Testimony

Before the Subcommittee on the District of Columbia,

Committee on Government Reform, House of

Representatives and Subcommittee on Oversight of

Government Management, Restructuring and the

District of Columbia, Committee on Governmental

Affairs, U.S. Senate

United States General Accounting Office

GAO

For Release on Delivery

Expected at 11:00 a.m. EDT

Friday June 8, 2001 DISTRICT OF COLUMBIA

Oversight in the PostControl Board Period

Statement of J. Christopher Mihm

Director, Strategic Issues

GAO-01-845T
Page 1 GAO-01-845T DC Post-Control Board Period

Madam Chairwoman, Mr. Chairman, and Members of the Subcommittees:

I am pleased to be here today to discuss issues relating to the suspension

of the activities of the District of Columbia Financial Responsibility and

Management Assistance Authority (Authority). As agreed with the

Subcommittees, my comments this morning will cover three topics. First, I

will highlight the central elements in the District’s financial recovery since

1995 and the continuing long-term challenges it faces. Second, I will

discuss some of the new reporting requirements that Congress has put in

place since 1995 to assist it in oversight and decision-making regarding the

District. Finally, as requested, I’ll identify some additional mechanisms

that Congress may wish to consider to ensure that it and the District have

the information needed to help the District maintain its financial viability.

In response to the District’s severe financial crisis, Congress passed the

District of Columbia Financial Responsibility and Management Assistance

Act (commonly known as the Financial Responsibility Act) in April 1995.1

The Financial Responsibility Act established the Authority to assist the

District in restoring financial solvency and improving management

effectiveness during a “control period.” The Financial Responsibility Act

also established an independent Office of the Chief Financial Officer

(CFO) within the District government. The CFO was given responsibility

for all financial offices of the District (budget, controller, treasurer,

finance, and revenue). During a control period, the CFO is nominated by

the Mayor and appointed by the Authority. The act also revised the Office

of the Inspector General’s (OIG) powers and responsibilities and provided

that the Inspector General (IG) be appointed to a 6-year term by the Mayor

and approved by the Authority, during a control period. In 1997, Congress

passed the National Capital Revitalization and Self-Government

Improvement Act (Revitalization Act), which provided key structural

changes to the District’s finances, including the federal government’s

assumption of the District’s unfunded pension liabilities and a larger share

of the District’s Medicaid expenditures.

As you know, the Authority has certified that the relevant provisions of the

law have been met and, on September 30, 2001, the control period will end

and the Authority will suspend its activities. The relevant provisions

include the following: all borrowings by and on behalf of the District of

Columbia from the U.S. Treasury have been repaid; the District has

 1

Public Law No. 104-8, 109 Stat. 97 (April 17, 1995).
Page 2 GAO-01-845T DC Post-Control Board Period

obtained access to both short-term and long-term credit markets at

reasonable rates to meet its borrowing needs; and the District has

balanced its budget for 4 consecutive fiscal years in accordance with

generally accepted accounting principles (GAAP) based on the

Comprehensive Annual Financial Report (CAFR) for the District.2

The District’s outstanding return to financial health is the direct product of

the combined, cooperative efforts of the District and its elected and

appointed leadership, the Authority, and Congress. It in no way minimizes

this remarkable achievement to note, however, that the District, similar to

many other cities, continues to face a series of substantial, long-term

challenges to its financial viability. Addressing these challenges requires

continued dedicated and inspired leadership to make the hard decisions

and often painful trade-offs among equally compelling needs and

priorities. Sound financial and program cost and performance information

is and will be critical to making these decisions in an economical, efficient,

and effective manner.

Toward that end, the District must ensure that its new financial

management system is effectively implemented and provides

decisionmakers with reliable and timely data. In addition, since 1995

Congress has put in place a number reporting requirements to help

provide the financial, planning, and performance information that it needs

to conduct effective oversight and make decisions. Congress may wish to

consider additional mechanisms to ensure that it and the District have the

information needed to help the District maintain its financial viability and

address its current and emerging challenges. Such mechanisms must be

considered and implemented within a context that seeks to balance two

sets of values: the overriding importance of Home Rule and respect for the

District’s democratic institutions on the one hand and Congress’ oversight

and decision-making responsibilities for the nation’s capital on the other.

