GAO-05-162R District’s Structural Imbalance and Management Issues 

United States Government Accountability Office

Washington, DC 20548 

November 19, 2004 

The Honorable Mike DeWine 

Chairman 

Subcommittee on the District of Columbia 

Committee on Appropriations 

United States Senate 

Subject: Posthearing Questions: District of Columbia’s Structural Imbalance and 

Management Issues

Dear Chairman DeWine: 

On June 22, 2004, I testified before your subcommittee on the District of Columbia’s 

structural imbalance and management issues.1 This letter responds to a request from 

your staff that I provide answers to follow-up questions from the Honorable Richard 

Durbin, United States Senate. The questions and answers follow. 

MANAGEMENT CHALLENGES

Update on Management Challenges and Possible Improvements

• Can you provide us with any current insights about whether the District has 

taken steps to address these concerns, and whether those efforts have 

produced positive results? 

• What additional improvements would you like to see? 

As I stated in my June 2004 testimony before your subcommittee, the District of 

Columbia has made progress in improving management and maintaining fiscal 

discipline. In fact, it appears the District has made some progress since we issued 

our comprehensive report—District of Columbia: Structural Imbalance and 

Management Issues—in May 2003 (upon which my June 2004 testimony was based).2

 

For example, District officials have taken steps to balance their budgets for fiscal 

years 2004 and 2005. Also, the District’s bond rating has been upgraded by all of the 

major rating agencies in part due to the region’s improving economy and better 

financial management. 

 

1

 GAO, District of Columbia: Structural Imbalance and Management Issues, GAO-04-908T 

(Washington, D.C.: June 22, 2004). 

2

 GAO, District of Columbia: Structural Imbalance and Management Issues, GAO-03-666 

(Washington, D.C.: May 22, 2003). 
Page 2 GAO-05-162R District’s Structural Imbalance and Management Issues

Further, our recent mandated review of the District’s performance and accountability 

plan for fiscal year 2003 found that the District complied with statutory reporting 

requirements and that the report provided a comprehensive review of the District’s 

performance.3

 We also found that the 2003 performance report provided an update 

on the following performance management programs. 

 

• The District reported on the expansion of performance-based budgeting to 27 

additional agencies. All 77 agencies are expected to be utilizing performancebased budgeting by 2006. 

• The District also reported plans to expand its recommendations and court 

orders tracking system to begin tracking the costs of implementing 

recommendations and court orders. Originally this system was intended to 

only track the extent to which recommendations and court orders had been 

implemented throughout the District. 

• In addition, the District reported plans to implement an online budgeting and 

performance program (Argus) to link agency budgeting and performance 

reporting. The District expected to implement the program in October 2004 in 

those agencies that are already using or implementing performance-based 

budgeting. This system will allow for monthly performance reporting and 

enhance oversight of agencies’ data collection efforts. Through this system, 

agencies will prepare budget requests based on actual program costs. Further, 

the system will eliminate an agency’s ability to modify performance targets or 

past performance without management approval. 

The District’s performance goals represent about 90 percent of its total expenditures. 

While the District has made steady progress in implementing a more results-oriented 

approach to management and accountability, actions have not been completed on our 

prior recommendations related to expanding coverage of goals and measures to all 

activities within the Mayor’s authority, as well as the monitoring of court costs. 

Despite the progress that has been made, challenges still remain, as evidenced by 

several studies and investigations that have been released since the issuance of our 

May 2003 report. For example, the independent auditor of the District’s financial 

statements for fiscal year 2003 again reported District Medicaid provider accounting 

and financial reporting as a material weakness.4

 We highlighted Medicaid 

management as a major challenge in our May 2003 report. According to the 

independent auditors’ report, certain conditions have hindered the ability of the 

District of Columbia Public Schools (DCPS) and Department of Mental Health to 

accurately estimate and record amounts owed from the federal government for 

eligible services in a timely fashion. This means that the District continues to bear 

more of the burden of its high Medicaid costs with local funds than necessary and 

does not fully leverage the permanently enhanced federal Medicaid match (70 

percent) that Congress gave it in 1997. Addressing these problems in a timely manner 

 

3

 GAO, District of Columbia: FY 2003 Performance Report Shows Continued Improvements, GAO-04-

940R (Washington, D.C.: July 7, 2004).

