<DOC> [105th Congress House Hearings] [From the U.S. Government Printing Office via GPO Access] [DOCID: f:42315.wais] MEDICAID AND TREASURY BORROWING SECTIONS OF THE PRESIDENT'S NATIONAL CAPITAL REVITALIZATION AND SELF-GOVERNMENT IMPROVEMENT PLAN ======================================================================= HEARING before the SUBCOMMITTEE ON THE DISTRICT OF COLUMBIA of the COMMITTEE ON GOVERNMENT REFORM AND OVERSIGHT HOUSE OF REPRESENTATIVES ONE HUNDRED FIFTH CONGRESS FIRST SESSION __________ APRIL 25, 1997 __________ Serial No. 105-25 __________ Printed for the use of the Committee on Government Reform and Oversight 42-315 U.S. GOVERNMENT PRINTING OFFICE WASHINGTON : 2002 ____________________________________________________________________________ For Sale by the Superintendent of Documents, U.S. Government Printing Office Internet: bookstore.gpr.gov Phone: toll free (866) 512-1800; (202) 512ÿ091800 Fax: (202) 512ÿ092250 Mail: Stop SSOP, Washington, DC 20402ÿ090001 COMMITTEE ON GOVERNMENT REFORM AND OVERSIGHT DAN BURTON, Indiana, Chairman BENJAMIN A. GILMAN, New York HENRY A. WAXMAN, California J. DENNIS HASTERT, Illinois TOM LANTOS, California CONSTANCE A. MORELLA, Maryland ROBERT E. WISE, Jr., West Virginia CHRISTOPHER SHAYS, Connecticut MAJOR R. OWENS, New York STEVEN H. SCHIFF, New Mexico EDOLPHUS TOWNS, New York CHRISTOPHER COX, California PAUL E. KANJORSKI, Pennsylvania ILEANA ROS-LEHTINEN, Florida GARY A. CONDIT, California JOHN M. McHUGH, New York CAROLYN B. MALONEY, New York STEPHEN HORN, California THOMAS M. BARRETT, Wisconsin JOHN L. MICA, Florida ELEANOR HOLMES NORTON, Washington, THOMAS M. DAVIS, Virginia DC DAVID M. McINTOSH, Indiana CHAKA FATTAH, Pennsylvania MARK E. SOUDER, Indiana ELIJAH E. CUMMINGS, Maryland JOE SCARBOROUGH, Florida DENNIS KUCINICH, Ohio JOHN SHADEGG, Arizona ROD R. BLAGOJEVICH, Illinois STEVEN C. LaTOURETTE, Ohio DANNY K. DAVIS, Illinois MARSHALL ``MARK'' SANFORD, South JOHN F. TIERNEY, Massachusetts Carolina JIM TURNER, Texas JOHN E. SUNUNU, New Hampshire THOMAS H. ALLEN, Maine PETE SESSIONS, Texas HAROLD E. FORD, Jr., Tennessee MIKE PAPPAS, New Jersey ------ VINCE SNOWBARGER, Kansas BERNARD SANDERS, Vermont BOB BARR, Georgia (Independent) ROB PORTMAN, Ohio Kevin Binger, Staff Director Daniel R. Moll, Deputy Staff Director Judith McCoy, Chief Clerk Phil Schiliro, Minority Staff Director ------ Subcommittee on the District of Columbia THOMAS M. DAVIS, Virginia, Chairman CONSTANCE A. MORELLA, Maryland ELEANOR HOLMES NORTON, District of ILEANA ROS-LEHTINEN, Florida Columbia STEPHEN HORN, California THOMAS H. ALLEN, Maine Ex Officio DAN BURTON, Indiana HENRY A. WAXMAN, California Ron Hamm, Staff Director Anne Mack, Professional Staff Member Roland Gunn, Professional Staff Member Ellen Brown, Clerk Cedric Hendricks, Minority Professional Staff Member C O N T E N T S ---------- Page Hearing held on April 25, 1997................................... 1 Statement of: DeSeve, Edward, Controller, Office of Management and Budget; Debbie I. Chang, Director, Legislative and Intergovernmental Affairs/HCFA, Health and Human Services; and Mozelle Thompson, Principal Deputy Assistant Secretary, Treasury Department........................................ 4 Rogers, Michael, city administrator, District of Columbia; Jalal Greene, deputy CFO/Budget and Planning, District of Columbia; Paul Offner, commissioner, Commission on Health Care Finance, DC Department of Health; Linda Cropp, chairwoman, Committee on Human Services, city council; and Mark Goldstein, deputy director, Financial Responsibility and Management Assistance Authority........................ 25 Huestis, Thomas, deputy CFO/Finance and Treasurer, District of Columbia; Frank Smith, chairman, Finance and Revenue Committee, District of Columbia City Council; and Dexter Lockamy, chief financial officer, Financial Responsibility and Management Assistance Authority........................ 73 Letters, statements, etc., submitted for the record by: Chang, Debbie I., Director, Legislative and Intergovernmental Affairs/HCFA, Health and Human Services, prepared statement of......................................................... 7 Cropp, Linda, chairwoman, Committee on Human Services, city council: Information concerning identification cards.............. 71 Prepared statement of.................................... 50 Goldstein, Mark, deputy director, Financial Responsibility and Management Assistance Authority, prepared statement of. 59 Greene, Jalal, deputy CFO/Budget and Planning, District of Columbia, prepared statement of............................ 36 Huestis, Thomas, deputy CFO/Finance and Treasurer, District of Columbia, prepared statement of......................... 76 Lockamy, Dexter, chief financial officer, Financial Responsibility and Management Assistance Authority, prepared statement of...................................... 91 Offner, Paul, commissioner, Commission on Health Care Finance, DC Department of Health, prepared statement of.... 42 Rogers, Michael, city administrator, District of Columbia, prepared statement of...................................... 27 Smith, Frank, chairman, Finance and Revenue Committee, District of Columbia City Council, prepared statement of... 81 Thompson, Mozelle, Principal Deputy Assistant Secretary, Treasury Department, prepared statement of................. 12 MEDICAID AND TREASURY BORROWING SECTIONS OF THE PRESIDENT'S NATIONAL CAPITAL REVITALIZATION AND SELF-GOVERNMENT IMPROVEMENT PLAN ---------- FRIDAY, APRIL 25, 1997 House of Representatives, Subcommittee on the District of Columbia, Committee on Government Reform and Oversight, Washington, DC. The subcommittee met, pursuant to notice, at 2 p.m., in room 2154, Rayburn House Office Building, Hon. Thomas M. Davis (chairman of the subcommittee) presiding. Present: Representatives Davis, Morella, Horn and Norton. Staff present: Ron Hamm, staff director; Howard Denis, counsel; Anne Mack, and Roland Gunn, professional staff members; Ellen Brown, clerk; and Cedric Hendricks, minority professional staff member. Mr. Davis. Would the first panel be seated. Thank you. Good afternoon and welcome. This is the fifth hearing for this subcommittee as we continue our review of the administration's National Capital Revitalization and Self- Government Plan. Today, we will focus on two of the most significant aspects of that plan, those sections dealing with Medicaid and Treasury borrowing. We are combining two subjects in this hearing in an effort to accelerate consideration and facilitate what I hope will be the timely emergence of consensus legislation. We are most definitely at a critical junction in this process. This subcommittee has invested considerable time and effort to get as many stakeholders as possible moving in the same direction. The President has put down his marker, and it has been appropriate for us to use his initiatives as a starting point. But while we are all in general agreement that something significant must be done to revitalize the Nation's Capital, as well as the areas in which innovation is necessary, we are in danger of losing the momentum created by this rare environment. I share the administration's goal of restructuring the relationship between the District of Columbia and the Federal Government. But I also agree with those responsible individuals and groups, some of whom have been witnesses at previous hearings, that the administration's proposals do not fully address concerns about tax relief, economic development, and fall short in other areas as well. So while I'm grateful to the administration for helping provide us with an opportunity to enact necessary reforms, there are also many issues about which we differ. And I am grateful for this opportunity to work together with all the stakeholders to craft a plan which moves up along the path to a revitalized city. It is understandable that the administration desires that a Memorandum of Understanding be signed among the District government, the Control Board, and the Office of Management and Budget. Such a document would certainly help to facilitate the legislative process. But I must make it absolutely clear that neither Congress nor this subcommittee is a rubber stamp. We cannot be expected to blindly pass a proposal simply because it is reflected in a signed memorandum among only these interested parties. That is not the way the legislative process works, and that is not the way it is supposed to work. In the final analysis, Congress is the branch of Government that passes the laws and supplies the resources. So we have not only the intention, but an obligation to do what we think best. In the meantime, we encourage the city and the administration to help us narrow the issues in the very limited amount of time remaining. Today, we will explore the Medicaid and Treasury borrowing sections of the President's proposals. The proposed 70-30 Medicaid split would result in around $917 million in increased payments to the city over 5 years. In return, the city is expected to enact many reforms. I look forward to hearing from our witnesses today about the specifics and any connection that may exist between the formula changes and the implementation of reforms. As to the critical Treasury borrowing section, the subcommittee is interested in the terms, conditions and window of availability the District would have. We also want to explore any impact on the city's overall cash position and any offset due to the suggested elimination of the Federal payment. So we are continuing our review of the President's proposals in a serious way and will continue to do so. Permit me to emphasize that time is now of the essence. This subcommittee and Congress are proceeding to keep momentum going. But there is just so far that we can go without the city and the White House. To the extent that they are absorbed with each other, they can't very well be engaged with us in a productive way. So, we encourage the move ahead on the Memorandum of Understanding and the other issues so we can more fully work with you to address the issues. We appreciate the initiative the administration is sharing. The Chair now recognizes Ms. Norton. Ms. Norton. Thank you. I want to thank Chairman Davis for calling this hearing today on the President's National Capital Revitalization and Self-Government Improvement Plan, and for his continuing cooperation in moving hearings on President Clinton's plan. A systematic and rapid schedule is necessary so that we can meet the timeframes necessary to have the changes in place by the next fiscal year beginning this October 1st. Except for pensions, the two issues that are the subject matter of today's hearing are probably the most important in the President's plan, Medicaid because its escalating annual cost alone is enough to defeat the District's recovery, and a Treasury borrowing because its absence alone would preclude solvency. The District's over $400 million projected Medicaid costs for fiscal year 1997, along with the city's $5 billion unfunded pension liability were the chief villains taking the city into inevitable insolvency. Medicaid ranks with pensions not only because of its annual cost, but because it presents a special case of unfairness. Cities don't pay for Medicaid; States do. Even New York City, the only city that contributes to Medicaid funding, pays for only 25 percent of the total city cost, while the plan before the subcommittee would leave the District with 30 percent of its Medicaid costs. Astonishingly, 39 States have a better Medicaid match than the District. The second subject of our hearing is the sine qua non of solvency. Without a Treasury borrowing, the District cannot liquidate its almost $500 million accumulated deficit. The debate in the District and in our own appropriation committees here over progress in decreasing the city's annual deficit has failed to discuss or to produce a strategy for eliminating the large accumulated deficit. We ignore the debt we have been rolling over for 2 years at our peril. Even after a balanced budget is achieved on an annual basis, the large accumulated deficit could still block credit worthiness and access to the market. While Congress may still make changes, President Clinton deserves great credit and praise for his proposals on Medicaid and a Treasury borrowing for deficit elimination in particular because of the significance of these two matters in achieving anything close to permanent financial stability for the city. These are just two more elements in the President's innovative package that the city did not entirely expect, but that give the plan the comprehensiveness that alone can assure the city's financial health. It is necessary for the subcommittee to keep pace if we are to meet House and Senate timeframes beyond our control. The chairman and his staff have our appreciation for the attention they are giving to achieving this goal. I welcome today's witnesses and look forward to their testimony. Thank you, Mr. Chairman. Mr. Davis. Thank you very much. I also recognize our colleague from California, Mr. Horn. Mr. Horn, any opening comment? Mr. Horn. No. Mr. Davis. Thank you very much. At this point, I would call our first panel to testify: Edward DeSeve, Controller of Office of Management and Budget; Deborah Chang, Director of Legislative and Intergovernmental Affairs, Health and Human Services; and the Honorable Mozelle Thompson, Principal Deputy Assistant Secretary for Government Financial Policy, Department of Treasury. As you know, it is the policy of this committee that all witnesses be sworn before they testify. Would you please rise and raise your right hand. [Witnesses sworn.] Mr. Davis. I ask your comments be made part of the written record, as I request that in the interest of time you limit your oral statements to 5 minutes. We have read the statements, and we invite questions. I also want to thank you for addressing some of the questions in your opening statements. That will save us time. Miss Chang, we will start with you, or we can start with Mr. DeSeve, if you prefer. STATEMENTS OF EDWARD DeSEVE, CONTROLLER, OFFICE OF MANAGEMENT AND BUDGET; DEBBIE I. CHANG, DIRECTOR, LEGISLATIVE AND INTERGOVERNMENTAL AFFAIRS/HCFA, HEALTH AND HUMAN SERVICES; AND MOZELLE THOMPSON, PRINCIPAL DEPUTY ASSISTANT SECRETARY, TREASURY DEPARTMENT Mr. DeSeve. I would like to briefly thank the committee for again having a hearing on these important items and indicate three things. One, this is a continuation of work we have done jointly with the committee for more than 2 years. The people with me today have also been working as part of the Presidential Task Force on the District of Columbia. We know that we are on a tight timetable with you to try to craft legislation, and we are anxious to do so. We think the continued cooperation that we have had with you is terribly important, and we look forward to continued cooperation with the District. You have indicated we have a long way to go, and I and my colleagues and my boss Frank Raines are committed and dedicated to getting that done. We are delighted to have Debbie Chang and Mozelle Thompson with us today. I will be happy to answer any questions as well after they finish. Mr. Davis. Thank you very much. Ms. Chang. Thank you, Mr. Chairman and members of the subcommittee. I am pleased to be here to talk about the Medicaid provisions in the President's plan for DC, as this is a vital aspect of the President's plan to reconfigure the obligations between the District and the Federal Government in terms of providing for a better financial situation and better management of the DC programs. The committee has expressly asked about the link between the Medicaid legislative proposal and the Memorandum of Understanding, and I will speak directly to that. The way we have designed this is that the enhanced Federal match of 70-30, that has been discussed previously would not take effect until October 1, 1997, this year, or, when the Secretary has approved the management plans that are required in the Memorandum of Understanding, whichever is later. So, we have a direct link between the enhanced Federal match and the Memorandum of Understanding for the Medicaid provisions. Now let me go to the logic of the Medicaid matching rate. As you may know, under the current law, the District has 50 percent of its program paid for by the Federal Government. In addition, under current law, a State can have localities contribute up to 60 percent of the State's share. Now DC, of course, is in a very unique position. It is not a State, but it is treated as a State under current law, and it is not a State in the sense that it cannot get contributions from other places either surrounding the District, and it can't use the State's economic base to help with the burden of the Medicaid costs. So what we would do in the President's plan is we would basically change the current formula for DC, so that the matching rate is equal to the maximum amount a local government can be required to contribute under law, and what that means is you take the 60 percent that is permitted under Federal law and you apply that to the current States' 50 percent, and that results in 30 percent that the District would pay under the President's plan. I want to stress that we think this is a good way to go for equity reasons, and that under this plan the Federal Government would pay 70 percent, and the District would pay 30 percent. But, in addition to this, we thought it was important to link this enhanced Federal match with other provisions in the Memorandum of Understanding, which I will now go through. The first thing we would do is we would have the District develop an ongoing internal system to identify and collect moneys owed by third parties. Right now under Medicaid law, Medicaid is the payer of last resort; therefore, Medicare or other private payers pay first, Medicaid should pay last, and we would require the District to identify and collect moneys owed by these third parties. In addition, we would want the District to address its current backlog in cost reports and unaudited cost reports for institutional providers, including hospitals, nursing facilities, and facilities for the mentally retarded. Third, we would ask that the District develop and implement a comprehensive data system for management information requirements, and