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 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. 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. 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 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, 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 report and our May 16, 2001, testimony, 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 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 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.