As of September 30, 1993, the District of Columbia’s three defined benefit pension plans for police officers and firefighters, teachers, and judges had a total of about 24,000 participants. During 1993, the District contributed a total of about $292.3 million to the plans and the federal government paid about $52.1 million. The Congress created the three plans over a number of years beginning early in this century. Under the plans’ enabling legislation, only the federal government paid into the plans and did so just for current annual retirement benefits (known as pay-as-you-go funding). The Congress did not authorize accumulating funds to meet the plans’ normal costs—the amount of funds needed each year that would be sufficient to pay all retirement benefits of active plan participants when due. Effective with Home Rule in January 1975, the responsibility for making the pay-as-you-go payments was transferred to the District government. Because the plans’ normal costs were not funded, the shortfall in funds needed to pay future retirement benefits—the plans’ unfunded liability—increased each year. The Congress partly addressed the plans’ unfunded liability with the District of Columbia Retirement Reform Act of 1979, which changed the District’s payments to the plans to a modified pay-as-you-go basis and authorized annual federal payments to the plans of about $52.1 million. Consequently, the contribution requirements in the reform act did not provide for amortizing (paying off over a number of years) the plans’ unfunded liability. In November 1992, we reported that the plans’ unfunded liability had grown to about $5 billion and that they were not as well funded as other public plans. Our report also noted that the District faced an increasing demand on revenues from the three plans. We reported that by the year 2005 its contributions could grow to about 15 percent of revenues ($640.2 million), compared with about 8 percent ($234.9 million) in 1991. Similarly, as shown in figure 1.1, without changes to the current law the District’s contributions to the three plans as a percentage of payroll will increase from 54 percent to a high of 71 percent in 2005, when federal contributions cease. Since our report, there has been much discussion about how to address these plans’ continued underfunding. H.R. 3728, in conjunction with D.C. Act 10-239, has been proposed as one means to do so. The House bill and the District’s act would eliminate the unfunded liability in the year 2035, mainly by increasing the obligations of the federal government, active plan participants, and retirees, and by placing the District’s contributions on an actuarial basis. (See chapter 3 for a full discussion of these provisions.) Concern for the plans’ underfunding was heightened by the District’s recent cash flow difficulties. These difficulties caused the District to defer its contributions to the funds for the second and third quarters of fiscal year 1994 until fiscal year 1995. This action led to a lawsuit by the District of Columbia Retirement Board (DCRB) that required the contributions to be made. We reported in June 1994 that the District is faced with both unresolved long-term financial issues and continued short-term financial crises, such as a significant and continuing decline in its cash position. Placing the plans’ funding on an actuarial basis and eliminating their unfunded liability would relieve the District of a significant financial burden. Such action would also help ensure that sufficient funds are available to pay future retirement benefits. To fully evaluate H.R. 3728, the Ranking Minority Member of the House Committee on the District of Columbia requested us to provide certain information related to the three plans and their unfunded liability. Specifically, he asked us to provide the history and current status of the plans’ unfunded pension liability and the number of plan participants before Home Rule, including a comparison of the plans’ unfunded liability with other state and local plans, and an analysis of the District’s funding formula under the proposed legislation and alternative federal funding methods. To develop the history of the plans’ unfunded liability, we reviewed the legislative history of the District of Columbia Retirement Reform Act of 1979, which established the pension funds for the three plans. We also reviewed the reports of commissions that had been established at various times by the Congress and the District government to evaluate the District’s fiscal activities, including reviews of the plans’ pension funds. In addition, we held discussions with and obtained information from District government and DCRB staff and officials, such as the number of plan participants before Home Rule. To compare the three plans’ unfunded liability with other state and local plans, we obtained survey data published in March 1993 by the Public Pension Coordinating Council. We used these data to update the comparison of the funding status of the three District plans with 24 comparable defined benefit state and local governmental pension plans in our