our rationale behind that is that we want a system where we can verify eligibility across programs, we can identify what services our beneficiaries are getting, we can monitor claims processing, and we can basically assess the overall quality of services and the quality of the program under the Medicaid program, under the--for the District of Columbia. So this is an essential part of what we think is a tool for the District to better manage its program. Last, we would work with the District to develop a comprehensive behavioral managed health care system, and we have already begun discussions with the District on this. The purpose of this is to coordinate the services that are currently provided with respect to mental health, to both coordinate and provide a better set of services to beneficiaries. You have asked in your request about the--what we feel about the capacity of DC, to implement this, in these areas. We feel that these conditions are reasonable and practical, and it is in the self-interest of the District to do these, and as you will hear later from the head of the Medicaid program and others, they too believe that the elements identified for the Medicaid program are reasonable and a good step toward really helping the District in improving its program. Let me also mention before I close that we think there are a lot of signs that under its current new leadership, the Medicaid program has really improved, and, in fact, in terms of services, we have recently approved several different waivers where the District will provide home care to the mentally ill or mentally retarded, and that the District is providing comprehensive services to children with special needs. They have also taken steps to improve their eligibility verification system because, as you may know, they recently found there were about 19,000 people who were actually on the Medicaid program but were not actually eligible. So they have taken a lot of steps to improve the program. We think what we have presented represents a set of tools that they can buildupon to improve the program further. With that, I will stop, and I will be happy to take any questions. Mr. Davis. Thank you very much. [The prepared statement of Ms. Chang follows:] [GRAPHIC] [TIFF OMITTED] T2315.001 [GRAPHIC] [TIFF OMITTED] T2315.064 [GRAPHIC] [TIFF OMITTED] T2315.002 Mr. Davis. Mr. Thompson. Mr. Thompson. Chairman Davis, Congresswoman Norton and distinguished members of the subcommittee, I am pleased to appear before you today to discuss an important part of the President's National Capital Revitalization and Self-Government Improvement Plan--the financing of the District of Columbia's accumulated deficit. As you know, the President's plan is a broad-based proposal to change the existing relationship between the Federal Government and the District of Columbia. It recognizes the District's unique needs and how the Federal Government can help to address them. A critical element for restoring the fiscal health of the District is providing some method of addressing the District's years of accumulated deficits. My testimony provides some background about borrowing issues and how the Treasury financing will provide an important tool to enable the District to better manage its debt and cash-flow needs. In the past, Congress authorized the Treasury to provide the District with long-term financing for certain capital projects on a project-by-project basis. It also authorized the Treasury to make short-term advances for seasonal cash-flow purposes. Right now of those old loans, $50 million in long- term capital loans remains outstanding. In 1981, the District obtained the authority to go to private financial markets to borrow. It borrowed about $6 billion, and about $3 billion remains outstanding. By the early 1990's, however, the District began to experience financial difficulties and accumulated operating deficits, and this deficit is now approximately $500 million. Two years ago, when Congress enacted the District of Columbia Financial Responsibility and Management Assistance Act, Treasury was authorized to provide the District with two different kinds of loans. It was able to provide short-term loans to help the District finance its growing operating deficit on a temporary basis until a long-range solution was developed. Since 1995, Treasury has provided the District with $689 million in ``transitional'' short-term loans. Most of these loans were repaid from the Federal payment, but $223 million remains outstanding. Treasury's authority to provide this kind of loan expires on September 30, 1997. The act also authorized the Treasury to make seasonal short-term cash-flow loans to the District. The terms of the loans are up to 11 months and those loans can cross fiscal years. That cash-flow lending window does not expire in September with the ``transitional'' loan authority. The District has yet to use the seasonal cash-flow window, and all of its borrowing instead has been done under the ``transitional'' facility. The President's plan presents a blueprint for satisfying the District's long-standing, yet unaddressed, need for deficit financing. It would authorize the Secretary of the Treasury to make new loans with terms of up to 15 years to assist in financing the accumulating operating deficit. The interest rate on such loans would be based on Treasury rates and be subject to the Credit Reform Act of 1990, and must be scored as part of the budget in the year in which the loans are authorized. At the same time, the Secretary's authority under the 1995 act to make short-term cash-flow loans would continue to be available. Providing the District with deficit financing would provide substantial benefits for the District and its residents. First, it would allow the District to better manage its financing by breaking a pattern of annual rollovers of millions of dollars of deficit. Second, it would allow the District to reduce its debt service costs by being able to repay its deficit over a longer time, utilizing longer-term interest rates. Third, it would enable the District to more quickly rebuild access to credit markets to the extent that this vehicle provides the District with a stable and responsible means for eliminating the deficit. The administration believes that any legislation that provides a deficit financing mechanism should have sufficient flexibility for the Treasury to work with the District and the DC Financial Responsibility and Management Assistance Authority to structure an appropriate loan. Our plan contemplates such flexibility. However, the Treasury also believes any deficit financing will only be successful if it also encourages appropriate accountability and management of District finances. Accordingly, the plan contemplates any deficit financing will contain the following elements. First, the authority to make deficit loans will be available for only a limited time, and for a limited amount. By limiting the amount and timing of such borrowing, we will avoid creating a financing structure that could encourage the accumulation of new deficits. Second, the District will continue to be required to demonstrate that it is unable to obtain credit from the private market on reasonable terms. The Treasury continues to believe the District benefits from using and maintaining its own access to credit markets. Consistent with this principle, any deficit loan mechanism would also allow the Treasury to require the District to refinance deficit loans in the private market if the Treasury determines the District is able to do so without adversely affecting its financial stability. Third, any intermediate-term loans would be no longer than 15 years. We are aware the District believes it may benefit from some short-term borrowing on an ``inter-year'' basis, and our plan is flexible enough to permit such borrowing. However, we believe such loans should be made under conditions that would not lead to ``roll-over'' financing of new deficits. Fourth, we would continue to require the same kind of certificates and supporting materials that we have required in the past. We believe this is precisely the kind of initiative and deficit financing vehicle that is worthy of the Nation's Capital. Mr. Chairman and Congresswoman Norton, this concludes my testimony. Mr. Davis. Thank you very much. [The prepared statement of Mr. Thompson follows:] [GRAPHIC] [TIFF OMITTED] T2315.003 [GRAPHIC] [TIFF OMITTED] T2315.004 [GRAPHIC] [TIFF OMITTED] T2315.005 [GRAPHIC] [TIFF OMITTED] T2315.006 Mr. Davis. Let me just try to--explain to me in layman's terms the scoring provisions of the Treasury borrowing. Mr. DeSeve. Under the Credit Reform Act, any borrowing has to be scored. You don't know how it will score or what the amount is until the terms and conditions of the borrowing are presented. So let's use an FHA loan as an example. We have a history of FHA loans--any FHA loan, and they are bundled together each year. You look at the potential loss rate on that loan, and in the first year, the year in which it is authorized, you set aside enough money to pay for that loan. We have been working with the credit rating agencies and the District to try to get our scores in OMB comfortable with the nature of that set- aside, that requirement. Mr. Horn is very familiar with this process, he has been working with us in other areas of debt collection and credit reform with that. CBO will provide scoring as well. When we did the Financial Responsibility and Management Assistance Authority Act, we looked at the Federal payment as a source of security. With that as a source of security, there was no scoring implication that was scored, but it was scored at zero by OMB because of the existence of the Federal payment. Mr. Davis. Does this proposal replace the Treasury borrowings? Mr. DeSeve. It extends them because they expire, and it also adds the 15-year intermediate term as well. Mr. Thompson. It also changes it in one way. To the extent it provides an express provision for deficit financing over a longer term, it is different from what is contained in the act. What does remain from the act, though, is the continued authority to borrow on a short-term basis for seasonal cash- flow purposes. Mr. Davis. Miss Chang, let me ask a question. How many other cities operate their Medicaid programs? Ms. Chang. Under current Medicaid law, the counties can operate their Medicaid programs, and it is really based on the States; the States decide. Mr. Davis. Are there a lot of them? Ms. Chang. Yes, there are. There are at least 10 States where they have the counties operate and contribute financing for the Medicaid program. Mr. Davis. How about cities; I know L.A. does it, and, I guess, New York. Ms. Chang. Again, it depends on the State, and in those States that I mentioned, they do in those States provide for the county to provide both money as well as administering the program. Mr. Davis. Is it a 70-30 match? Is that a reasonable match, or is that a low end or a high end for a city and county operating; from the city's perspective, take the State out of it? Ms. Chang. Right now States can contribute ranging from 20 to 50 percent in terms of the program, and as I mentioned to you earlier, up to 60 percent of the State's share can be used by the counties. So it can take 60 percent. It's a range of about 12 percent to 30 percent, so in that sense, DC is on the high end of what a district would contribute. Mr. Davis. Thinking of the city as a city, then, the share is on the high end. Thinking of the city as a State, makes it very good, so it depends on the perspective. Ms. Chang. That is true. Mr. Davis. OK. How well do you think the city is doing managing a Medicaid program today? Ms. Chang. As I said earlier, I think the city has made a lot of improvements in managing the program under its new leadership, but clearly there are areas of improvement we have outlined in the Memorandum of Understanding. One of the key things is that the city needs to build an infrastructure of both information and accountability, financial accountability, and that is why the data system I mentioned, dealing with the cost reports, dealing with making sure that we--that the city collects all the third-party liability, all those things are very important for the city to move forward in improving its program. Mr. Davis. Well, let me ask, assuming, say, Maryland or Virginia wanted to contract collections, is there anything to prohibit the city from contracting out collections to Maryland or Virginia if they wanted to do that? Ms. Chang. That is a complex issue, and there are legal issues as well as capacity issues. I don't really know the answer to that question. Mr. Davis. And do you have any thought on that? Mr. DeSeve. I don't. We would like to get back to you with a written response. Mr. Davis. Or privatized. But say Maryland is next door and does a pretty good job and will, for a fee, do that as opposed to taking it. Mr. DeSeve. Pennsylvania take over Delaware, something like that. Let us take a look and get that for you. Mr. Davis. Is that feasible; is it easier than trying to reinvent the wheel? And I don't have any particular thoughts on it, but it is something that has been suggested up here, so I wanted to get your thoughts on that. Well, let me ask this: Will the Treasury loans be at reduced rates or in terms of below the private market? Mr. Thompson. The Treasury loans will be based on what the Treasury rates are, plus if that is where we have structured them now because of our cost of borrowing, we have to go out and borrow. Also, subject to whatever the credit story has to be, we are not looking to provide a subsidized rate here because that would have a substantial credit scoring impact. Mr. Davis. I guess my last question I would like to ask all panelists--we will send you some other questions. We have two other panels here. The private bond markets, especially holders or insurers of outstanding District general obligation debt, have been concerned about the Treasury using Federal payment as collateral and having first called that funding source. How does this proposal and the elimination of the Federal payment affect future bond rates? Any thought on that? Mr. Thompson. Sure. First of all, we at Treasury believe that we want to be cautious with someone else's bonds and obligations. Mr. DeSeve. We have enough of our own to worry about. Mr. Thompson. The purpose of---- Mr. Davis. You also understand you have us down the road. Mr. Thompson. Sure. The important part about providing deficit financing on a longer-term basis is that will provide the District with stability and certainty to the extent that it provides a plan to provide stability, to the extent it provides certainty, that there is a mechanism to reduce outstanding obligations, we think both of those features are things the market looks for as a balance. Mr. Davis. Plus any others; particularly, first call of cash and the predictability and the certainty of being able to be sure. Mr. Thompson. Sure, but I don't think anybody is looking at the Treasury or anywhere else to do anything that threatens the District's ability to meet its obligations. Mr. Davis. In fact, the whole idea is so the city can meet obligations and take obligations within a framework it can afford. OK. I may have additional questions, but that covers it. Thank you very much. Ms. Norton. Ms. Norton. Thank you, Mr. Chairman. Miss Chang, I appreciate that the 70-30 formula is considerably better than what the city has now. I know you appreciate that. The Medicaid match you happen to have would bring down some States, States that are really struggling with Medicaid. Medicaid costs have remained quite uncontrollable, despite what I will not call our best efforts, but despite efforts here in the Congress. Therefore, this is a cost that I look to with some skepticism, particularly since the Congress hasn't said what in the world it is going to do with it. Since most of the money goes for nursing homes, it is in very many ways a middle class entitlement, since they were the people who were going in and becoming elderly. The fact is the Federal Government has shares with entire States that range all the way up to 80 percent. While I understand the way in which you get to your figures, and it is a rational way, it is not a figure plucked out of the air, I wonder if it's possible to justify the Federal Government picking up an 80 percent share for a State like Louisiana and only a 70 percent share or a lesser share for a city which is rapidly losing its middle-income tax base. Since the District is treated as a State, whenever it is to the advantage of the Federal Government, why was the District not treated as a State and looked at in comparison with other States in this regard so that we might have had a truer nexus to our own underlying economy, which you still have to cough up a lot of money because it is Medicaid and because of the escalated cost of Medicaid. Ms. Chang. You mentioned several things here. Let me try to address all of them. With respect to the formula under the current program, in fact, as I think I already indicated, it ranges from 50 percent to 80 percent, and that is the very nature of the program. So there are programs that are getting 80 percent, higher than the 70 percent we propose for the District, and it is really due to the way the formula is crafted. The way the formula is crafted is States with high per capita income basically pay more for their Medicaid program, and that is why the District pays the minimum amount, which is 50 percent, and that is just a function of the formula. Now, with respect to your other point, however, I just want to underscore that while it is true that the Medicaid program does provide some long-term care costs, it is an essential safety net for low-income people, and, in fact, 50 percent of the recipients under Medicaid are low-income children who need health care services, and even the people who spend--who need nursing home services---- Ms. Norton. Excuse me, I am talking about the money. I am interested in the money. Two-thirds of the money goes to people in nursing homes. The District of Columbia cannot control that. The fact is when people use the figures about poor children, they hide the real facts, and that is that people spend out their money, and they can't help