The District of Columbia Self-Government and Governmental Reorganization Act (Home Rule Act), Public Law 93-198, approved on December 23, 1973, initiated the process by which limited autonomy was conferred on District residents, with the approval of the Home Rule charter by referendum election on May 7, 1974. In addition to the limited autonomy conferred on the District to govern local affairs, certain financial responsibilities were transferred from the federal government to the District. The most significant of these were an unaudited accumulated deficit and an unfunded pension liability relating to previously established pension plans. Fiscal year 1979 was the first fiscal year, post-home rule, that an audited balance sheet was prepared on the District. During this audit, it was determined that the accumulated deficit was $274 million; however, in a period subsequent to fiscal year 1980, this amount was changed to $284 million—an additional deficit of $10 million. Fiscal year 1980 was the first fiscal year that a full financial statement audit was performed on the District. For fiscal year 1980, the District reported a deficit of $104 million that increased the accumulated deficit to $378 million. From fiscal years 1981 through 1990, the District incurred surpluses and deficits that resulted in an audited net surplus of $46 million and an accumulated deficit of $332 million at the end of fiscal year 1990. This deficit was fully funded in fiscal year 1991 with deficit reduction bonds, and the District had a small surplus for fiscal year 1992. It was not until fiscal year 1993 that the District began to experience consistent annual deficits. While fiscal year 1993 had a reported surplus of $8 million, it included 15 months of property tax revenues due to a change in tax year that resulted in an additional $173 million in property tax revenue reported for that period. Thus, fiscal year 1993, adjusted downward for the extra 3 months of revenues, would have reported a deficit of $165 million. Therefore, our analysis focused on fiscal years 1993 through 1995—the period when the District’s current financial difficulties began to emerge. In addition, we have included the congressionally enacted fiscal year 1996 budget and the fiscal year 1997 proposed budget that was approved by the Authority in our analysis. Figure 1 shows the reported actual budget surpluses/deficits for fiscal years 1980 through those projected for fiscal year 1997. Note 1: 1980 was the first year that a full set of audited financial statements was prepared. Note 2: Amounts for 1996 and 1997 are projected. The District’s revenue structure is made up of three types of revenue streams—locally generated revenues, operating grants, and the federal payment—as shown in figures 2 and 3. Note 1: Amounts for fiscal years 1996-1997 are projected. Note 2: Local revenues do not include transfers from Lottery & Games. Note 3: Nominal refers to revenues valued in actual dollars. In fiscal years 1993 through 1995, local revenues declined by $175 million—from about $2.9 billion in fiscal year 1993 to about $2.7 billion in fiscal year 1995. In inflation-adjusted 1995 dollars, the decline and, thus, the loss of purchasing power, was even greater. In inflation-adjusted 1995 dollars, the District’s local revenues decreased about $315 million during this period, primarily due to the decrease in real property tax revenues. However, increases in income and business taxes and sales and use taxes helped offset the real property tax decrease. For fiscal years 1996 and 1997, the District projects local revenues to remain relatively flat. From fiscal years 1993 through 1995, reported real property tax revenues decreased by $274 million to $654 million. There are two primary reasons for this decline. The first reason relates to the previously mentioned, one-time accounting change that artificially inflated fiscal year 1993 revenues but did not affect the cash received from real property tax revenues. Specifically, the District changed its real property tax year-end, which caused an additional 3 months of revenue to be recognized for accounting purposes in fiscal year 1993. This change resulted in a small annual surplus in the District’s financial statements. If the change had not occurred, as previously mentioned, the District would have recorded an annual deficit of about $165 million in fiscal year 1993. According to District officials, the tax year was changed so that the real property tax year-end would coincide with the District’s September 30 fiscal year-end, which would ease reporting requirements. If fiscal year 1993 real property tax revenues had been adjusted by removing the additional 3 months of revenues, the decline between fiscal years 1993 and 1995 would not have been as great. The second reason for the decline in real property tax revenue is a decrease in the assessed value of the District’s commercial and residential property. Lower assessed property values generally equate to lower property tax revenues. From fiscal years 1993 through 1995, the assessed value of the District’s taxable property declined by about 6.3 percent, with most of the decline attributable to