November 1992 report. To analyze H.R. 3728 and the companion District act we used, in part, a study of the bill that was done for DCRB by Milliman & Robertson, Inc., its actuarial consultants. In addition, we reviewed the actuarial model developed by the firm and used it to determine the potential effects of alternate funding methods for eliminating the three plans’ unfunded liability. This model includes typical actuarial assumptions about rates of inflation, wage increases, and investment earnings. Our work was performed from January through October 1994 in accordance with generally accepted government auditing standards. We did not obtain agency comments on this report. However, we discussed the history and status of the three pension plans with District officials to ensure that the report’s descriptions were accurate and complete. When the Congress created the District’s plans for police officers and firefighters, teachers, and judges, it provided for funding them on a pay-as-you-go basis. Beginning in the mid-1970s, congressional committees considered various proposals to fund the plans on an actuarial basis and to eliminate their unfunded liability. In 1978, the Congress passed one proposal that, however, was vetoed because the federal funding obligation was deemed too high. In 1979, compromise legislation was enacted that provided for lower federal funding and modified pay-as-you-go payments for the District. Because this legislation did not provide for eliminating the plans’ unfunded liability, the liability had increased to $5 billion in 1993, with the plans continuing to be not as well funded as other comparable public plans. The Congress created defined benefit pension plans for District of Columbia police officers and firefighters, teachers, and judges at different times: police officers and firefighters in 1916; teachers in 1920; and judges in 1970. These plans were funded on a pay-as-you-go basis, which meant that they received only enough money to pay current annual retirement benefits but did not accumulate any funds with which to meet the constantly accruing future pension liabilities of their participants. In 1946, however, the funding of the teachers’ plan was changed to an actuarial basis so that the District’s contribution covered the normal cost of the plan as well as amortizing the accrued unfunded liability over a 20-year period. Subsequently in 1968, the District’s commissioners requested and were granted permission by the Congress to fund only the normal cost of the plan each year because of the need to use revenues for other purposes. This change was enacted in 1970 by Public Law 91-263, which put the fund on a modified pay-as-you-go basis, covering only the normal cost each year. This law also froze the fund at its June 20, 1969, balance of $61.8 million and mandated that it remain at that level or the amount of the employees’ equity, whichever was greater. Congressional concern with District operations led to the establishment of the Commission on the Organization of the Government of the District of Columbia (Nelsen Commission) in September 1970. The commission’s charter was to analyze the District government’s operations with the goal of promoting increased economy and efficiency. Accordingly, the scope of the commission’s review included the District’s pension plans for police officers and firefighters and teachers (the judges plan was not within its charter). The commission’s August 1972 report recommended the creation of a separate pension fund for police officers and firefighters that would invest moneys not required for current operations and have periodic Department of the Treasury actuarial valuations. In addition, the commission recommended actions to reverse the increase in the unfunded liabilities in the police officers’ and firefighters’ and teachers’ plans and to provide a means for financing any liberalization of their benefits that might be approved in the future. In May 1974, in response to the Nelsen Commission report, the Chairman of the House Subcommittee on Revenue and Financial Affairs, Committee on the District of Columbia, introduced H.R. 15139, intended to establish and finance a pension fund for police officers and firefighters. There was opposition from the Office of Management and Budget (OMB) and the bill died in Subcommittee. The Congress took no further action on the pension funding issue until March 1976, when legislation was considered by the House Subcommittee on Fiscal Affairs, Committee on the District of Columbia. An objective of the legislation was to establish an actuarially sound basis for financing retirement benefits in the plans for police officers and firefighters, teachers, and judges. H.R. 14960 was reported out by the full Committee in August 1976, but was not considered by the House because of opposition by OMB. On April 6, 1977, the House Subcommittee on Fiscal Affairs, Committee on the District of Columbia, reported out H.R. 2465. Subsequently, the bill was reported out of the Committee on April 26, 1977; introduced in the full House as H.R. 6536; and passed in September 1977.