4

 Government of the District of Columbia, Office of the Inspector General, District of Columbia: 

Independent Auditors’ Report on Compliance and on Internal Control Over Financial Reporting 

(Washington, D.C.: Feb. 2004). 
Page 3 GAO-05-162R District’s Structural Imbalance and Management Issues

has taken on greater significance because the District has proposed eliminating its 

Medicaid reserve fund in fiscal year 2005 ($55 million in fiscal year 2004). This 

reserve was intended to serve as a cushion in the District’s budget in the event of 

less-than-expected federal reimbursement, which had been a significant problem in 

previous years. 

In another example, in September 2003 the DC Appleseed Center for Law and Justice5

and Piper Rudnick LLP issued a study on special education problems in DCPS, which 

we also discussed in our May 2003 report.6 The District lacks appropriate special 

education programs and services, which frequently results in DCPS expending 

resources to subsidize private school placements and related transportation 

expenses, as well as the costs associated with due process hearings. According to 

the DC Appleseed Center for Law and Justice report, these problems are exacerbated 

by DCPS’s inadequate dispute resolution process. The report concluded that DCPS’s 

inability to promptly address parental inquiries and concerns about inadequate 

special education services and facilities results in anger and mistrust on the part of 

parents. Responding to parental concerns earlier and more effectively could 

minimize anger and mistrust, thereby reducing lawsuits, due process hearings, and 

their related legal costs. The report also laid out recommendations for improving 

DCPS’s dispute resolution process. 

Moreover, the District Office of the Inspector General reported in September 2003 

that DCPS lost the use of approximately $4.5 million in federal homeland security 

funds because it was unable to identify a use for and obligate these funds in a timely 

fashion.7

 Although DCPS lost out on the use of these funds, it nonetheless has 

identified a need for security enhancements totaling $5.7 million. 

 

As agreed with your staff, we did not conduct updated reviews of or new interviews 

with officials in District agencies in advance of my June 2004 testimony. 

Nonetheless, several GAO studies completed since the issuance of our report in May 

2003 further describe the status of the District’s management challenges. Several 

select examples of other more recent GAO work related to the District follow. In 

some cases, GAO has also recommended that certain actions be taken to address 

management challenges. 

• District-wide management and performance. In our July 2004 review of 

the District’s performance and accountability report for fiscal year 2003 

(described above), we identified certain gaps. Specifically, the 2003 

performance report did not include 33 activities that represent 10 percent of 

the District’s budget, including public charter schools (the most significant 

program activity that lacked goals). Previously, we recommended that the 

District establish goals for the charter schools and report on progress. District 

 

5

 The DC Appleseed Center for Law and Justice is an organization that brings together volunteer teams 

of attorneys and other experts to conduct studies of serious local issues, research and analyze them, 

develop and publish recommendations for systemic reform, and advocate for solutions. 6

 DC Appleseed Center for Law and Justice and Piper Rudnick LLP, A Time for Action: The Need to 

Repair the System for Resolving Special Education Disputes in the District of Columbia

(Washington, D.C.: Sept. 2003). 

7

 Government of the District of Columbia Office of the Inspector General, Use of Homeland Security 

Funds at the District of Columbia Public Schools (Washington, D.C.: Sept. 2003). 
Page 4 GAO-05-162R District’s Structural Imbalance and Management Issues

officials told us that goals have been established for the charter schools and 

will appear in the 2004 performance report. According to the report, most of 

the remaining program activities relate to particular funds (e.g., the disability 

compensation fund), and measures are not set for such funds. 

