security mechanism. We are looking at

what the District provides now in terms of security for other creditors, so that——

Ms. NORTON. Are you going to tell the committee at this time

what you regard as appropriate security?

Mr. THOMPSON. One of the things we are going to look very closely at, and we will be talking to the District about, is the mechanism it sets up for its own bondholders to see if that is adequate

security for us.

Ms. NORTON. This is something—this creates some anxiety obviously in the District. I hope it means that OMB, put in the same

position again, would not require the Federal payment for collateral. I have to assume you have greater confidence in the District

as well, and I appreciate what you have done in this bill. Thank

you, Mr. Chairman.

Mr. DAVIS. Thank you. Thank you all very much.

Second panel. The panel consists of Mike Rogers, the city administrator, District of Columbia; Mr. Jalal Greene, the deputy chief financial officer of Budget and Planning; Mr. Paul Offner, the commissioner of the Commission on Health Care Finance, DC Department of Health; the Honorable Charlene Drew-Jarvis, chairwoman

pro tempore; the Honorable Linda Cropp, chairwoman of the ComVerDate 11-MAY-2000 09:11 Jul 08, 2002 Jkt 079474 PO 00000 Frm 00028 Fmt 6633 Sfmt 6602 W:\DISC\42315 pfrm12 PsN: 42315
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mittee on Human Services; and Mark Goldstein, deputy executive

director for the Financial Responsibility and Management Assistance Authority.

Miss Jarvis is not being asked to testify, but if she has any general comments, we can hear them at the outset.

As you know, the policy of this committee is to be sworn before

they testify. Will you please rise and raise your right hand.

[Witnesses sworn.]

Mr. DAVIS. The subcommittee will carefully review any statements you care to submit, and they will all be a part of the record.

I also will ask you to limit your testimony to 5 minutes or less. We

have your full testimony, which we have read and have questions

based on that subject, so the quicker you read it, the faster we can

get to questions.

Let me start with Mr. Rogers. We would like to welcome you.

STATEMENTS OF MICHAEL ROGERS, CITY ADMINISTRATOR,

DISTRICT OF COLUMBIA; JALAL GREENE, DEPUTY CFO/

BUDGET AND PLANNING, DISTRICT OF COLUMBIA; PAUL

OFFNER, COMMISSIONER, COMMISSION ON HEALTH CARE

FINANCE, DC DEPARTMENT OF HEALTH; LINDA CROPP,

CHAIRWOMAN, COMMITTEE ON HUMAN SERVICES, CITY

COUNCIL; AND MARK GOLDSTEIN, DEPUTY DIRECTOR, FINANCIAL RESPONSIBILITY AND MANAGEMENT ASSISTANCE

AUTHORITY

Mr. ROGERS. Thank you. Good afternoon, Chairman Davis, Ms.

Norton, Mr. Horn, and members of the subcommittee on the District of Columbia. I am pleased to appear before you today to discuss the Medicaid provisions contained in President Clinton’s

White House plan for the District.

Let me first commend the President for recognizing the District’s

unique structure as the seat of the Federal Government and

unique fiscal constraints and restrictions associated with this position. The President’s plan has indeed energized our city with historic and unprecedented discussions of renewal, regrowth and restructuring of our Nation’s Capital.

The President’s plan recognizes the structural shortcomings of

our city, particularly the untenable burden associated with misplaced State functions. It also recognizes the Federal Government’s

long-standing role in perpetuating the particular imbalances that

have so defined the face of the District.

Mayor Barry welcomes the President’s plan. It is by no means

perfect, nor is it a panacea, but it is a welcome work in progress

which deserves full attention and commitment.

Let me turn, specifically, to the Medicaid provisions. You have

invited Dr. Paul Offner, commissioner of the Health Care Finance

in the District, to join me today in giving testimony on the President’s plan regarding Medicaid reform. I will speak broadly on this

issue, while Mr. Offner follows with more specific information regarding program needs and challenges within the context of the

President’s proposal.

The President’s plan proposes to increase the Federal Government’s share of Medicaid payments from 50 percent to 70 percent,

based on current Medicaid projections provided by the Health Care

26

Finance Commission. Savings from the proposed new matching

rate will be $162 million in fiscal year 1998, $166 in fiscal year

1999, to $172 million in the year 2000.

As you know, as you have just discussed, with the exception of

New York City, no other city pays Medicaid. Rather, States perform that role. One of the previous panelists, when you said ‘‘city,’’ they said ‘‘county,’’ and I am saying ‘‘city’’ here.

Even in the case of New York City, the Federal Government

picks up 75 percent of the program costs.

The Federal Government picks up 75 percent of program costs.

The DC Financial Authority issued a report earlier this month

which states that nearly every health and human service program

provided by the District government has a component normally

provided by a State. Also, with respect to Medicaid, the report indicated that the District has 2 taxpayers for every Medicaid recipient, versus 4.4 taxpayers in Maryland and 4.3 in Virginia per Medicaid recipient. The bottom line is that the District’s per capita

Medicaid expenses are 2.6 times the national average.

Given these figures, I am compelled to ask how much clearer can

the inequity be? How can the District ever gain any semblance of

control over rising Medicaid costs and public assistance needs with

such a skewed participation rate in Medicaid costs?

As I mentioned earlier, the President’s plan proposes to increase

the Federal share from 50 percent to 70 percent. The Financial Authority in its April report on the White House plan recommends

that the District be required to contribute no more than 20 percent

of Medicaid program expenditures, and that a peculiar offset be

provided for other assistance.

The District government supports the Financial Authority’s Federal participation rate, which exceeds the proposed 70 percent.

Whether that rate is set at 75 to 80 percent is an issue that deserves serious consideration by the White House and OMB and the

Congress.

I am confident that Mr. Offner will provide more specific program comments on this issue. And I will defer to his assessment

of the President’s proposal in this regard. Mr. Offner will also provide a candid discussion on the current state of the District’s Medicaid program and discuss critical issues relating to the ability and

readiness to implement the MOU.

Let me say that progress has been made in the Medicaid program over the past year. We are pleased with the cost savings initiatives that have been implemented, but we still have a long way

to go. But in committing to this MOU process, the District must

be and is committed to implementing the changes required in the

MOU. Thank you very much.

Mr. DAVIS. Thank you very much.

[The prepared statement of Mr. Rogers follows:]

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Mr. DAVIS. Mr. Greene.

Mr. GREENE. Thank you.

Good afternoon, Mr. Chairman and Members of the Congress. I

am Jalal Greene, the chief financial officer for Budget and Planning for the District of Columbia. I am pleased to have this opportunity to discuss the President’s plan for revitalizing the District.

Today, I will discuss the Medicaid portion of the President’s plan

and offer some brief comments on the impact of the overall plan on

the District’s budget.

From the perspective of the District’s budget, reducing Medicaid

costs is a critical issue. For fiscal year 1998, the District will spend

approximately $40 million in local funds on the Medicaid program.

This expenditure represents approximately 12 percent of the District’s local funds budget. And in the recent past, Medicaid spending has grown at a rate that is not sustainable. Since 1990, the

District’s local fund spending on Medicaid has more than doubled from approximately $170 million in 1990, to $384 million in 1996.

Cost containment measures instituted by the District will restrain

the growth in Medicaid to some extent; however, it is clear that

something must be done to relieve the District of some part of its

current Medicaid obligation.

The President’s plan called for increasing the 50–50 ratio to a

70–30 ratio. We currently estimate that the Medicaid provisions of

the President’s plan will lead to over $160 million in direct savings

in fiscal year 1998. This would provide much needed budget relief

to the District.

We believe that the current 50–50 match cannot be justified. It

was determined according to the standard Federal medical assistance percentage. This formula compares State per capita personal

income with national per capita income. States with a lower than

average per capita income receive a relatively higher match than

States with higher per capita incomes. According to this formula,

the District receives the lowest possible match of 50 percent.

It has been recognized by many authorities, including GAO, that

the Federal medical assistance percentage formula does not accurately reflect the ability of a State to pay for Medicaid programs.

In the District’s case, the formula does not account for its high levels of poverty and small size. Currently five States, Mississippi,

Louisiana, South Carolina, New Mexico, and Alabama, receive a 70

percent match. The District receives a much smaller Medicaid

match than those States even though they have comparable levels

of poverty.

Given the congressionally imposed limitations on the District’s

ability to raise revenue, it is unfair to expect it to deal with the

large and increasing burden of Medicaid at the same match rate

as wealthy States. The President’s plan correctly recognizes this

fact and offers a reasonable proposal for increasing the match to

70 percent.

A strong argument can be made for increasing the Medicaid

match above 70 percent. The District faces the challenge of serving

a high-poverty population in a high-cost area. The large percentage

of its population which lives in poverty and faces serious health

problems requires greater Medicaid expenditures. In 1995, the District’s per capita Medicaid expenditures of $1,429 was almost 2.5

35

times the national average. This figure includes both the high percentage of the population receiving Medicaid benefits, almost 21

percent in 1995, and the high cost of medical services in the Washington metropolitan area. Furthermore, the District’s small size

makes it difficult to achieve economies of scale for administration.

I recommend that Congress consider these factors as it decides

what is the appropriate Medicaid match for the District.

The President’s plan will provide approximately $49 million in

net benefits to the District in fiscal year 1998. This benefit will

grow to around $140 million in fiscal year 2001. The net benefits

of the President’s plan will represent a significant step toward resolving the District’s financial crisis.

