<DOC>
[107th Congress House Hearings]
[From the U.S. Government Printing Office via GPO Access]
[DOCID: f:75899.wais]
THE OUTLOOK FOR THE DISTRICT OF COLUMBIA GOVERNMENT: THE POST-CONTROL
BOARD PERIOD
=======================================================================
JOINT HEARING
before the
SUBCOMMITTEE ON THE DISTRICT OF COLUMBIA
of the
COMMITTEE ON GOVERNMENT REFORM
HOUSE OF REPRESENTATIVES
and the
OVERSIGHT OF GOVERNMENT MANAGEMENT,
RESTRUCTURING, AND THE DISTRICT OF
COLUMBIA SUBCOMMITTEE
of the
COMMITTEE ON GOVERNMENTAL AFFAIRS
U.S. SENATE
ONE HUNDRED SEVENTH CONGRESS
FIRST SESSION
__________
JUNE 8, 2001
__________
Serial No. 107-15
__________
Printed for the use of the Committees on Government Reform and
Governmental Affairs
Available via the World Wide Web: http://www.gpo.gov/congress/house
http://www.house.gov/reform
______
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75-899 PDF WASHINGTON : 2001
COMMITTEE ON GOVERNMENT REFORM
DAN BURTON, Indiana, Chairman
BENJAMIN A. GILMAN, New York HENRY A. WAXMAN, California
CONSTANCE A. MORELLA, Maryland TOM LANTOS, California
CHRISTOPHER SHAYS, Connecticut MAJOR R. OWENS, New York
ILEANA ROS-LEHTINEN, Florida EDOLPHUS TOWNS, New York
JOHN M. McHUGH, New York PAUL E. KANJORSKI, Pennsylvania
STEPHEN HORN, California PATSY T. MINK, Hawaii
JOHN L. MICA, Florida CAROLYN B. MALONEY, New York
THOMAS M. DAVIS, Virginia ELEANOR HOLMES NORTON, Washington,
MARK E. SOUDER, Indiana DC
JOE SCARBOROUGH, Florida ELIJAH E. CUMMINGS, Maryland
STEVEN C. LaTOURETTE, Ohio DENNIS J. KUCINICH, Ohio
BOB BARR, Georgia ROD R. BLAGOJEVICH, Illinois
DAN MILLER, Florida DANNY K. DAVIS, Illinois
DOUG OSE, California JOHN F. TIERNEY, Massachusetts
RON LEWIS, Kentucky JIM TURNER, Texas
JO ANN DAVIS, Virginia THOMAS H. ALLEN, Maine
TODD RUSSELL PLATTS, Pennsylvania JANICE D. SCHAKOWSKY, Illinois
DAVE WELDON, Florida WM. LACY CLAY, Missouri
CHRIS CANNON, Utah ------ ------
ADAM H. PUTNAM, Florida ------ ------
C.L. ``BUTCH'' OTTER, Idaho ------
EDWARD L. SCHROCK, Virginia BERNARD SANDERS, Vermont
------ ------ (Independent)
Kevin Binger, Staff Director
Daniel R. Moll, Deputy Staff Director
James C. Wilson, Chief Counsel
Robert A. Briggs, Chief Clerk
Phil Schiliro, Minority Staff Director
Subcommittee on the District of Columbia
CONSTANCE A. MORELLA, Maryland, Chairman
TODD RUSSELL PLATTS, Pennsylvania ELEANOR HOLMES NORTON, Washington,
THOMAS M. DAVIS, Virginia, DC
JOE SCARBOROUGH, Florida ------ ------
------ ------
Ex Officio
DAN BURTON, Indiana HENRY A. WAXMAN, California
Russell Smith, Staff Director
Heea Vazirani-Fales, Counsel
Matthew Batt, Clerk
Jon Bouker, Minority Counsel
COMMITTEE ON GOVERNMENTAL AFFAIRS
JOSEPH I. LIEBERMAN, Connecticut, Chairman
CARL LEVIN, Michigan FRED THOMPSON, Tennessee
DANIEL K. AKAKA, Hawaii TED STEVENS, Alaska
RICHARD J. DURBIN, Illinois SUSAN M. COLLINS, Maine
ROBERT G. TORRICELLI, New Jersey GEORGE V. VOINOVICH, Ohio
MAX CLELAND, Georgia PETE V. DOMENICI, New Mexico
THOMAS R. CARPER, Delaware THAD COCHRAN, Mississippi
JEAN CARNAHAN, Missouri ROBERT F. BENNETT, Utah
MARK DAYTON, Minnesota JIM BUNNING, Kentucky
Joyce A. Rechtschaffen, Staff Director and Counsel
Hannah S. Sistare, Minority Staff Director and Counsel