• Medicaid—mental health system. In March 2004 we issued a report on the 

status of reforms to the District’s mental health system, which is managed by 

the Department of Mental Health (DMH), including its enrollment and billing 

system.8

 DMH has developed and implemented a comprehensive enrollment 

and billing system designed to coordinate clinical, administrative, and financial 

processes. Under this system, a core services agency, which is a DMH-certified 

provider, enrolls eligible consumers in the District mental health system and 

develops treatment plans, provides and coordinates services, and bills DMH on 

a fee-for-service (FFS) basis. This system has two key attributes. First, it links 

payment directly to treatment planning and services provided. Second, it 

increases access to certain community-based mental health services, with a 

significant share of the costs reimbursable by federal Medicaid funds for 

community-based mental health services. For fiscal year 2003, DMH received 

$17.5 million in federal Medicaid funds, and DMH expects further growth in 

Medicaid revenue. In transitioning to FFS, however, providers have faced 

challenges managing cash flow in a system that no longer guarantees revenue 

regardless of performance. In addition, because provider contracts were tied 

to the FFS billing projections, DMH could not pay claims in 2003 for providers 

that were delivering more services than had been projected until their 

contracts were changed. As a result, providers did not always receive claims 

payments on a timely basis in fiscal year 2003. By August 2003, DMH made the 

necessary contract changes to allow providers to be paid for the remainder of 

the fiscal year and, according to senior officials, had a plan in process for 

fiscal year 2004 to prevent this problem from recurring. 

• Medicaid—program and fiscal integrity. In July 2004, we issued a report 

on state and federal efforts to prevent and detect improper Medicaid payments 

to providers.9

 Fraudulent and abusive billing practices across the 50 states and 

the District include billing for services, drugs, equipment, or supplies not 

provided or not needed. States can generate cost savings by applying certain 

measures to providers determined to be at high risk for inappropriate billing 

and by generally strengthening their program controls for all providers. We 

identified a number of program control approaches and surveyed all of the 

states and the District on the extent to which they have implemented them. 

These include time-limited enrollment, on-site inspections, and criminal 

background checks, as well as increased use of information technology and 

prescription drug controls. According to our inventory, the District had 

implemented 9 of these 20 cost-saving approaches. 

 

8

 GAO, District of Columbia: Status of Reforms to the District’s Mental Health System, GAO-04-387 

(Washington, D.C.: Mar. 31, 2004). 

9

 GAO, Medicaid Program Integrity: State and Federal Efforts to Prevent and Detect Improper 

Payments, GAO-04-707 (July 16, 2004). 
Page 5 GAO-05-162R District’s Structural Imbalance and Management Issues

• Public safety and justice—jail facilities. In August 2004 we issued a report 

that reviewed the status of health and safety conditions at the District of 

Columbia’s Jail and Correctional Treatment Facility (CTF) along with its 

management of capital improvement projects at the facility.10 We reported that 

District health inspectors consistently identified problems at the facility 

regarding air quality, vermin infestation, fire safety, and plumbing (among 

other things). However, we found that District health inspectors did not 

always document where deficiencies were identified or exact times and dates 

when they were identified—making it difficult for CTF officials to determine 

how prevalent health and safety deficiencies were, whether problems were 

occurring in the same locations, or whether they changed over time. Further, 

we found that the District lacked written policies and procedures concerning 

the management of jail-related capital improvement projects. We 

recommended that District health inspectors improve the specificity of their 

reports. We also recommended that the District strengthen management of 

capital improvement projects by establishing specific time frames for 

completing work and developing and implementing policies and procedures.

• DCPS—special education. In September 2003, we issued a report on special 

education disputes and mediation strategies across the states (including the 

District).11 Officials told us that disagreements usually arose between parents 

and school districts over fundamental issues of identifying students’ need for 

special education, developing and implementing their individualized education 

programs, and determining the appropriate education setting. We found that 

most due process hearings were concentrated in five states—California, 

Maryland, New Jersey, New York, and Pennsylvania—and the District of 

Columbia. We reported that 2,311 special education disputes occurred in 

these five states and the District in the year 2000—compared to 709 in all other 

states combined. Also, the District had 336 due process hearing per 10,000 

students, compared with 24 per 10,000 in New York. We also found that 

dispute resolution activity was generally low relative to the number of 

students with disabilities. 

The District has made and is making real and important progress in addressing its 

long-term and difficult management challenges. However, more work needs to be 

done. Sustained progress is needed to address the critical financial, program, and 

performance management challenges that the District faces across various agencies 

and program areas. 

Link between Structural Imbalance and Management Challenges

• While you note that addressing these management issues could help reduce 

future budget shortfalls, such improvements will not offset the structural 

imbalance. I assume that conclusion is not in any way intended to signal 

that ignoring the management problems is acceptable, but can you please 

comment further on that? 