However, I must emphasize the fact that the President’s plan

alone will not bring long-term financial stability to the District. To

restore financial stability over the long run, the District must continue to improve in areas of management efficiency and service delivery. The District must also take steps to reduce the tax burden

on businesses and residents to levels that are competitive with surrounding jurisdictions.

I urge the Congress to pass the President’s plan as it stands. It

provides significant benefits to the District which will grow over

time. Thank you.

Mr. HORN [presiding]. We thank you very much for your testimony.

[The prepared statement of Mr. Greene follows:]

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Mr. HORN. And the next giver is Mr. Offner, the commissioner

of Health Care Finance for the District of Columbia.

Mr. OFFNER. Members of the committee, my name is Paul

Offner. I am in charge of the District’s Medicaid program. Before

this I was in charge of health and welfare on the Senate Finance

Committee. I want to assure you that this is harder work.

The District of Columbia has a problem because historically it

has not invested the resources both in systems and in personnel

that should have been invested, and the four specifics that have

been identified in this Memorandum of Understanding are really

testament to that. They represent management failings that we are

now beginning to cope with but that historically have not gotten

the attention they should have.

Third-party recovery. There are literally millions and millions of

dollars to be made by States in making sure that Medicaid is the

payor of last resort. The District’s third-party recovery program is

underfunded, understaffed and underautomated. It has nowhere

near the level of sophistication of other States. I used to run the

Medicaid program in the State of Ohio. We have begun to make

some progress here. The last 6 months the recoveries have risen.

We have a long way to go.

The second item is audits. We have providers of health care for

whom we don’t have a settled audit for 6 or even 8 years. Trying

to run a Medicaid program under those circumstances is like trying

to navigate a ship in the dark. It’s impossible. We need desperately

to get those audits up to date. You can’t reform reimbursement systems if you don’t know what the costs are, and in too many cases

we don’t. We have made some progress in that area, but again, we

have a long way to go.

The most important, and the most expensive area is, of course,

the Medicaid Management Information System. The District has

an antiquated system that provides management with very little of

the information that is really needed to manage a program like

this. Here we are spending close to $1 billion a year, yet we don’t

know where the money is going, or who is getting paid. We have

none of the management information that a manager ought to have

for a program of this size. We have started over the last few

months to plan a total overhaul of this system, but we still have

a long ways to go, and the inclusion of this item in Memorandum

of Understanding, I think, is important.

Finally, there is the mental health initiative. Some time ago,

Mayor Barry launched a comprehensive effort to integrate the mental health system. The District spends more money on mental

health than any jurisdiction in the world. It is a remarkably expensive program, largely because our clients spend too much time in

hospitals, and our whole mental health system is not integrated in

any meaningful way. We have now hired the former Commissioner

of Mental Health from Massachusetts to come in and head up this

effort, and I think it has enormous promise both to improve services and over time to save money.

Over the last year, the District’s Medicaid program has undergone a total overhaul. We have—as was, I think, just referenced—

we have removed 25,000 individuals from the rolls, representing

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gible. We have reduced our inpatient hospital rates by 25 percent.

We have reduced our HMO rates by 17 percent. We have cut longterm care rates by $14 million. We are in the process over the next

12 months of moving all of our AFDC recipients into HMOs, and

are now implementing a waiver so we can provide comprehensive

services in the community to disabled people to keep them out of

our group homes for the mentally retarded, which also are the most

expensive in the country; over $100,000 per person per year.

So we have made enormous progress, but we still have a long

way to go, and I believe the provisions in this Memorandum of Understanding will be a major asset.

Mr. DAVIS [presiding]. Thank you very much.

[The prepared statement of Mr. Offner follows:]

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Mr. DAVIS. Ms. Cropp.

Ms. CROPP. Thank you very much.

Good afternoon, Mr. Davis, Ms. Norton, Mr. Horn. I am Linda W.

Cropp, chair of Council’s Committee on Human Services. On behalf

of council, I am pleased to appear before you today to testify on the

Medicaid section of the President’s plan.

The President’s proposal on Medicaid begins to create a more equitable relationship between the District and the Federal Government by recognizing that the District, unlike any other city in the

Nation, is not supported by a State. This lack of support by a State

has been felt in many areas including the funding and managing

of health and human services programs. State-type functions account for approximately 85 percent of the District’s Department of

Human Services budget. These State-type programs, and I believe

someone had asked that question earlier, within the department include Medicaid, public assistance, mental health, foster care, child

day care, and substance abuse treatment and prevention.

By far the District’s most costly health and human services program, as it is in all States, is the Medicaid program. The Medicaid

program accounts for approximately 48 percent of District appropriations for the Department of Human Services.

The current use of the per capita income standard is an inequitable standard when applied to the District. The District of Columbia is an urban jurisdiction with a high percentage—approximately

38 percent—of our population living at or below the poverty line.

The District, not unlike many other cities, has a population that is

older, sicker, and poor. But unlike other cities, it cannot be normed

in with the more affluent suburban areas of other States to help

offset the high cost of the city.

The President’s proposal would increase the Federal Government’s share of Medicaid costs from 50 percent to 70 percent,

thereby reducing the District’s share to 30 percent. While the council enthusiastically supports the increased Federal share of Medicaid costs, the District would still remain the only city in the Nation to contribute such a high percentage toward Medicaid costs,

and five other States would receive a higher matching rate. New

York has been cited as a city which pays 25 percent because of its

county-type status.

The effect of the increased Federal match would be a reduction

in the District’s Medicaid expenditures. The District and the Office

of Management and Budget have agreed on the extent of the Medicaid savings that ought to be achieved over the 5-year period, and,

in fact, our figures were extremely closely aligned.

I am pleased to report that the Council further agrees with OMB

on the conditions placed upon the District in return for the increased Medicaid. Under the President’s plan, the District would

develop and implement an effective system for identification and

collection of amounts owed by third parties. Mr. Offner just talked

about that, and, in fact, the council’s committee just approved additional personnel positions in that line area so that we could start

this process of increasing the third parties.

We also support a system to ensure the timely audit and settlement of cost reports. In fact, if you look at where Medicaid was 3

years ago, there has been an awful lot achieved in a short period

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of time with regard to the audits. An awful lot of work still needs

to be done.

A comprehensive behavioral managed health care system which

combines substance abuse and mental health grant programs has

already been moving forward and is already in the planning stage,

and we look forward to its implementation.

All of these conditions reflect sound management policies that,

regardless of the President’s plan, the District is already moving

forward to implement. Collections from third parties will benefit by

both the District and the Federal Government. The District has

made progress in eliminating the backlog of audits and settlements.

The implementation of these conditions will require commitment

and additional resources on the part of the District. I have requested that the Medicaid Administration prepare an analysis of

what additional resources will be necessary to carry out the President’s plan. I am pleased that under the plan, the U.S. Department

of Health and Human Services will continue to provide more intensive technical assistance to help the District move toward improving the management of the Medicaid program. They have been very

helpful in the recent past.

The District is making progress in the implementation of Medicaid cost containment measures. Reimbursement rates for hospitals, nursing homes, and the intermediate care facilities for the

mentally retarded have been reduced significantly. All Medicaid

beneficiaries who receive public assistance will be enrolled in the

managed care organizations that are compensated at a capitated

rate, and we should receive savings there. The contract to implement mandatory managed care enrollment is close to the award

stage. Quite frankly, it has been a long time coming, but I am

happy it is about to be awarded.

Other initiatives include reducing the pharmacy dispensing fee,

increasing pharmacy copayments, reducing reimbursement for

transportation, and reducing payments for day treatment and residential treatment facilities.

In addition, the District has recently obtained a home- and community-based services waiver for the developmentally disabled population. A similar waiver for the elderly population will be submitted this fiscal year, and as Ms. Norton had talked about, the

cost of nursing homes, this would help to significantly reduce the

costs in that particular area.

Many of the delays in implementing reforms in the Medicaid program are due to systemic problems with the District’s procurement

process. The council is addressing this problem with the enactment

of procurement reform legislation. In addition, the Medicaid program will be able to take advantage of the Federal procurement

system through a Memorandum of Understanding executed by the

District and Federal Governments.

The council has reviewed the District’s 26 optional Medicaid

services for possible Medicaid expenditure reductions. It is my understanding that Virginia funds 21, Maryland 22, optional services.

However, the District is not out of line when compared with other

jurisdictions.

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In working with the Medicaid Administration, it has been determined that significant savings would not be realized, as some beneficiaries would be eligible for those services whether an option or

not existed, such as ICF/MR services. The District would still be

left to bear the full cost of the service, and in essence that would

mean the District would end up paying more money if that option

were to be implemented.

In conclusion, the Medicaid proposal within the President’s plan

begins to address the financial burden placed on the District by assuming the financial responsibility of State functions. With the additional Federal funding of State functions, the District will be able

to focus its resources on quality of life issues. The District must

focus on these quality of life issues, such as education and public

safety, if it is to restore the health and viability of our Nation’s

Capital.

I thank you very much for this opportunity to testify before you.

Mr. DAVIS. Thank you very much.

[The prepared statement of Ms. Cropp follows:]

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Mr. DAVIS. Mr. Goldstein.