it because it costs $40 to $50,000 a year, and that is who gets the money. It is true that the children in numbers are the larger representative, but DC, when it comes to paying out the money, DC is going to be paying it to nursing homes, and there is not anything they can do because it remains an entitlement, and that is what I was speaking to, and I wish you would respond to. Ms. Chang. You are asking me to respond why we came up with the 70-30 match? Mr. DeSeve. Let me try that. It is really a political question. We looked at the statutory formula; Congress enacted the formula. We did not invent the formula in the administration. In looking at the formula, we saw the rationale for city shares and State shares, and we chose the most difficult rationale for the District. It was a policy choice not done by technicians, but done broadly in the context of a plan. So we said, what is the most a city could pay? You may argue the proper construction is what is the least the State can pay, and I think that is a valid argument as well. Ms. Norton. Please understand that what you have done leaves the city very substantially--we are just killing the city. I am up here where I hear the States come forward on their knees, who are much richer than the District, and I am posing that question for that reason. Let me ask another question. One State function that is very large that was not transferred, that you did not consider, was welfare. Now, if you insist upon treating the city as a city, then, of course, I am going to insist that you be consistent. If you insist upon treating the city as a city, look at the position the city is left in now, and here there is very clear and present danger, because if the city doesn't get 50 percent of its welfare recipients into work activity by 2002, and 25 percent by the end of this year, it begins to lose real money. This is the first time this has ever happened to the city, and it could lose up to 21 percent of its grant. That could happen, of course, to any State. The difference is that in trying to put together, let's say, the 25 percent for this year, Maryland will not get anything like that number out of Baltimore because it has the whole State of Maryland with its State demographic base to draw from. And in the same way, Virginia will probably not get a lot of them from Richmond. In fact, there are jobs in northern Virginia that will make it easier to get, perhaps, a disproportionate share from northern Virginia, but the District has no place to get them from except its own inner city. So if you are insisting upon the city formula, I want to ask you why you are not willing to take over some portion of welfare in the way you have taken over some portion of Medicaid? Mr. Horn [presiding]. The question will be answered, and then we will go to the next panel. Mr. DeSeve. Thank you, Mr. Horn. We are trying to work very hard in a new environment for laws, as you put it, in welfare reform. And we wanted to allow that new law to begin working. We are very sensitive to the District's plight here, and are working very closely with the District as they try to fashion their response to the new law. And we will look very, very carefully at it. Ms. Norton. Excuse me, that was a two-part question, sir. Would you consider supporting my bill, which would erase the discrimination the District now faces in having to essentially get its 25 percent and then its 50 percent from the inner-city population, erase it by allowing the District, with respect to the percentage, to be compared to cities so that if, for example, Baltimore and Richmond are contributing X percent to the State quota, the District could contribute approximately the same percent to the quota, rather than being treated as a State where we don't have a State demographic base? Mr. DeSeve. May we take a look at that and get back to you? We didn't come prepared today to do welfare, I am sorry. We would be delighted to take a look at that and get back to you with our positions on it. Ms. Norton. I appreciate that very much. Thank you, sir. Mr. Horn. You are quite welcome. The gentleman from California is recognized for 7 minutes on the equality of time. Mr. DeSeve. The normal rule in the Horn subcommittee is only 5 minutes. Mr. Horn. No, it isn't. Whenever I go over, I give another Member the extra time, so I am giving myself the 7 minutes this time. Ms. Norton is pursuing a very interesting idea, and that was going to be my first question: Whose idea was this? You are saying it was the administration's idea. What type of consultation occurred with the District of Columbia government, and were there other areas you feel would be indeed a better increased Federal contribution? Mr. DeSeve. Mr. Horn, the proposal of the President, as you know, encompasses criminal justice, infrastructure, economic development, pensions, Medicaid, borrowing and tax collection. We listened very carefully and looked very thoughtfully over the last 2 years--before the plan was put in place--at all of the testimony in this committee and other committees, read a whole series of reports, talked to our counterparts in the District of Columbia. And then the President and the Director of OMB made a decision that among the collection of proposals that we had seen put forward by a variety of the people, that this particular collection was the one that provided significant and substantial relief to the District; the collection provided significant and substantial relief to the District. Mr. Horn. Well, Medicaid, how are you looking at it, is it simply dealing with consumable services, or is there a capital outlay program in here somewhere? Mr. DeSeve. We know of no capital outlay program. All we are doing is mathematically changing the cash formula as it exists now to provide fiscal relief for the District at the same time we are asking the District to undertake a series of management reforms. That was the narrow intent of this particular part of the proposal. Mr. Horn. Ordinarily when you are using bond money, you would have some sort of amortization of infrastructure involved, and this one you really don't have amortization of infrastructure, you have consumable services. Do you think it is improper to use bond money on consumable services? Mr. DeSeve. This refers, of course, to the borrowing section of the proposal, and in the borrowing section of the proposal, we had to recognize that budget crises, as we have known them in municipalities, have two characteristics: One, you have a budget which you can't balance, and that is OK; it is not good, but it's OK for a city, as long as they have access to the credit, as long as they have liquidity. On the other hand, it's OK to have a balanced budget and no liquidity because normally, again, you can access the credit market in that case. In the District's case, we have an unbalanced budget and lack of liquidity. The unbalanced budget occurred over several years; it didn't occur in any 1 year. The accumulated fund balance deficit as it exists now will be this year estimated in excess of $500 million. The question then is if we were an individual, would we do a debt consolidation loan, and would we finance that over a period of years to try to use the tax base as it exists now and savings that the District must achieve? In order to be able to afford that debt over time, would we do that kind of debt consolidation loan? We believe it is the only way to restore liquidity to the District. As Mr. Thompson testified, we have--they will be holding their own fiscal feet to the fire in achieving a kind of capacity, over $50 million a year, I would guess, to pay off that accumulated deficit. Do you want to add to that? Mr. Thompson. One thing we also looked at is if you look at every city that has gotten into some kind of fiscal trouble and had some accumulated deficit, there was some way provided to buy it off over time. In the case of New York, there was the Municipal Assistance Corp.; same thing was true in Philadelphia. So, we are providing a vehicle that in some cases a State would provide as a financing tool. Mr. Horn. Basically, though, it isn't just Medicaid. We are really talking money expendable. Mr. DeSeve. Right. Mr. Horn. It doesn't matter where the operational deficit comes from, this is the way to pay for it, and if they fouled that up, I don't know what else they would do is what it boils down to. Mr. DeSeve. That's correct. The fact is, this hearing combined Medicaid and borrowing; those were two elements of the President's plan. You are correct. Mr. Horn. I personally happen to agree with Ms. Norton, and many Governors would take this position that maybe the Federal Government ought to take unto itself the funding of Medicaid because it has been a tremendous burden on the States in terms of matching money. It is very difficult to get services because repayment of those services is so low. Very few doctors will take MediCal in the State of California, and there is no question that the nursing home example is a good one. That is basically what pays the nursing homes in this country, and it is limited to poor people because you become rapidly poor if you have to go to a nursing home. And I guess I am curious here, though, on the example-- let's take Wyoming, Vermont and New Hampshire, among others, which is really about the population of the District of Columbia, certainly Wyoming is, and the degree to which there is a State/Federal proportion there. If you would put in the record at this point, and I would appreciate it--unless you have it, Ms. Chang? Ms. Chang. You said Wyoming? Mr. Horn. Wyoming, Vermont and New Hampshire. Ms. Chang. Wyoming's Federal matching rate is 59.88; Vermont is 61.05. And, I am sorry, sir, what was the third one? Mr. Horn. New Hampshire. Ms. Chang. New Hampshire is 50 percent in terms of the Medicaid matching rate. Mr. Horn. Now let's take the Southern State that has the least State payment and the most Federal payment. Which one would that be? Ms. Chang. Southern State with the--oh, that would be Mississippi. Mr. Horn. It is usually Mississippi. Nothing has changed in 30 years then. And then what is that number? Ms. Chang. Actually, before I gave you what the Federal Government paid. The Federal Government pays 77.22, so the State pays about 22.8 percent. Mr. Horn. Is that the highest Federal payment in the country, among States? Ms. Chang. I believe it is. Yes, it is, sir. Mr. Davis [presiding]. May I ask you to yield for 1 second? What is Virginia's Federal matching rate? Ms. Chang. I am ready for that one; 51.45. Mr. Horn. See, they weren't as poor as you thought they were. You never should have given it up during the Civil War; the War between the States, as you say. Let me ask you, where is the administration of this particular financial aspect going to be controlled, or is the Control Board going to watch that throughout the life of the loans? Mr. Thompson. First of all, one of the things we would ask for in this structure is that the money go to the Financial Control Board, as the loan proceeds do right now. There would continue to be required certification that any loans that we would make would be consistent with an approved budget and financial plan. So, there would be a series of checks and balances that would be required before the Secretary of the Treasury could make a loan. Mr. Horn. In other words, the bondholders and the bond providers would be assured of some scrutiny beyond that of the District of Columbia. Mr. Thompson. Well, I can only say with regard to any loan we would give, it would be subject to close scrutiny because we would be in charge of looking out for the taxpayers' interest. Mr. Horn. What is the current life under law of the Control Board? Mr. Thompson. I think it depends. It is defined in terms of a control period. Mr. DeSeve. There are two tests. One is whether the Authority itself has any debt outstanding, and the second is the number of years after the city has balanced its budget, and I believe it is 4 years--I could stand corrected, but I believe it was 4 years after the city achieves a balanced budget, if they then have a budget that is unbalanced, it springs back into existence. Mr. Horn. But, in other words, they would not go out of existence until these bonds were repaid. Mr. DeSeve. If this were the debt of the Authority. The proposal is to make a debt of the District of Columbia, not of the Authority at this point, so this would not affect the life of this entity. Mr. Horn. What is the Treasury's concerns that those bonds are not repaid? Mr. Thompson. We always have a concern when any are not repaid, but one of the things that we will seek is assurances. We have a test called the reasonable assurance of repayment tests. We would be looking to see that the District would be able to budget and plan for sufficient debt service to cover any loans that we would make, the way we would have for any other obligation that they would incur. To the extent there is a control period during which the Authority will be in place, we would be looking to it to provide certifications, and as Mr. DeSeve pointed out, the way the law works is that after the point the Authority maybe goes out of business, should the District become out of balance again, the Authority comes back. So, we will be working closely with the District. Mr. Horn. The last question is, do you see these as solely Federal bonds, as municipal bonds as that term is understood, when municipalities go on the market and secure funding? Mr. Thompson. We don't look at them as bonds. We look at them as direct obligations between the District and the Treasury. So there would be a notice, and there will be direct debt from the District to us, not bonds. We don't calculate it that way. Mr. Horn. How would you define the note versus bond and how it is typically retired. I mean, you have a payment schedule there? Mr. Thompson. Right. Mr. Horn. That is what a bond also has. Mr. Thompson. Right. Well, there is no document that represents a bond that can be transferred, for example, in the secondary market or sold. That doesn't exist. So it would be like what you would have with any other loan. There would be a security agreement indicating that we have, a loan agreement with the District, as we have now for the existing debt. Mr. DeSeve. For example, if a Member of Congress had a note with another Member of Congress that was not transferable, that would be a note, where if he had a loan like a mortgage, it would be sold in a secondary mortgage, that would have a different characteristic. Mr. Horn. If it was between Members, you might want to turn it over to the mob for collection. I am just wondering if the Treasury will be in that mode in the District of Columbia. I mean, do you really expect to get the money back? Mr. Thompson. As I pointed out earlier, one characteristic of the District is that it has never defaulted on its debt. Mr. Horn. It just kept getting debt. Is that the way they solved it? It sounds like the Federal Government to me. Mr. Thompson. And also with respect to the long-term loans it has had, it has paid us on time or early on every one of those. The District owes us still about $50 million, but it is current. Mr. DeSeve. We would never make a loan if we didn't expect it to be repaid. Mr. Horn. I hope you are right. Mr. Davis. Thank you. Ms. Norton had one other question. Ms. Norton. I had one other question, and I have to warn you before the chairman does, he has to leave here at 4 p.m., so we are going to have to move more quickly, and I will certainly cooperate in that. I do have a question that has to be put on the record. The Treasury drove a very hard bargain when it came to Treasury borrowings. It insisted that the Federal payment be collateral for its borrowings. Now it wants to take away the Federal payment and assume that the District will somehow, without collateral, be able to borrow from the Treasury, and presumably from the market. Will you tell us why you insisted upon collateral if you think the District no longer needs collateral? Mr. Thompson. Well, I think the President's plan anticipates that with all the elements in place, that over time the District's surplus will grow, and I believe it also deals with the issues so the District will be better able to meet those obligations. We are currently working with the District and the Financial Control Board to determine an appropriate security mechanism. We are looking at what the District provides now in terms of security for other creditors, so that---- Ms. Norton. Are you going to tell the committee at this time what you regard as appropriate security? Mr. Thompson. One of the things we are going to look very closely at, and we will be talking to the District about, is the mechanism it sets up for its own bondholders to see if that is adequate security for us. Ms. Norton. This is something--this creates some anxiety obviously in the District. I hope it means that OMB, put in the same position again, would not require the Federal payment for collateral. I have to assume you have greater confidence in the District as well, and I appreciate what you have done in this bill. Thank you, Mr. Chairman. Mr. Davis. Thank you. Thank you all very much. Second panel. The panel consists of Mike Rogers, the city administrator, District of Columbia; Mr. Jalal Greene, the deputy chief financial officer of Budget and Planning; Mr. Paul Offner, the commissioner of the Commission on Health Care Finance, DC Department of Health; the Honorable Charlene Drew- Jarvis, chairwoman pro tempore; the Honorable Linda Cropp, chairwoman of the Committee on Human Services; and Mark Goldstein, deputy executive director for the Financial Responsibility and Management Assistance Authority. Miss Jarvis is not being asked to testify, but if she has any general comments, we can hear them at the outset. As you know, the policy of this committee is to be sworn before they testify. Will you please rise and raise your right hand. [Witnesses sworn.] Mr. Davis. The subcommittee will carefully review any statements you care to submit, and they will all be a part of the record. I also will ask you to limit your testimony to 5 minutes or less. We have your full testimony, which we have read and have questions based on that subject, so the quicker you read it, the faster we can get to