 

10 GAO, District of Columbia Jail: Management Challenges Exist in Improving Facility Conditions,

GAO-04-742 (Aug. 27, 2004). 

11 GAO, Special Education: Numbers of Formal Disputes Are Generally Low and States Are Using 

Mediation and Other Strategies to Resolve Conflict, GAO-03-897 (Washington, D.C.: Sept. 9, 2003). 
Page 6 GAO-05-162R District’s Structural Imbalance and Management Issues

Ignoring the management challenges that we and others have identified is not 

acceptable, nor did we mean to imply this in our report or my testimony. District 

officials agree that management issues need to be addressed. For example, in the 

District’s formal response to our May 2003 report, the District Chief Financial Officer 

(CFO) concurred that improved program performance would permit the District to 

enhance the quality of the services it delivers and position the District to obtain a 

higher level of federal reimbursement than it currently receives. The CFO also 

acknowledged that significant opportunities for efficiency improvements exist within 

District programs and noted that the District is taking some corrective actions. 

Nonetheless, it is important to consider certain critical points regarding the District’s 

management challenges and their relationship to the fiscal structural imbalance we 

confirmed in our report. The models we used to estimate the range of the District’s 

fiscal structural imbalance presume that services are provided with average 

efficiency. To the extent that a jurisdiction does not deliver services with average 

efficiency, its actual level of services may actually be below average. Due to a 

combination of its significant management problems and its substantial structural 

deficit, the District is likely providing a below-average level of services even though 

its tax burden is among the highest in the nation. Accordingly, the District’s 

management problems waste resources that it cannot afford to lose and draw 

resources away from providing even an average level of services. 

By addressing the management challenges that GAO and others have identified over 

the years, the District could free up local funds and possibly gain additional federal 

funds for use in increasing the level of services to its residents and visitors. For 

example, improving Medicaid management could allow the District to obtain a 

greater level of federal Medicaid funding and fully leverage its enhanced Medicaid 

match. However, management improvements will not offset the underlying structural 

imbalance because it is caused by factors beyond the direct control of District 

officials. As a consequence, District officials may face more difficult policy choices 

than most other jurisdictions in addressing a budget gap between spending and 

revenues based on current policies. 

As we stated in our May 2003 report, by virtue of the District being the nation’s 

capital, justification may exist for a greater role by the federal government to help the 

District address its structural imbalance. However, this strategy is not without its 

own risks. For example, significant management problems in the District mean that 

the aid provided, if not used wisely, could result in more wasteful spending or in the 

District postponing management reforms. Given its management challenges, it is 

important that the District establish basic management, performance, and 

accountability standards to ensure the efficient and effective use of any federal 

resources. Along these lines, it should continue planned management reforms, 

including the movement to performance-based budgeting. It should also address 

management problems and implement recommendations for improvements that have 

been highlighted by GAO and others. 
Page 7 GAO-05-162R District’s Structural Imbalance and Management Issues

LEGISLATIVE REMEDIES

• What guidance can GAO offer as Congress evaluates legislative measures to 

address the District’s fiscal structural imbalance challenge? 

• What should be included in legislative language that would ensure adequate 

and appropriate transparency and accountability for the use of any federal 

contributions that may be authorized to address the structural imbalance? 

• What safeguards would you recommend be considered as essential elements 

of any funding proposal? 

• Using H.R. 4269, the District of Columbia Fair Federal Compensation Act of 

2004, as a baseline, what additions would improve that approach?

Due in part to its substantial structural deficit, the District is likely providing a below 

average level of services even though its tax burden is among the highest in the 

nation. As a consequence, District officials may face more difficult policy choices 

than other jurisdictions in addressing a budget gap between spending and revenues 

based on current policies. For example, given its existing high tax burdens, further 

raising taxes would likely worsen its competitive advantage in attracting new 

businesses and residents to the city rather than surrounding jurisdictions. It would 

also be difficult to cut services further. 

If raising taxes or cutting services is to be avoided, an alternative option District 

officials might exercise would be to continue deferring improvements to its capital 

infrastructure. However, this strategy also is not viable in the long run, in that 

deteriorating infrastructure would of necessity lead to further reductions in the levels 

and types of services provided and ultimately would necessitate either higher taxes 

or cuts in services. 