Mr. GOLDSTEIN. Good afternoon, Mr. Chairman, Members of the

committee. My name is Mark Goldstein. I am deputy director of the

Financial Authority. I’ll be brief. I know you have a lot of witnesses

here today. With me is Doneg McDonough, the program manager

for Health and Human Services at the Authority. He can respond

to any questions you may have that I can’t answer.

The President’s plan proposes to increase the Federal Government’s contribution for District Medicaid expenditures to 70 percent. This will have the effect of increasing the Federal Government’s contribution for the District’s Medicaid benefit expenditures

from the 50 percent rate that is in place today to 70 percent for

fiscal years 1998 and beyond. The President’s plan does not include

recommendations for changing the financing of the other State-type

health and human service programs.

The Authority applauds the administration’s recommendation on

Medicaid, but believes it is necessary to expand the proposal to include a greater share of Medicaid program expenditures and to address other health and human service programs.

The Authority has been working over the past several months to

re-examine the relationship between the District and the Federal

Government. Two weeks ago, as Mr. Rogers has mentioned, the Authority issued a report entitled ‘‘Toward a More Equitable Relationship: Structuring the District of Columbia’s State Functions.’’ The

report identified that if the District were to have a relationship

with its ‘‘State,’’ the Federal Government, that is akin to the Statelocal financial relationship found across the country, the District

would be required to contribute no more than 20 percent of the

State-type health and human service programs. At present, the

District covers 100 percent of these costs.

Today, I would like to make the specific recommendation of Authority that the Federal Government contribute 100 percent of the

funding for Medicaid, TANF, Temporary Assistance to Needy Families, formerly the AFDC program, and the related child care expenditures.

The Authority’s recommendation was generated after reviewing

the relationships States have with their local jurisdictions in regard to financing a range of health and human services. In addition

to our own research, the Authority commissioned a study by the

Urban Institute to assemble more detailed information regarding

the financing and administration of State Medicaid programs and

to consider various options. The Authority’s recommendation was

also framed by the fact that all major State-type health and human

service programs are either federally mandated or require the

maintenance of a minimum funding level.

If I may, I would like to request that the Authority’s report on

State functions and the Urban Institute report be entered into the

record.

Briefly I will review the information that led the Authority to

make these recommendations.

Rather than recommend a refashioning of the financial and administrative relationships across the myriad of State-type functions, the Authority has chosen to limit the proposed changes to

the two largest Federal-State programs.

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Three structural factors exist in the District that when combined

produce relative demands on the District that are multiples of the

demands shouldered by other jurisdictions. The first structural factor is high per beneficiary costs under Medicaid. The District’s per

beneficiary Medicaid expenditures are nearly 70 percent higher

than the country as a whole. This finding is not surprising as

urban settings are typically associated with higher costs of living

as well as more intense health problems, such as the number of

AIDS cases and the level of violence.

In the Urban Institute report, the District’s Medicaid program

costs were compared against those of high-cost States such as New

York and Massachusetts. The District’s average costs were actually

lower than the average costs in these States. The message from

this is the District has higher than average Medicaid per beneficiary costs, although it is not out of line with what might be considered reasonable for a high-cost jurisdiction.

The second structural factor is a high concentration of poverty.

This reality lends for a greater demand for public assistance and

as such a relatively higher percentage of population enrolled in

Medicaid and other public assistance programs.

The third structural factor is the narrow pool of individuals

available to support these relatively high demands for services. The

District does not have suburban populations over which to spread

these costs, of course.

If you take the relatively high cost of services, compound that

with the greater percentages of the population requiring these services, and add a third factor, the narrow pool of individuals that

comprise the District’s tax base, it produces an insupportable situation.

The District has, for instance, only two taxpayers per Medicaid

recipient, whereas Maryland and Virginia have 4.4 and 4.3 respectively. From this it is evident that the burden of Medicaid is tremendously greater in the District as each District taxpayer is required to carry not only a proportionately greater number of public

assistance recipients, but the cost per recipient is higher.

These findings provide ample justification for a major restructuring of the financing of the District’s Medicaid program. An additional finding of the Urban Institute is that if the District were

treated similar to the counties in New York, the State that requires

the greatest contribution of its local jurisdiction, the District’s effective contribution for Medicaid would be 16.5 percent of expenditures versus the 30 percent required under the President’s plan.

Another relevant comparison is that if the District had a relationship with its State, the Federal Government, akin to the relationship between State and local government in three-quarters of

the States today, the District would be required to make no direct

contribution toward Medicaid program expenditures.

It is this comparative analysis of how States interact with their

local jurisdictions, as well as the disproportionate burden found in

the District which is the result of its urban characteristics, that requires the Authority to recommend that the Federal Government

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sulting from such a Medicaid policy change are estimated to be approximately $2.4 billion over fiscal years 1998 to 2002.

The findings in the Authority’s April 15th report show that on

average States cover 92 percent of the costs of the major health

and human service programs, including health care, mental health

services, welfare, et cetera, which led the Authority to recommend

that, as a step to begin to equalize the District’s overall burden, the

TANF program and related child care expenditure should be assumed by the Federal Government. The savings to the District resulting from such a change are estimated to be $550 million over

fiscal years 1998 to 2002.

It should be recognized that the Authority’s recommendations are

not overly generous for the District. Even with the implementation

of the Authority’s recommendations, the District would be in a relatively less favorable position than all other local jurisdictions in

the country.

If the recommendations of the Authority are implemented whereby the funding for the two largest State-Federal programs is assumed by the Federal Government, the District would continue to

carry a relatively greater share of program costs than local jurisdictions nationally at 33 percent, but the relationship would be tremendously improved over what exists today.

Mr. Chairman, that concludes my statement, and my colleague

and I would be happy to respond to questions you or the committee

have.

Mr. DAVIS. Thank you.

[The prepared statement of Mr. Goldstein follows:]

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Mr. DAVIS. I have just got a couple questions for the panel. Mr.

Goldstein, let’s start with you. The Authority is basically recommending the Feds pick up 100 percent of the costs——

Mr. GOLDSTEIN. Yes, Mr. Chairman.

Mr. DAVIS [continuing]. In its capacity as the District’s State government, but you haven’t said that the District will give up its taxing powers, specifically income and sales that States use to pay for

Medicaid and other programs. So in effect you are asking the Federal taxpayers to pay 100 percent of the State share without the

State share being apportioned amongst District taxpayers. That is

OK, but we need to understand the policy and ramifications. Is this

basically because the city’s tax base is just too low?

Mr. GOLDSTEIN. Yes, Mr. Chairman, we recognize that is an

issue that needs to be resolved as this process went forward, but

that is the Authority’s recommendation.

Mr. DAVIS. Yes. It is always dangerous to think out loud, but my

gut feeling is this, as the Federal Government takes over some

things, we should look for some tax relief in the city, because I

think that would make the city more competitive economically over

the long term. But we will be working with everybody involved

here as we fashion a solution.

Linda, let me ask a question, and, Charlene, you can chime in.

The city has basically cut the Medicaid benefits that they were giving out 2, 3 years ago, and it is more on a par with Virginia and

Maryland.

Ms. CROPP. We have initiated an awful lot of savings——

Mr. DAVIS. I don’t mean cuts, that is a radioactive word, but you

have adjusted the way that it is sorted out, and it is more in line

with Virginia and Maryland.

Ms. CROPP. Yes, and also our benefits actually were not too far

out of line. We offer 26 benefits. Maryland and Virginia offer, I

think, 21 and 22. We offer 26. We are in line. And with the other

services, we are fairly comparable with those services.

Mr. DAVIS. What we’d like, and I am not sure if we have it in

the record, we would like a chart showing what the city offers and

what the two suburban jurisdictions offer. Not that you need to

model everything after what the other jurisdictions do, and I think

you pointed out that there are other costs to not offering these programs that are paid in other areas.

Ms. CROPP. Exactly. For example, the ICFMRs, if we did not

have them in the Medicaid program. The District would be responsible for paying the entire cost of that program, and in essence it

would end up costing the District more money. That is one of the

optional benefits that we offer that perhaps some of the other

States don’t offer, but it would not be beneficial for us to eliminate

that option.

Mr. DAVIS. Thanks.

Let me ask Mr. Rogers and you, Mr. Offner, and others, have the

issues regarding the payments to the Charter Health Plan been resolved?

Mr. ROGERS. That matter is still under review by the CFO, and

I don’t believe it has been resolved.

Mr. DAVIS. OK. Those are my questions.

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We had some others. We appreciate your heading some of the

questions up in your testimony that we have had already.

Ms. NORTON. Yes, Mr. Chairman. I will—I have only a few questions in that regard as well.

Mr. Offner, first of all I want to congratulate you for the work

you are doing in Medicaid. I know how difficult it is in the best of

circumstances, and I can’t imagine how you have done what you

have done.

I want to ask Ms. Cropp, I guess Mr. Rogers, I am not sure, Ms.

Jarvis, it has to do with the state of the welfare reform or welfare

reform in the District of Columbia, and I would like to know from

you whether or not the District is, my bill notwithstanding—and I

am going to try to get my bill into this bill—is in danger of simply

losing before it gets started. That is to say it looks like you are trying to do something that is very difficult under the circumstances,

and the whole government—the Department of Human Services is

in collapse apparently. At least it has not begun to be reformed.