Darla D. Cassell, Chief Clerk
------
SUBCOMMITTEE ON OVERSIGHT OF GOVERNMENT MANAGEMENT, RESTRUCTURING, AND
THE DISTRICT OF COLUMBIA
RICHARD J. DURBIN, Illinois, Chairman
DANIEL K. AKAKA, Hawaii GEORGE V. VOINOVICH, Ohio
ROBERT G. TORRICELLI, New Jersey TED STEVENS, Alaska
THOMAS R. CARPER, Delaware SUSAN M. COLLINS, Maine
JEAN CARNAHAN, Missouri PETE V. DOMENICI, New Mexico
MARK DAYTON, Minnesota THAD COCHRAN, Mississippi
Marianne Clifford Upton, Staff Director and Chief Counsel
Andrew Richardson, Minority Staff Director
Julie L. Vincent, Chief Clerk
C O N T E N T S
----------
Page
Hearing held on June 8, 2001..................................... 1
Statement of:
Gandhi, Natwar M., chief financial officer, District of
Columbia government; Charles C. Maddox, inspector general,
District of Columbia; Joshua S. Wyner, executive director,
DC Appleseed Center; Renee Boicourt, managing director,
Moody's Investors Service; and Parry Young, director,
public finance department, Standard & Poor's............... 78
Rivlin, Alice, chair, Financial Control Board; Anthony
Williams, Mayor, District of Columbia; Linda W. Cropp,
chair, Council of the District of Columbia; and J.
Christopher Mihm, Director, Strategic Issues, General
Accounting Office.......................................... 27
Letters, statements, etc., submitted for the record by:
Boicourt, Renee, managing director, Moody's Investors
Service, prepared statement of............................. 139
Davis, Hon. Thomas M., a Representative in Congress from the
State of Virginia, prepared statement of................... 18
Gandhi, Natwar, chief financial officer, District of Columbia
government, prepared statement of.......................... 80
Maddox, Charles, inspector general, District of Columbia,
prepared statement of...................................... 96
Mihm, J. Christopher, Director-Strategic Issues, General
Accounting Office, prepared statement of................... 41
Morella, Hon. Constance A., a Representative in Congress from
the State of Maryland, prepared statement of............... 5
Norton, Hon. Eleanor Holmes, a Representative in Congress
from the District of Columbia, prepared statement of....... 12
Voinovich, Hon. George V., a Senator in Congress from the
State of Ohio, prepared statement of....................... 25
Williams, Anthony, Mayor, District of Columbia; Alice Rivlin,
chair, Financial Control Board; and Linda W. Cropp, chair,
Council of the District of Columbia, prepared statement of. 33
Wyner, Joshua S., executive director, DC Appleseed Center,
prepared statement of...................................... 132
Young, Parry, director, public finance, Standard & Poor's,
prepared statement of...................................... 146
THE OUTLOOK FOR THE DISTRICT OF COLUMBIA GOVERNMENT: THE POST-CONTROL
BOARD PERIOD
----------
FRIDAY, JUNE 8, 2001
House of Representatives, Subcommittee on the
District of Columbia, Committee on Government
Reform, joint with the U.S. Senate, Oversight
of Government Management, Restructuring, and
the District of Columbia Subcommittee,
Committee on Governmental Affairs,
Washington, DC.
The subcommittees met, pursuant to notice, at 11:04 a.m.,
in room 2154, Rayburn House Office Building, Hon. Constance A.
