United States General Accounting Office

GAO Report to the Subcommittee on the

District of Columbia, Committee on

Appropriations, House of

Representatives

December 1998 DISTRICT OF

COLUMBIA

Presentation of the

Authority’s Financial

Information for Fiscal

Years 1997 and 1996

GAO/AIMD-99-22

GAO United States

General Accounting Office

Washington, D.C. 20548

Accounting and Information

Management Division

B-279973 

December 2, 1998

The Honorable Charles H. Taylor

Chairman, Subcommittee on the

 District of Columbia

Committee on Appropriations

House of Representatives

Dear Mr. Chairman:

In a letter dated March 30, 1998, you requested that we review the audited

financial statements and management letters of the District of Columbia

Financial Responsibility and Management Assistance Authority

(Authority) for fiscal years 1996 and 1997. Specifically, you asked that we

compare the Authority’s audited financial statements and management

letters to the District’s Comprehensive Annual Financial Report (CAFR) to

(1) determine whether there was agreement of amounts and consistency

of presentation regarding the Authority’s financial information and

(2) determine why the District’s internal control weakness that relates to

the Authority was not identified in the audit report on the Authority’s

financial statements. Subsequently, your office also requested that we

provide information on

• the Authority’s use of interest income from escrow accounts established

on behalf of the District,

• the Authority’s purpose for the transaction entitled “Taxable Equipment

Lease/Purchase Agreement,” and

• the status of the Authority’s implementation of our suggestions for

improving its financial reporting, which we made in a prior letter on the

Authority’s financial statements for fiscal years 1995 and 1996.1

Background As a result of the District’s financial crisis in 1994, the Congress passed the

District of Columbia Financial Responsibility and Management Assistance

Act of 1995 (the 1995 Act).2

 The Congress established the Authority to

perform the following functions, among others:

1

Analysis of the District of Columbia Authority’s Financial Statements for Fiscal Years 1995 and 1996

(GAO/AIMD-97-80R, May 23, 1997).

2

Public Law 104-8, 109 Stat. 97, 100 (April 17, 1995), D.C. Code Ann. section 47-391.1.

Page 1 GAO/AIMD-99-22 D.C. Authority’s Financial Information
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• eliminate budget deficits and cash shortages of the District through

visionary financial planning, sound budgeting, accurate revenue forecasts,

and careful spending,

• ensure the most efficient and effective delivery of services, including

public safety services, by the District during a period of fiscal emergency,

and

• conduct necessary investigations and studies to determine the fiscal status

and operational efficiency of the District.

In assuming these responsibilities, the Authority was to ensure that funds

were available to meet the District’s obligations to vendors and taxpayers

in a timely manner. To accomplish this, the Authority was required by law

to establish several escrow accounts separate from the District’s General

Fund so that monies could be separately maintained to fund District

activities including water and sewer service, public schools, and the

University of the District of Columbia.

The Authority was established as an entity within the District of Columbia

government,3

 with five board members appointed by the President of the

United States. The Authority receives a regular, annual appropriation from

the general fund of the District of Columbia in fixed amounts. Other

appropriations authorizing the use of (1) gifts, bequests, and other

contributions and (2) interest earned on escrow accounts maintained by

the Authority, are available for an indefinite period.

The District of Columbia Management Reform Act of 19974

 (Management

Reform Act) expanded the Authority’s responsibilities to include the

development and implementation of management reform plans. The plans

cover the major entities of the District5

 and all departments of the District

in the city-wide functions of Asset Management, Information Resource

Management, Personnel, and Procurement.

The Management Reform Act required that the Authority enter into

contracts with consultants to develop plans for the major entities and four

city-wide functions and establish management reform teams to implement

3

Section 101(a) of the 1995 Act.

4

Public Law 105-33, title XI, subtitle B, sections 11101 through 11106, 111 Stat. 731 (August 5,

1997) D.C. Code Ann. sections 47-395.1 through 47-395.5 (1998 Supplement).

5

The entities are Fire and Emergency Medical Services, Public Works, Administrative Services,

Corrections, Human Services (functions now separated and known as the Departments of Human

Development and Health), Consumer and Regulatory Affairs, Employment Services, Housing and

Community Development, Public Health, Public Schools, Police, and Financial Management (the last

three were previously taken over by the Authority).

Page 2 GAO/AIMD-99-22 D.C. Authority’s Financial Information
B-279973 

each plan.6 These new responsibilities increased the amount of funds

being spent by the Authority on behalf of the District. That act also

authorized the Authority to spend interest earned on the escrow accounts

maintained by the Authority as it considers appropriate to promote the

economic stability and management efficiency of the District government.7

Currently for activities for which the Authority controls the funds

provided on behalf of the District, the Authority pays District-related

expenses in one of three ways. For contracts originated by the District, the

Authority either reimburses the District’s General Fund after District

agencies pay vendors, or the Authority pays third parties directly based on

District agencies’ submission of a payment request and approved invoice.