Training has been—all of the training, I take it, has been in the

Department of Human Services at the same time you are trying to

get up a welfare reform bill, which at least, as it is presently, as

it presently stands, would mean that you are on line to lose, what

is it, 5 percent this year. You are on line to lose money. And I just

have to ask you what is the state of that? Is anybody being

trained? Is the welfare program—is DC going to lose money from

its welfare grant this year? I want to be able to know whether or

not you are on line to lose some money, and you should have

planned for that in your budget if that is going to happen.

Ms. CROPP. The District has developed quite a few work activities that would fit within job definitions of the new Federal bill.

However, by nature of the District being a city and not having suburban areas that would offer jobs, we are in a very precarious situation in actually placing our welfare recipients in those particular

areas.

We are developing them, we are moving forward, and we hope

that we would be fairly successful. We have already placed I believe it is about 18 percent at this point within the job definition.

But my anxiety level is extremely high because I think the District

is penalized by the bill, but we are still working toward trying not

to lose any money.

Ms. NORTON. It really is penalized. That is why I have a bill in

to correct that. I am going to have a hard time getting that bill out

in any case, but particularly if I can’t show that the District is

doing the very best it could, because I have nothing to do with

whether or not the District is starting up its own program to place

people in work activities. I would like to have someone—perhaps

Mr. Rogers can tell me some progress on that.

Mr. ROGERS. Well, we will give you a more complete response

subsequent to this hearing, but let me say it certainly is our intent

to lose not one nickel, and we are positioning ourselves so that that

won’t happen. There are——

Ms. NORTON. That means that you are going to have 25 percent

in work activities by—what is the month?

Ms. CROPP. September, I think, of this year.

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Ms. NORTON. Twenty-five percent by worker activities. Otherwise—the reason I ask is otherwise you are going to begin the fiscal year the way you did last time, making cuts before you spend,

and all without a plan to do so, and just picking up the cuts wherever you can find them.

Mr. ROGERS. We have, as you know, the Welfare Reform Task

Force, the external and internal task force that made its report. We

are acquiring technical assistance to complete the last leg of the

process in preparation for a better training program. The recent

issues with training notwithstanding, we intend to move forward if

it is on a contracted basis. We don’t have to provide it in-house.

There are ways to, you know, contract out the training so that we

can meet our mission.

Ms. NORTON. I am having a very hard time, because they are not

going to give anybody any slack. I am not going to be able to get

any slack for the District because everybody else is running for

something. So I have to have some early warning, too, if there are

problems in meeting that.

Could I just quickly ask on two issues that I raised at the last

hearing? I don’t know if—Ms. Cropp was not here, but I have sent

her a letter about people who came to see me that I referred the

city to, but I was so concerned about it that I looked into the matter myself, and that is I was told in spite of our foster care problem, and it is just like everybody else’s, it is not any different from

New York and Philadelphia and anybody else, but it is heartbreaking, that there was a backlog of people wanting to adopt children in the District of Columbia and couldn’t get through our court

systems.

I called up the chief judge and said, my God, and he said that

it was the—the way the law was written, and it had been very

strictly construed, and obviously once you have a precedent, it is

hard to get over that precedent. And he suggested if the law were

changed, and that it could be changed, and I have sent you the relevant sections of the 1997 Uniform Adoption Act. Could I ask what

is the status of that?

Ms. CROPP. Ms. Norton, I have had a dialog with Chief Judge

Hamilton with regard to that. We have decided we were going to

meet. There is one component of that act of which he has great concern. We are prepared to move that act as expeditiously as possible.

Ms. NORTON. What does that mean, though, Ms. Cropp? The notion that there would be people who would come to me to say, we

represent providers who want to adopt children, we can’t do that.

Can you give me a month, are you going out for summer, what

are—can this be done before you go out on your summer vacation

so the courts could move this backlog?

Ms. CROPP. Could I get back with you? Judge Hamilton wanted

to speak——

Ms. NORTON. I will talk to Judge Hamilton. I thought the whole

problem is they needed people to adopt children, and to find out

they can’t do it in the District because of the way this law is construed, seems to me there ought to be some kind of a fast track

on which to put that before you go to summer vacation.

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Ms. CROPP. We could look a that, but I don’t think it is in isolation, I think it is in combination, and we do have a policy of available parents—— Ms. NORTON. I understand that, but to the extent that there are

people who line up in court who can’t get through, it seems the

first thing we should do is clear the legal paraphernalia out of the

way.

Ms. CROPP. As I said, Judge Hamilton and I are working to move

that as quickly as possible.

Ms. NORTON. I wish you would provide me information on whether you will be able to get a bill passed before you go out on summer

vacation.

Finally, Mr. Rogers, I wrote you concerning something that cities

would kill for, and that is to get on the so-called FTS–2000 system

of the Federal Government. We could have been on that for at least

the last 4 years. We are informed that GSA tried and has repeatedly failed to be able to get you to do that. I have to ask this question, because they have told us you could be paying about $13 per,

what is it, per line, and that they estimate you are now paying

something close to $30 at a time when you are having to cut the

hell out of everything. I have to ask you, what you provided me indicated you are not using FTS. If you are not using FTS, I would

like to know why.

Mr. ROGERS. Well, one, we will, and that directive has been

given. Second, with respect to the ISDN platform, the system that

we have, that helps us in terms of our instruments. It helps us in

terms of our local call costs—— Ms. NORTON. What is that; what is the ISDN?

Mr. ROGERS. The ISDN is a telephone platform that helps us tie

in the local telephone company, Bell Atlantic, in providing our service. It helps us reduce our costs and manage our system better. The

FTS–2000 relates to long distance costs. There is information we

are collecting from the agencies that will help us implement that

system.

Ms. NORTON. Are you working with anyone from GSA? I would

like to facilitate that if I could.

Mr. ROGERS. I am advised that the staff of the Department of

Administrative Services has been working with GSA and AT&T.

Once the information that we have out to the agencies is back in,

it will be furnished over to AT&T, and we will be able to—— Ms. NORTON. Mr. Rogers, that will take us back to where we

were. That is where it was last time we were waiting from information from the District that would then allow them to proceed. The

amounts are so great here. You are paying, it looks like, more than

twice what you could be paying at a time when you are having to

cut everything. Could I ask that you provide us for the record the

information that you provided to GSA——

Mr. ROGERS. OK.

Ms. NORTON [continuing]. Before we close our record? When

would that be?

Mr. DAVIS. Ten days.

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

Mr. DAVIS. Thank you.

Mr. Horn.

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Mr. HORN. Thank you Mr. Chairman.

Mr. Rogers, following up on that, since I Chair the investigating

subcommittee that relates to GSA and the FTS–2000, do you need

any particular legal authority in order to access the GSA rates, or

do you already have that?

Mr. ROGERS. I believe we already have that.

Mr. HORN. All right. Because Ms. Norton is right, the best deal

in America are the GSA rates. We don’t know where we are going

next, but hopefully it will be a better deal, and the District ought

to be taking advantage of that.

Mr. Offner, you indicated the need for the authority in your testimony. Could you describe what that would permit you to do?

Mr. OFFNER. Mr. Horn, the 1115 waiver is a broad authority that

the Government has, and in this application, as a State cuts its reimbursement or its expenditures, different States have been able to

get waivers to allow them to capture the Federal part of those savings to, in effect, expand coverage to the uninsured. Obviously

every time the District of Columbia cuts Medicaid by $1, we not

only save ourselves 50 cents, but we save the Federal Government

50 cents. If we could capture that Federal 50 cents and use that

to expand coverage to the uninsured, which is a proposition that

Tennessee and a lot of States have gone with, it would allow us to

do something about the 110,000 uninsured people.

Mr. HORN. If—I think you need specific authority in law so you

don’t have to go through the appeal like the other State does; is

that what your desire is?

Mr. OFFNER. Well, at this point, Mr. Horn, we are about to start

working with a consultant to develop our proposal, and the people

at the Health Care Finance Administration have been extremely

cooperative. If we run into problems, maybe we could reserve the

right to—— Mr. HORN. I was going to say, if they are going to sign off, wonderful, but many Governors have found it takes them forever to

sign off, and since you are in a unique relationship to the Congress,

we ought to be able to consider that if they don’t approve it and

make sure you get those economies.

Mr. Rogers, I am curious, is there an inspector general in the

District of Columbia?

Mr. ROGERS. Yes.

Mr. HORN. And to whom does he report?

Mr. ROGERS. Reports to the Mayor, the Council, and the Financial Authority; or shall I say sends information, kind of reports.

They are independent.

Mr. HORN. I understand that.

Has the inspector general ever inspected the Medicaid situation

in the District of Columbia?

Mr. OFFNER. Actually, Mr. Horn, we have four separate investigations, again, not cosmic ones, but as I indicated, we removed

125,000 ineligible people from the rolls. The Inspector General initiated an investigation of whether or not we could recover for the

expenditures that were made for those people while they were

being covered inappropriately, and that is still in progress. And

there are several other investigations that we are currently working with them on.

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Mr. HORN. Now, do you have your own audit staff in your agency?

Mr. OFFNER. I have a small audit staff. We also contract out the

field audits. I have a small audit staff of five people.

Mr. HORN. How much fraud have we found in Medicaid recipients?

Mr. OFFNER. Recipients?

Mr. HORN. Among the recipients, how much are on there fraudulently?