Morella (chairman of the Subcommittee on the District of
Columbia) presiding.
Present for the District of Columbia Subcommittee:
Representatives Morella, Davis, and Norton.
Present for the Oversight of Government Management,
Restructuring, and the District of Columbia Subcommittee:
Senator Voinovich.
Staff present for the Subcommittee on the District of
Columbia: Russell Smith, staff director; Heea Vazirani-Fales,
deputy staff director; Robert White, communications director;
Matthew Batt, clerk; Carl Picconato, science fellow; Victoria
Proctor, professional staff member, Committee on Government
Reform, Subcommittee on Technology and Procurement Policy;
Howie Denis, counsel, Committee on Government Reform,
Subcommittee on Technology and Procurement Policy; Melissa
Wojciak, staff director, Committee on Government Reform,
Subcommittee on Technology and Procurement Policy; Andrea
Abrams, intern with Mrs. Morella; Jean Gosa, minority clerk;
and Jon Bouker, minority counsel.
Staff present for the Oversight of Government Management,
Restructuring, and the District of Columbia Subcommittee:
Marianne Clifford Upton, staff director and chief counsel; Kate
Eltrich, professional staff member for Senator Mary Landrieu,
Senate Committee on Appropriations, Subcommittee on the
District of Columbia; Julie Gunlock, minority clerk; Mason
Alinger, minority professional staff member; and Andrew
Richardson, minority staff director.
Mrs. Morella. I'm going to call to order the Subcommittee
of the District of Columbia of the Committee on Government
Reform of the U.S. Congress.
It's been more than 6 years since the passage of
legislation establishing the District of Columbia Financial
Responsibility and Management Authority, and thanks to the
city's turnaround, it's balanced its budget for 4 consecutive
years, transformed a half-billion-dollar debt into nearly a
half-billion-dollar surplus, cut the size of its work force,
and begun to make improvements in government service. We've
reached this point: Today we're less than 4 months from the
demise of the Control Board, and even if we had a crystal ball,
I doubt we would have foreseen this.
I wanted to start by publicly thanking the men and women
who gave their time and considerable talents at the Control
Board over the past 6 years. They are chairman--or Chairwoman
Alice Rivlin, who is here to testify; former Chairman Andrew
Brimmer; Constance Berry Newman; Robert Watkins; Eugene Kinlow;
Stephen Harlan; Joyce Ladner; Darius Mans; and Edward
Singletary. Your service to your Nation's Capital at a time of
great distress will long be appreciated, and I'll be asking my
colleagues to support a joint resolution recognizing your
contributions.
I also want to thank all of our witnesses for being here
today, including our Mayor Anthony Williams, Council chair
Linda Cropp, chief financial officer Natwar Gandhi, inspector
general Charles Maddox, our outside financial experts. I also
want to recognize our GAO witness who is going to be testifying
on the report. And in addition, I want to recognize the
distinguished members of my subcommittee, the House oversight
Subcommittee on the District of Columbia, Congresswoman Eleanor
Holmes Norton, the District's Representative, who has been a
great guide through all of this and very important to this
committee; our Virginia Congressman Tom Davis, whose leadership
was crucial in the creation of the Control Board, who is my
immediate predecessor as Chair of this District of Columbia
Subcommittee.
And I am pleased that we will be joined today in about 40
minutes or so by Senator George Voinovich of Ohio. Senator
Voinovich was the mayor of Cleveland while that city was
emerging from a control period, and he is the ranking member of
the Senate Governmental Affairs Oversight of Government
Management, Restructuring, and the District of Columbia
Subcommittee. He has long been active and engaged on D.C.
oversight issues, and was instrumental in organizing this joint
hearing.
The purpose of our hearing today is twofold: First, to look
back at the progress the District of Columbia has made over the
past 6 years, to explore whether it has met all of the goals of
the 1995 Control Board Act, and to gauge the success of that
legislation. Second, we want to look ahead at ways to ensure
D.C.'s financial and management success continues.