Federal policymakers are faced with difficult choices regarding what role they should 

play, if any, in addressing the District’s structural imbalance. Federal policymakers 

could choose not to address the District’s structural imbalance and require local 

officials to deal with the difficult choices it faces to meet its obligations. This 

approach recognizes that other jurisdictions also face substantial structural deficits, 

and District officials are in the best position to decide for themselves the most 

effective means of balancing trade-offs between high tax burdens and reduced levels 

of public services for local residents and visitors to the nation’s capital. 

Alternatively, additional federal assistance for the District could compensate for its 

structural imbalance. However, this assistance might suggest that some other states, 

also with sizable structural imbalances, would have an equally sound claim on 

additional federal assistance. Nevertheless, by virtue of the District being the 

nation’s capital, and the restrictions placed upon it, justification may exist for a 

greater role by the federal government to help the District maintain fiscal balance. As 

previously noted, this strategy is not without its own risks. For example, 

management problems that plague the District mean that the aid provided, if not used 

wisely, could result in the District simply postponing many management reforms 

necessary to avoid the wasteful expenditure of much needed resources and would 

assist in closing current budget gaps. Given its management challenges, the District 
Page 8 GAO-05-162R District’s Structural Imbalance and Management Issues

must achieve basic management performance and accountability standards to ensure 

an efficient use of any resources. 

In the end, it is up to Congress to decide whether or in what form to provide the 

District with additional federal assistance to compensate for its structural imbalance. 

As the Mayor of the District of Columbia discussed in his May 2004 report to the 

Senate Committee on Appropriations, there are various forms that enhanced federal 

assistance could take. The Mayor outlined three forms: an unrestricted federal 

payment, assumption of state-like functions by the federal government, and federal 

funding that would be targeted for specific purposes as laid out in the District of 

Columbia Fair Federal Compensation Act of 2004. 

No matter what form this assistance might take, it is important for Congress to have 

assurances that the funds would be spent efficiently and effectively and be used for 

any intended purposes. These safeguards should be written into any legislation. 

Specifically, District officials should be required to report to Congress on how they 

plan to spend the federal assistance and regularly report on how it is being spent. For 

instance, Congress could require District officials to submit a master plan to 

Congress on how they intend to spend the federal assistance—before any funds are 

obligated—and update this plan as circumstances or priorities change. Further, any 

reports and financial statements should be required to undergo periodic review by 

independent auditors. In addition, Congress may consider further specifying the 

types of projects for which federal funds could be used. Congress may also consider 

a matching requirement to ensure that some local funds continue to be used for 

infrastructure and capital projects. 

Finally, as I discussed in my testimony before your subcommittee, it is of critical 

importance to have an effective and transparent capital decision-making and 

management system in place for all District agencies. In my response to the third set 

of questions that follow, I discuss principles and practices that should be followed to 

ensure efficient and effective capital decision making and management.
Page 9 GAO-05-162R District’s Structural Imbalance and Management Issues

PLANNING AND OVERSIGHT

• What types of preliminary evaluations should be conducted and what 

management controls should be in place as a prerequisite for addressing the 

District’s infrastructure needs? 

• In your oral testimony, you referred to an inventory of infrastructure and 

noted that what GAO was provided as part of its work was an “incomplete” 

array. Can you elaborate further and describe any impediments GAO 

encountered in getting complete information? 

• What do you suggest would help ensure that the District compiles and 

maintains an accurate and full inventory of its infrastructure needs and 

estimates, as well as having in place a fully functional system for tracking 

investments made and projected future costs?

If the District were to receive additional federal assistance to compensate for its 

structural imbalance and enhance its ability to fund capital investments—as is 

proposed in the District of Columbia Fair Federal Compensation Act of 2004 (H.R. 

4269)—it is important that the District follow sound practices in order to avoid the 

costly management inefficiencies it has experienced in the past. Congress needs 

assurance that any federal assistance to the District would be spent effectively and 

efficiently. It is critical to have clear, transparent reporting and accountability 

mechanisms in place to ensure the proper use of federal funds. One option for 

Congress would be to require the District to develop and submit for review a set of 

capital planning and management policies and procedures that would be reliably 

followed by all District agencies. 