Mr. OFFNER. Mr. Horn, I will tell you I don’t know the answer

to that, but I will tell you the 25,000 people that we removed, it

was not a fraud issue. It was an issue of computer systems that

weren’t talking to each other. My experience as a newcomer to the

District is that more of our problems are due to systems malfunctioning and inadequate staffing and resources than to fraud. We

are much more involved with provider fraud, and we hand over

those cases to the Corporation Counsel, but again, we need to do

much more in that area, and that is the kind of improvement that

I think we would want to make as we get some additional resources.

Mr. HORN. Now, do you have any jurisdiction over the Welfare

Department?

Mr. OFFNER. No.

Mr. HORN. Is there much need for cooperation between the Medicaid services and the Welfare Department?

Mr. OFFNER. There is enormous need. The eligibility function for

Medicaid is in the Welfare Department, so we have to work very

closely with them on the eligibility side, but that is not something

directly under my control.

Mr. HORN. Maybe the members of the Council know, is there an

identification card when one has welfare and a photo on it as well

as a fingerprint?

Ms. CROPP. I am not certain about an identification card. If I can

get that information back.

[The information referred to follows:]

In the District, TANF recipients receive two identification cards for public assistance benefits. Food Stamp recipients receive a photo identification card without fingerprint identification, Medicaid recipients receive a Medicaid identification card

which does not include photograph or fingerprint identification.

Mr. OFFNER. But there is an identification card for Medicaid, and

it does not have either a photograph or a thumbprint. Most States

don’t do that. Now, what does happen, someone walks into a provider’s office, the provider types in the number into the telephone

and accesses an electronic system. So, you know, if the computer

is working properly, we, in fact, can verify eligibility with great accuracy.

Mr. HORN. You verify eligibility of the card, but you don’t know

that the person carrying the card that day is the same person that

is presumably represented by the card.

Mr. OFFNER. That is correct.

Mr. HORN. Los Angeles County found years ago when you put a

photo, thumbprint on it, thousands left the welfare roll, because

they were double-dipping in terms of separate names, whatever. It

seems the Council ought to be energetically demanding of the adVerDate 11-MAY-2000 09:11 Jul 08, 2002 Jkt 079474 PO 00000 Frm 00075 Fmt 6633 Sfmt 6602 W:\DISC\42315 pfrm12 PsN: 42315
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ministration, and the administration on its own initiative ought to

be undertaking simple little things like that to make sure that the

limited money we have in the District of Columbia goes to people

that really need it and not people that are simply tapping the till.

Now I get to doctors, and the question is has there been any investigation by auditors of the billing of the doctors in the District

of Columbia under Medicaid, and the nursing homes under Medicaid, and home care? Has any home care come up during Medicaid? All of those areas——

Mr. OFFNER. We have audits for all of them, most of those providers, and we are working right now with the Corporation Counsel

on—and we have a staff of people who work on ferreting out cases

that look questionable, which we then hand over to the Corporation

Counsel’s office, and we are working with them to pursue those.

Now, I will admit we could be doing more, and if we had more

staff, we would do more.

Mr. HORN. Well, it would be nice if you only had four, if they are

targeted in on some of these areas that have shown up in other

States. When I came here in 1993–94, I was on Mr. Towns’ subcommittee on the Government Reform, then known as the Government Operations Committee, and his subcommittee went to New

York, found substantial fraud in the Medicaid program, in this case

by doctors. And many doctors in California don’t even take MediCal

because the rates are so low, but in New York they had their hands

in the till substantially, and there were indictments brought.

So I just would commend the administration to a little more

vigor in terms of examining those situations and getting yourself

your own audit staff if you need it, if the inspector general isn’t

going to do it, to zero in on this. That would give everybody a better sense that the fiscal concerns of the District are being taken seriously by the people responsible for administrating. Thank you.

Ms. MORELLA [presiding]. Thank you, Mr. Horn.

I think that Ms. Norton doesn’t have any other questions.

I want to thank this panel very much for your testimony and for

appearing here today. Thank you.

I am now going to call on the third panel, the next panel, which

is going to testify on the Treasury borrowing section of the President’s plan from the perspective of local officials.

And this panel is going to consist of Mr. Thomas Huestis, who

is the deputy chief financial officer for finance and treasurer of the

District of Columbia; Mr. Rogers; Council Chair Pro Tempore Jarvis; the Honorable Frank Smith, chairman of the Council’s Committee on Finance and Revenue; and Mr. Dexter Lockamy, CFO for

the Control Board. Also present, but not at the witness table, is

Ms. Marguerite Owen, deputy general counsel to the Control

Board, who will be available to answer any questions.

I think as you all know, it is the policy of this committee that

all witnesses be sworn in before they may testify, and so I would

kindly ask you if you would please rise with me and raise your

right hand.

[Witnesses sworn.]

Mrs. MORELLA. The record will show that you responded in the

affirmative. Thank you.

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Ms. DREW-JARVIS. Madam Chair, excuse me, since there is an

able complement of officials from the District of Columbia here,

and since we are to meet with Dr. Brimmer at 4 p.m., and my colleagues have already gone ahead, do you think I might be excused

from this panel, since you have such an array of experts here?

Mrs. MORELLA. As you presented, Ms. Jarvis, it is so hard to

refuse. I can understand why you are in politics, and indeed I think

it is all right with this subcommittee, yes, indeed. Thank you.

Mr. ROGERS. Madam Chair.

Mrs. MORELLA. And I wanted to mention, Ms. Jarvis, that there

is no objection, so we have unanimous consent, that your statement

will be included in the record.

Mr. ROGERS. Madam Chair, I have to attend the same meeting.

My statement has been provided. Mr. Huestis is very able on these

matters, and if you look at our testimony, we are totally in sync

with the issues raised with respect to the President’s plan and the

borrowing opportunity for the District. I would like to be excused

as well.

Mrs. MORELLA. Mr. Rogers, we will also excuse you, and your

testimony will also be in the record.

Mr. Huestis, I am glad you are not leaving.

Mr. HUESTIS. Madam Chair, I am not going to leave.

Mrs. MORELLA. You have an awesome responsibility now.

STATEMENTS OF THOMAS HUESTIS, DEPUTY CFO/FINANCE

AND TREASURER, DISTRICT OF COLUMBIA; FRANK SMITH,

CHAIRMAN, FINANCE AND REVENUE COMMITTEE, DISTRICT

OF COLUMBIA CITY COUNCIL; AND DEXTER LOCKAMY,

CHIEF FINANCIAL OFFICER, FINANCIAL RESPONSIBILITY

AND MANAGEMENT ASSISTANCE AUTHORITY

Mr. HUESTIS. Good afternoon, members of the committee, and

thank you very much for having me. My name is Tom Huestis, deputy CFO and treasurer for the District, and thank you again for

inviting me to appear before the subcommittee to comment on the

President’s plan.

The President’s plan includes a funding proposal that will help

solve the District’s cash-flow problem. Included in this plan is a

proposal for up to $500 million U.S. Treasury borrowing with a 15-

year repayment term, and this is designed to fund the cash needs

and a portion of the accumulated deficit. In addition, the U.S.

Treasury is proposing a short-term financing vehicle that would be

structured similar to the current U.S. Treasury advance provisions.

My staff has worked closely with Mr. Rogers’ staff, the Office of

Management and Budget, the Council’s staff and the Authority’s

staff on evaluating this and how it would be implemented, and I’d

like to address that now. Currently the District has an accumulated deficit of approximately $453 million, as a result of cumulative net operating deficits in the past. At the end of fiscal year

1997, the District’s accumulated deficit is projected to increase to

$527 million as a result of the budget deficit for fiscal year 1997.

Although the accumulated deficit is expected to be over $500 million, the District’s cash deficit is only approximately $300 million.

That means what the District has had to do, in order to stay liquid,

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is borrow at least $300 million from next year into this year in

order to make payments.

It has accomplished that this year through the use of U.S. Treasury advances. So it has advanced payments from next fiscal year,

brought against next fiscal year’s Federal payment in order to pay

its bills currently.

One of the things that happens with the President’s plan is, it

proposed that the Federal payment goes away. That means the

District will be left with no source to repay these $300 million

Treasury advances. So in the first, in advance, the financing portion of this plan is essential because the District has no other

source of repaying its U.S. Treasury advances.

Second, the financing portion of this plan is, in itself, healthy for

the District. Currently, these advanced provisions, where we have

to do three or four borrowing Treasury advances every year in

order to get that money up to this year from next year’s Federal

payment, are extremely burdensome. By implementing this plan,

we can take those Treasury advances and finance those into a longterm obligation, thereby eliminating the annual advances and giving some order into the market.

In addition, the credit markets—we believe that by changing

these advances into a long-term financing will give us better access

into the credit markets. There are some concerns. Our existing

bond holders have relied on the Federal payment as a source of repayment, a last source of repayment. So eliminating the Federal

payment does provide our existing bondholders with some concern.

However, the word we get back from them is, if the plan does

what it is designed to do, give the District significant expenditure

relief, and takes care of the ever present pension problem, which

is projected to explode, if the President’s plan takes care of those

items, that it will be a net benefit to the District and to those bondholders.

Because of the time, I would like to cut through a lot of my testimony and it will be in the record.

One of the major things that we have done is, we have gone to

the rating agencies and the credit market participants, or bondholders, and talked to them about the size of the financing and

about how much we should essentially borrow and how much Congress should authorize.