The third approach involves the Authority using its own contracting

authority. For those, it approves the services rendered and pays third

parties directly for goods and services provided to District agencies.

Results in Brief Our review of the Authority’s audited financial statements and the

District’s audited CAFR for fiscal years 1996 and 1997 revealed that the

financial statements included the same amounts for Authority operations.

The presentation and categorization of the Authority’s amounts were in

accordance with the appropriate sections of the Government Accounting

Standards Board (GASB)8

 accounting principles for both sets of financial

statements.

In the District’s auditors’ Report on Internal Controls and Compliance for

fiscal year 1997, they identified a material weakness concerning financial

reporting controls over transactions involving the Authority.9

 The

District’s auditors recommended that the Authority, along with the

District, implement procedures to provide monthly balances and the

related support for all financial activity each month on behalf of the

District. The Authority’s auditors stated and we agree that this material

weakness did not affect the Authority’s internal controls over financial

reporting (preparation of its financial statements). While Authority

officials stated their belief that there was sufficient documentation

6

D.C. Code Ann. sections 47-395.2(a) and 47-395.3 (1998 Supplement).

7

Section 106(d) of the 1995 Act as added by Public Law 105-33, section 11711(a), 111 Stat. 782,

August 5, 1997, D.C. Code Ann. section 47-391.6(d) (1998 Supplement).

8

GASB establishes accounting principles for state and local government, and its statements and

interpretations apply to the financial reports of state and local government entities.

9

The District’s auditors, KPMG Peat Marwick LLP, stated that the District had not developed adequate

procedures to account for funds held by the Authority and did not effectively reconcile the amounts

which are recorded to the relevant Authority records.

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B-279973 

available within the District to record financial activity on its books, the

Authority’s role in District operations and the District’s dependence on the

Authority for data on certain transactions and balances would seem to

necessitate effective communication of financial activity between the two

entities. Absent this level of communication, the District will continue to

have difficulty in recording all District activity and reconciling District and

Authority financial records.

Since the Authority established the escrow accounts on behalf of the

District, the accounts have earned interest income of $9.8 million and

$5.5 million for fiscal years 1997 and 1996, respectively. During fiscal year

1997, the Authority used $5 million of the interest income on behalf of the

District in accordance with the law.10 The $5 million was paid directly to

vendors, transferred from an escrow account, or used to finance the

Authority’s operations. As of September 30, 1997, the balance of accrued

interest income in the escrow accounts was $10.3 million.

The Authority entered into an agreement, entitled “Taxable Equipment

Lease/Purchase Agreement.” Authority officials stated that the purpose of

the agreement was to obtain needed financing and to free-up budget

capacity (budget authority). After looking at the economic benefit of the

transactions and analyzing account balances as of September 30, 1997, we

concluded that there was not an economic need for the Authority to enter

into the agreement.

In our prior letter,11 we identified seven opportunities for improving the

Authority’s future financial statements. To date, the Authority has

implemented six of our seven suggestions. The one exception was the

inclusion of a Management Discussion and Analysis (MD&A) section as part

of its audited financial statements. The Authority is currently required

under Section 224 of the 1995 Act to submit annual reports that address its

financial performance and accomplishments, which, according to the

Authority, makes including the same information in its financial

statements unnecessary. However, with the concept of MD&A expanding

across all governmental entities and presently a requirement in the federal

government and for publicly-traded private sector corporations, we

continue to believe that including an MD&A section in the Authority’s

audited financial statements is needed and would enhance its financial

statements.

10See footnote 7.

11GAO/AIMD-97-80R, May 23, 1997.

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B-279973 

Objectives, Scope,

and Methodology

Our objectives were to determine (1) whether the Authority’s financial

information was in the same amounts and consistently presented in the

fiscal year 1996 and 1997 audited financial statements of the Authority and

the District’s CAFR, (2) why the District’s internal control weakness

concerning the Authority was not also included in the audit report on the

Authority, (3) the Authority’s use of the escrow accounts’ interest income,

(4) the Authority’s purpose for the “Taxable Equipment Lease/Purchase

Agreement,” and (5) whether suggestions made to the Authority’s

management in our prior letter12 were implemented.

To address these objectives, we reviewed the Authority’s audited financial

statements and management letters and the District’s CAFR and Report on

Internal Controls and Compliance for fiscal years 1997 and 1996. We also

obtained detailed supporting schedules, related documentation, and

explanations from Authority officials as we considered necessary. In

addition, we obtained and reviewed the specific laws cited and legal

interpretations made through discussions with Authority officials.