Regarding my comments about the District’s infrastructure inventory, we had some 

difficulties obtaining complete and timely information on infrastructure projects that 

were not recommended for financing due to funding constraints. This emphasizes 

the importance of the District having systems in place to track information related to 

all infrastructure projects, including proposed projects not approved for funding. 

A key way to ensure that federal capital funds are spent effectively and efficiently is 

to have a clear capital decision-making and management system in place. Along 

these lines, GAO has developed an executive guide that identifies organizational 

attributes that are important to the capital decision-making process as a whole, as 

well as capital decision-making principles and practices used by leading state and 

local governments and private sector organizations.12 These principles and practices 

could be applied to any District agency or the District as a whole. Key elements of 

this guidance are to closely link any planned capital investments to a government’s or 

organization’s strategic goals and objectives, ensure that effective information 

systems are in place to support sound decision making and management, and ensure 

that city leaders to clearly communicate their vision and goals to project managers. 

Specifically, we have identified five basic principles of effective capital decision 

making and linked certain practices that leading public and private entities use to 

carry out each principle. 

 

12 GAO, Executive Guide: Leading Practices in Capital Decision-making, GAO/AIMD-99-32 

(Washington, D.C.: December 1998). 
Page 10 GAO-05-162R District’s Structural Imbalance and Management

Issues

We did not examine the District's capital planning and management functions in 

advance of my June 2004 testimony, and District officials may already be following 

some of these principles and practices in certain program areas. Nevertheless, the 

District should consider these principles and practices in ensuring the 

implementation of an effective, transparent, and reliable system for making capital 

decisions and managing them from start to finish. Our executive guide contains 

additional detail on each of these practices along with numerous examples from the 

leading organizations that we studied. 

 

Principle I: Integrate organizational goals into the capital decision-making 

process. 

• Conduct comprehensive assessments of needs to meet mission and 

results-oriented goals and objectives. Conducting a comprehensive 

needs assessment or analysis of program requirements is an important first 

step in an organization’s capital decision-making process. A 

comprehensive assessment of capital needs considers an organization’s 

overall mission and identifies the resources needed to fulfill both 

immediate requirements and anticipated future needs based on the resultsoriented goals and objectives that flow from the organization’s mission. 

• Identify current capabilities, including the use of an inventory of 

assets and their conditions, and determine if there is a gap between 

current and needed capabilities. Leading organizations gather and 

track information that helps them identify the gap between what they have 

and what they need to fulfill their goals and objectives. To help assess 

current capabilities and establish a baseline, such organizations maintain 

automated systems that track the use and performance of existing assets 

and facilities. Current and accurate information is essential. Some 

functions performed by asset inventory and tracking systems include (1) 

identifying asset and facility location and status, (2) tracking and reporting 

asset and facility condition and deferred maintenance needs, and (3) 

tracking user satisfaction. Routinely assessing the condition of assets and 

facilities allows managers and other decision makers to evaluate the 

capabilities of current assets, plan for future asset replacements, and 

calculate the costs of deferred maintenance. 

 

• Decide how best to meet the gap by identifying and evaluating 

alternative approaches (including noncapital approaches). Leading 

organizations consider a wide range of alternatives to satisfy their needs, 

including noncapital alternatives, before choosing to purchase or construct 

a capital asset or facility. Managers carefully consider options such as 

contracting out or divesting the activity the asset would support. When 

they determine that capital is needed, managers also consider repair and 

renovation of existing assets. When evaluating alternatives, prudent 

decision makers also consider the various funding options available to 

them. They weigh the different impacts of debt financing, engaging in 
Page 11 GAO-05-162R District’s Structural Imbalance and Management

Issues

joint-venture projects, or using current-year appropriations. Leading 

organizations examine their needs and seriously consider whether capital 

is needed to fulfill their requirements. They look at two primary issues to 

evaluate options available to them: (1) whether the function is essential to 

fulfilling the organization’s core responsibilities and (2) whether the 

organization has the specific expertise to perform the function well and 

cost effectively. 