questions. Let me start with Mr. Rogers. We would like to welcome you. STATEMENTS OF MICHAEL ROGERS, CITY ADMINISTRATOR, DISTRICT OF COLUMBIA; JALAL GREENE, DEPUTY CFO/BUDGET AND PLANNING, DISTRICT OF COLUMBIA; PAUL OFFNER, COMMISSIONER, COMMISSION ON HEALTH CARE FINANCE, DC DEPARTMENT OF HEALTH; LINDA CROPP, CHAIRWOMAN, COMMITTEE ON HUMAN SERVICES, CITY COUNCIL; AND MARK GOLDSTEIN, DEPUTY DIRECTOR, FINANCIAL RESPONSIBILITY AND MANAGEMENT ASSISTANCE AUTHORITY Mr. Rogers. Thank you. Good afternoon, Chairman Davis, Ms. Norton, Mr. Horn, and members of the subcommittee on the District of Columbia. I am pleased to appear before you today to discuss the Medicaid provisions contained in President Clinton's White House plan for the District. Let me first commend the President for recognizing the District's unique structure as the seat of the Federal Government and unique fiscal constraints and restrictions associated with this position. The President's plan has indeed energized our city with historic and unprecedented discussions of renewal, regrowth and restructuring of our Nation's Capital. The President's plan recognizes the structural shortcomings of our city, particularly the untenable burden associated with misplaced State functions. It also recognizes the Federal Government's long-standing role in perpetuating the particular imbalances that have so defined the face of the District. Mayor Barry welcomes the President's plan. It is by no means perfect, nor is it a panacea, but it is a welcome work in progress which deserves full attention and commitment. Let me turn, specifically, to the Medicaid provisions. You have invited Dr. Paul Offner, commissioner of the Health Care Finance in the District, to join me today in giving testimony on the President's plan regarding Medicaid reform. I will speak broadly on this issue, while Mr. Offner follows with more specific information regarding program needs and challenges within the context of the President's proposal. The President's plan proposes to increase the Federal Government's share of Medicaid payments from 50 percent to 70 percent, based on current Medicaid projections provided by the Health Care Finance Commission. Savings from the proposed new matching rate will be $162 million in fiscal year 1998, $166 in fiscal year 1999, to $172 million in the year 2000. As you know, as you have just discussed, with the exception of New York City, no other city pays Medicaid. Rather, States perform that role. One of the previous panelists, when you said ``city,'' they said ``county,'' and I am saying ``city'' here. Even in the case of New York City, the Federal Government picks up 75 percent of the program costs. The Federal Government picks up 75 percent of program costs. The DC Financial Authority issued a report earlier this month which states that nearly every health and human service program provided by the District government has a component normally provided by a State. Also, with respect to Medicaid, the report indicated that the District has 2 taxpayers for every Medicaid recipient, versus 4.4 taxpayers in Maryland and 4.3 in Virginia per Medicaid recipient. The bottom line is that the District's per capita Medicaid expenses are 2.6 times the national average. Given these figures, I am compelled to ask how much clearer can the inequity be? How can the District ever gain any semblance of control over rising Medicaid costs and public assistance needs with such a skewed participation rate in Medicaid costs? As I mentioned earlier, the President's plan proposes to increase the Federal share from 50 percent to 70 percent. The Financial Authority in its April report on the White House plan recommends that the District be required to contribute no more than 20 percent of Medicaid program expenditures, and that a peculiar offset be provided for other assistance. The District government supports the Financial Authority's Federal participation rate, which exceeds the proposed 70 percent. Whether that rate is set at 75 to 80 percent is an issue that deserves serious consideration by the White House and OMB and the Congress. I am confident that Mr. Offner will provide more specific program comments on this issue. And I will defer to his assessment of the President's proposal in this regard. Mr. Offner will also provide a candid discussion on the current state of the District's Medicaid program and discuss critical issues relating to the ability and readiness to implement the MOU. Let me say that progress has been made in the Medicaid program over the past year. We are pleased with the cost savings initiatives that have been implemented, but we still have a long way to go. But in committing to this MOU process, the District must be and is committed to implementing the changes required in the MOU. Thank you very much. Mr. Davis. Thank you very much. [The prepared statement of Mr. Rogers follows:] [GRAPHIC] [TIFF OMITTED] T2315.007 [GRAPHIC] [TIFF OMITTED] T2315.008 [GRAPHIC] [TIFF OMITTED] T2315.009 [GRAPHIC] [TIFF OMITTED] T2315.010 [GRAPHIC] [TIFF OMITTED] T2315.011 [GRAPHIC] [TIFF OMITTED] T2315.012 [GRAPHIC] [TIFF OMITTED] T2315.013 Mr. Davis. Mr. Greene. Mr. Greene. Thank you. Good afternoon, Mr. Chairman and Members of the Congress. I am Jalal Greene, the chief financial officer for Budget and Planning for the District of Columbia. I am pleased to have this opportunity to discuss the President's plan for revitalizing the District. Today, I will discuss the Medicaid portion of the President's plan and offer some brief comments on the impact of the overall plan on the District's budget. From the perspective of the District's budget, reducing Medicaid costs is a critical issue. For fiscal year 1998, the District will spend approximately $40 million in local funds on the Medicaid program. This expenditure represents approximately 12 percent of the District's local funds budget. And in the recent past, Medicaid spending has grown at a rate that is not sustainable. Since 1990, the District's local fund spending on Medicaid has more than doubled from approximately $170 million in 1990, to $384 million in 1996. Cost containment measures instituted by the District will restrain the growth in Medicaid to some extent; however, it is clear that something must be done to relieve the District of some part of its current Medicaid obligation. The President's plan called for increasing the 50-50 ratio to a 70-30 ratio. We currently estimate that the Medicaid provisions of the President's plan will lead to over $160 million in direct savings in fiscal year 1998. This would provide much needed budget relief to the District. We believe that the current 50-50 match cannot be justified. It was determined according to the standard Federal medical assistance percentage. This formula compares State per capita personal income with national per capita income. States with a lower than average per capita income receive a relatively higher match than States with higher per capita incomes. According to this formula, the District receives the lowest possible match of 50 percent. It has been recognized by many authorities, including GAO, that the Federal medical assistance percentage formula does not accurately reflect the ability of a State to pay for Medicaid programs. In the District's case, the formula does not account for its high levels of poverty and small size. Currently five States, Mississippi, Louisiana, South Carolina, New Mexico, and Alabama, receive a 70 percent match. The District receives a much smaller Medicaid match than those States even though they have comparable levels of poverty. Given the congressionally imposed limitations on the District's ability to raise revenue, it is unfair to expect it to deal with the large and increasing burden of Medicaid at the same match rate as wealthy States. The President's plan correctly recognizes this fact and offers a reasonable proposal for increasing the match to 70 percent. A strong argument can be made for increasing the Medicaid match above 70 percent. The District faces the challenge of serving a high-poverty population in a high-cost area. The large percentage of its population which lives in poverty and faces serious health problems requires greater Medicaid expenditures. In 1995, the District's per capita Medicaid expenditures of $1,429 was almost 2.5 times the national average. This figure includes both the high percentage of the population receiving Medicaid benefits, almost 21 percent in 1995, and the high cost of medical services in the Washington metropolitan area. Furthermore, the District's small size makes it difficult to achieve economies of scale for administration. I recommend that Congress consider these factors as it decides what is the appropriate Medicaid match for the District. The President's plan will provide approximately $49 million in net benefits to the District in fiscal year 1998. This benefit will grow to around $140 million in fiscal year 2001. The net benefits of the President's plan will represent a significant step toward resolving the District's financial crisis. However, I must emphasize the fact that the President's plan alone will not bring long-term financial stability to the District. To restore financial stability over the long run, the District must continue to improve in areas of management efficiency and service delivery. The District must also take steps to reduce the tax burden on businesses and residents to levels that are competitive with surrounding jurisdictions. I urge the Congress to pass the President's plan as it stands. It provides significant benefits to the District which will grow over time. Thank you. Mr. Horn [presiding]. We thank you very much for your testimony. [The prepared statement of Mr. Greene follows:] [GRAPHIC] [TIFF OMITTED] T2315.014 [GRAPHIC] [TIFF OMITTED] T2315.015 [GRAPHIC] [TIFF OMITTED] T2315.016 [GRAPHIC] [TIFF OMITTED] T2315.017 Mr. Horn. And the next giver is Mr. Offner, the commissioner of Health Care Finance for the District of Columbia. Mr. Offner. Members of the committee, my name is Paul Offner. I am in charge of the District's Medicaid program. Before this I was in charge of health and welfare on the Senate Finance Committee. I want to assure you that this is harder work. The District of Columbia has a problem because historically it has not invested the resources both in systems and in personnel that should have been invested, and the four specifics that have been identified in this Memorandum of Understanding are really testament to that. They represent management failings that we are now beginning to cope with but that historically have not gotten the attention they should have. Third-party recovery. There are literally millions and millions of dollars to be made by States in making sure that Medicaid is the payor of last resort. The District's third- party recovery program is underfunded, understaffed and underautomated. It has nowhere near the level of sophistication of other States. I used to run the Medicaid program in the State of Ohio. We have begun to make some progress here. The last 6 months the recoveries have risen. We have a long way to go. The second item is audits. We have providers of health care for whom we don't have a settled audit for 6 or even 8 years. Trying to run a Medicaid program under those circumstances is like trying to navigate a ship in the dark. It's impossible. We need desperately to get those audits up to date. You can't reform reimbursement systems if you don't know what the costs are, and in too many cases we don't. We have made some progress in that area, but again, we have a long way to go. The most important, and the most expensive area is, of course, the Medicaid Management Information System. The District has an antiquated system that provides management with very little of the information that is really needed to manage a program like this. Here we are spending close to $1 billion a year, yet we don't know where the money is going, or who is getting paid. We have none of the management information that a manager ought to have for a program of this size. We have started over the last few months to plan a total overhaul of this system, but we still have a long ways to go, and the inclusion of this item in Memorandum of Understanding, I think, is important. Finally, there is the mental health initiative. Some time ago, Mayor Barry launched a comprehensive effort to integrate the mental health system. The District spends more money on mental health than any jurisdiction in the world. It is a remarkably expensive program, largely because our clients spend too much time in hospitals, and our whole mental health system is not integrated in any meaningful way. We have now hired the former Commissioner of Mental Health from Massachusetts to come in and head up this effort, and I think it has enormous promise both to improve services and over time to save money. Over the last year, the District's Medicaid program has undergone a total overhaul. We have--as was, I think, just referenced--we have removed 25,000 individuals from the rolls, representing over 15 percent of our caseload, people who were found to be ineligible. We have reduced our inpatient hospital rates by 25 percent. We have reduced our HMO rates by 17 percent. We have cut long-term care rates by $14 million. We are in the process over the next 12 months of moving all of our AFDC recipients into HMOs, and are now implementing a waiver so we can provide comprehensive services in the community to disabled people to keep them out of our group homes for the mentally retarded, which also are the most expensive in the country; over $100,000 per person per year. So we have made enormous progress, but we still have a long way to go, and I believe the provisions in this Memorandum of Understanding will be a major asset. Mr. Davis [presiding]. Thank you very much. [The prepared statement of Mr. Offner follows:] [GRAPHIC] [TIFF OMITTED] T2315.018 [GRAPHIC] [TIFF OMITTED] T2315.019 [GRAPHIC] [TIFF OMITTED] T2315.020 [GRAPHIC] [TIFF OMITTED] T2315.021 [GRAPHIC] [TIFF OMITTED] T2315.022 Mr. Davis. Ms. Cropp. Ms. Cropp. Thank you very much. Good afternoon, Mr. Davis, Ms. Norton, Mr. Horn. I am Linda W. Cropp, chair of Council's Committee on Human Services. On behalf of council, I am pleased to appear before you today to testify on the Medicaid section of the President's plan. The President's proposal on Medicaid begins to create a more equitable relationship between the District and the Federal Government by recognizing that the District, unlike any other city in the Nation, is not supported by a State. This lack of support by a State has been felt in many areas including the funding and managing of health and human services programs. State-type functions account for approximately 85 percent of the District's Department of Human Services budget. These State-type programs, and I believe someone had asked that question earlier, within the department include Medicaid, public assistance, mental health, foster care, child day care, and substance abuse treatment and prevention. By far the District's most costly health and human services program, as it is in all States, is the Medicaid program. The Medicaid program accounts for approximately 48 percent of District appropriations for the Department of Human Services. The current use of the per capita income standard is an inequitable standard when applied to the District. The District of Columbia is an urban jurisdiction with a high percentage-- approximately 38 percent--of our population living at or below the poverty line. The District, not unlike many other cities, has a population that is older, sicker, and poor. But unlike other cities, it cannot be normed in with the more affluent suburban areas of other States to help offset the high cost of the city. The President's proposal would increase the Federal Government's share of Medicaid costs from 50 percent to 70 percent, thereby reducing the District's share to 30 percent. While the council enthusiastically supports the increased Federal share of Medicaid costs, the District would still remain the only city in the Nation to contribute such a high percentage toward Medicaid costs, and five other States would receive a higher matching rate. New York has been cited as a city which pays 25 percent because of its county-type status. The effect of the increased Federal match would be a reduction in the District's Medicaid expenditures. The District and the Office of Management and Budget have agreed on the extent of the Medicaid savings that ought to be achieved over the 5-year period, and, in fact, our figures were extremely closely aligned. I am pleased to report that the Council further agrees with OMB on the conditions placed upon the District in return for the increased Medicaid. Under the President's plan, the District would develop and implement an effective system for identification and collection of amounts owed by third parties. Mr. Offner just talked about that, and, in fact, the council's committee just approved additional personnel positions in that line area so that we could start this process of increasing the third parties. We also support a system to ensure the timely audit and settlement of cost reports. In fact, if you look at where Medicaid was 3 years ago, there has been an awful lot achieved in a short period of time with regard to the audits. An awful lot of work still needs to be done. A comprehensive behavioral managed health care system which combines substance abuse and mental health grant programs has already been moving forward and is already in the planning stage, and we look forward to its implementation. All of these conditions reflect sound management policies that, regardless of the President's plan, the District is already moving forward to implement. Collections from third parties will benefit by both the District and the Federal Government. The District has made progress in eliminating the backlog of audits and settlements. The implementation of these conditions will require commitment and additional resources on the part of the District. I have requested that the Medicaid Administration prepare an analysis of what additional resources will be necessary to carry out the President's plan. I am pleased that under the plan, the U.S. Department of Health and Human Services