My comments today are based on our reviews of the District’s

Comprehensive Annual Financial Reports for fiscal years 1990 through

2000 and related financial management reports and documents issued by

the District CFO, the IG, and the Authority; our recent work on the

District’s financial management system and performance planning and

 2

A fourth provision, that all obligations arising from the Authority’s issuance of bonds,

notes, or other obligations be discharged, was not relevant since the Authority never had to

issue its own bonds, notes, or other obligations; thus, there were no such obligations to

discharge.
Page 3 GAO-01-845T DC Post-Control Board Period

reporting efforts;3 and our discussions with the Deputy Mayor/City

Administrator, the D.C. Council Budget Director and other representatives

of the District Council, the CFO and other officials in the Office of the

CFO, the IG and other officials in the OIG, and officials from other states

and cities that have experienced local government fiscal crises and

recoveries, including officials from the Miami Financial Emergency

Oversight Board and Florida Auditor General’s Office, the Office of the

New York State Comptroller, and the Ohio State Auditor.

In 1995, the District of Columbia faced the worst financial crisis in its

history. Unable to pay its employees or its contractors, the District was

running a significant operating deficit, carrying a large accumulated

deficit, and relying on the U.S. Treasury for help in funding its operations.

The District’s ordinary services, such as motor vehicle inspections and

building permits, were difficult to obtain, and the District could not sell its

bonds at market rates. In short, as we testified in February 1995, the

District was without the cash to pay its bills.

Since then, aided by a strong local economy and through the combined

and cooperative efforts of the Authority, the District government,

Congress, and the citizens of the District, the District has experienced a

remarkable turnaround in its financial condition. For example, in fiscal

year 1996, the District ended the year with a $33 million operating deficit

and a $518 million accumulated deficit. In contrast, for fiscal years 1997,

1998, 1999, and 2000, the District generated operating surpluses. The

District has eliminated its accumulated deficit and at the end of fiscal year

2000 had a positive fund balance of over $465 million—a turnaround of

almost a billion dollars from its accumulated deficit in September 1996.

As shown in figure 1, in looking at the trends in the District’s general fund

balance from 1990 through 2000, its financial situation has improved

remarkably since fiscal year 1997. Prior to fiscal year 1997, the District had

experienced operating deficits in 4 out of 7 years, and the surplus in 1991

reflected a one-time sale of $331 million of “deficit reduction bonds” that

were designed to eliminate the District’s accumulated deficit at the time.

In addition, the surplus it showed in 1993 included a “windfall” of $173

 3

District of Columbia: Weaknesses in Financial Management System Implementation

(GAO-01-489, April 30, 2001), and District of Columbia: Observations on Management

Issues (GAO-01-743T, May 16, 2001).

The District’s

Financial Recovery

and Continuing

Challenges
Page 4 GAO-01-845T DC Post-Control Board Period

million in real estate taxes due to a change in the tax year—recognizing 15

months’ worth of taxes in a 12-month period. These transactions masked

the financial crisis that was brewing in the District. In 1994, the District’s

financial crisis became apparent, and the District experienced 3

consecutive years of significant operating deficits. Once the District’s

financial situation began to turn around in 1997, the District reported an

operating surplus of $186 million. Currently, the District has achieved its

fourth consecutive balanced budget, showing a $241 million surplus for

fiscal year 2000—a major achievement for a city that had been struggling

to recover from financial difficulties for years. The District expects this

trend to continue through 2001 with a projected surplus of $65 million.
Page 5 GAO-01-845T DC Post-Control Board Period

Figure 1: The District’s General Fund Annual and Accumulated Surplus /(Deficit) for Fiscal Years 1990 Through 2000.

Source: District of Columbia Comprehensive Annual Financial Reports, Fiscal Years 1990-2000.

0

50

100

150

200

250

300

350

400

450

500 Dollars in millions

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000

241

-118

 333

 2 8

-335

-55

-33

186

 445

86

Year
Page 6 GAO-01-845T DC Post-Control Board Period

During 1995, the District’s general obligation (GO) bond ratings were

lowered by Standard and Poor’s Corporation, Moody’s Investors Service,

and Fitch IBCA to levels that were considered to be below investment

grade. The bond ratings were lowered because of the District’s financial

deterioration and its lack of a short- or long-term plan for resolving its

budget problems. In 1998, after the District’s financial situation had turned

around, all three rating agencies began to increase the rating on the

District’s GO bonds, a trend that has continued through the most recent

bond ratings. In February 2001, Standard and Poor’s upgraded the

District’s bond rating from BBB to BBB+, citing the District’s improved

financial operations due to substantial operating surpluses and its

enhanced debt position. In March of this year, Moody’s also upgraded the

District’s bond rating from Baa3 to Baa1, citing, among other things, the

District’s fourth consecutive budget surplus in fiscal year 2000. Also in

March 2001, Fitch IBCA upgraded the District’s bond rating from BBB to

BBB+ because of the District’s positive financial performance and

strengthening economic indicators.