 

Principle II: Evaluate and select capital assets using an investment approach. 

• Establish a review and approval framework supported by analyses. 

We found that establishing a decision-making framework that encourages 

the appropriate levels of management review and approval, supported by 

the proper financial, technical, and risk analyses, is a critical factor in 

making sound capital investment decisions. A well-thought-out review and 

approval framework can mean capital investment decisions are made more 

efficiently and supported by better information. Some leading 

organizations have review processes in place that determine the level of 

analysis and review that will be conducted based on the size, complexity, 

and cost of the project. As part of the capital review and approval process, 

leading organizations develop a decision or investment package to justify 

capital project requests. Common categories of information in the 

packages include links to organizational objectives; solutions to 

organizational needs; project resource estimates and schedules; and 

project costs, benefits, and risks. These packages provide decision makers 

with a valuable tool for analysis and planning at the time the project is 

being considered. Decision packages are supported by a range of 

materials. Types of materials include detailed economic and financial 

analyses, such as cost-benefit analyses and analysis of return on 

investment. 

• Rank and select projects based on established criteria. Leading 

organizations have defined processes for ranking and selecting projects. 

The selection of capital projects is based on preestablished criteria and a 

relative ranking of investment proposals. Leading organizations determine 

the right mix of projects by viewing all proposed investments and existing 

capital assets as a portfolio. Organizations generally find it beneficial to 

rank projects because the number of requested projects usually exceeds 

available funding. Sound criteria help link potential investments to 

program priorities and desired results. 

• Develop a long-term capital plan that defines capital asset 

decisions. Once projects are ranked, they should be put into a long-term 

capital plan. Leading organizations develop long-term capital plans to 

guide implementation of organizational goals and objectives and help 

decision makers establish priorities over the long term. While a plan must 

respond to changing requirements, it is based on the long-range vision for 

the organization embodied in its overall strategic plan. Therefore, any 

year-to-year changes to the capital plan should be driven by strategic 
Page 12 GAO-05-162R District’s Structural Imbalance and Management

Issues

decisions. Leading organizations prepare long-term capital plans to 

document specific planned projects, plan for resource use over the long 

term, and establish priorities for implementation. These plans usually 

cover a 5-, 6-, or 10-year period and are updated either annually or 

biennially. Long-term planning requires that decision makers rank capital 

needs and promotes making informed choices about managing the 

organization’s resources and debt. Some leading organizations also 

prepare long-term asset and facility maintenance plans that are 

incorporated into their long-term capital plans. This helps decision makers 

determine whether and when to purchase a new capital asset or continue 

to maintain an existing one. 

Principle III: Balance budgetary control and managerial flexibility when 

funding capital projects. 

• Budget for projects in useful segments. One strategy that has been 

proven to be useful to organizations in dealing with problems posed by full 

funding in a capped environment is to budget for projects in useful 

segments. This means that when a decision has been made to undertake a 

specific capital project, funding sufficient to complete a useful segment of 

the project is provided in advance. The U.S. Office of Management and 

Budget has defined a useful segment as a component that either (1) 

provides information that allows the agency to plan the capital project, 

develop the design, and assess the costs, benefits, and risks before 

proceeding to full acquisition (or canceling the acquisition) or (2) results in 

a useful asset for which the benefits exceed the costs even if no further 

funding is appropriated. For full up-front funding and the funding of useful 

segments to be effective, organizations must be able to develop good, firm 

cost estimates of the full cost of either the project or the segments early in 

the life of the project. To develop these estimates, the organization must 

have good information and data systems in place. Some organizations fund 

capital projects in useful or meaningful phases by breaking up their capital 

planning and budgeting cycles into segments, such as predesign, design, 

and construction. Funding is provided for one of these segments at a time 

and generally is not guaranteed from one phase to the next. 

• Consider innovative approaches to full up-front funding. Alternative 

strategies used by some leading organizations and federal agencies to 

accommodate full funding of capital projects in a constrained budget 

environment include contracting out for capital-intensive services, using an 

investment component that is similar to a savings account, and developing 

public/private partnerships. These strategies enhance an organization’s 

flexibility to finance the full costs of projects without compromising 

management’s ability to make decisions based on full costs. 