will continue to provide more intensive technical assistance to help the District move toward improving the management of the Medicaid program. They have been very helpful in the recent past. The District is making progress in the implementation of Medicaid cost containment measures. Reimbursement rates for hospitals, nursing homes, and the intermediate care facilities for the mentally retarded have been reduced significantly. All Medicaid beneficiaries who receive public assistance will be enrolled in the managed care organizations that are compensated at a capitated rate, and we should receive savings there. The contract to implement mandatory managed care enrollment is close to the award stage. Quite frankly, it has been a long time coming, but I am happy it is about to be awarded. Other initiatives include reducing the pharmacy dispensing fee, increasing pharmacy copayments, reducing reimbursement for transportation, and reducing payments for day treatment and residential treatment facilities. In addition, the District has recently obtained a home- and community-based services waiver for the developmentally disabled population. A similar waiver for the elderly population will be submitted this fiscal year, and as Ms. Norton had talked about, the cost of nursing homes, this would help to significantly reduce the costs in that particular area. Many of the delays in implementing reforms in the Medicaid program are due to systemic problems with the District's procurement process. The council is addressing this problem with the enactment of procurement reform legislation. In addition, the Medicaid program will be able to take advantage of the Federal procurement system through a Memorandum of Understanding executed by the District and Federal Governments. The council has reviewed the District's 26 optional Medicaid services for possible Medicaid expenditure reductions. It is my understanding that Virginia funds 21, Maryland 22, optional services. However, the District is not out of line when compared with other jurisdictions. In working with the Medicaid Administration, it has been determined that significant savings would not be realized, as some beneficiaries would be eligible for those services whether an option or not existed, such as ICF/MR services. The District would still be left to bear the full cost of the service, and in essence that would mean the District would end up paying more money if that option were to be implemented. In conclusion, the Medicaid proposal within the President's plan begins to address the financial burden placed on the District by assuming the financial responsibility of State functions. With the additional Federal funding of State functions, the District will be able to focus its resources on quality of life issues. The District must focus on these quality of life issues, such as education and public safety, if it is to restore the health and viability of our Nation's Capital. I thank you very much for this opportunity to testify before you. Mr. Davis. Thank you very much. [The prepared statement of Ms. Cropp follows:] [GRAPHIC] [TIFF OMITTED] T2315.023 [GRAPHIC] [TIFF OMITTED] T2315.024 [GRAPHIC] [TIFF OMITTED] T2315.025 [GRAPHIC] [TIFF OMITTED] T2315.026 [GRAPHIC] [TIFF OMITTED] T2315.027 [GRAPHIC] [TIFF OMITTED] T2315.028 Mr. Davis. Mr. Goldstein. Mr. Goldstein. Good afternoon, Mr. Chairman, Members of the committee. My name is Mark Goldstein. I am deputy director of the Financial Authority. I'll be brief. I know you have a lot of witnesses here today. With me is Doneg McDonough, the program manager for Health and Human Services at the Authority. He can respond to any questions you may have that I can't answer. The President's plan proposes to increase the Federal Government's contribution for District Medicaid expenditures to 70 percent. This will have the effect of increasing the Federal Government's contribution for the District's Medicaid benefit expenditures from the 50 percent rate that is in place today to 70 percent for fiscal years 1998 and beyond. The President's plan does not include recommendations for changing the financing of the other State-type health and human service programs. The Authority applauds the administration's recommendation on Medicaid, but believes it is necessary to expand the proposal to include a greater share of Medicaid program expenditures and to address other health and human service programs. The Authority has been working over the past several months to re-examine the relationship between the District and the Federal Government. Two weeks ago, as Mr. Rogers has mentioned, the Authority issued a report entitled ``Toward a More Equitable Relationship: Structuring the District of Columbia's State Functions.'' The report identified that if the District were to have a relationship with its ``State,'' the Federal Government, that is akin to the State-local financial relationship found across the country, the District would be required to contribute no more than 20 percent of the State- type health and human service programs. At present, the District covers 100 percent of these costs. Today, I would like to make the specific recommendation of Authority that the Federal Government contribute 100 percent of the funding for Medicaid, TANF, Temporary Assistance to Needy Families, formerly the AFDC program, and the related child care expenditures. The Authority's recommendation was generated after reviewing the relationships States have with their local jurisdictions in regard to financing a range of health and human services. In addition to our own research, the Authority commissioned a study by the Urban Institute to assemble more detailed information regarding the financing and administration of State Medicaid programs and to consider various options. The Authority's recommendation was also framed by the fact that all major State-type health and human service programs are either federally mandated or require the maintenance of a minimum funding level. If I may, I would like to request that the Authority's report on State functions and the Urban Institute report be entered into the record. Briefly I will review the information that led the Authority to make these recommendations. Rather than recommend a refashioning of the financial and administrative relationships across the myriad of State-type functions, the Authority has chosen to limit the proposed changes to the two largest Federal-State programs. Three structural factors exist in the District that when combined produce relative demands on the District that are multiples of the demands shouldered by other jurisdictions. The first structural factor is high per beneficiary costs under Medicaid. The District's per beneficiary Medicaid expenditures are nearly 70 percent higher than the country as a whole. This finding is not surprising as urban settings are typically associated with higher costs of living as well as more intense health problems, such as the number of AIDS cases and the level of violence. In the Urban Institute report, the District's Medicaid program costs were compared against those of high-cost States such as New York and Massachusetts. The District's average costs were actually lower than the average costs in these States. The message from this is the District has higher than average Medicaid per beneficiary costs, although it is not out of line with what might be considered reasonable for a high- cost jurisdiction. The second structural factor is a high concentration of poverty. This reality lends for a greater demand for public assistance and as such a relatively higher percentage of population enrolled in Medicaid and other public assistance programs. The third structural factor is the narrow pool of individuals available to support these relatively high demands for services. The District does not have suburban populations over which to spread these costs, of course. If you take the relatively high cost of services, compound that with the greater percentages of the population requiring these services, and add a third factor, the narrow pool of individuals that comprise the District's tax base, it produces an insupportable situation. The District has, for instance, only two taxpayers per Medicaid recipient, whereas Maryland and Virginia have 4.4 and 4.3 respectively. From this it is evident that the burden of Medicaid is tremendously greater in the District as each District taxpayer is required to carry not only a proportionately greater number of public assistance recipients, but the cost per recipient is higher. These findings provide ample justification for a major restructuring of the financing of the District's Medicaid program. An additional finding of the Urban Institute is that if the District were treated similar to the counties in New York, the State that requires the greatest contribution of its local jurisdiction, the District's effective contribution for Medicaid would be 16.5 percent of expenditures versus the 30 percent required under the President's plan. Another relevant comparison is that if the District had a relationship with its State, the Federal Government, akin to the relationship between State and local government in three- quarters of the States today, the District would be required to make no direct contribution toward Medicaid program expenditures. It is this comparative analysis of how States interact with their local jurisdictions, as well as the disproportionate burden found in the District which is the result of its urban characteristics, that requires the Authority to recommend that the Federal Government act in the capacity of the District's State and assume full financing of the District's Medicaid program. The savings to the District resulting from such a Medicaid policy change are estimated to be approximately $2.4 billion over fiscal years 1998 to 2002. The findings in the Authority's April 15th report show that on average States cover 92 percent of the costs of the major health and human service programs, including health care, mental health services, welfare, et cetera, which led the Authority to recommend that, as a step to begin to equalize the District's overall burden, the TANF program and related child care expenditure should be assumed by the Federal Government. The savings to the District resulting from such a change are estimated to be $550 million over fiscal years 1998 to 2002. It should be recognized that the Authority's recommendations are not overly generous for the District. Even with the implementation of the Authority's recommendations, the District would be in a relatively less favorable position than all other local jurisdictions in the country. If the recommendations of the Authority are implemented whereby the funding for the two largest State-Federal programs is assumed by the Federal Government, the District would continue to carry a relatively greater share of program costs than local jurisdictions nationally at 33 percent, but the relationship would be tremendously improved over what exists today. Mr. Chairman, that concludes my statement, and my colleague and I would be happy to respond to questions you or the committee have. Mr. Davis. Thank you. [The prepared statement of Mr. Goldstein follows:] [GRAPHIC] [TIFF OMITTED] T2315.029 [GRAPHIC] [TIFF OMITTED] T2315.030 [GRAPHIC] [TIFF OMITTED] T2315.031 [GRAPHIC] [TIFF OMITTED] T2315.032 [GRAPHIC] [TIFF OMITTED] T2315.033 [GRAPHIC] [TIFF OMITTED] T2315.034 [GRAPHIC] [TIFF OMITTED] T2315.035 Mr. Davis. I have just got a couple questions for the panel. Mr. Goldstein, let's start with you. The Authority is basically recommending the Feds pick up 100 percent of the costs---- Mr. Goldstein. Yes, Mr. Chairman. Mr. Davis [continuing]. In its capacity as the District's State government, but you haven't said that the District will give up its taxing powers, specifically income and sales that States use to pay for Medicaid and other programs. So in effect you are asking the Federal taxpayers to pay 100 percent of the State share without the State share being apportioned amongst District taxpayers. That is OK, but we need to understand the policy and ramifications. Is this basically because the city's tax base is just too low? Mr. Goldstein. Yes, Mr. Chairman, we recognize that is an issue that needs to be resolved as this process went forward, but that is the Authority's recommendation. Mr. Davis. Yes. It is always dangerous to think out loud, but my gut feeling is this, as the Federal Government takes over some things, we should look for some tax relief in the city, because I think that would make the city more competitive economically over the long term. But we will be working with everybody involved here as we fashion a solution. Linda, let me ask a question, and, Charlene, you can chime in. The city has basically cut the Medicaid benefits that they were giving out 2, 3 years ago, and it is more on a par with Virginia and Maryland. Ms. Cropp. We have initiated an awful lot of savings---- Mr. Davis. I don't mean cuts, that is a radioactive word, but you have adjusted the way that it is sorted out, and it is more in line with Virginia and Maryland. Ms. Cropp. Yes, and also our benefits actually were not too far out of line. We offer 26 benefits. Maryland and Virginia offer, I think, 21 and 22. We offer 26. We are in line. And with the other services, we are fairly comparable with those services. Mr. Davis. What we'd like, and I am not sure if we have it in the record, we would like a chart showing what the city offers and what the two suburban jurisdictions offer. Not that you need to model everything after what the other jurisdictions do, and I think you pointed out that there are other costs to not offering these programs that are paid in other areas. Ms. Cropp. Exactly. For example, the ICFMRs, if we did not have them in the Medicaid program. The District would be responsible for paying the entire cost of that program, and in essence it would end up costing the District more money. That is one of the optional benefits that we offer that perhaps some of the other States don't offer, but it would not be beneficial for us to eliminate that option. Mr. Davis. Thanks. Let me ask Mr. Rogers and you, Mr. Offner, and others, have the issues regarding the payments to the Charter Health Plan been resolved? Mr. Rogers. That matter is still under review by the CFO, and I don't believe it has been resolved. Mr. Davis. OK. Those are my questions. We had some others. We appreciate your heading some of the questions up in your testimony that we have had already. Ms. Norton. Yes, Mr. Chairman. I will--I have only a few questions in that regard as well. Mr. Offner, first of all I want to congratulate you for the work you are doing in Medicaid. I know how difficult it is in the best of circumstances, and I can't imagine how you have done what you have done. I want to ask Ms. Cropp, I guess Mr. Rogers, I am not sure, Ms. Jarvis, it has to do with the state of the welfare reform or welfare reform in the District of Columbia, and I would like to know from you whether or not the District is, my bill notwithstanding--and I am going to try to get my bill into this bill--is in danger of simply losing before it gets started. That is to say it looks like you are trying to do something that is very difficult under the circumstances, and the whole government--the Department of Human Services is in collapse apparently. At least it has not begun to be reformed. Training has been--all of the training, I take it, has been in the Department of Human Services at the same time you are trying to get up a welfare reform bill, which at least, as it is presently, as it presently stands, would mean that you are on line to lose, what is it, 5 percent this year. You are on line to lose money. And I just have to ask you what is the state of that? Is anybody being trained? Is the welfare program--is DC going to lose money from its welfare grant this year? I want to be able to know whether or not you are on line to lose some money, and you should have planned for that in your budget if that is going to happen. Ms. Cropp. The District has developed quite a few work activities that would fit within job definitions of the new Federal bill. However, by nature of the District being a city and not having suburban areas that would offer jobs, we are in a very precarious situation in actually placing our welfare recipients in those particular areas. We are developing them, we are moving forward, and we hope that we would be fairly successful. We have already placed I believe it is about 18 percent at this point within the job definition. But my anxiety level is extremely high because I think the District is penalized by the bill, but we are still working toward trying not to lose any money. Ms. Norton. It really is penalized. That is why I have a bill in to correct that. I am going to have a hard time getting that bill out in any case, but particularly if I can't show that the District is doing the very best it could, because I have nothing to do with whether or not the District is starting up its own program to place people in work activities. I would like to have someone--perhaps Mr. Rogers can tell me some progress on that. Mr. Rogers. Well, we will give you a more complete response subsequent to this hearing, but let me say it certainly is our intent to lose not one nickel, and we are positioning ourselves so that that won't happen. There are---- Ms. Norton. That means that you are going to have 25 percent in work activities by--what is the month? Ms. Cropp. September, I think, of this year. Ms. Norton. Twenty-five percent by worker activities. Otherwise--the reason I ask is otherwise you are going to begin the fiscal year the way you did last time, making cuts before you spend, and all without a plan to do so, and just picking up the cuts wherever you can find them. Mr. Rogers. We have, as you know, the Welfare Reform Task Force, the external and internal task force that made its report. We are acquiring technical assistance to complete the last leg of the process in preparation for a better training program. The recent issues with training notwithstanding, we intend to move forward if it is on a contracted basis. We don't have to provide it in-house. There are ways to, you know, contract out the training so that we can meet our