To further support the information provided in the financial statements

and management letters, we interviewed and received additional

supporting documentation from the external independent auditors of the

Authority and the District. We also interviewed the Authority’s Executive

Director, Chief Financial Officer, and General Counsel.

We conducted our work from April 1998 through August 1998 in

accordance with generally accepted government auditing standards. We

requested comments from the Authority’s Chairperson on a draft of this

report. The Authority’s Executive Director provided us with written

comments, which are discussed in the “Authority’s Comments and Our

Evaluation” section and are reprinted in appendix II.

12GAO/AIMD-97-80R, May 23, 1997.

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B-279973 

Comparison of Fiscal

Year 1996 and 1997

Audited Financial

Statements of the

Authority and the

District

The Authority’s financial information as reported in its financial

statements is consistent with the Authority’s financial information

presented in the District’s CAFR. The fiscal years 1996 and 1997 financial

statements of the Authority were included in the District’s CAFR, as a

component unit, as required by GASB,

13 and both the Authority and the

District presented the Authority’s financial activities in accordance with

GASB.

As a result of the widely different annual revenue amounts for the

Authority ($8.6 million for fiscal year 1997) and the District ($5.2 billion in

fiscal year 1997), the Authority’s account balances, which represent less

than .2 percent of the District’s revenue, are summarized in the District’s

CAFR instead of being reported in detail, as in the Authority’s financial

statements. For example, several account line items (Due from

District-Management Reform, Other Receivables from the District, and

Advances from the District) on the Authority’s financial statements were

combined, identified by a different name, and rounded to the nearest

$1,000 when incorporated into one account (Interfund Account) in the

District’s CAFR. However, the total dollar amounts reported by both the

Authority and the District were the same.

In addition, because the Authority and the District are different reporting

entities, there were appropriately some differences in their presentation

and classification of accounts. For example, several account balances

(Government Appropriation, Interest Transferred from Escrow Accounts,

and Other Income) that the Authority presented as “revenue” were

presented as Interfund Transfers-In, an “other financing source” in the

District’s CAFR. Further, the Sale of Fixed Asset amount was presented as

“revenue” by the Authority and as an “other financing sources—proceed”

in the District’s CAFR.

Reported Internal

Control Weakness

Concerning the

Authority

In the District’s auditors’ Reports on Internal Controls and Compliance for

fiscal years 1996 and 1997, an internal control weakness was identified

concerning controls over financial reporting involving the Authority’s

transactions that relate to the District. The material weakness related to a

lack of communication between the District and the Authority when

transactions involve funds that are held by the Authority on behalf of the

13GASB requires that “combining financial statements for discretely presented component units should

be included in the reporting entity’s comprehensive annual financial report using the same

methodology as combining (and individual fund) statements of the fund types of the primary

government.”

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B-279973 

District.14 No finding on this issue was reported by the Authority’s auditors

nor would such a finding be expected since this internal control weakness

does not affect the Authority’s financial operations.

The District’s auditors reported that the District’s Office of Finance and

Treasury did not have complete records of the District funds that are

maintained by the Authority in escrow accounts and could not regularly

reconcile its balances for those accounts with the Authority’s recorded

balances. The auditors also cited the following specific reasons for the

above-reported internal control weakness.

• The Authority did not promptly notify or provide the necessary

documentation to the District of the specific details regarding financial

activity that it incurred on behalf of the District.

• The Authority issued the management reform contracts without promptly

notifying the District of the financial activity to allow for the prompt

recording of the related transactions.

• The District and the Authority had not developed procedures to promptly

notify each other of amounts anticipated or actually received by the

Authority on behalf of the District.

The District’s auditors recommended that the District and the Authority

jointly develop procedures that would result in the Authority providing to

the District the kind of monthly financial information needed for the

District to perform a comprehensive reconciliation. They further stated

that such information should include the monthly balances and the

financial activity for each individual escrow account maintained by the

Authority on behalf of the District. It was also recommended that the

Authority and District develop procedures that provide for dual

notification of activities involving donations and contracts administered

by the Authority for the District.

The Authority’s auditors stated, and we agree, that this material weakness

did not affect the Authority’s internal controls related to preparation of its

financial statements. Authority officials added their view that the problems

cited in the District auditors’ report resulted from an internal control

weakness within the District agencies, and not within the Authority, for

the following reasons.

14Page 13 of appendix B - Internal Control Over Financial Reporting, in KPMG’s Report On Compliance

And On Internal Control Over Financial Reporting Based On An Audit Of Financial Statements

Performed In Accordance With Government Auditing Standards for the year ended September 30,

1997, dated February 5, 1998.