I am interested in hearing from our city leaders about
their proposal to create an independent chief financial
officer, and we expect to discuss whether other mechanisms are
necessary to guard the District slipping back into a financial
abyss and causing the Control Board to return. With appropriate
safeguards, and strong and effective local leadership, we will
avoid a return to the bad not-so-old days when the District
borrowed money from the Federal Treasury just to keep the
government running, and when political interference transformed
the city's revenue and expenditure estimates into works of
fiction.
In a larger sense the demise of the Control Board presents
us with an opportunity to revisit the entire Federal-local
relationship in our Nation's Capital, a chance perhaps to build
upon the 1997 Revitalization Act. Under that legislation, the
Federal Government is soon to control many additional State
functions of the District, in addition to relieving the city of
its unfunded pension liability and reducing its share of
Medicare costs. But as we go forward, let's keep in mind one
important fact: Congress has an explicit constitutional
obligation to oversee the District of Columbia, and while Mayor
Williams and other officials have done a very impressive job in
turning the District around, it's impossible for those of us
here on the dais to simply turn our backs on that
responsibility.
One of my goals as Chair of this subcommittee is to work
with Congressman Joe Knollenberg, who chairs the D.C.
Appropriations Subcommittee, and our Senate colleagues to
further refine the Federal-local relationship and move the
District closer to full home rule.
We've been asked to reexamine some of the congressional
restraints, such as a required cash reserves equal to 7 percent
of the District's budget, and the 30-day review period of
legislation, and both Congressman Knollenberg and I have
expressed our willingness to look into these issues. The
District's progress over the past 5 years is the reason we're
able to at least consider these steps. Guided by the firm hand
of the Control Board, the District moved from the brink of
insolvency into an era of surpluses and sensible fiscal
management.
A city unable to clear the streets of snow, pick up trash
regularly, open schools on time, or deliver needed human
services has made significant strides in almost all areas. A
government that struggles to issue bonds has seen its credit
ratings rise from junk bond to investment level. To be sure,
there is more work to be done by the city, as our city leaders
will be the first to acknowledge. The city's structural budget
problems need to be addressed before a weakened economy begins
to slice into revenues. We have to find a way to repair and
renovate D.C. schools at a faster pace, as well as improve the
quality of their instruction. And the city is still lagging
behind in the implementing of its financial management,
personnel and procurement systems as part of its efforts to
improve the efficiency of municipal government.
And that brings us to today's hearing. Let me be very
clear, I have some reservations about the city's proposal for
the position of the chief financial officer [CFO], which was
created along with the Control Board. I believe that the CFO
must remain independent, autonomous and insulated from
political pressure. I am not totally convinced that the
legislation as introduced by Chairwoman Cropp and Councilman
Evans goes far enough. The proposal does not require the CFO to
prepare fiscal impact statements on all or even most pieces of
legislation, and removes some of his powers over personnel and
his own budget. I am concerned that the individual chief
financial officers of the various government agencies would not
be directly appointed by or report to the District's chief
financial officer.
In addition, I want to pose the concern that a chief
financial officer whose term runs virtually concurrent with the
Mayor's is sufficiently independent. I worry that the CFO could
be just another political appointment, certainly in the future
beholden to the chief executive and the City Council.
Well, as such, I want to explore today the possibility of
having some sort of special review of the city's revenue
estimate and financial audit, as the Mayor has recently
suggested and some Council members publicly have supported this
week, having an independent body verify the city's revenue
estimate, a process that would allow for substantial public
scrutiny, could help ward off any political manipulation of the
members. A revenue committee or an audit committee to review
the District's financial audits should not be seen in any way
as an extension of the Control Board, but as bodies whose
members would be appointed by and would work with local
officials.
We should keep in mind that it is extremely unusual for a
city to see its control period end so abruptly, as is the case
here. And because the city did not borrow any Federal money to
aid in its recovery, there is no provision for a gradual
phaseout of the Control Board. I know that this is of some
concern to those who monitor the District's finances, as you
will hear in the testimony from the managing director of
Moody's Investment Service. So we have called this hearing to
gain an honest assessment from city leaders, an honest
assessment from the Control Board and outside financial experts
about the District of Columbia's financial and management
health and the short and long-term challenges it faces. I am
looking forward to a lively and productive discussion.