The District was unable to achieve unqualified, or “clean,” opinions on its

fiscal years 1995 and 1996 financial statements and received qualified

opinions.4

 The reasons for the qualified opinions included the District’s

inability to provide evidence to support business tax receivables and

credit balances in the tens of millions of dollars and the related impact on

revenues, expenditures, and fund balances as a result of business system

inadequacies. The auditors also cautioned that the District experienced

increases in its accumulated deficit and declines in its pooled cash. Then,

in fiscal year 1997, the District began to turn its financial reporting around

and was able to receive a clean opinion on its financial statements. The

District continued its recovery and, most recently, in fiscal year 2000, also

received a clean opinion on its financial statements.

While the District has made significant progress over the last 6 years, it

still faces short- and long-term challenges to its financial situation. For

example, the District’s current projection for its fiscal year 2001 surplus is

approximately $65 million. This represents a fairly tight financial margin

 4

A qualified opinion means that the financial statements are presented in conformity with

generally accepted accounting principles, with the exception of any issues(s) identified in

the opinion.

Bond Ratings

Audit Opinions

Continuing Challenges
Page 7 GAO-01-845T DC Post-Control Board Period

for a budget of approximately $4.9 billion. In order to ensure that the

District does not experience unexpected deficits, constant monitoring of

actual revenues and expenditures is needed throughout the year. As

budget pressures are identified, the District needs to take quick, decisive

actions in order to address the budget pressures and avoid running

deficits. Over the longer term, as Authority Chair Rivlin noted in her

February 14, 2001, statement,5

 significant challenges still facing the District

are securing its financial future for the longer run and addressing the

structural imbalance of a jurisdiction caught between the need for greatly

improving services and a narrow tax base. Moreover, the bond rating

companies also have issued cautions about future factors that could affect

the District. For instance, Moody’s cautions that the District could be

vulnerable in two areas: (1) potential costs and obstacles to improving the

quality and efficiency of public services and (2) whether elected officials

will have the ability and will to produce results to continue to build

stakeholder confidence. Standards and Poor’s cautions that financial

pressures will come from the District’s limited revenue flexibility,

significant amount of capital needs, and risks associated with the District’s

unique economic profile. Fitch cautions that the District still faces

challenges including a high debt load, funding of health care, and deferred

capital and operating needs, in addition to the possibility of an economic

downturn, which is beginning to be felt in other parts of the country.

A sound financial management system is critical in helping the District

address the continuing pressures that it faces. As we noted in our April 30,

2001 report6 and our May 16, 2001, testimony,7 the District continues to

face significant challenges in its efforts to put in place a financial

management framework that ensures timely and reliable financial data on

the cost of the District’s operations. Almost 4 years after the District’s

acquisition of its core financial management system, that system and

related elements are in various stages of implementation. The current mix

of components involves duplication of effort and, in some cases, requires

cumbersome manual processing. As a result, the system does not produce

certain types of financial information on a timely and reliable basis, such

as the cost of services at the program level. In our report, we made several

 5

Statement of Alice M. Rivlin, Chair, Authority, February 14, 2001.

6

District of Columbia: Weaknesses in Financial Management System Implementation

(GAO-01-489, April 30, 2001).

7

District of Columbia: Observations on Management Issues (GAO-01-743T, May 16, 2001).
Page 8 GAO-01-845T DC Post-Control Board Period

recommendations related to the District’s completion of its financial

management system implementation and the District’s need to ensure that

the system effectively and efficiently meets the District’s information

requirements. We are pleased that the CFO and other District leaders are

already taking action on some of our recommendations and plan to

implement the recommendations remaining from our prior reports.

It is also important to note that the District has internal control

weaknesses that were identified by its independent auditor during the

course of its annual financial statement audits. The weaknesses reported

by the District’s independent auditor as a result of its 2000 audit include

issues related to reconciliation of bank accounts and cash management,

accounting for payroll transactions, transaction processing for the Public

Benefit Corporation and the University of the District of Columbia, lack of

timely entry of transactions into the District’s core general ledger System

of Accounting and Reporting (SOAR), failure to monitor expenditures

against open procurements, accounting and reporting for intra-District

transactions, and timely reporting of budgetary revisions. Similar to its

response to our report, the District has shown a commitment to

addressing these problems and is taking action accordingly.

At the time of the District’s financial crisis, concerns were raised that

Congress did not have the oversight mechanisms in place and the

information it needed to identify the nature and scope of the District’s

problems before they became a full-blown crisis and to help the District

respond effectively to those problems. Since then, Congress has added

new reporting requirements that, if effectively implemented, could provide

Congress with critical financial and performance information to help

Congress in its oversight and decision-making. We believe that two of the

requirements in place may be especially helpful in providing information

and perspective that Congress needs to make decisions.