mission. Ms. Norton. I am having a very hard time, because they are not going to give anybody any slack. I am not going to be able to get any slack for the District because everybody else is running for something. So I have to have some early warning, too, if there are problems in meeting that. Could I just quickly ask on two issues that I raised at the last hearing? I don't know if--Ms. Cropp was not here, but I have sent her a letter about people who came to see me that I referred the city to, but I was so concerned about it that I looked into the matter myself, and that is I was told in spite of our foster care problem, and it is just like everybody else's, it is not any different from New York and Philadelphia and anybody else, but it is heartbreaking, that there was a backlog of people wanting to adopt children in the District of Columbia and couldn't get through our court systems. I called up the chief judge and said, my God, and he said that it was the--the way the law was written, and it had been very strictly construed, and obviously once you have a precedent, it is hard to get over that precedent. And he suggested if the law were changed, and that it could be changed, and I have sent you the relevant sections of the 1997 Uniform Adoption Act. Could I ask what is the status of that? Ms. Cropp. Ms. Norton, I have had a dialog with Chief Judge Hamilton with regard to that. We have decided we were going to meet. There is one component of that act of which he has great concern. We are prepared to move that act as expeditiously as possible. Ms. Norton. What does that mean, though, Ms. Cropp? The notion that there would be people who would come to me to say, we represent providers who want to adopt children, we can't do that. Can you give me a month, are you going out for summer, what are--can this be done before you go out on your summer vacation so the courts could move this backlog? Ms. Cropp. Could I get back with you? Judge Hamilton wanted to speak---- Ms. Norton. I will talk to Judge Hamilton. I thought the whole problem is they needed people to adopt children, and to find out they can't do it in the District because of the way this law is construed, seems to me there ought to be some kind of a fast track on which to put that before you go to summer vacation. Ms. Cropp. We could look a that, but I don't think it is in isolation, I think it is in combination, and we do have a policy of available parents---- Ms. Norton. I understand that, but to the extent that there are people who line up in court who can't get through, it seems the first thing we should do is clear the legal paraphernalia out of the way. Ms. Cropp. As I said, Judge Hamilton and I are working to move that as quickly as possible. Ms. Norton. I wish you would provide me information on whether you will be able to get a bill passed before you go out on summer vacation. Finally, Mr. Rogers, I wrote you concerning something that cities would kill for, and that is to get on the so-called FTS- 2000 system of the Federal Government. We could have been on that for at least the last 4 years. We are informed that GSA tried and has repeatedly failed to be able to get you to do that. I have to ask this question, because they have told us you could be paying about $13 per, what is it, per line, and that they estimate you are now paying something close to $30 at a time when you are having to cut the hell out of everything. I have to ask you, what you provided me indicated you are not using FTS. If you are not using FTS, I would like to know why. Mr. Rogers. Well, one, we will, and that directive has been given. Second, with respect to the ISDN platform, the system that we have, that helps us in terms of our instruments. It helps us in terms of our local call costs---- Ms. Norton. What is that; what is the ISDN? Mr. Rogers. The ISDN is a telephone platform that helps us tie in the local telephone company, Bell Atlantic, in providing our service. It helps us reduce our costs and manage our system better. The FTS-2000 relates to long distance costs. There is information we are collecting from the agencies that will help us implement that system. Ms. Norton. Are you working with anyone from GSA? I would like to facilitate that if I could. Mr. Rogers. I am advised that the staff of the Department of Administrative Services has been working with GSA and AT&T. Once the information that we have out to the agencies is back in, it will be furnished over to AT&T, and we will be able to-- -- Ms. Norton. Mr. Rogers, that will take us back to where we were. That is where it was last time we were waiting from information from the District that would then allow them to proceed. The amounts are so great here. You are paying, it looks like, more than twice what you could be paying at a time when you are having to cut everything. Could I ask that you provide us for the record the information that you provided to GSA---- Mr. Rogers. OK. Ms. Norton [continuing]. Before we close our record? When would that be? Mr. Davis. Ten days. Ms. Norton. Thank you very much, Mr. Chairman. Mr. Davis. Thank you. Mr. Horn. Mr. Horn. Thank you Mr. Chairman. Mr. Rogers, following up on that, since I Chair the investigating subcommittee that relates to GSA and the FTS- 2000, do you need any particular legal authority in order to access the GSA rates, or do you already have that? Mr. Rogers. I believe we already have that. Mr. Horn. All right. Because Ms. Norton is right, the best deal in America are the GSA rates. We don't know where we are going next, but hopefully it will be a better deal, and the District ought to be taking advantage of that. Mr. Offner, you indicated the need for the authority in your testimony. Could you describe what that would permit you to do? Mr. Offner. Mr. Horn, the 1115 waiver is a broad authority that the Government has, and in this application, as a State cuts its reimbursement or its expenditures, different States have been able to get waivers to allow them to capture the Federal part of those savings to, in effect, expand coverage to the uninsured. Obviously every time the District of Columbia cuts Medicaid by $1, we not only save ourselves 50 cents, but we save the Federal Government 50 cents. If we could capture that Federal 50 cents and use that to expand coverage to the uninsured, which is a proposition that Tennessee and a lot of States have gone with, it would allow us to do something about the 110,000 uninsured people. Mr. Horn. If--I think you need specific authority in law so you don't have to go through the appeal like the other State does; is that what your desire is? Mr. Offner. Well, at this point, Mr. Horn, we are about to start working with a consultant to develop our proposal, and the people at the Health Care Finance Administration have been extremely cooperative. If we run into problems, maybe we could reserve the right to---- Mr. Horn. I was going to say, if they are going to sign off, wonderful, but many Governors have found it takes them forever to sign off, and since you are in a unique relationship to the Congress, we ought to be able to consider that if they don't approve it and make sure you get those economies. Mr. Rogers, I am curious, is there an inspector general in the District of Columbia? Mr. Rogers. Yes. Mr. Horn. And to whom does he report? Mr. Rogers. Reports to the Mayor, the Council, and the Financial Authority; or shall I say sends information, kind of reports. They are independent. Mr. Horn. I understand that. Has the inspector general ever inspected the Medicaid situation in the District of Columbia? Mr. Offner. Actually, Mr. Horn, we have four separate investigations, again, not cosmic ones, but as I indicated, we removed 125,000 ineligible people from the rolls. The Inspector General initiated an investigation of whether or not we could recover for the expenditures that were made for those people while they were being covered inappropriately, and that is still in progress. And there are several other investigations that we are currently working with them on. Mr. Horn. Now, do you have your own audit staff in your agency? Mr. Offner. I have a small audit staff. We also contract out the field audits. I have a small audit staff of five people. Mr. Horn. How much fraud have we found in Medicaid recipients? Mr. Offner. Recipients? Mr. Horn. Among the recipients, how much are on there fraudulently? Mr. Offner. Mr. Horn, I will tell you I don't know the answer to that, but I will tell you the 25,000 people that we removed, it was not a fraud issue. It was an issue of computer systems that weren't talking to each other. My experience as a newcomer to the District is that more of our problems are due to systems malfunctioning and inadequate staffing and resources than to fraud. We are much more involved with provider fraud, and we hand over those cases to the Corporation Counsel, but again, we need to do much more in that area, and that is the kind of improvement that I think we would want to make as we get some additional resources. Mr. Horn. Now, do you have any jurisdiction over the Welfare Department? Mr. Offner. No. Mr. Horn. Is there much need for cooperation between the Medicaid services and the Welfare Department? Mr. Offner. There is enormous need. The eligibility function for Medicaid is in the Welfare Department, so we have to work very closely with them on the eligibility side, but that is not something directly under my control. Mr. Horn. Maybe the members of the Council know, is there an identification card when one has welfare and a photo on it as well as a fingerprint? Ms. Cropp. I am not certain about an identification card. If I can get that information back. [The information referred to follows:] In the District, TANF recipients receive two identification cards for public assistance benefits. Food Stamp recipients receive a photo identification card without fingerprint identification, Medicaid recipients receive a Medicaid identification card which does not include photograph or fingerprint identification. Mr. Offner. But there is an identification card for Medicaid, and it does not have either a photograph or a thumbprint. Most States don't do that. Now, what does happen, someone walks into a provider's office, the provider types in the number into the telephone and accesses an electronic system. So, you know, if the computer is working properly, we, in fact, can verify eligibility with great accuracy. Mr. Horn. You verify eligibility of the card, but you don't know that the person carrying the card that day is the same person that is presumably represented by the card. Mr. Offner. That is correct. Mr. Horn. Los Angeles County found years ago when you put a photo, thumbprint on it, thousands left the welfare roll, because they were double-dipping in terms of separate names, whatever. It seems the Council ought to be energetically demanding of the administration, and the administration on its own initiative ought to be undertaking simple little things like that to make sure that the limited money we have in the District of Columbia goes to people that really need it and not people that are simply tapping the till. Now I get to doctors, and the question is has there been any investigation by auditors of the billing of the doctors in the District of Columbia under Medicaid, and the nursing homes under Medicaid, and home care? Has any home care come up during Medicaid? All of those areas---- Mr. Offner. We have audits for all of them, most of those providers, and we are working right now with the Corporation Counsel on--and we have a staff of people who work on ferreting out cases that look questionable, which we then hand over to the Corporation Counsel's office, and we are working with them to pursue those. Now, I will admit we could be doing more, and if we had more staff, we would do more. Mr. Horn. Well, it would be nice if you only had four, if they are targeted in on some of these areas that have shown up in other States. When I came here in 1993-94, I was on Mr. Towns' subcommittee on the Government Reform, then known as the Government Operations Committee, and his subcommittee went to New York, found substantial fraud in the Medicaid program, in this case by doctors. And many doctors in California don't even take MediCal because the rates are so low, but in New York they had their hands in the till substantially, and there were indictments brought. So I just would commend the administration to a little more vigor in terms of examining those situations and getting yourself your own audit staff if you need it, if the inspector general isn't going to do it, to zero in on this. That would give everybody a better sense that the fiscal concerns of the District are being taken seriously by the people responsible for administrating. Thank you. Ms. Morella [presiding]. Thank you, Mr. Horn. I think that Ms. Norton doesn't have any other questions. I want to thank this panel very much for your testimony and for appearing here today. Thank you. I am now going to call on the third panel, the next panel, which is going to testify on the Treasury borrowing section of the President's plan from the perspective of local officials. And this panel is going to consist of Mr. Thomas Huestis, who is the deputy chief financial officer for finance and treasurer of the District of Columbia; Mr. Rogers; Council Chair Pro Tempore Jarvis; the Honorable Frank Smith, chairman of the Council's Committee on Finance and Revenue; and Mr. Dexter Lockamy, CFO for the Control Board. Also present, but not at the witness table, is Ms. Marguerite Owen, deputy general counsel to the Control Board, who will be available to answer any questions. I think as you all know, it is the policy of this committee that all witnesses be sworn in before they may testify, and so I would kindly ask you if you would please rise with me and raise your right hand. [Witnesses sworn.] Mrs. Morella. The record will show that you responded in the affirmative. Thank you. Ms. Drew-Jarvis. Madam Chair, excuse me, since there is an able complement of officials from the District of Columbia here, and since we are to meet with Dr. Brimmer at 4 p.m., and my colleagues have already gone ahead, do you think I might be excused from this panel, since you have such an array of experts here? Mrs. Morella. As you presented, Ms. Jarvis, it is so hard to refuse. I can understand why you are in politics, and indeed I think it is all right with this subcommittee, yes, indeed. Thank you. Mr. Rogers. Madam Chair. Mrs. Morella. And I wanted to mention, Ms. Jarvis, that there is no objection, so we have unanimous consent, that your statement will be included in the record. Mr. Rogers. Madam Chair, I have to attend the same meeting. My statement has been provided. Mr. Huestis is very able on these matters, and if you look at our testimony, we are totally in sync with the issues raised with respect to the President's plan and the borrowing opportunity for the District. I would like to be excused as well. Mrs. Morella. Mr. Rogers, we will also excuse you, and your testimony will also be in the record. Mr. Huestis, I am glad you are not leaving. Mr. Huestis. Madam Chair, I am not going to leave. Mrs. Morella. You have an awesome responsibility now. STATEMENTS OF THOMAS HUESTIS, DEPUTY CFO/FINANCE AND TREASURER, DISTRICT OF COLUMBIA; FRANK SMITH, CHAIRMAN, FINANCE AND REVENUE COMMITTEE, DISTRICT OF COLUMBIA CITY COUNCIL; AND DEXTER LOCKAMY, CHIEF FINANCIAL OFFICER, FINANCIAL RESPONSIBILITY AND MANAGEMENT ASSISTANCE AUTHORITY Mr. Huestis. Good afternoon, members of the committee, and thank you very much for having me. My name is Tom Huestis, deputy CFO and treasurer for the District, and thank you again for inviting me to appear before the subcommittee to comment on the President's plan. The President's plan includes a funding proposal that will help solve the District's cash-flow problem. Included in this plan is a proposal for up to $500 million U.S. Treasury borrowing with a 15-year repayment term, and this is designed to fund the cash needs and a portion of the accumulated deficit. In addition, the U.S. Treasury is proposing a short- term financing vehicle that would be structured similar to the current U.S. Treasury advance provisions. My staff has worked closely with Mr. Rogers' staff, the Office of Management and Budget, the Council's staff and the Authority's staff on evaluating this and how it would be implemented, and I'd like to address that now. Currently the District has an accumulated deficit of approximately $453 million, as a result of cumulative net operating deficits in the past. At the end of fiscal year 1997, the District's accumulated deficit is projected to increase to $527 million as a result of the budget deficit for fiscal year 1997. Although the accumulated deficit is expected to be over $500 million, the District's cash deficit is only approximately $300 million. That means what the District has had to do, in order to stay liquid, is borrow at least $300 million from next year into this year in order to make payments. It has accomplished that this year through the use of U.S. Treasury advances. So it has advanced payments from next fiscal year, brought against next fiscal year's Federal payment in order to pay its bills currently. One of the things that happens with the President's plan is, it proposed that the Federal payment goes away. That means the District will be left with no source to repay these $300 million Treasury advances. So in the first, in advance, the financing portion of this plan is essential because the District has no other source of repaying its U.S. Treasury advances. Second, the financing portion of this plan is, in itself, healthy for the District. Currently, these advanced provisions, where we have to do three or four borrowing Treasury advances every year in order to get that money up to this year from next year's Federal payment, are extremely burdensome. By implementing this plan, we can take those Treasury advances and finance those into a long-term obligation, thereby eliminating the annual advances and giving some order into the market. In addition, the credit markets--we believe that by changing these advances into a long-term financing will give us better access into the credit markets. There are some concerns. Our existing bond holders have relied on the Federal