I want to reiterate this is not micromanaging, this is
looking ahead, congratulating you for what's been done and
looking ahead to what do we need for the future. And so it's
now my pleasure to recognize the distinguished ranking member
of this D.C. Subcommittee, Congresswoman Eleanor Holmes Norton.
[The prepared statement of Hon. Constance A. Morella
follows:]
[GRAPHIC] [TIFF OMITTED] T5899.001
[GRAPHIC] [TIFF OMITTED] T5899.002
[GRAPHIC] [TIFF OMITTED] T5899.003
Ms. Norton. Thank you very much, Mrs. Morella. I thank our
Chair Connie Morella for convening this hearing and for her
efforts as a new Chair to assist the District. I also want to
thank Senator George Voinovich, who served as Chair of the
Senate D.C. Subcommittee previously and as a former mayor of
Cleveland and Governor of Ohio, and made a special contribution
to the city.
For Congress, of course, this is another in a series of
important hearings. For the District today is more like a
celebration. Technically the Authority is in place until
September 30th. In reality, the District is well into its post-
Control Board period. That period dates from January 1999, when
Congress returned the powers to a new Mayor and a new City
Council that had been lost through congressional attachments in
the years following the enactment of the original Control Board
statute. On that same date, the current chair Alice Rivlin and
the second Control Board took office and began the transition
to a fully empowered D.C. government.
We are grateful for the hard work of the Authority's first
chair Andrew Brimmer and of the first Control Board, who got in
the trenches with the District, helped the city to dig itself
out of a financial hole. We are grateful as well to Alice
Rivlin and her board for their many contributions, for
respecting the home rule prerogative of our elected officials
and insisting that the Mayor and the City Council run the D.C.
government, and for beginning the transition to normal
government 3 years ago.
The District was fortunate indeed in the quality of the
extraordinary residents who came forward pro bono to serve on
the Financial Authority. Unlike other cities that have faced
the same financial difficulties, the District was the home of
two of the country's leading economists and urban financial
experts, who agreed to serve the Financial Authority and
offered countless hours and suffered untold grief for their
hometown.
Those of us who do not work with the city's finances on a
daily basis may not have a full appreciation for what the
District has achieved or, for that matter, what further needs
to be done. Perhaps the best way to understand the city's
accomplishments is to measure them against the four goal posts
that Congress itself erected. Congressional goal post No. 1:
Achieve four consecutive budgets in 4 years or start all over
again. The District: Four consecutive balanced budgets achieved
2 years ahead of the congressional mandate, registering
surpluses all 4 years, and, despite a somewhat weakened
national economy, projecting yet another surplus year. In
addition, D.C. has a $150 million budget reserve now and by
fiscal year 2003 will have a full 7 percent cash reserve as
well, 3 years ahead of schedule.
Goal post No. 2: Get access to short and long-term credit
markets at reasonable rates. The District: Attained investment
grade bond status by the 3rd year of the control period rather
than in 4 years.
Congressional goal post No. 3: Repay all borrowings from
the U.S. Treasury. The District: Not only repaid all
borrowings, but also eliminated its accumulated deficit.
Congressional goal post No. 4: Discharge all obligations
arising from obligations issued by the Financial Authority. The
District: No authority obligations ever issued.
Having surpassed all congressional requirements, the
testimony we have received today shows District officials
imposing on themselves an innovative set of controls over and
above what the Authority statute requires, including a term for
the chief financial officer and enhanced powers that increase
the independence of the CFO. Separately the inspector general
has come forward with proposals to strengthen the oversight and
independence of his role as the city's primary investigator.
With the legislation the city now proposes, the District
has met every statutory mandate imposed upon the city and gone
well beyond. The time has come for Congress to keep its
statutory promise. There is a great deal more for Congress to
do than mull over and tweak what the District is doing for
itself. Six years ago Congress placed on the District the
toughest Control Board law in the country. Included in that law
is a sunset provision. The District has more than kept its end
of the bargain. Congress has no less an obligation. If Congress
in any way seeks to renege on its statutory promise or to enact
its own legislation against the will of the District of
Columbia, it will find in me neither an affable or a silent
partner or enabler.