• Since 1997, the CFO has been required to submit a quarterly report to

Congress on the District’s financial and budgetary status. This quarterly

financial report, which must be submitted no later than 15 days after the

end of each calendar quarter, is to contain a comparison between the

actual and forecasted cash receipts and disbursements for each month of

the quarter. Within the report, the CFO is required to explain any

differences between the actual and forecasted cash amounts, any changes

that would need to be made to the remaining months’ cash forecasts, any

impact these changes would have on the budget or supplemental budget

request, or if these changes would necessitate any reduction in any

Congress Has

Established

Requirements for

Financial and

Performance

Reporting to Aid Its

Oversight and

Decision-making
Page 9 GAO-01-845T DC Post-Control Board Period

agency’s expenditures. Provided that this financial information is timely,

reliable, and objective, this quarterly financial report could be useful to

Congress and others in monitoring the District’s financial condition.

• Since 1998, the Mayor has been required to develop and submit to

Congress a performance accountability plan for each fiscal year, including

a statement of measurable, objective performance goals for all of the

District’s significant activities. After each fiscal year, the Mayor is to

develop and submit a performance report that includes (1) the level of

performance achieved in relation to each of the goals in the performance

plan, (2) the title of the management employee most directly responsible

for achieving each goal and the title of the employee’s immediate

supervisor or superior, and (3) the status of any applicable court orders

and the steps taken to comply with such orders. This law’s general

approach of establishing performance goals and reporting on performance

is similar to the requirements for executive branch federal agencies under

the Government Performance and Results Act of 1993.

In reviewing the District’s fiscal year 2000 performance report, we found

that performance management remains very much a work in progress for

the District, and the performance report reflects that fact. The District’s

goals and measures were in a state of flux during fiscal year 2000,

changing as the District introduced new plans, goals, and measures into its

performance management process. These changes were part of its ongoing

efforts to further develop and improve the performance management

process. Nevertheless, these significant and continuing revisions to the

District’s performance goals limit the usefulness of the performance report

for oversight, transparency, accountability, and decision-making. District

officials recognize that much work remains in its goal setting, performance

measurement, and accountability efforts, and they have important

initiatives under way. For example, the Deputy Mayor/City Administrator

recently outlined the District’s performance-based budgeting initiative

that, if effectively implemented, should help improve the transparency and

accountability of District agencies by clearly showing the relationship

among dollars spent and activities undertaken and services provided.

In addition to these two requirements, there are other permanent and

temporary reporting requirements that are intended to provide Congress

with specific information regarding the state of the District’s finances.8

 8

Public Law No. 106-522, 114 Stat. 2440 (November 22, 2000).
Page 10 GAO-01-845T DC Post-Control Board Period

(See appendix I for a sample of these reporting requirements, most of

which were included in the 2001 D.C. Appropriations Act.)

While the reporting requirements enacted since 1995 are to provide

Congress with important information and perspective on the financial

condition, plans, and program performance of the District—information

that was sorely lacking in the past—Congress may wish to consider the

need for additional mechanisms to help it and the District ensure that they

have the information needed to help the District maintain its financial

viability. One option that Congress may wish to consider is requiring the

District to notify it if certain predefined “reportable events” occur that

require the prompt attention of Congress and the District to ensure that

financial viability is maintained. Under the Financial Responsibility Act, an

Authority could be reestablished if any number of a specific set of major

events occur, such as the District’s default on any loans, bonds, notes, or

other forms of borrowing or the District’s failure to meet its payroll for any

pay period. The major events that could lead to the reestablishment of the

Authority are clearly to be avoided at nearly all costs. But to do so,

Congress and the District need pertinent information in time to act before

a crisis occurs that would necessitate the return of the Authority. A

reportable event notification system could be designed to provide just

such information and include some or all of the following types of

information:

• cash flow pressures that show—

• projected difficulties in meeting any of the District’s financial

responsibilities, including debt service, payroll, pension payments,

payments under interstate agreements, or any other financial

obligations of the District;

• projected difficulties in meeting any of the District’s operational,

program, and service obligations to its citizens;

• a need for increased short-term borrowings to cover the District’s

operations;

• budget gap pressures that could indicate—

• tight operating margins or potential future operating deficits;

• that certain major programs or services within the District are

experiencing difficulties in meeting their missions within their current

structures and levels of resources;

• pressures or questions from the bond rating organizations regarding the

District’s credit ratings; and

• cash projections that indicate a future need for Treasury borrowings.