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B-279973 

• The Authority did not originally notify the District of the management

reform contracts and their cost since the Authority originally intended to

pay for those studies from its available funds. However, the

documentation of the contract and costs to date were provided to the

District agencies once a decision was made by the Authority to have the

agencies reimburse the Authority for these costs.

• The U.S. Department of the Treasury or the District’s Office of Treasury is

responsible for notifying District agencies of cash receipts held on their

behalf by the Authority for the issuance of general obligation bonds or

receipt of the District’s annual appropriation.

• District agencies should be responsible for recording expenditures when

they approve amounts for payment, and prior to their submission to the

Authority for payment from escrow accounts.

The reasons cited for the Authority’s disagreement with the District’s

auditors’ findings are valid for transactions initiated and approved by the

District. However, as described in the earlier “Background” section of this

report, when transactions are initiated by the Authority, that data would

not necessarily be concurrently available for the District. As a result,

implementation of the District auditors’ recommendations that the

Authority provide monthly information to the District and that the two

entities provide dual notification on activities involving

Authority-administered contracts and donations is practical and

necessary. Effective implementation of these recommendations would

improve the District’s controls over cash by enabling it to promptly report

and reconcile all financial activity.

Use of Interest From

Escrow Accounts

Section 106(d) of the 1995 Act15 authorizes the Authority to expend any

amounts derived from interest income on accounts held by the Authority

on behalf of the District for such purposes as it considers appropriate to

promote the economic stability and management efficiency of the District

government. In fiscal years 1997 and 1996, the escrow accounts earned

interest of $9.8 million and $5.5 million, respectively. The Authority used

$5 million of the interest income during fiscal year 1997, and the escrow

accounts contained $10.3 million in accumulated interest as of

September 30, 1997 (see table 1).

15D.C. Code Ann. section 47-391.6(d) (1998 Supplement).

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Table 1: Interest on Escrow Accounts

Description Amount

Interest income - FY 1996 $5,516,716

Interest income - FY 1997 9,810,517

Total interest income as of 9/30/97 15,327,233

Direct payments to consultants 2,075,199

Transferred from the Federal Payment Fund Escrow Account 1,752,390

Payment to D.C. General Fund for D.C. share of medicaid 476,700

Authority expenditures in excess of budget 734,471

Total payments/transfer during fiscal year 1997 5,038,760

Balance in escrow accounts as of 9/30/97 $10,288,473a

aUpon the return of the almost $1.8 million to the Federal Payment Fund escrow account in

October 1997, the Authority’s balance of interest income in the escrow accounts was $12 million.

Source: Information provided by the Authority’s auditors.

The Management Reform Act required the Authority to contract with

consultants to perform preliminary studies and reviews of District

agencies so that recommendations could be made on the nature of the

reform required at each agency. Of the $2.1 million paid in fiscal year 1997,

the largest portion, about $1.3 million, was used for an ongoing contract to

conduct a comprehensive study and make recommendations on the

Metropolitan Police Department’s organization and operation. The

remaining contractor payments of about $800,000 were for various

operational reviews of the University of the District of Columbia, Public

Schools, and other agencies.

At September 30, 1997, the Authority held almost $1.8 million that had

been transferred from interest earned on the Federal Payment Fund

escrow account. The Authority initially intended to pay for management

reform consulting expenses using the transferred amount. However,

before the end of the fiscal year, the Authority decided to have the affected

District agencies pay for the consulting expenses. Accordingly, it

established an amount due back to the Federal Payment Fund escrow

account and authorized the bank to return the almost $1.8 million to the

escrow account. Authority officials stated that the amount was returned in

October 1997.

The Authority also paid $476,700 to cover the District’s share of medicaid

payments and used the remaining $734,471 to pay its actual operating

expenses in excess of budgeted amounts. This included a $478,000

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B-279973 

increase in personnel costs for fiscal year 1997 that resulted from

(1) hiring additional employees, (2) giving pay raises totaling $120,000 to

24 employees, and (3) paying $24,500 for lump sum retroactive locality pay

adjustments for fiscal years 1995 and 1996.16

Taxable Equipment

Lease/Purchase

Agreement

On September 30, 1997, the Authority borrowed from a bank $300,000

secured by (1) a lien on personal property (furniture and equipment)

acquired by the Authority during fiscal years 1996 and 1997 and (2) a

pledge of a $300,000 certificate of deposit (CD) purchased from the bank.17

Under the agreement,18 title to the property, with a book value of $271,770,

and the interest earned on the CD, vests in the bank should the Authority

default on the repayment of the loan. In addition, in the event of default,

the bank is given the right to the funds on deposit in the CD to satisfy the

Authority’s obligation. The District can pay off the debt at any time

without fines or penalties for early prepayment.