Despite 4 years of astonishing progress by the District,
Congress has yet to respond in kind. Textbooks uniformly teach
that the best way to encourage responsible behavior is to
reward it. Congress may not have read these texts. In some ways
that is understandable. The Congress is fully equipped with
four staffed subcommittees with little to do except watch an
independent jurisdiction that is doing its job. Isn't it time
for Congress to reciprocate by streamlining its own processes
that impose costly burdens on D.C. taxpayers?
Next week I will ask the members of the subcommittee to be
original cosponsors of a bill that I believe is justified by
the progress upon which every member of the subcommittee has
remarked. Yet this bill is not chiefly a reward to the District
for a job Congress has said has been well done. The importance
of this bill lies in the contribution it would allow Congress
to make to the revitalization that Congress has required of the
District. At the center of the Control Board mandate has been
the requirement that the District streamline layers of
government redundancy and inefficiency and that the city reduce
the cost of government. However, because Congress has not
reformed or streamlined its own oversight procedures for the
city, D.C. taxpayers incur millions of dollars in extra and
unnecessary expenses and in costly delay. To correct these
problems, the D.C. Budget and Legislative Autonomy Act would
provide budget and legislative autonomy for the District while,
I emphasize, Congress would still retain its full powers under
article 1, section 8 to exercise its oversight at will.
While the reform of the District government is a work still
in progress, the greatest structural barrier to reform no
longer lies with the District. It is the Congress that takes
the typical 6-month budget process in States and cities, and
makes it into a 12 to 18-month process for the District of
Columbia.
It is the Congress that guarantees that no matter how well
the District does financially, it will never have the best
investment bond rating because of the uncertainty created by
the congressional budget process.
It is the Congress that forces the District to engage in
contortions of temporary and stopgap procedures because D.C.
legislation cannot become final for 30 or 60 legislative days,
which often become months because of the congressional calendar
and congressional recesses.
Even during the depths of the fiscal crisis and continuing
into last year, Congress has consistently added delay to its
already laborious budget process by seeing to it that the
District budget was virtually last to be voted, often many
weeks after the end of the fiscal year. These are hardships on
the people of the District that they do not deserve and that
Congress should relieve.
There is another indispensable step Congress should take to
assure lasting stability. Perhaps inevitably Congress has
focused almost exclusively on the expenditure side of the
budget and paid almost no attention to the revenue side. Yet
Congress is responsible for the most important structural
revenue barriers the District faces. The District cannot
collect property taxes from the Federal Government, and yet
gets no payment in lieu of taxes and gets no payment in lieu of
taxes for having its prime land off the tax rolls. The
District's major industry, the Federal Government, exempts
itself from normal income taxes that, for example, the
biotechnical industry pays to Montgomery County and that the
dot-com industry pays to Fairfax County. Yet Congress bars the
District from collecting any taxes from commuters who wreck the
city streets and freely use its police, fire and other costly
services.
A nonresident tax credit is necessary to relieve
congressionally imposed structural financial burdens on its
capital. This revenue would come from the Federal Government at
no cost to commuters because most of the employees who use D.C.
services free of charge are Federal employees. The fully
compensated 2 percent tax credit derived from taxes commuters
already pay to the Federal Government would initially raise
$400 million, a fraction of the cost of services to commuters,
and would rise gradually, with the wages of commuters used as a
yardstick rather than as a source of revenue. I hope that the
members of the subcommittee will also become original
cosponsors of the D.C. Nonresident Tax Credit Act.
I appreciate the deference to home rule that the committees
of the House and Senate often have shown the District. I now
ask the committees to engage in the same self-examination
Congress has required of the District. Congress can speed
ongoing reform if city officials know that responsible
government from them will yield more self-government from
Congress. Congress can assure that the financial stability the
District has achieved will be lasting if Congress faces and
relieves the structural financial burdens for which Congress is
wholly responsible. I ask no more than that Congress give the
District the same respect Congress demands for its own
districts.