Options for Additional

Mechanisms to

Ensure That Congress

and the District Have

Needed Information
Page 11 GAO-01-845T DC Post-Control Board Period

A reportable events notification system for the District would be generally

consistent with the approaches that have been taken in other local

jurisdictions that have had experiences similar to the District’s. For

example, the Office of the New York State Comptroller has an ongoing

program to assess cities and townships that experience trouble generating

sufficient revenues on a continuing basis while maintaining adequate

service levels. The assessment program uses nine financial indicators,

such as the jurisdiction’s fund balance, the liquidity of its cash and

investments, and its current liabilities as a percent of net operating

revenues. These factors are used as ratios to facilitate comparisons with

comparable local jurisdictions. The program also uses nonfinancial

indicators, such as the locality’s reliance on intergovernmental revenues,

the jurisdiction’s management ability (measured by the timeliness of

annual reports and stability of key management positions), and economic

activity measures (for example, the per capita income and number of

building permits issued). After determining the causes for the local

jurisdiction’s financial distress, the State Comptroller offers a wide range

of services to address the problem.

Similarly, the Ohio Auditor of State uses various financial indicators that

could result in a “fiscal watch” of local governments under financial stress.

To determine if a local government qualifies for a fiscal watch, the Auditor

of State conducts an initial review of the jurisdiction’s accounts payable,

deficits, cash, and marketable investments. While under a fiscal watch,

local governments can receive technical assistance ranging from advice on

budget formulation to developing performance audits. A key element of

Ohio’s fiscal intervention system is providing local officials the

opportunity to respond to a fiscal crisis prior to the establishment of an

oversight commission.

Another notable example is the ongoing transition to local control from

the Miami Financial Emergency Oversight Board to the City of Miami,

during which a set of financial integrity principles and policies have been

developed and codified into city ordinances. Among the 10 financial

integrity principles is a provision for financial oversight and reporting,

which includes monthly financial reports issued to city departments, the

Mayor, and the city commission on any potentially adverse fiscal trends or

conditions including comparing the city’s budgeted revenues and

expenditures.

The experiences of these governments, our work at the District, and our

related work on reportable events notification systems, suggest that such a
Page 12 GAO-01-845T DC Post-Control Board Period

system would be most useful to Congress and the District if, in crafting the

system, the following considerations are kept in mind.

• The District and Congress should seek to reach broad agreement on the

reportable events that would warrant notification to Congress. Such an

agreement would help to ensure that the notification system serves the

common needs of the District and Congress in ensuring that the District

maintains its financial viability.

• The reportable events should focus squarely on those current financial

pressures that have the potential of developing into a triggering event

requiring the re-establishment of the Authority if not promptly and

adequately corrected.

• The reportable events should be selected so that, in the event they occur,

enough time is available for Congress and the District to take any needed

remedial action to address the matter before it leads to a crisis or triggers

the return of the Authority.

• The reportable events should be clearly defined and transparent so as to

limit the possibility of unproductive debate about whether or not a

reportable event has actually occurred.

• The reportable events should be well documented; that is, the notification

of a reportable event should include discussion of what happened and

why, an assessment of the risk to the District’s financial situation, and a

discussion of needed actions, if any, to address the reportable event.

• Such a system should include a “vital few” set of reportable events.

Reportable events are not intended to be a substitute for more

comprehensive periodic reporting of financial and program performance,

but rather are to draw attention to specific events needing immediate

attention.

• The system should seek, as much as possible, to build on financial

information already collected, monitored, and used by the District. This

would help to minimize the reporting burden and, more importantly, help

to ensure that reportable events are valid and reliable indicators of fiscal

performance. In that regard, much of the financial information needed to

support a reportable events notification system likely is already processed

and monitored by the District’s CFO. For example, the CFO produces

quarterly Financial Status Reports, which provide consolidated summaries

of the District’s financial status and describe the current status of

revenues and expenditures, as well as any developing budget gaps and

pressures. The reports also provide updated information about projected

revenues and expenditures for the remainder of the fiscal year.
Page 13 GAO-01-845T DC Post-Control Board Period

At the request of Congress, we would be pleased to work with the District

and Congress to develop a reportable events notification system that

meets the common needs of the District and Congress.

As I noted at the outset of my statement, in crafting the Financial

Responsibility Act, Congress established an independent Office of the

Chief Financial Officer within the District government with full authority

over all financial offices of the District. Congress recognized that it was

critical for timely, reliable, and objective financial information to be

available to the District and Congress. Congress also recognized that the

CFO’s independence and authority is vital to its effectiveness. It is

important to note, however, that certain powers and functions granted to

the OCFO by the Financial Responsibility Act during a control period will

change under current law, as the District moves into a noncontrol period.

For example:

• In a control period, all budgeting, accounting, and financial management

personnel of the executive branch of the District government (including

the independent agencies) are appointed by, serve at the pleasure of, and

act under the direction and control of the CFO. This authority will cease

during a noncontrol period.

• In a control period, the CFO employs its own legal counsel. The CFO’s

legal counsel is independent of the District’s Office of the Corporation

Counsel, which mainly serves the Mayor, and is under the direct

administrative control of the Mayor. Current law does not provide the

OCFO with authority to employ its own legal counsel during a noncontrol

period.