The agreement calls for the Authority to make 12 quarterly repayments of

$25,000 totaling $300,000, from January 1, 1998, to October 1, 2000. The

Authority is also required to pay $15,487 in interest during the first 4

quarters of the agreement’s term to cover the first year’s interest. Interest

expenses for years 2 and 3 of the agreement will be determined in

accordance with the terms of the agreement. It stipulates that the interest

rate on the debt accrues at the rate of 50 basis points in excess of the

interest earned on the CD pledged as security. The interest rate on the CD is

subject to annual adjustments.

Authority officials stated that the purpose of the agreement was to obtain

needed financing by recovering the net cost of assets acquired with fiscal

year 1997 and 1996 funds and spreading the cost over a 3-year period and

to free-up budget capacity (budget authority). After looking at the

economic benefit of the transaction and analyzing the Authority’s cash on

16Our letter, dated June 16, 1998 (B-279095.2), to the Honorable Charles H. Taylor, Chairman,

Subcommittee on the District of Columbia of the House Committee on Appropriations, we concluded

there was no basis for the Authority to make retroactive payments to the Executive Director and

General Counsel.

17The agreement also requires the Authority to maintain the certificate of deposit in an amount equal to

the outstanding loan balance owed the bank. This requirement was made in order to secure the rate

for the loan.

18We found that while the agreement is entitled “Taxable Equipment Lease/Purchase Agreement,” it is

in substance a secured loan because the Authority received $300,000 in cash for the bank’s security

interest in property owned by the Authority prior to entering into the agreement, and absent default on

the payments, there is no provision for ownership and possession of the equipment vesting in the

bank.

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B-279973 

hand and other account balances as of September 30, 1997, and analyzing

the transaction’s future impact, we concluded that there was not an

economic need for the Authority to enter into this transaction. Although

the transaction resulted in an increase in the Authority’s fiscal year 1997

surplus,19 it had an overall negative economic impact by creating a net

additional cost of $3,488 over the term of the agreement (interest

payments of $27,863 versus interest earned on the pledged certificate of

deposit of $24,375). In addition, when the Authority entered into this

agreement, it

• pledged $300,00020 of existing cash to the bank (which placed the cash in a

restricted account) in order to receive the same amount of funds, resulting

in no increase in available cash,

• had an accumulated surplus of $444,982 at the beginning of fiscal year

1997, already had a $253,000 surplus for fiscal year 1997 from general

operations, and had sufficient cash on hand to meet its current liabilities,

• had access to $10.3 million of escrow account interest as of September 30,

1997, which was available for District operations, and

• created the need to repay $303,48821 over the term of the loan using future

appropriations or escrow account interest.

Repaying this debt would (1) save the Authority more than $1,100 in net

interest to be paid over the next 2 years, (2) remove restrictions on the

outstanding amount of $200,000 currently being held in a certificate of

deposit, and (3) eliminate the need for further administration of the

agreement.

Follow-Up on Prior

GAO Letter

Our May 23, 1997, letter22 identified seven opportunities to improve the

Authority’s future financial statements. The Authority implemented all of

our prior report’s suggestions, except for the inclusion of an MD&A section

as part of its audited financial statements (see appendix I).

In our 1997 letter, we suggested to the Authority that, although it is not a

current reporting requirement for state and local government entities,

19In state and local government accounting, the proceeds of a lease or loan are reflected as Other

Financing Sources, which, depending on the circumstances, either increases the surplus or reduces the

deficit in the general fund.

20Twelve $25,000 quarterly payments over a 3-year period.

21The amount to repay is equal to the minimum payments of $300,000 plus the net interest paid $3,488

on the outstanding debt over the interest earned on the pledged certificate of deposit.

22GAO/AIMD-97-80R, May 23, 1997.

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including a MD&A section could enhance the Authority’s financial

statements. Authority officials stated that they provide a separate annual

report on their progress and accomplishments to the Congress, as required

under Section 224 of the 1995 Act, and that audited financial statements

under GASB are not required to address the Authority’s performance and

accomplishments. They suggested that including the same information in

its financial statements is unnecessary.

Federal agencies that prepare financial statements under the Chief

Financial Officer Act of 1990 (the CFO Act)23 and publicly held private

sector corporations24 regulated by the Securities and Exchange

Commission (SEC) include as part of their financial statements an overview

of the reporting entity, which is similar to an MD&A section. In addition, the

Federal Accounting Standards Advisory Board25 (FASAB) and GASB have

issued exposure drafts that will expand the use of MD&A. An MD&A section

presents information based on the results of an analytical review of

relevant financial and performance data of the programs, activities, and

funds that make up the reporting entity. An MD&A section would enhance

the Authority’s financial statements since it is an important vehicle for

(1) communicating managers’ insights about the reporting entity,

(2) increasing the understandability and usefulness of the financial

statements, and (3) providing understandable and accessible information

about the entity and its operations, successes, challenges, and future.