commercial property. Consolidation of federal office space, increased competition from suburban office space, and the downward renegotiation of rents on existing space have contributed to the decline in the assessed value of commercial property. In addition, a declining population and falling employment among District residents have caused a decline in housing values and residential sales in all but a few District neighborhoods. The District forecasts real property taxes to decline slightly in fiscal years 1996 and 1997. Operating grant revenue has fluctuated in recent years. Operating grants increased from $760 million to $960 million from fiscal year 1993 through fiscal year 1994, but then decreased to $855 million in fiscal year 1995. Operating grants are primarily a function of the level of expenditures on social programs. As the level of expenditures in these programs increases or decreases, the level of revenues from operating grants increases or decreases accordingly. In fiscal year 1995, over 75 percent, or about $653 million, of the District’s operating grants were for health and welfare programs. In addition, a significant portion of the operating grant revenue is due to Medicaid expenditures—the District’s largest health care expenditure. In fiscal year 1995, Medicaid expenditures for private providers of health care services totaled $744 million. The District is to receive 50 cents for each dollar spent on Medicaid from operating grants. Thus, at least $372 million, or 44 percent, of the total operating grant revenue for fiscal year 1995 represented reimbursements to the District for Medicaid expenditures. The District forecasts operating grants to decrease from $855 million in fiscal year 1995 to $823 million in fiscal year 1996, due to an over $100 million decrease related to the housing authority being placed into receivership that was partially offset by increases to Medicaid and other grants. Further, operating grants are projected to increase from $823 million in fiscal year 1996 to $850 million in fiscal year 1997—a change of about 3 percent, which is primarily due to the Medicaid program. The District has been receiving a federal payment since the 1800s. Historically, the federal payment has fluctuated because of changes in the method and calculations used to determine its amount. Recent history shows that in fiscal year 1992, the Congress adopted a formula to set the general purpose portion amount of the payment to 24 percent of the second prior fiscal year’s own-source revenues (local revenues) collected in the District. In addition to the formula, the Congress also funded certain initiatives as part of the federal payment. The general purpose portion made up about 97 percent of the total federal payment for fiscal years 1993 and 1994. In fiscal years 1993 and 1994, using the aforementioned formula, the federal payments were $636 million and $648 million, respectively. In fiscal year 1995, this formula was discontinued and replaced with a federal payment of $660 million that District officials projected to remain level through the year 2000. Assuming the inflation rate of about 3.3 percent per year through 2000 that the District used in its budget projections and no adjustment to the federal payment, the District will actually lose about $116 million in purchasing power during this period. Major studies performed on the District have concluded that there are inadequacies in the federal payment. For example, it does not fully compensate the District for (1) the additional responsibilities it carries as a result of the federal government’s presence or (2) the loss of revenue due to federally imposed restrictions. This structural issue affects the District’s relationship with the federal government and is one of the issues the Authority is expected to focus upon. The District’s ability to significantly increase its revenue is limited by the Home Rule Act and a large federal presence. Section 602 (a)(5) of the Home Rule Act prohibits the District from taxing nonresident income. Studies performed by the Rivlin Commission, the Appleseed Foundation, and the McKinsey & Company/Urban Institute concluded that this limitation deprives the District of a substantial potential revenue. The studies reported that the District’s inability to tax nonresident wages results in a loss of revenue because nearly $2 of every $3 earned in the District is earned by nonresidents. In addition, about 42 percent of the assessed value of all land and improvements in the District is tax exempt and about 23 percent of the total assessed value is federal property. Thus, the District is unable to obtain revenues from a significant portion of its land. Many sources have estimated the impact of eliminating the restrictions that prevent the District from taxing nonresident income and federal property. The D.C. Appleseed Center for Law and Justice concluded that the removal of these restrictions could have resulted in estimated revenues for the District of $471 million in nonresidential income tax and $694 million in additional property taxes in fiscal year 1995, which is $505 million more than the $660 million federal payment received.