• In a control period, the CFO is appointed and removed with the approval

of the Authority. However, in a noncontrol period, the CFO can be

removed by the Mayor for cause, with the approval of two-thirds of the

Council. The law does not define “cause.”

• In a control period, the CFO has the authority to contract for services. This

authority will revert to the District’s central procurement process during a

noncontrol period.

• During a control period, the CFO’s budget request is not subject to

revision but is subject to comment by the Mayor and Council as part of the

District’s annual appropriation request. During a noncontrol period, the

CFO’s budget would be included in the District’s regular budget process.

As the District and Congress consider options for ensuring the

independence and authority of the CFO, they may wish to consider

whether the requirement that the CFO certify the availability of funds for

Role of the CFO
Page 14 GAO-01-845T DC Post-Control Board Period

contracts should be amended to expressly include leases and collective

bargaining agreements, which can involve significant expenditures but are

not currently subject to the CFO’s certification. Currently, these items are

not expressly included in the CFO’s legal responsibility for certification,

thereby leaving the certification of funds process subject to disagreement.

In addition, Congress and the District may want to consider whether the

CFO’s budget, once it is appropriated by Congress, should be exempt from

being reduced by the Mayor. A similar exemption is currently in place for

the City Council.

Earlier this week, the Chair of the District City Council submitted a

legislative proposal to the City Council to specifically address issues

related to the CFO’s independence and the scope of the CFO’s duties.

While we have not had a chance to analyze the proposal in detail, we

support efforts by the District to continue or strengthen the independence

and authority of the District’s CFO in a post-Authority environment. Our

Executive Guide: Creating Value Through World-class Financial

Management,9

 notes that one of the essential elements of a successful

finance organization is clear, strong executive leadership. Once the

Authority suspends its activities, it is important to consider whether the

CFO will be able to continue to operate and perform its ongoing fiscal and

financial activities in an independent manner, without encroachment by

others, especially if the District faces difficult choices caused by financial

downturn.

The IG is now appointed to a 6-year term and may be removed by the

Mayor only with Authority approval during a control period. In 1995,

around the time of the passage of the Financial Responsibility Act, the OIG

had seven authorized full-time equivalents (FTE).10 Since 1995, the OIG has

substantially built its operations, staffing, and audit capabilities. Currently,

the OIG has authorized staffing of 105 FTEs. The current responsibilities

of the IG include the following:

• conducting independent fiscal and management audits of District

government operations;

 9

GAO/AIMD-00-134, April 2000.

10FTEs are used to measure federal civilian employment. One FTE is equal to 1 work year

of 2,080 hours.

Role of the IG
Page 15 GAO-01-845T DC Post-Control Board Period

• contracting and overseeing the contract with an outside auditor to

perform the annual audit of the District’s CAFR;

• conducting other special audits, assignments, and investigations;

• annually conducting an operational audit of procurement activities of the

District government;

• forwarding to the appropriate authorities evidence of criminal wrongdoing

that is discovered during the course of its audits, inspections, or

investigations; and

• submitting to the appropriate congressional committees and

subcommittees an annual report summarizing its activities from the

preceding fiscal year.

Each year, the IG establishes an audit plan, in consultation with the Mayor,

City Council, and Authority (during a control period) 30 days prior to the

beginning of the fiscal year. The IG’s criteria for selecting audit areas to be

included in the plan include the following: (1) materiality of the programs,

(2) activities and functions considered for audit, (3) vulnerability of

operations to fraud, waste, and mismanagement, and (4) whether there is a

legislative or regulatory audit requirement.

As with the CFO, the key is to ensure the IG’s independence and authority,

which are vital to its effectiveness. During a control period, the IG is

appointed and removed with the approval of the Authority. During a

noncontrol period, the IG can be removed by the Mayor for “cause,”

although the law does not define “cause.” In addition, Congress and the

District may want to examine whether the IG has personnel authorities

needed to maintain and assure independence. Finally, as with the CFO,

Congress and the District may want to consider whether the IG’s budget,

once it is appropriated by Congress, should be exempt from being reduced

by the Mayor.

One of the IG’s key responsibilities is identifying and reporting to the

Mayor, the District Council, and District department and agency heads any

problems in the administration of District programs and operations and

the need for corrective action. The IG’s role in a post-Authority

environment is critical because of its mandate to audit and report on the

economy, efficiency, and effectiveness of District programs and

operations. As such, Congress, the Mayor, and the District Council should

consider how to best use the IG’s financial and performance-related audits

and reporting in order to provide critical oversight and early warnings of

any potential problems.
Page 16 GAO-01-845T DC Post-Control Board Period

Audit committees have long been recognized as a key component of the

corporate governance system for private sector companies. Generally,

audit committees play an important role in corporate governance by

providing an independent view of management’s financial reporting and by

facilitating communication between management and its internal and

external auditors. Typical responsibilities of audit committees include

assessing the processes related to the company’s risks and control

environment, overseeing financial reporting, and evaluating the internal

and independent audit processes.