Principle IV: Use project management techniques to optimize project success. 

• Monitor project performance and establish incentives for 

accountability. Successful implementation of a capital investment 
Page 13 GAO-05-162R District’s Structural Imbalance and Management

Issues

project is determined primarily by whether the project was completed on 

schedule, came in within budget, and provided the benefits intended. 

However, the first step is to provide decision makers with good 

information about costs, risks, and scope of a planned project before

committing substantial resources to it. This, in combination with full upfront funding, can help to prevent cost overruns, project cancellations, and 

projects that fail to meet completion schedules. By monitoring project 

performance against cost, schedule, and performance goals—as well as 

establishing incentives to meet those goals—organizations can increase the 

likelihood that projects will be successfully completed. Typically, a good 

project plan is used to manage and control project implementation and 

includes performance measurement baselines for schedule and cost, major 

milestones, and target dates and risks associated with the project. Regular 

review of the status of cost, schedule, and performance goals by 

individuals outside the project team allows for an independent assessment 

of the project. Leading organizations also establish incentives to 

encourage teams to meet project goals. Leading organizations generally 

hold managers accountable for meeting goals. Further, leading 

organizations use a number of built-in incentives for managers and teams 

to meet project goals. Among them are reporting project status to 

individuals or groups in positions of authority outside the project and using 

the project manager’s overall performance in determining the assignment 

to future projects. 

• Use cross-functional teams to plan for and manage projects. Leading 

organizations use multidisciplinary teams, consisting of individuals from 

different functional areas led by a project manager, to plan and manage 

capital projects. Teams typically consist of people from the user 

community and from the organization’s budget, accounting, engineering, 

procurement, and other functions. A core project team is established early 

in the life cycle of a project and additional individuals with particular 

technical or operational expertise are incorporated during appropriate 

phases of the project. Moreover, successful teams have spirit, trust, and 

enthusiasm and a sense of ownership over the project. 

Principle V: Evaluate results and incorporate lessons learned into the 

decision-making process. 

• Evaluate results to determine if organizationwide goals have been 

met. One way of determining if a capital investment achieved the benefits 

that were intended is to evaluate its performance using measures that 

reflect a variety of outcomes and perspectives. By looking at a mixture of 

hard and soft measures, for example, financial improvement and customer 

satisfaction, managers are able to assess performance based on a 

comprehensive view of the needs and objectives of the organization. To 

implement this balanced approach to performance measurement, leading 

organizations developed financial and nonfinancial criteria for success that 

link to the organization’s overall goals and objectives. Another way to 

determine if a capital investment is contributing to the success of an 
Page 14 GAO-05-162R District’s Structural Imbalance and Management

Issues

organization’s goals and objectives is to conduct an audit after the project 

is completed. The primary focus is not to evaluate the technical aspects of 

the project, but rather to evaluate the process and whether the end users 

are satisfied. The lessons learned from the audit can be incorporated into 

the design and construction of the next project. 

• Evaluate the decision-making process: reappraise and update to 

ensure that goals are met. Although some organizations evaluate their 

capital decision-making process on an ongoing basis, this is not the norm. 

Leading organizations seemed generally to revise the processes in response 

to an internal crisis, such as severe budget constraints, or to a perception 

of changing needs, a changing environment, or both. In such situations, 

organizations felt that they had to conduct self-assessments and undergo 

major changes in their capital decision-making practices in order to 

continue successful operations. 

We are also sending this report to the Honorable Mary Landrieu, Ranking Minority 

Member of your subcommittee; the Honorable Richard Durbin, United States Senate; 

the Honorable Eleanor Holmes Norton, House of Representatives; and the 

Subcommittee on the District of Committee, Committee on Appropriations, House of 

Representatives. This report is also available to other interested parties at 

http://www.gao.gov. 

For additional information on our work on the District of Columbia’s fiscal imbalance 

and management issues, please contact me at (202) 512-6806 or daltonp@gao.gov. 

Individuals making contributions to this report were Thomas Yatsco, Jeanette 

Franzel, Norma Samuel, Linda Elmore, Jerry Fastrup, and James Wozny. 

Sincerely yours, 

Patricia A. Dalton 

Director, Strategic Issues 

450372