What they have come back to us and said is that the Congress

needs to authorize $500 million of this financing, but the District

should only borrow the minimum amount it needs up front, so all

it needs to borrow is the $300 million up front, but the Congress

and the administration need to authorize the entire $500 million

because, essentially, what we are doing is, we are financing our

cash deficit and then using the surpluses that will be generated

from the President’s plan to pay down the balance of the accumulated deficit.

From the Office of the Chief Financial Officer and the rating

agencies, we agree that this is the most prudent course and this

will allow the District to not become cash flushed, so it doesn’t

have to stop, so it won’t have to stop, the critical reforms in management initiatives that need to happen in the District, but it will

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ciently and then pay down the balance of the accumulated deficit

over time.

There is a cost to this plan. We talk about it here, of $13 million if we borrow the $300 million, or $15 million if we borrow the $500

million. The cost is due not to the borrowing in itself, it is due really to the loss of the Federal payment. If you think about it, we receive $660 million day one, and we

are trading that for expenditure relief, spread across the fiscal

year, all 12 months. And because we operate at such a narrow cash

margin, by that cash tradeoff, we have to borrow more money and

we have to borrow it sooner in the fiscal year. We have to essentially borrow day one into the fiscal year to match the cash that

we would have normally received through the Federal payment.

So the increase in the cost of this financing that we talk about

in our analysis and our budget and in our testimony here is not

due to the deficit borrowing itself, it is due to the tradeoff between

the Federal payment and the expenditure reductions.

Thank you. That concludes a summary of my testimony, and

thank you very much, and I will be happy to answer questions.

[The prepared statement of Mr. Huestis follows:]

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Mrs. MORELLA. Thank you, Mr. Huestis.

And for all of our panelists, your testimony in total will be included in the record.

I now recognize Mr. Smith.

Thank you for being with us.

Mr. SMITH. Thank you very much, to Congresswoman Norton

and you as acting chairman.

I am Frank Smith, I am the chairman of the City Council Committee on Finance and Revenue. I guess I would have to say that

I have to rely on my other 10 colleagues to adequately represent

me with Mr. Brimmer in the Control Board; I am sure they are capable.

Mrs. MORELLA. You are very noble to stay here to testify.

Mr. SMITH. Since this is my first opportunity to testify on this

matter, I figured I would stay around myself.

I am chairman of the Council Committee on Finance and Revenue, pleased to appear before you, to appear to discuss the Treasury borrowing element of the President’s National Revitalization

Government Improvement Plan.

First, just a little bit of history. The Home Rule Act has served

the District government since January 1975. They granted the District autonomy on how to spend its money, both locally raised revenue as well as the Federal payment. Indeed, the Home Rule Act

specified that the Mayor had to provide meaningful information to

the Congress regarding expenditures and to show how these expenditures benefited the District population.

The comparison was to include an estimate of the amount of

property tax lost because of taxes on land and the amount of unreimbursed services to the Federal Government, and a tax burden

relative to the suburbs.

The question of how local government could possibly cover costs

associated with running a city was raised at the beginning. This

leads me to conclude the proposed Treasury borrowing authorization does not offset the proposed elimination of the Federal payment, even from a cash standpoint. Absent the Federal payment,

projections by the Authority show that the District will experience

a surplus for only 1 or 2 years, even with the financing of the deficit.

In the beginning of the Home Rule period between 1972 and

1989, they were good financial years for the District. Although

there were severe fiscal problems during this period, we believed

we could overcome the problems, and you probably know we had

some good times and the District fared well.

In the past few years, we experienced a growing deficit. The

Council is struggling to find a solution within the confines of the

limitations of the financial realities with which we are now confronted. Two immediate hurdles face us, however, if we use the

proposal for Treasury assistance in eliminating the accumulated

deficit. One is the need to restructure the District’s debt limitation

requirements as currently imposed by the Home Rule Act. And I

think you probably know this already, that the home rule act limits

the amount of borrowing we can do to, I believe, 14 percent of what

all of our revenues are, and that 14 percent application applies to

our revenues, including the Federal payment.

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The other city long-term financing debt service of the accumulated deficit would exceed the statutory debt limit if you do not either amend that provision or exempt us from it.

And so that is one of the problems that I think you have to look

at, and I am sure you intend to do that in an effort to pursue this.

Without a waiver or increase in the current debt limitations, the

District will not be able to finance its multiyear programs because,

as I said earlier, the culmination of these two would exceed our

ability to borrow, unless you exempt us from the ceiling.

The impact of the terms proposed by the President’s plan on the

District’s overall financial conditions, its cash position, and cashflow is significant. It would free up current cash to pay operating

expenses. The Office of the Chief Financial Officer projects in the

absence of any borrowing, the District would end 1997, with a negative cash position of approximately $247 million.

The negative cash position is caused by advancing revenues from

future fiscal years to meet current year’s expenditures, which is, of

course, our accumulated deficit. I think the District’s accumulated

deficit and any approved deficit should be fully funded through

long-term borrowing and other means, including the need for capital projects funding pending the ability of the District to access the

private market, the Treasury loan provisions, with continued authority that exists in the Home Rule Act but has been suspended

by the Authority.

Finally, Madam Chair, I would like to remind everyone, in August 1991, Public Law 102–102 was passed by the Congress and

signed by the President to establish a formula-based Federal payment. The amount of the Federal payment was set at 24 percent

of the prior year’s revenue source collected by the District.

Since that time, the legislation has been introduced by the Congress, but to change the Federal payment, but you know as I do,

that has never been changed, so that we never had an adequate

Federal payment to take care of our problems, and, therefore, we

have had this accumulated deficit develop for us here in the District of Columbia.

Let me also say in closing, the Council has taken the view that

it wanted the Congress to continue the Federal payment, primarily

for the purpose of trying to find a way to provide some tax relief

to our businesses and to our citizens, and if you don’t do that, you

must enact some form of Ms. Norton’s bill in order to provide some

tax relief for our citizens. That is the only way to guarantee the

long-term sustained growth of the District of Columbia and the

ability of our citizens to take care of themselves and also to provide

for the Nation’s Capital.

Thank you.

[The prepared statement of Mr. Smith follows:]

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Mrs. MORELLA. Thank you, Mr. Smith.

I note your last commentary is not in the written testimony, and

obviously it was very heartfelt in you and spontaneous. Thank you.

Mr. Lockamy, delighted to hear from you, sir.

Mr. LOCKAMY. Thank you, Madam Chair, members of the committee. I am Dexter Lockamy, chief financial officer of the District

of Columbia, Financial Responsibility and Management Assistance

Authority, which I will refer to as the Authority. And with me, I

would like to recognize, is Marguerite Owen, deputy counsel to the

Authority.

We are pleased to appear before you to present the Authority’s

assessment into Treasury borrowing. I will be brief, given that the

testimony is in the record, but I do want to point out a couple of

things.

Madam Chairwoman, Dr. Brimmer, the Authority’s chair, stated

in his remarks to the subcommittee on March 13, the Authority advocated in a strategic plan the District ought to take a long-term

borrowing to pay down its accumulated deficits, and we are pleased

that the present plan also calls for such a borrowing and proposes

that the U.S. Treasury provide a financing.

I will not go into the details of the specifics of what is being proposed, but I do want to say the Authority fully endorses the concept that the District be provided with the Authority to obtain 15-

year term financing of the District’s accumulated deficit of the

Treasury. However, we do have some observations that I would like

to point out.

In our remarks, we would like to emphasize two very important

points: That a Treasury borrowing facility for the District’s accumulated deficit, while extremely helpful, will not, without a continued Federal payment, allow the District to achieve financial stability with respect to its present and future capital and financing

needs.

Second, the current uncertainty concerning the Federal payment

caused by this proposal and the District’s borrowing authority must

be clarified and settled as soon as possible. Otherwise, we believe

the District’s ability to finance its 1997 and 1998 could be jeopardized.

Clearly, we believe Congress must enact additional borrowing authority for the District. We believe the proposal in the President’s

plan for intermediate-term borrowing facility with the Treasury

will provide most, if not all, of the necessary additional borrowing

authority that is required by the District. But we also believe that

the provisions for transitional short-term Treasury advances, which

are due to expire on September 30, need to be extended by the Congress.

With respect to specific recommendations, we realize that some

of the savings that people anticipate in terms of asset sale surpluses may not be realized in the next couple years, and so we

therefore recommend that the District have the ability to finance

the full accumulated deficit at its discretion, subject of course to

the approval of the Authority as provided in Public Law 104–8.

The Authority further suggests the District be granted the authority to borrow the entire amount of the accumulated deficit from

the Treasury in tranches over a period of not more than 3 years.

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The Authority urges the Congress to extend the transitional

short-term Treasury borrowing authority provided in DC Code 47– 3401, and/or modify the seasonal cash management provisions of

that section to include any short-term borrowing requirement of

the District.

We also recommend that the authorizing legislation specifically

provide the intermediate-term borrowings have a maximum term of

15 years, and allow the District to elect a shorter period if it so desires, and that there be no penalty for prepayment.

And while we do not object to the Secretary having the provision

to suggest refinancing by the District, we strongly recommend that

any decision to refinance the Treasury borrowing in the capital

markets be left to the District’s discretion, after consultation and

approval by the Authority and made subject to—by specific criteria,

which will not result in increased financing costs to the District.