The importance of audit committees has also come to be recognized as

increasingly important in the public sector. In 1997, the Government

Finance Officers Association (GFOA) recommended that every

government establish an audit committee or its equivalent. The GFOA also

stated that each audit committee should be formally established by charter

and that the members of the audit committee should collectively possess

the expertise and experience in accounting, auditing, and financial

reporting needed to understand and resolve issues raised by the

independent audit of the financial statements. The GFOA stated that the

primary responsibility of the audit committee should be to oversee the

independent audit of the government financial statements from the

selection of the independent auditor to the resolution of audit findings.

The GFOA also stated that the audit committee should have access to

internal audit reports and plans. Finally, the GFOA recommended that the

audit committee present annually to the governing board and management

a written report on how it has discharged its duties.

The District’s IG has established a CAFR Oversight Committee, which

oversees the progress on the annual financial audit. While not an audit

committee, the CAFR Oversight Committee provides an excellent

opportunity for District financial management staff, OIG staff, and

representatives from the Mayor’s office, the D.C. Council, and the

Authority to be updated on the status of the audit and any issues being

encountered by the auditors. Consequently, issues affecting the audit

could be addressed in an effective and timely manner so the auditor’s

progress towards timely completion of the CAFR would not be impeded.

This process has been key in assuring that the District was able to

compensate for current issues and avoid many of the past problems that

resulted in the late issuance of the fiscal year 1999 CAFR. The CAFR

Oversight Committee, however, does not have the full scope of roles and

responsibilities typical of an audit committee, nor does it follow the

organizational requirements of a traditional audit committee. Congress

and the District may want to consider forming an audit committee or

Audit Committee
Page 17 GAO-01-845T DC Post-Control Board Period

variation of an audit committee based on the objectives of audit

committees described above, and/or strengthening and further defining the

current CAFR Oversight Committee already in place.

In summary, the District and its citizens, the Authority, and Congress have

jointly achieved an enormous accomplishment in restoring the District to

financial viability. At the same time, many of the challenges the District

faced in the past continue, requiring difficult decisions now and in the

future. The District and Congress must have reliable, accurate, and timely

financial, program cost, and performance information if they are to

confidently make these hard decisions. Specifically, the District and

Congress need current, reliable information about the District’s financial

condition and developing trends in order to promptly respond to any

pressures or warning signs that could indicate that future difficulties lie

ahead. District officials and Congress could thereby take an active and

prospective role in dealing with issues, rather than finding themselves in a

position of reacting to a crisis. Such information and oversight will also be

helpful to the District in providing confidence that the District is well

managed, providing needed services to its citizens, and maintaining its

financial solvency. We have a very constructive relationship with the

District and we look forward to continuing to work with Congress, your

Subcommittees, and District officials as the District government continues

to strive to provide the services that its residents expect and deserve.

Madam Chairwoman and Mr. Chairman, this concludes my prepared

statement. I would be pleased to respond to any questions you or other

members of the Subcommittees may have.

For further information, please contact Jeanette Franzel, Acting Director,

Financial Management and Assurance, at (202) 512-9406 or J. Christopher

Mihm, Director, Strategic Issues, at (202) 512-6806. Major contributors to

this testimony included Richard Cambosos, Sharon Caudle, Doug

Delacruz, Molly Gleeson, Steven Lozano, Meg Mills, Susan Ragland, and

Norma Samuel.

Contacts and

Acknowledgments
Page 18 GAO-01-845T DC Post-Control Board Period

Since the financial crisis precipitating establishment of the Authority,

Congress has enacted a number of reporting requirements for various

entities within the District of Columbia government. Some of the reports

are required by permanent law while others are temporary. A sample of

the permanent reporting requirements is listed in table 1.