payment as a source of repayment, a last source of repayment. So eliminating the Federal payment does provide our existing bondholders with some concern. However, the word we get back from them is, if the plan does what it is designed to do, give the District significant expenditure relief, and takes care of the ever present pension problem, which is projected to explode, if the President's plan takes care of those items, that it will be a net benefit to the District and to those bondholders. Because of the time, I would like to cut through a lot of my testimony and it will be in the record. One of the major things that we have done is, we have gone to the rating agencies and the credit market participants, or bondholders, and talked to them about the size of the financing and about how much we should essentially borrow and how much Congress should authorize. What they have come back to us and said is that the Congress needs to authorize $500 million of this financing, but the District should only borrow the minimum amount it needs up front, so all it needs to borrow is the $300 million up front, but the Congress and the administration need to authorize the entire $500 million because, essentially, what we are doing is, we are financing our cash deficit and then using the surpluses that will be generated from the President's plan to pay down the balance of the accumulated deficit. From the Office of the Chief Financial Officer and the rating agencies, we agree that this is the most prudent course and this will allow the District to not become cash flushed, so it doesn't have to stop, so it won't have to stop, the critical reforms in management initiatives that need to happen in the District, but it will provide the District with a sufficient amount of cash to operate efficiently and then pay down the balance of the accumulated deficit over time. There is a cost to this plan. We talk about it here, of $13 million if we borrow the $300 million, or $15 million if we borrow the $500 million. The cost is due not to the borrowing in itself, it is due really to the loss of the Federal payment. If you think about it, we receive $660 million day one, and we are trading that for expenditure relief, spread across the fiscal year, all 12 months. And because we operate at such a narrow cash margin, by that cash tradeoff, we have to borrow more money and we have to borrow it sooner in the fiscal year. We have to essentially borrow day one into the fiscal year to match the cash that we would have normally received through the Federal payment. So the increase in the cost of this financing that we talk about in our analysis and our budget and in our testimony here is not due to the deficit borrowing itself, it is due to the tradeoff between the Federal payment and the expenditure reductions. Thank you. That concludes a summary of my testimony, and thank you very much, and I will be happy to answer questions. [The prepared statement of Mr. Huestis follows:] [GRAPHIC] [TIFF OMITTED] T2315.036 [GRAPHIC] [TIFF OMITTED] T2315.037 [GRAPHIC] [TIFF OMITTED] T2315.038 Mrs. Morella. Thank you, Mr. Huestis. And for all of our panelists, your testimony in total will be included in the record. I now recognize Mr. Smith. Thank you for being with us. Mr. Smith. Thank you very much, to Congresswoman Norton and you as acting chairman. I am Frank Smith, I am the chairman of the City Council Committee on Finance and Revenue. I guess I would have to say that I have to rely on my other 10 colleagues to adequately represent me with Mr. Brimmer in the Control Board; I am sure they are capable. Mrs. Morella. You are very noble to stay here to testify. Mr. Smith. Since this is my first opportunity to testify on this matter, I figured I would stay around myself. I am chairman of the Council Committee on Finance and Revenue, pleased to appear before you, to appear to discuss the Treasury borrowing element of the President's National Revitalization Government Improvement Plan. First, just a little bit of history. The Home Rule Act has served the District government since January 1975. They granted the District autonomy on how to spend its money, both locally raised revenue as well as the Federal payment. Indeed, the Home Rule Act specified that the Mayor had to provide meaningful information to the Congress regarding expenditures and to show how these expenditures benefited the District population. The comparison was to include an estimate of the amount of property tax lost because of taxes on land and the amount of unreimbursed services to the Federal Government, and a tax burden relative to the suburbs. The question of how local government could possibly cover costs associated with running a city was raised at the beginning. This leads me to conclude the proposed Treasury borrowing authorization does not offset the proposed elimination of the Federal payment, even from a cash standpoint. Absent the Federal payment, projections by the Authority show that the District will experience a surplus for only 1 or 2 years, even with the financing of the deficit. In the beginning of the Home Rule period between 1972 and 1989, they were good financial years for the District. Although there were severe fiscal problems during this period, we believed we could overcome the problems, and you probably know we had some good times and the District fared well. In the past few years, we experienced a growing deficit. The Council is struggling to find a solution within the confines of the limitations of the financial realities with which we are now confronted. Two immediate hurdles face us, however, if we use the proposal for Treasury assistance in eliminating the accumulated deficit. One is the need to restructure the District's debt limitation requirements as currently imposed by the Home Rule Act. And I think you probably know this already, that the home rule act limits the amount of borrowing we can do to, I believe, 14 percent of what all of our revenues are, and that 14 percent application applies to our revenues, including the Federal payment. The other city long-term financing debt service of the accumulated deficit would exceed the statutory debt limit if you do not either amend that provision or exempt us from it. And so that is one of the problems that I think you have to look at, and I am sure you intend to do that in an effort to pursue this. Without a waiver or increase in the current debt limitations, the District will not be able to finance its multiyear programs because, as I said earlier, the culmination of these two would exceed our ability to borrow, unless you exempt us from the ceiling. The impact of the terms proposed by the President's plan on the District's overall financial conditions, its cash position, and cash-flow is significant. It would free up current cash to pay operating expenses. The Office of the Chief Financial Officer projects in the absence of any borrowing, the District would end 1997, with a negative cash position of approximately $247 million. The negative cash position is caused by advancing revenues from future fiscal years to meet current year's expenditures, which is, of course, our accumulated deficit. I think the District's accumulated deficit and any approved deficit should be fully funded through long-term borrowing and other means, including the need for capital projects funding pending the ability of the District to access the private market, the Treasury loan provisions, with continued authority that exists in the Home Rule Act but has been suspended by the Authority. Finally, Madam Chair, I would like to remind everyone, in August 1991, Public Law 102-102 was passed by the Congress and signed by the President to establish a formula-based Federal payment. The amount of the Federal payment was set at 24 percent of the prior year's revenue source collected by the District. Since that time, the legislation has been introduced by the Congress, but to change the Federal payment, but you know as I do, that has never been changed, so that we never had an adequate Federal payment to take care of our problems, and, therefore, we have had this accumulated deficit develop for us here in the District of Columbia. Let me also say in closing, the Council has taken the view that it wanted the Congress to continue the Federal payment, primarily for the purpose of trying to find a way to provide some tax relief to our businesses and to our citizens, and if you don't do that, you must enact some form of Ms. Norton's bill in order to provide some tax relief for our citizens. That is the only way to guarantee the long-term sustained growth of the District of Columbia and the ability of our citizens to take care of themselves and also to provide for the Nation's Capital. Thank you. [The prepared statement of Mr. Smith follows:] [GRAPHIC] [TIFF OMITTED] T2315.039 [GRAPHIC] [TIFF OMITTED] T2315.040 [GRAPHIC] [TIFF OMITTED] T2315.041 [GRAPHIC] [TIFF OMITTED] T2315.042 [GRAPHIC] [TIFF OMITTED] T2315.043 [GRAPHIC] [TIFF OMITTED] T2315.044 [GRAPHIC] [TIFF OMITTED] T2315.045 [GRAPHIC] [TIFF OMITTED] T2315.046 Mrs. Morella. Thank you, Mr. Smith. I note your last commentary is not in the written testimony, and obviously it was very heartfelt in you and spontaneous. Thank you. Mr. Lockamy, delighted to hear from you, sir. Mr. Lockamy. Thank you, Madam Chair, members of the committee. I am Dexter Lockamy, chief financial officer of the District of Columbia, Financial Responsibility and Management Assistance Authority, which I will refer to as the Authority. And with me, I would like to recognize, is Marguerite Owen, deputy counsel to the Authority. We are pleased to appear before you to present the Authority's assessment into Treasury borrowing. I will be brief, given that the testimony is in the record, but I do want to point out a couple of things. Madam Chairwoman, Dr. Brimmer, the Authority's chair, stated in his remarks to the subcommittee on March 13, the Authority advocated in a strategic plan the District ought to take a long-term borrowing to pay down its accumulated deficits, and we are pleased that the present plan also calls for such a borrowing and proposes that the U.S. Treasury provide a financing. I will not go into the details of the specifics of what is being proposed, but I do want to say the Authority fully endorses the concept that the District be provided with the Authority to obtain 15-year term financing of the District's accumulated deficit of the Treasury. However, we do have some observations that I would like to point out. In our remarks, we would like to emphasize two very important points: That a Treasury borrowing facility for the District's accumulated deficit, while extremely helpful, will not, without a continued Federal payment, allow the District to achieve financial stability with respect to its present and future capital and financing needs. Second, the current uncertainty concerning the Federal payment caused by this proposal and the District's borrowing authority must be clarified and settled as soon as possible. Otherwise, we believe the District's ability to finance its 1997 and 1998 could be jeopardized. Clearly, we believe Congress must enact additional borrowing authority for the District. We believe the proposal in the President's plan for intermediate-term borrowing facility with the Treasury will provide most, if not all, of the necessary additional borrowing authority that is required by the District. But we also believe that the provisions for transitional short-term Treasury advances, which are due to expire on September 30, need to be extended by the Congress. With respect to specific recommendations, we realize that some of the savings that people anticipate in terms of asset sale surpluses may not be realized in the next couple years, and so we therefore recommend that the District have the ability to finance the full accumulated deficit at its discretion, subject of course to the approval of the Authority as provided in Public Law 104-8. The Authority further suggests the District be granted the authority to borrow the entire amount of the accumulated deficit from the Treasury in tranches over a period of not more than 3 years. The Authority urges the Congress to extend the transitional short-term Treasury borrowing authority provided in DC Code 47- 3401, and/or modify the seasonal cash management provisions of that section to include any short-term borrowing requirement of the District. We also recommend that the authorizing legislation specifically provide the intermediate-term borrowings have a maximum term of 15 years, and allow the District to elect a shorter period if it so desires, and that there be no penalty for prepayment. And while we do not object to the Secretary having the provision to suggest refinancing by the District, we strongly recommend that any decision to refinance the Treasury borrowing in the capital markets be left to the District's discretion, after consultation and approval by the Authority and made subject to--by specific criteria, which will not result in increased financing costs to the District. Last, because the current structure of the District's debt includes large principal payments through fiscal year 2003, we request the legislation should provide principal payments be deferred until fiscal year 2004, when level debt service could begin, and that the Treasury borrowings be exempt from the requirements of DC Code 47-25, which requires that general obligation bond principal payments begin not more than 3 years after the date of such bonds. Regarding my conclusions, in conclusion, Madam Chairwoman, we view the Treasury borrowing projections in the President's plan are acceptable, provided the details and conditions associated with the borrowing be finalized as soon as possible, along the lines that we have proposed. We emphasize that prompt clarification of the issues discussed is necessary to avoid any market confusion and concerns that may be generated as the District moves forward with its planned fiscal year 1997 and 1998 capital borrowings. We are happy to answer any questions that you might have. [The prepared statement of Mr. Lockamy follows:] [GRAPHIC] [TIFF OMITTED] T2315.047 [GRAPHIC] [TIFF OMITTED] T2315.048 [GRAPHIC] [TIFF OMITTED] T2315.049 [GRAPHIC] [TIFF OMITTED] T2315.050 [GRAPHIC] [TIFF OMITTED] T2315.051 [GRAPHIC] [TIFF OMITTED] T2315.052 [GRAPHIC] [TIFF OMITTED] T2315.053 [GRAPHIC] [TIFF OMITTED] T2315.054 Mrs. Morella. Thank you very much, Mr. Lockamy. I just thought I would ask several questions and then look to Ms. Norton for her questioning. First of all, I think that from your testimony, I pretty much heard a response to the fact that you do support the Treasury proposal as you understand it. Did I hear you say that? Mr. Huestis. Yes. Mrs. Morella. What is the status of the MOU, the Memorandum of Understanding, which includes the Treasury proposal, as I understand? Mr. Smith. Do you want me to answer that? Mrs. Morella. Yes. Mr. Smith. We have--just this afternoon, actually--the Council had a few minutes of consultation on that matter, and we will be taking it up again over the weekend. As you know, we are scheduled to vote upon it on Tuesday, the 29th, and I would not presume to tell you what my colleagues are going to do in a vote before it happens. You operate in a body similar to mine, and I am sure you understand. Mrs. Morella. Do you know how you are going to vote? Mr. Smith. Yes. Mrs. Morella. Shall I ask you? Shall I ask you, or would you prefer to wait? Mr. Smith. Well, they might be watching this. I know we are on television. I don't want to tip my hat too early. Mrs. Morella. That's perfectly understandable. But Tuesday, the 29th. Mr. Smith. Yes. And I will say this to you. I am sure you are aware the Council had some concerns with some aspects of it. We have returned what we consider to be a proposal that we could all work off of, and some negotiations are going back and forth on it now, and I hope those will be concluded by the time we get to the Tuesday vote. Mrs. Morella. That will be good, because we want to move the whole program ahead. You know, the Home Rule Act, like most city charges, requires the District to have a balanced budget and not run deficits. We know that the District inherited and accumulated operating deficit of more than $200 million. You mentioned that in your testimony, Mr. Huestis. In 1991, Congress allowed the city to sell $331 million in deficit financing bonds to liquidate its accumulated deficit, and now we are faced with the prospect of authorizing the District to liquidate an accumulated deficit of more than $400 million well before the 1991 bonds are paid off. What can Congress do to ensure that the District not get into that kind of deficit situation in the future, requiring such action? I mean, what kind of assurance do we have on top of the concept of debtor budget? What else can we do? What can Congress do to restrict or require of the District government? And then I wonder, whatever you will see, if you do have something to offer that we should suggest, should it be legislated? And I guess, let's start out that way. Mr. Smith. I think that Congress is doing many things now to help us to solve that problem. And let me just say, I think the District government itself, too, has done a great deal to help solve the problem. It has sobered up to the reality it has to control spending, and that was one of the missing elements back in the early days when you did the first refinancing, and the Council itself did not engage itself in the kind of arduous process we have been engaged in in the last 2 years to try to cut spending and then to get it under control. Second, you know, already you have given us a Control Board and CFO and various other stopgap measures you have employed to help us maintain the discipline and the cuts that we have put in place. Third, you have taken a step to try to take over some of the State functions that the District government should never have been saddled with in the first place. And fourth, I guess among those things, you have taken over some responsibility for a pension payment that the Congress said it was going to take over, and it is just now getting around to doing so. And let me say any budget that would have had to carry an item in it that large for such a long period of time