Conclusions As of September 30, 1997, the same financial activity for the Authority for

fiscal years 1997 and 1996 was reported and presented properly in the

Authority’s financial statements and the District’s CAFR. We agree with the

District’s auditors that if the District received from the Authority more

prompt and detailed information regarding monthly balances and financial

activity, improved controls over cash and improved communication

between the two entities would result. We continue to believe that our

prior suggestion that the Authority include an MD&A section in its audited

financial statements is needed and would enhance its financial statements.

23Office of Management and Budget (OMB) Bulletins No. 93-02 and 97-01, Form and Content of Agency

Financial Statements.

24SEC Accounting Standards Release No. 299, Management’s Discussion and Analysis of Financial

Condition and Results of Operations, dated September 28, 1981.

25FASAB recommends accounting standards for the federal government, and OMB, Treasury, and GAO

decide whether to adopt the recommended standards. If they are adopted, the standards are published

by OMB and GAO.

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The Authority has made the required payments on the “Taxable Equipment

Lease/Purchase Agreement” through September 30, 1998. At this time, the

transaction has 2 years to run and we see no economic benefit for the

Authority in continuing with it. The Authority has the ability to pay off the

loan by using some of the $10.3 million in interest income from escrow

accounts.

Authority’s Comments

and Our Evaluation

In commenting on a draft of the report, the Authority disagreed with

sections in our report concerning

• the lack of communication between the Authority and the District when

transactions involve funds that are held by the Authority on behalf of the

District,

• the Authority’s rights and economic benefits resulting from the agreement

called “Taxable Equipment Lease/Purchase Agreement,” and

• our suggestions to enhance the Authority’s financial statements with an

MD&A section.

In addition, the Authority took exception to a previously issued GAO legal

opinion that was referred to in a footnote to this report regarding the

Authority’s compliance with pay rate limits provided in the 1995 Act.

The Authority stated that it disagreed with the District auditors’ statement

that the Authority did not notify the District in a timely manner of specific

details regarding expenditures. The Authority’s basis for disagreement is

that the District incurs expenditures, and not the Authority. The Authority,

however, does incur expenditures not only when it initiates payments

made for transactions incurred by the District, but also for transactions it

initiates on behalf of the District. As such, the District auditors’ noted that

for these types of transactions the District did not have complete records

of its funds maintained by the Authority in escrow accounts and could not

regularly reconcile its balances. The Authority also stated that it is a

temporary entity and that it is appropriate to hold the District’s Office of

the CFO responsible for tracking and reconciling its revenues and

expenditures, regardless of where funds may be held. Even though it is

temporary in nature, until the Authority no longer exists it has a fiduciary

responsibility to provide the necessary documentation in a timely manner

to the District CFO to ensure that the District’s records are adequately

maintained, especially in those cases where it initiates payments on behalf

of the District.

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The Authority took exception with our statement that the transaction

provided in the “Taxable Equipment Lease/Purchase Agreement” between

the Authority and a bank is in substance a secured loan. We believe our

description of this transaction is accurate for several reasons. First, while

the Authority stated that our view of the transaction failed to recognize

that the equipment “was sold back to the bank,” the Authority also stated

that the bank “only has a lien against the equipment.” If the Authority sold

the equipment to the bank, thereby making the bank the equipment’s

owner, then the bank would not have needed to have a lien against

equipment it owned when it leased the equipment to the Authority.

Second, the Authority’s statement that the equipment was sold to the bank

is inconsistent with the agreement. Section 10 of the agreement states that

title to the equipment is deemed to be with the Authority unless the

Authority defaults on its obligation under the agreement. Section 21 of the

agreement provides that the bank’s security interest in the equipment ends

and the Authority’s title is free and clear of all encumbrances when the

Authority satisfies its obligations under the agreement. These and other

provisions of the agreement establish that the transaction was a secured

loan. While the Authority states that our view of the transaction is contrary

to the legal position of both the Authority and the bank’s counsel, the

Authority did not respond to our requests for the legal analysis of either its

or the bank’s counsel.

During our review, the Authority staff advised us that the transaction and

use of the proceeds was entered into pursuant to section 103(g) of the

1995 Act, authorizing the Executive Director to enter into such contracts

as the Executive Director considers appropriate (subject to approval of

the chair) to carry out the Authority’s responsibilities under the act. The

general grant of authority to contract does not authorize an entity to

borrow and spend the proceeds. Without explicit authority to

borrow—and we are not aware of any such authority in this case—the

Authority’s borrowing and use of the proceeds was an improper

augmentation of its appropriation.

In addition, the Authority stated that the transaction sets an example for

the District government because it leveraged scarce operating revenues.