Last, because the current structure of the District’s debt includes

large principal payments through fiscal year 2003, we request the

legislation should provide principal payments be deferred until fiscal year 2004, when level debt service could begin, and that the

Treasury borrowings be exempt from the requirements of DC Code

47–25, which requires that general obligation bond principal payments begin not more than 3 years after the date of such bonds.

Regarding my conclusions, in conclusion, Madam Chairwoman,

we view the Treasury borrowing projections in the President’s plan

are acceptable, provided the details and conditions associated with

the borrowing be finalized as soon as possible, along the lines that

we have proposed.

We emphasize that prompt clarification of the issues discussed is

necessary to avoid any market confusion and concerns that may be

generated as the District moves forward with its planned fiscal

year 1997 and 1998 capital borrowings.

We are happy to answer any questions that you might have.

[The prepared statement of Mr. Lockamy follows:]

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Mrs. MORELLA. Thank you very much, Mr. Lockamy.

I just thought I would ask several questions and then look to Ms.

Norton for her questioning.

First of all, I think that from your testimony, I pretty much

heard a response to the fact that you do support the Treasury proposal as you understand it. Did I hear you say that?

Mr. HUESTIS. Yes.

Mrs. MORELLA. What is the status of the MOU, the Memorandum of Understanding, which includes the Treasury proposal,

as I understand?

Mr. SMITH. Do you want me to answer that?

Mrs. MORELLA. Yes.

Mr. SMITH. We have—just this afternoon, actually—the Council

had a few minutes of consultation on that matter, and we will be

taking it up again over the weekend.

As you know, we are scheduled to vote upon it on Tuesday, the

29th, and I would not presume to tell you what my colleagues are

going to do in a vote before it happens. You operate in a body similar to mine, and I am sure you understand.

Mrs. MORELLA. Do you know how you are going to vote?

Mr. SMITH. Yes.

Mrs. MORELLA. Shall I ask you? Shall I ask you, or would you

prefer to wait?

Mr. SMITH. Well, they might be watching this. I know we are on

television. I don’t want to tip my hat too early.

Mrs. MORELLA. That’s perfectly understandable. But Tuesday,

the 29th.

Mr. SMITH. Yes. And I will say this to you. I am sure you are

aware the Council had some concerns with some aspects of it. We

have returned what we consider to be a proposal that we could all

work off of, and some negotiations are going back and forth on it

now, and I hope those will be concluded by the time we get to the

Tuesday vote.

Mrs. MORELLA. That will be good, because we want to move the

whole program ahead.

You know, the Home Rule Act, like most city charges, requires

the District to have a balanced budget and not run deficits. We

know that the District inherited and accumulated operating deficit

of more than $200 million. You mentioned that in your testimony,

Mr. Huestis.

In 1991, Congress allowed the city to sell $331 million in deficit

financing bonds to liquidate its accumulated deficit, and now we

are faced with the prospect of authorizing the District to liquidate

an accumulated deficit of more than $400 million well before the

1991 bonds are paid off.

What can Congress do to ensure that the District not get into

that kind of deficit situation in the future, requiring such action?

I mean, what kind of assurance do we have on top of the concept

of debtor budget?

What else can we do? What can Congress do to restrict or require

of the District government?

And then I wonder, whatever you will see, if you do have something to offer that we should suggest, should it be legislated? And

I guess, let’s start out that way.

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Mr. SMITH. I think that Congress is doing many things now to

help us to solve that problem. And let me just say, I think the District government itself, too, has done a great deal to help solve the

problem. It has sobered up to the reality it has to control spending,

and that was one of the missing elements back in the early days

when you did the first refinancing, and the Council itself did not

engage itself in the kind of arduous process we have been engaged

in in the last 2 years to try to cut spending and then to get it under

control.

Second, you know, already you have given us a Control Board

and CFO and various other stopgap measures you have employed

to help us maintain the discipline and the cuts that we have put

in place.

Third, you have taken a step to try to take over some of the

State functions that the District government should never have

been saddled with in the first place.

And fourth, I guess among those things, you have taken over

some responsibility for a pension payment that the Congress said

it was going to take over, and it is just now getting around to doing

so. And let me say any budget that would have had to carry an

item in it that large for such a long period of time would probably

eventually run into a wall the way we did in this one.

But I think we are taking steps that can assure you and others

that we will get this matter under control, we will discipline ourselves to keep it under control, and with a little help to reseed our

economy of tax breaks and things like that, we think we can guarantee you a future in the Nation’s Capital that we can all be proud

of.

Mrs. MORELLA. I mean, that sounds all well and good, and I appreciate you saying it, and I know you truly mean it. I am also saying we are going to have a hard time selling this to other Members

of Congress, and they are going to say, what assurances do you

have? And it is easy to say, well, now we have a Control Board and

now things are going better. I think Congress is probably going to

ask for more than that, maybe something a little more tangible.

And if anyone else has any comment—Mr. Huestis, did you want

to comment? Mr. Lockamy.

Mr. HUESTIS. I agree with Mr. Smith. I think Congress has already done a lot. I think the Control Board and CFO have been a

big part of the District turning around and good—a very good reason why the deficit bonds are not going to be wasted this time.

And I think if you just look at the results of last fiscal year,

where we had a budgeted deficit of $116 million and we ended up

with an operating deficit of less than $60, and that is quite extraordinary, and that was, in part, to the good work of the Control

Board and the CFO of ratcheting down spending and making sure

that agencies did not overspend their budgets and deficits were not

acceptable—so I think there is already some history that the actions that Congress has taken in the past have been effective.

I think that the other thing is that, in reviewing the President’s

plan, you want to make sure that the—when, after the plan is implemented, that expenditure growth does not outpace revenue

growth.

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I mean, what we have now is, we have expenditure growth of 6

or 7 percent in the District; if left unattended and revenue growths

are very, very small, 1 percent, 2 percent. So you have this structural imbalance, and the President’s plan is designed to narrow it.

But the District will never be able to fully function as a normal operating government unless that structural imbalance is narrowed,

and so the Congress must make sure that that structural imbalance is taken care of with the President’s plan or another plan.

Mrs. MORELLA. I would like to ask Mr. CFO himself to comment

on that.

Mr. LOCKAMY. Well, Madam Chair, the meeting both Ms. Jarvis

and Mr. Rogers left and that is being held right now at the Control

Board is in an attempt to try to reach a balanced budget for fiscal

year 1998, 1 year earlier than what was required by the law. And

the struggle is balancing the budget in such a way that we try to

achieve true structural balance going forward, rather than rely

upon various sorts of conventions that will balance it this year but

then to bring about a recurring problem in the future.

I think the Congress, I think, has done a lot. I think I concur

with my colleagues on this panel that the independent CFO, ourselves, the new leadership that we see on the City Council is going

a long way in terms of restoring confidence. But one of the things

that could derail all of these efforts is the flat revenue stream that

the District has to contend with, and that is why we feel that pulling away the Federal payment without having identified new, viable revenue sources is only going to put in jeopardy a lot of the efforts that are under way.

Mrs. MORELLA. Yes. I guess we also—I hear that often too.

I wanted to also ask: You know, the private bond market, especially holders or insurers of outstanding District general obligation

debt, was concerned about Treasury, using the Federal payment as

collateral, and having first call on that funding source.

How do you think this proposal and the elimination of the Federal payment will affect current district bonds and future bond ratings? And remember, you have spoken about that, Mr. Huestis.

You may all just want to briefly respond to that so we have it on

the record.

Mr. HUESTIS. I did respond to that in my testimony, and I think

that our conversations with the holders think that if the goals of

the President’s plan are carried out, that the pensions are taken

care of, and that the structural imbalance is narrowed in any way,

that this would be a positive for the bondholders, even losing the

Federal payment, which is part of the existing security structure

of the GO bonds.

Mrs. MORELLA. Mr. Smith, you also feel that the Federal payment is critical?

Mr. SMITH. Yes, I think Mr. Huestis has made it plain, and I

think Mr. Lockamy said in his testimony, we need to be settling

this issue early, as soon as possible, and early in the next fiscal

year, because we have some outstanding bonds out there that are

going to come due in 19—in fiscal year 1998, one of which I know

is—says right at the bond issue, we are going to use the full faith

and credit, District government included in Federal payment, and

I can tell you right now, bondholders are looking to the Federal

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payment. So, if it is not there, or, alternatively, if we don’t do this

long-term debt restructuring quickly, they are going to get very

nervous.

Mr. LOCKAMY. I would like to say that we have been in touch

with Mr. Huestis and his office and his conversations with rating

agencies. We independently have had conversations with the rating

agencies to explore this issue.

One of the things we are concerned about is what the collateral

is that the U.S. Treasury will require with respect to this loan, and

so long as there is nothing that is created that would create a higher order of priority over the existing general obligation bondholders, we feel the market would be comforted.

I think going forward, the market is really looking for a reasonableness that they can get paid back in terms of the full general

obligation pledge of the District.

Surely, pulling out the $660 Federal payment does have a negative impact, and so long as there is a corresponding sort of cost

avoidance or reduction in expenditure, the market could probably

get comforted. And I think the real issue for the market is liquidity

of the District going forward and flexibility to deal with unforeseen

and unexpected issues. If the District—you know, if the debt becomes such a burden to the District going forward, I think the market will have an unfavorable reaction.