would probably eventually run into a wall the way we did in this one. But I think we are taking steps that can assure you and others that we will get this matter under control, we will discipline ourselves to keep it under control, and with a little help to reseed our economy of tax breaks and things like that, we think we can guarantee you a future in the Nation's Capital that we can all be proud of. Mrs. Morella. I mean, that sounds all well and good, and I appreciate you saying it, and I know you truly mean it. I am also saying we are going to have a hard time selling this to other Members of Congress, and they are going to say, what assurances do you have? And it is easy to say, well, now we have a Control Board and now things are going better. I think Congress is probably going to ask for more than that, maybe something a little more tangible. And if anyone else has any comment--Mr. Huestis, did you want to comment? Mr. Lockamy. Mr. Huestis. I agree with Mr. Smith. I think Congress has already done a lot. I think the Control Board and CFO have been a big part of the District turning around and good--a very good reason why the deficit bonds are not going to be wasted this time. And I think if you just look at the results of last fiscal year, where we had a budgeted deficit of $116 million and we ended up with an operating deficit of less than $60, and that is quite extraordinary, and that was, in part, to the good work of the Control Board and the CFO of ratcheting down spending and making sure that agencies did not overspend their budgets and deficits were not acceptable--so I think there is already some history that the actions that Congress has taken in the past have been effective. I think that the other thing is that, in reviewing the President's plan, you want to make sure that the--when, after the plan is implemented, that expenditure growth does not outpace revenue growth. I mean, what we have now is, we have expenditure growth of 6 or 7 percent in the District; if left unattended and revenue growths are very, very small, 1 percent, 2 percent. So you have this structural imbalance, and the President's plan is designed to narrow it. But the District will never be able to fully function as a normal operating government unless that structural imbalance is narrowed, and so the Congress must make sure that that structural imbalance is taken care of with the President's plan or another plan. Mrs. Morella. I would like to ask Mr. CFO himself to comment on that. Mr. Lockamy. Well, Madam Chair, the meeting both Ms. Jarvis and Mr. Rogers left and that is being held right now at the Control Board is in an attempt to try to reach a balanced budget for fiscal year 1998, 1 year earlier than what was required by the law. And the struggle is balancing the budget in such a way that we try to achieve true structural balance going forward, rather than rely upon various sorts of conventions that will balance it this year but then to bring about a recurring problem in the future. I think the Congress, I think, has done a lot. I think I concur with my colleagues on this panel that the independent CFO, ourselves, the new leadership that we see on the City Council is going a long way in terms of restoring confidence. But one of the things that could derail all of these efforts is the flat revenue stream that the District has to contend with, and that is why we feel that pulling away the Federal payment without having identified new, viable revenue sources is only going to put in jeopardy a lot of the efforts that are under way. Mrs. Morella. Yes. I guess we also--I hear that often too. I wanted to also ask: You know, the private bond market, especially holders or insurers of outstanding District general obligation debt, was concerned about Treasury, using the Federal payment as collateral, and having first call on that funding source. How do you think this proposal and the elimination of the Federal payment will affect current district bonds and future bond ratings? And remember, you have spoken about that, Mr. Huestis. You may all just want to briefly respond to that so we have it on the record. Mr. Huestis. I did respond to that in my testimony, and I think that our conversations with the holders think that if the goals of the President's plan are carried out, that the pensions are taken care of, and that the structural imbalance is narrowed in any way, that this would be a positive for the bondholders, even losing the Federal payment, which is part of the existing security structure of the GO bonds. Mrs. Morella. Mr. Smith, you also feel that the Federal payment is critical? Mr. Smith. Yes, I think Mr. Huestis has made it plain, and I think Mr. Lockamy said in his testimony, we need to be settling this issue early, as soon as possible, and early in the next fiscal year, because we have some outstanding bonds out there that are going to come due in 19--in fiscal year 1998, one of which I know is--says right at the bond issue, we are going to use the full faith and credit, District government included in Federal payment, and I can tell you right now, bondholders are looking to the Federal payment. So, if it is not there, or, alternatively, if we don't do this long-term debt restructuring quickly, they are going to get very nervous. Mr. Lockamy. I would like to say that we have been in touch with Mr. Huestis and his office and his conversations with rating agencies. We independently have had conversations with the rating agencies to explore this issue. One of the things we are concerned about is what the collateral is that the U.S. Treasury will require with respect to this loan, and so long as there is nothing that is created that would create a higher order of priority over the existing general obligation bondholders, we feel the market would be comforted. I think going forward, the market is really looking for a reasonableness that they can get paid back in terms of the full general obligation pledge of the District. Surely, pulling out the $660 Federal payment does have a negative impact, and so long as there is a corresponding sort of cost avoidance or reduction in expenditure, the market could probably get comforted. And I think the real issue for the market is liquidity of the District going forward and flexibility to deal with unforeseen and unexpected issues. If the District--you know, if the debt becomes such a burden to the District going forward, I think the market will have an unfavorable reaction. Mrs. Morella. Do you want to speculate about what you think the Federal payment should be if the other reforms are enacted? Mr. Lockamy. I am sorry? Mrs. Morella. Do you want to speculate what you think the Federal payment should be if the other reforms are enacted? Mr. Lockamy. The Authority's position is, the full Federal payments stay in place with the President's plan. Mrs. Morella. With the President's plan. Mr. Smith. Mr. Smith. Yes, I would say we ought to do it, at least for a--for a considerable period of time, the full Federal payment, because, as I said earlier, among other things, the District government would like to--the Council, certainly, on the leadership of the Finance and Revenue Committee, would like to find a way to make the tax structure of the District of Columbia more compatible with surrounding jurisdictions. That is the only way to ever guarantee a full economy there where we can have a tax base that can produce the kind of revenue that will give us a sustained base so that all of our creditors and our citizens, too, can be employed and also can be--our creditors can be paid back. So we would like to have a Federal payment so we have flexibility. Without the Federal payment, we do not have any flexibility or capability to do that. Mrs. Morella. You think it should be $660 also, Mr. Huestis, or you don't have any comment? Mr. Huestis. It is a policy decision, and I think the revenue should be sufficient for the District to continue to operate, and whether that is a Federal payment or increased taxes from Congresswoman Norton's plan or another facility that is a policy decision, we will evaluate that. Mrs. Morella. Thank you. I want to thank you, gentlemen. I am now going to recognize Ms. Norton, the ranking member of this subcommittee, for her line of questioning. Ms. Norton. Madam Chair, I don't have specific questions. I do note the difference here on the Federal payment, some difference between the CFO and Control Board. Mr. Huestis. No difference. Ms. Norton. In any case, it is not in any of your hands. Mr. Huestis. Right. Ms. Norton. And we are just going to have to do the best as we can. What we would most like is to keep the Federal payment. I feel irresponsible if I simply say we are going to keep the Federal payment and want everybody to try to help us to figure out what to do in case we don't get to keep it all. I want everybody to know that the Federal payment is going to be used to pay for the plan and don't want to leave the impression that there is any free lunch up here. Therefore, what we have got to figure, and I think what you all ought to be figuring out right now, you want the Federal payment, you can probably get it. It is now worth $500 million. You will lose some part of what the President's plan has. And so what I would like the Control Board and the Authority and the Council and the Mayor to engage in is some thought about tradeoffs, because the chairman and I are now engaging in tradeoffs. In other words, the chance that what we will do is to get the President's plan, which is more than any of us thought he would come through on in the first place. And on top of that is $660 million. You must not be living where the Washington Post comes out every day to talk about deficit reduction. I do that only because I cannot pander on an issue as critical as this. We need that cash. It would make us much more stable, much more secure. All you say about collateral and bondholders is exactly right. They also understand the President's plan to be the substantial linchpin to the District's payment, not the Federal payment. I have to be very careful because, in essence, I want the Federal payment, and I also do not want to pull the rug from under the plan, and I do not want to give Members who don't want to give the District 2 cents the opportunity to say, well, you all really haven't figured out this plan, there is no understanding about what would be traded off, and we don't want to do this any way. So one of the things I would like to ask you to do in your own councils is to think if, in fact, the Congress of the United States is unwilling in a year, when there is only one issue on the table, and that is deficit reduction, to give the District everything the President's plan says plus--and the Control Board of course says, also, other State functions plus the Federal payment--if for some reason that doesn't happen, we can't beat something with nothing, and what I am never caught up here with is, they come back and at some point somebody is going to come back, and they are going to say, OK, here is what we want. The only way I am able to get anything for the District up here is, I am the one that comes and says this is the tradeoff we make, because it will otherwise be on their terms. Any thought you can give and any advice and counsel you can give on that, considering the plan has some things in it we never thought would be in it--economic development corporation, infrastructure, all kinds of things about the prisons we didn't think would be in it; we were not sure they would take 100 percent of the pensions; on Medicaid, we had no idea they would go to 70, 30. That is how it works up here. I just want everybody to know that. It does not work like, here is some more. The President hardly gets what he asks for--now we are going--hardly ever gets what he asks for, much less, here is what you asked for, and here is more. There may be ways for us to still come out ahead. When I say tradeoffs, I don't mean we end up with a lesser package than we have now necessarily, but I am very, very anxious about being caught with somebody listening, overhearing our conversations in our hearings, and coming back, because it has happened to me before. Let me say, the chair asked about the MOU. First let me say, with the Council, which I think just handled this very well, I mean the Council, which, after all, has a constituency, and we have lived with the Federal payment for almost 200 years, can't be expected to say, OK, take the Federal payment. Therefore, it is perfectly understandable you would want some accommodation with the Federal payment. And what you have--what you have come forward with, all, it seems to me, ought to be taken into account as we try to figure out what to do. The MOU, I think everybody ought to get the chairman's opening remarks on the MOU. And I want to caution everybody that there is needless polarization out here in conversations that I think progresses somewhat with the chair pro tem, and with the Mayor, and Mr. Evans. That was this week. I have also had conversations with the senior operatives at OMB. And I know that the Council has had conversations, and I believe progress is being made. The chairman has told me--I think you heard it--that in a real sense, we want the MOU, we want to be able to point to it to undergird us when Members lack confidence that this thing is going to go well. But it would be a monumental mistake to let the fight over the President's plan take place on the MOU. It would be a monumental mistake, because it would then feed into people who would say, look, they have problems. What we get back then is, they are fighting over the particulars of whether they even do what their own administration wants them to do, and you want me to vote for this bill when, in fact, what is being fought over doesn't have anything to do with that, it has to do with Mr. Davis's plan. And I think one of the first rules of politics is, understand when you have won, declare victory, go home. So we are fighting over Mr. Davis's bill, and he is the one, that Mr. Davis's prison section--I can't understand what the fight between two parties, neither of whom have the ultimate say on that, the administration on the one hand, the Council on the other. We know where you both stand on that, so I think we can get over that, and I think there is kind of language that we can deal with that on the Federal payment. There was already a victory that could have been declared and everybody went home, when it wasn't in the MOU. Then it got back in the MOU, rubbing the administration's face in it. You hit somebody that hits you back. Once it was out, it seems to me somebody had a victory somewhere who could say, you know, you hadn't signed anything with the Federal payment in it; I am talking to everybody concerned. I am sure, having talked with everybody concerned, that this is not going to be a problem. I just raise this now because I would like everybody to understand, I have said the same thing to the OMB. They are now going back with some suggested language we have been talking about. Ms. Jarvis knows about some suggested language. And I just want to say for the record, there is not real disagreement on the two items such that they affect the MOU; that is to say, the Federal payment and the prison section. They are matters for Congress, and the administration and the city have worked so well up until now that it has really helped the bill, and so I encourage you to really work as you have, and I am going to continue to work with both sides, because you have both come very far, in my judgment, and I appreciate the way in which you have responded to what would otherwise be a very difficult situation. Mr. Smith. Let me say on behalf of the Council, we appreciate your effort in this, too, your effort and also the effort of our colleagues from the surrounding jurisdictions, from Maryland and Virginia, in helping us with this fight. I know it hasn't been easy, and this is, I think, an important step for all of us, for our city and for the Nation's Capital. My understanding is that the--these--that there is a considerable amount of progress in negotiations and some language that is being worked out and might enable us all to go forward. I hope that will happen over the weekend and, by the time we vote on Tuesday, we will be ready to go. Ms. Norton. It won't happen over the weekend, but I have already spoken with your chair pro tem. One thing that would be helpful is, given the fact, only today, for example, if I talk with people from the OMB, particularly since the MOU is not up against any timeframe wall, we won't have answers back from OMB before then, but we are making progress. So I hope you are not up against a wall on a vote that won't be necessary, but I already talked to Ms. Jarvis about that. And, again, you all have helped in what you did, I guess it was yesterday. And while we are not there yet, I have every confidence, based on how you all have been moving and based on my conversation, that we are going to get there. We will not be there, though, by Tuesday. Mrs. Morella. Thank you, Ms. Norton. And I think all of us on the subcommittee agree with what you said. I know I have some concerns about the criminal justice element, and I think we will probably be changing that, but we are all committed to do everything that we can, working cooperatively with you to make sure that this capital city is the capital with a capital C. I am going to ask unanimous consent that written statements from this panel and from anyone else who has testified, that written statements be included in the permanent record. I want to thank you for being here. The record will be open for 10 days, and there may be some other questions we will get back to you on, other Members that may not be here, if that is acceptable. Thank you very much, and the subcommittee hearing is adjourned. Thank you. [Whereupon, at 4:43 p.m., the subcommittee was adjourned.] [Additional information submitted for the hearing record follows:] [GRAPHIC] [TIFF OMITTED] T2315.055 [GRAPHIC] [TIFF OMITTED] T2315.056 [GRAPHIC] [TIFF OMITTED] T2315.057 [GRAPHIC] [TIFF OMITTED] T2315.058 [GRAPHIC] [TIFF OMITTED] T2315.059 [GRAPHIC] [TIFF OMITTED] T2315.060 [GRAPHIC] [TIFF OMITTED] T2315.061 [GRAPHIC] [TIFF OMITTED] T2315.062 [GRAPHIC] [TIFF OMITTED] T2315.063