However, the Authority had a $253,000 surplus for fiscal year 1997, a

$444,982 accumulated surplus carried forward from prior years, and

access to more than $10 million of interest earned on escrow accounts.

Further, it was not leveraging resources since it had to pledge $300,000 of

existing cash, which was placed into a restricted account, in order to

receive the same amount. The Authority also stated that our analysis

Page 14 GAO/AIMD-99-22 D.C. Authority’s Financial Information
B-279973 

unfairly focused upon the economic benefit of the transaction. As

discussed in our report, the transaction did not generate additional cash

and resulted in a net cost to the District with no apparent benefit, financial

or nonfinancial. Thus, entering into such a transaction without a sound

reason, economic or otherwise, is not a good example for the District

government to emulate.

The Authority stated that the inclusion of an MD&A section in the financial

statements is unnecessary, time consuming, and redundant. OMB and SEC

have already recognized the usefulness of an MD&A section in the financial

statements of federal entities and private sector companies, respectively.

GASB also recognizes the importance of an MD&A section for state and local

government entities as demonstrated in its exposure draft on “Basic

Financial Statements—and Management’s Discussion and Analysis—for

State and Local Government,” dated January 31, 1997. Currently, the

Authority prepares another report with the same types of information that

can be used in an MD&A section. Thus, utilizing information already

available would not be time consuming and, as stated in our report, would

enhance the understandability and usefulness of the Authority’s financial

statements.

Finally, the Authority took exception to our legal opinion

(B-279095.2) issued on June 16, 1998 relating to its compliance with the

rate of basic pay to senior executives. At the time we prepared our

opinion, we were aware of the Authority’s argument, which was included

in attachments to its November 2, 1998 response commenting on a draft of

this report, but we concluded that the language of section 102 of the 1995

Act does not permit the Authority’s staff to be paid at rates that exceed the

pay limitation. In addition, the Congress specifically stipulated in the

Authority’s fiscal year 1999 appropriation that funds provided to the

Authority may not be used to pay “any compensation of the Executive

Director or General Counsel of the Authority at a rate in excess of the

maximum rate of compensation which may be paid to such individual

during fiscal year 1999 under section 102 of [the 1995 Act] as determined

by the Comptroller General (as described in GAO legal opinion

B-279095.2).”

We have evaluated the Authority’s technical suggestions and have

incorporated them as appropriate. In addition, the Authority provided

attachments to its response regarding it correspondence with

congressional committees on the Authority’s compliance with rate of basic

Page 15 GAO/AIMD-99-22 D.C. Authority’s Financial Information
B-279973 

pay. We have considered these attachments in our evaluation. However,

these attachments are not included in the report.

We are sending copies of this report to the Ranking Minority Member of

your Subcommittee and the Chairmen and Ranking Minority Members of

the Subcommittee of the District of Columbia, Senate Committee on

Appropriations; Subcommittee on Oversight of Government Management,

Restructuring and the District of Columbia, Senate Committee on

Governmental Affairs; and Subcommittee on the District of Columbia,

House Committee on Government Reform and Oversight. We are also

sending a copy to the Chairperson, District of Columbia Financial

Responsibility and Management Assistance Authority. Copies will be made

available to others upon request.

Major contributors to this report are listed in appendix III. If you or your

staff have any questions, please contact me at (202) 512-4476 or Hodge

Herry, Assistant Director, at (202) 512-9469.

Sincerely yours,

Gloria L. Jarmon

Director, Health, Education, & Human Services

 Accounting and Financial Management Issues

Page 16 GAO/AIMD-99-22 D.C. Authority’s Financial Information
Page 17 GAO/AIMD-99-22 D.C. Authority’s Financial Information
Contents

Letter 1

Appendix I 

Status Of GAO’s Prior

Year Suggestions

20

Appendix II 

Comments From the

District of Columbia

Financial

Responsibility and

Management

Assistance Authority

21

Appendix III 

Major Contributors to

This Report

27

Table Table 1: Interest on Escrow Accounts 9

Abbreviations

CAFR Comprehensive Annual Financial Report

CD certificate of deposit

CFO chief financial officer

FASAB Federal Accounting Standards Advisory Board

GASB Government Accounting Standards Board

MD&A Management Discussion and Analysis

OMB Office of Management and Budget

SEC Securities and Exchange Commission

Page 18 GAO/AIMD-99-22 D.C. Authority’s Financial Information
Page 19 GAO/AIMD-99-22 D.C. Authority’s Financial Information
Appendix I 