Mrs. MORELLA. Do you want to speculate about what you think

the Federal payment should be if the other reforms are enacted?

Mr. LOCKAMY. I am sorry?

Mrs. MORELLA. Do you want to speculate what you think the

Federal payment should be if the other reforms are enacted?

Mr. LOCKAMY. The Authority’s position is, the full Federal payments stay in place with the President’s plan.

Mrs. MORELLA. With the President’s plan.

Mr. Smith.

Mr. SMITH. Yes, I would say we ought to do it, at least for a—

for a considerable period of time, the full Federal payment, because, as I said earlier, among other things, the District government would like to—the Council, certainly, on the leadership of the

Finance and Revenue Committee, would like to find a way to make

the tax structure of the District of Columbia more compatible with

surrounding jurisdictions. That is the only way to ever guarantee

a full economy there where we can have a tax base that can

produce the kind of revenue that will give us a sustained base so

that all of our creditors and our citizens, too, can be employed and

also can be—our creditors can be paid back. So we would like to

have a Federal payment so we have flexibility. Without the Federal

payment, we do not have any flexibility or capability to do that.

Mrs. MORELLA. You think it should be $660 also, Mr. Huestis, or

you don’t have any comment?

Mr. HUESTIS. It is a policy decision, and I think the revenue

should be sufficient for the District to continue to operate, and

whether that is a Federal payment or increased taxes from Congresswoman Norton’s plan or another facility that is a policy decision, we will evaluate that.

Mrs. MORELLA. Thank you. I want to thank you, gentlemen.

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I am now going to recognize Ms. Norton, the ranking member of

this subcommittee, for her line of questioning.

Ms. NORTON. Madam Chair, I don’t have specific questions. I do

note the difference here on the Federal payment, some difference

between the CFO and Control Board.

Mr. HUESTIS. No difference.

Ms. NORTON. In any case, it is not in any of your hands.

Mr. HUESTIS. Right.

Ms. NORTON. And we are just going to have to do the best as we

can.

What we would most like is to keep the Federal payment. I feel

irresponsible if I simply say we are going to keep the Federal payment and want everybody to try to help us to figure out what to

do in case we don’t get to keep it all. I want everybody to know

that the Federal payment is going to be used to pay for the plan

and don’t want to leave the impression that there is any free lunch

up here.

Therefore, what we have got to figure, and I think what you all

ought to be figuring out right now, you want the Federal payment,

you can probably get it. It is now worth $500 million. You will lose

some part of what the President’s plan has.

And so what I would like the Control Board and the Authority

and the Council and the Mayor to engage in is some thought about

tradeoffs, because the chairman and I are now engaging in tradeoffs.

In other words, the chance that what we will do is to get the

President’s plan, which is more than any of us thought he would

come through on in the first place. And on top of that is $660 million.

You must not be living where the Washington Post comes out

every day to talk about deficit reduction. I do that only because I

cannot pander on an issue as critical as this. We need that cash.

It would make us much more stable, much more secure.

All you say about collateral and bondholders is exactly right.

They also understand the President’s plan to be the substantial

linchpin to the District’s payment, not the Federal payment.

I have to be very careful because, in essence, I want the Federal

payment, and I also do not want to pull the rug from under the

plan, and I do not want to give Members who don’t want to give

the District 2 cents the opportunity to say, well, you all really

haven’t figured out this plan, there is no understanding about what

would be traded off, and we don’t want to do this any way.

So one of the things I would like to ask you to do in your own

councils is to think if, in fact, the Congress of the United States

is unwilling in a year, when there is only one issue on the table,

and that is deficit reduction, to give the District everything the

President’s plan says plus—and the Control Board of course says,

also, other State functions plus the Federal payment—if for some

reason that doesn’t happen, we can’t beat something with nothing,

and what I am never caught up here with is, they come back and

at some point somebody is going to come back, and they are going

to say, OK, here is what we want.

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The only way I am able to get anything for the District up here

is, I am the one that comes and says this is the tradeoff we make,

because it will otherwise be on their terms.

Any thought you can give and any advice and counsel you can

give on that, considering the plan has some things in it we never

thought would be in it—economic development corporation, infrastructure, all kinds of things about the prisons we didn’t think

would be in it; we were not sure they would take 100 percent of

the pensions; on Medicaid, we had no idea they would go to 70, 30.

That is how it works up here. I just want everybody to know

that. It does not work like, here is some more. The President hardly gets what he asks for—now we are going—hardly ever gets what

he asks for, much less, here is what you asked for, and here is

more. There may be ways for us to still come out ahead.

When I say tradeoffs, I don’t mean we end up with a lesser package than we have now necessarily, but I am very, very anxious

about being caught with somebody listening, overhearing our conversations in our hearings, and coming back, because it has happened to me before.

Let me say, the chair asked about the MOU. First let me say,

with the Council, which I think just handled this very well, I mean

the Council, which, after all, has a constituency, and we have lived

with the Federal payment for almost 200 years, can’t be expected

to say, OK, take the Federal payment. Therefore, it is perfectly understandable you would want some accommodation with the Federal payment. And what you have—what you have come forward

with, all, it seems to me, ought to be taken into account as we try

to figure out what to do.

The MOU, I think everybody ought to get the chairman’s opening

remarks on the MOU. And I want to caution everybody that there

is needless polarization out here in conversations that I think progresses somewhat with the chair pro tem, and with the Mayor, and

Mr. Evans.

That was this week. I have also had conversations with the senior operatives at OMB. And I know that the Council has had conversations, and I believe progress is being made.

The chairman has told me—I think you heard it—that in a real

sense, we want the MOU, we want to be able to point to it to undergird us when Members lack confidence that this thing is going

to go well.

But it would be a monumental mistake to let the fight over the

President’s plan take place on the MOU. It would be a monumental

mistake, because it would then feed into people who would say,

look, they have problems.

What we get back then is, they are fighting over the particulars

of whether they even do what their own administration wants

them to do, and you want me to vote for this bill when, in fact,

what is being fought over doesn’t have anything to do with that,

it has to do with Mr. Davis’s plan. And I think one of the first rules

of politics is, understand when you have won, declare victory, go

home.

So we are fighting over Mr. Davis’s bill, and he is the one, that

Mr. Davis’s prison section—I can’t understand what the fight between two parties, neither of whom have the ultimate say on that,

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the administration on the one hand, the Council on the other. We

know where you both stand on that, so I think we can get over

that, and I think there is kind of language that we can deal with

that on the Federal payment.

There was already a victory that could have been declared and

everybody went home, when it wasn’t in the MOU. Then it got

back in the MOU, rubbing the administration’s face in it. You hit

somebody that hits you back. Once it was out, it seems to me somebody had a victory somewhere who could say, you know, you hadn’t

signed anything with the Federal payment in it; I am talking to everybody concerned.

I am sure, having talked with everybody concerned, that this is

not going to be a problem. I just raise this now because I would

like everybody to understand, I have said the same thing to the

OMB. They are now going back with some suggested language we

have been talking about. Ms. Jarvis knows about some suggested

language.

And I just want to say for the record, there is not real disagreement on the two items such that they affect the MOU; that is to

say, the Federal payment and the prison section. They are matters

for Congress, and the administration and the city have worked so

well up until now that it has really helped the bill, and so I encourage you to really work as you have, and I am going to continue to

work with both sides, because you have both come very far, in my

judgment, and I appreciate the way in which you have responded

to what would otherwise be a very difficult situation.

Mr. SMITH. Let me say on behalf of the Council, we appreciate

your effort in this, too, your effort and also the effort of our colleagues from the surrounding jurisdictions, from Maryland and Virginia, in helping us with this fight. I know it hasn’t been easy, and

this is, I think, an important step for all of us, for our city and for

the Nation’s Capital.

My understanding is that the—these—that there is a considerable amount of progress in negotiations and some language that is

being worked out and might enable us all to go forward. I hope

that will happen over the weekend and, by the time we vote on

Tuesday, we will be ready to go.

Ms. NORTON. It won’t happen over the weekend, but I have already spoken with your chair pro tem.

One thing that would be helpful is, given the fact, only today, for

example, if I talk with people from the OMB, particularly since the

MOU is not up against any timeframe wall, we won’t have answers

back from OMB before then, but we are making progress. So I hope

you are not up against a wall on a vote that won’t be necessary,

but I already talked to Ms. Jarvis about that. And, again, you all

have helped in what you did, I guess it was yesterday. And while

we are not there yet, I have every confidence, based on how you

all have been moving and based on my conversation, that we are

going to get there. We will not be there, though, by Tuesday.

Mrs. MORELLA. Thank you, Ms. Norton.

And I think all of us on the subcommittee agree with what you

said. I know I have some concerns about the criminal justice element, and I think we will probably be changing that, but we are

all committed to do everything that we can, working cooperatively

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with you to make sure that this capital city is the capital with a

capital C.

I am going to ask unanimous consent that written statements

from this panel and from anyone else who has testified, that written statements be included in the permanent record.

I want to thank you for being here. The record will be open for

10 days, and there may be some other questions we will get back

to you on, other Members that may not be here, if that is acceptable.

Thank you very much, and the subcommittee hearing is adjourned. Thank you.

[Whereupon, at 4:43 p.m., the subcommittee was adjourned.]

[Additional information submitted for the hearing record follows:]

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