Table 1: Reporting Requirements Enacted as Permanent Law and Codified in D.C. Code

Permanent Laws

Report and statuteaDescription Prepared by Prepared for

Annual Performance Accountability Plan

D.C. Code 47-231

A performance accountability

plan for all departments,

agencies, and programs of the

D.C. government for the

subsequent fiscal year to be

submitted not later than March

1 of each year

Mayor Senate and House

Committees on

Appropriations, Senate

Committee on

Governmental Affairs,

House Committee on

Government Reform and

Oversight, and the

Comptroller General

Annual Performance Accountability Report

DC Code 47-232

A performance accountability

report on activities of the D.C.

government during the fiscal

year ending on the previous

September 30, to be

submitted not later than March

1 of each year

Mayor Senate and House

Committees on

Appropriations, Senate

Committee on

Governmental Affairs,

House Committee on

Government Reform and

Oversight, and the

Comptroller General

Financial Accountability Plan and Report

D.C. Code 47-233

A 5-year financial plan for the

D.C. government that contains

a description of the steps the

government will take to

eliminate any differences

between expenditures from

and revenues attributable to,

each fund of the District of

Columbia during the first 5

fiscal years beginning after the

submission of the plan, to be

submitted not later than March

1 of each year

Chief Financial Officer

(CFO)

Senate and House

Committees on

Appropriations, Senate

Committee on

Governmental Affairs,

House Committee on

Government Reform and

Oversight and the

Comptroller General

Quarterly Financial Report

D.C. Code 47-234

A report on the financial and

budgetary status of the D.C.

government for the previous

quarter to be submitted not

later than 15 days after the

end of every calendar quarter.

CFO Subcommittees on the

District of Columbia of the

House and Senate

Committees on

Appropriations, Senate

Committee on

Governmental Affairs, and

House Committee on

Government Reform and

Oversight

Appendix I: District Reporting Requirements
Page 19 GAO-01-845T DC Post-Control Board Period

Permanent Laws

Report and statuteaDescription Prepared by Prepared for

Emergency Reserve Fund Use

P.L. 106-522

Sec. 450A, 114 Stat. 2480

Notification to Congress of the

use of the emergency reserve

fund to be issued not more

than 30 days after the

expenditure of funds

Mayor and D.C. Council

(and the Authority during

a control year)

Senate and House

Committees on

Appropriations

Quarterly Report on Emergency Reserve

Funds

P.L. 106-522

Sec. 450A, 114 Stat. 2481

A quarterly report that

includes a monthly statement

on the balance and activities

of the contingency and

emergency reserve funds

CFO Mayor, D.C. Council, the

Authority, and Senate and

House Committees on

Appropriations

Report on Federal, Private, and Other Grants

P.L. 106-522

Sec. 126, 114 Stat 2465

Quarterly report providing

detailed information on

federal, private, and other

grants, to be submitted not

later than 15 days after the

end of the quarter

CFO D.C. Council and Senate

and House Committees on

Appropriations

Inspector General Audit

P.L. 106-522

Sec. 135, 114 Stat. 2468

Annual audit of the financial

statements of the D.C.

Highway Trust Fund, to be

submitted not later than

February 1, 2001, and each

February 1 thereafter

Inspector General Congress

Annual Review

P.L. 106-522

Sec. 450B, 114 Stat. 2475

A review of the

comprehensive financial

management policy to be

issued at the end of each

fiscal year

CFO Senate and House

Committees on

Appropriations, Senate

Committee on

Governmental Affairs, and

House Committee on

Government Reform

a

District of Columbia Appropriations Act, 2001, P.L. 106-522, 114 Stat. 2440 (November 22, 2000).
Page 20 GAO-01-845T DC Post-Control Board Period

The table below lists a sample of temporary reporting requirements that

were included in the 2001 D.C. Appropriations Act.

Table 2: Temporary Reporting Requirements from the 2001 D.C. Appropriations Act.

Temporary Laws

Report and statuteaDescription Prepared by Prepared for

Quality of Life Indicators

P.L. 106-522

Sec. 424, 114 Stat. 2477

Quarterly report on the issues of

crime, access to drug abuse

treatment, management of

parolees, education and special

education access, improvement in

rat control and abatement,

application and management of

federal grants, and indicators of

child well-being

Mayor Senate and House Committees on

Appropriations, Senate Committee

on Governmental Affairs, and

House Committee on Government

Reform

Capital Outlay Borrowings Report

P.L. 106-522

Sec. 110, 114 Stat. 2459

An annual plan, by quarter and by

project, for capital outlay

borrowing

Mayor DC Council and Congress

Management of Real Property

Assets

P.L. 106-522

Sec 139, 114 Stat. 2470

A comprehensive plan for

management of the District of

Columbia’s real property assets

Mayor and D.C. Council Senate and House Committee on

Appropriations, Senate Committee

on Governmental Affairs, and

House Committee on Government

Reform

Reports on Current Leases

P.L. 106-522

Sec 138, 114 Stat. 2469

Quarterly reports on location of

property involved, the extent to

which the property is or is not

occupied by the D.C. government,

and a plan for occupying and

utilizing the property

Mayor and D.C. Council Senate and House Committees on

Appropriations

a

District of Columbia Appropriations Act, 2001, P.L. 106-522 Stat. 2440 (November 22, 2000).

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