Status Of GAO’s Prior Year Suggestions

Suggestions Implemented Not addressed

Include a Management Discussion and Analysis

(MD&A) section to enhance the annual report. X

Clearly label and describe (1) the Agency Funds’

separate statement, (2) what the information

represents, and (3) how it relates to the Authority’s

financial statements, in the notes to the financial

statements. X

Define the actual, actual (budgetary basis), and

budgeted reporting bases used in the FY 1996

Combined Statement of Revenues, Expenditures,

and Changes in Fund Balance. X

Delete reference to Propriety Fund in Note 2 since

none were reported. X

Revise Note 2 to refer to the Combined Statement

of Revenues, Expenditures, and Changes in Fund

Balance and discuss that no encumbrances were

reported for fiscal year 1996. X

Include more detailed and useful information on

the types of reimbursement due from the District in

Note 3. X

Explain in Note 5 that fixed assets are reported on

the Combined Balance Sheet at their net value

and depreciation is not reported on the Statement

of Revenues, Expenditures, and Changes in Fund

Balance in accordance with governmental

accounting standards. X

Page 20 GAO/AIMD-99-22 D.C. Authority’s Financial Information
Appendix II 

Comments From the District of Columbia

Financial Responsibility and Management

Assistance Authority

Note: GAO comments

supplementing those in the

report text appear at the

end of this appendix.

Page 21 GAO/AIMD-99-22 D.C. Authority’s Financial Information
Appendix II 

Comments From the District of Columbia

Financial Responsibility and Management

Assistance Authority

See comment 1.

See comment 2.

See comment 3.

See comment 4.

Page 22 GAO/AIMD-99-22 D.C. Authority’s Financial Information
Appendix II 

Comments From the District of Columbia

Financial Responsibility and Management

Assistance Authority

See comment 5.

See comment 6.

See comment 7.

Page 23 GAO/AIMD-99-22 D.C. Authority’s Financial Information
Appendix II 

Comments From the District of Columbia

Financial Responsibility and Management

Assistance Authority

Page 24 GAO/AIMD-99-22 D.C. Authority’s Financial Information
Appendix II 

Comments From the District of Columbia

Financial Responsibility and Management

Assistance Authority

The following are GAO’s comments on the letter from the Executive

Director of the District of Columbia Financial Responsibility and

Management Assistance Authority dated November 2, 1998.

GAO Comments 1. We revised the report as appropriate.

2. Our report did not state that the Authority used $734,471 to give pay

raises and lump sum retroactive pay adjustments. Our report properly

states that these payments were part of the Authority’s expenditures in

excess of budgeted amounts.

3. Our report did not state that the use of interest earnings took place in

fiscal year 1996. Our report properly states that the Authority was

authorized to use interest income on all escrow accounts with the passage

of the Management Reform Act and retroactively applied the interest

earnings to its excess expenditures during fiscal year 1997.

4. The Authority stated that its role and function have increased from its

inception without an increase to the Authority’s appropriated budget.

While it is true that the Authority’s responsibilities have increased, the

Congress also provided the Authority with additional sources of financing

that could be used for the increased responsibility. In fiscal year 1997, the

Congress, in the Management Reform Act, provided the Authority with

access to the interest earned on all escrow accounts held on behalf of the

District.

5. The Authority’s statements that neither the CD nor the interest is pledged

to the bank is inconsistent with provisions of the “Taxable Equipment

Lease/Purchase Agreement” and related documents. Section 10 of the

agreement states that the Authority’s obligation under the agreement shall

be secured by a Deposit Pledge Agreement under which the Authority will

pledge to the bank a CD representing $300,000 on deposit with the bank.

Section 2.1 of the Deposit Pledge Agreement provides that the Authority

pledge a continuing lien and security interest in the (a) CD, (b) all money

and funds on deposit pursuant to, or represented by, the CD, and (c) all

rights for payment of the CD and all interest payable by reason of the CD.

Finally, section 4.1 of the Deposit Pledge Agreement provides that the

Authority’s failure to pay the amount owed to the bank entitles the bank to

the CD, related cash, and unpaid interest to satisfy the Authority’s

obligation to the bank.

Page 25 GAO/AIMD-99-22 D.C. Authority’s Financial Information
Appendix II 

Comments From the District of Columbia

Financial Responsibility and Management

Assistance Authority

6. The draft report provided to the Authority for formal comment on

October 21, 1998, did not include any recommendations.

7. We revised the report to reflect the District’s current functional

realignment.

Page 26 GAO/AIMD-99-22 D.C. Authority’s Financial Information
Appendix III 

Major Contributors to This Report

Accounting and

Information

Management Division,

Washington, D.C.

Hodge Herry, Assistant Director

Steven Haughton, Audit Manager

Godwin Nwosu, Auditor-In-Charge

Maria Zacharias, Communications Analyst

Office of General

Counsel

Richard Cambosos, Senior Attorney

(916252) Page 27 GAO/AIMD-99-22 D.C. Authority’s Financial Information
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