District of Columbia officials have responded, complied,
and surpassed expectations. Congress must now be mindful that
the District is not the only party to this process that has
obligations. Congress now has obligations it must meet to its
capital.
I welcome today's witnesses and appreciate their testimony.
Mrs. Morella. Thank you, Ms. Norton.
[The prepared statement of Hon. Eleanor Holmes Norton
follows:]
[GRAPHIC] [TIFF OMITTED] T5899.004
[GRAPHIC] [TIFF OMITTED] T5899.005
[GRAPHIC] [TIFF OMITTED] T5899.006
[GRAPHIC] [TIFF OMITTED] T5899.007
Mrs. Morella. It is now my pleasure to yield time to the
gentleman who is my predecessor as Chair of this subcommittee
Mr. Davis.
Mr. Davis. Thank you very much, Mrs. Morella. Thank you for
continuing to provide outstanding leadership as Chair of this
subcommittee and for holding this historic hearing. I look
forward to working with you and our colleagues as we strive to
maintain momentum for our Nation's Capital. I am confident
we'll continue to be proactive. Working with the ranking member
of this subcommittee, my good friend Delegate Holmes Norton,
I'm certain we'll continue to address the city's many tough
challenges in the spirit of bipartisan cooperation, respecting
this city and its rights. That's the best way for us to
guarantee that we can build on the progress that has been made.
You know, back in the last millennia the District of
Columbia was in the midst of a crisis of epic proportions. That
was just 6 years ago. But it was 10 years ago that a commission
chaired by Dr. Alice Rivlin prophetically warned of an
impending disaster. Dr. Rivlin called the numbers down to the
decimal point on every fiscal issue. We are therefore indeed
fortunate to have Dr. Rivlin serving as chair of the Control
Board as it is about to enter its long-planned dormant stage.
Despite a lot of suspicion at the outset of this
legislation, we always intended for the Control Board to work
its way out of a job, which it has done, and the city has
surpassed expectations for fiscal management earlier than I
think any of us really anticipated and had some outstanding
leadership get us there, and I applaud all of those who have--
the Mayor and the Council who have worked together to make this
historic event come about.
But I know that Dr. Rivlin and the members and the staff of
the Control Board will be working until the end to perform
their statutory responsibilities. Moreover, I fully expect that
Dr. Rivlin will give us her expert opinion now and after the
dormant stage is reached as to whether or not the city is in
danger of reverting to the bad old days.
An item of great interest to us all is the status of the
office of chief financial officer, which we created for the
city as part of the Control Board Act. Again, we're in a unique
position to get expert opinion on the future of that office not
only from its outstanding current occupant Nat Gandhi, but from
its first occupant Mayor Anthony Williams. Congress has worked
with the city in a constructive way to strengthen and make more
independent the CFO, and now that we stand at the crossroads,
it's important that we reach a consensus as to any additional
adjustments that may be deemed helpful.
Back in 1995, the District faced a spending problem of
monumental proportions and a management failure as well. Basic
service could not be delivered, and there were very real
concerns that the city would run out of cash to pay its debt
service or meet its payroll. So when we wrote the Control Board
Act, we included seven such events, seven deadly sins, if you
will, that would trigger a new control period. That provision
is consistent with the other provisions for Control Board-like
entities in the cities we surveyed that had experienced similar
problems, such as New York City, Philadelphia and Cleveland.
I'm aware that reference has been made to structural
imbalance in the city, and some have pointed to the restriction
in the Home Rule Act against the commuter tax. I have to
reiterate my longstanding belief that should additional
resources be necessary for the Nation's Capital, that this
would be a Federal responsibility, and that would be unfair to
impose an undue burden on regional commuters. This is, after
all, a national responsibility, not just the responsibility of
two States.
We were very careful in drafting the original statute to
name the entity we created as the Financial Responsibility and
Management Assistance Authority. Dr. Rivlin, I think that was
your language, as we worked through that.
Ms. Rivlin. It was sufficiently awkward that no one could
ever remember it.
Mr. Davis. We deliberately avoided any such term as
``Control Board,'' but nevertheless, the Authority was quickly
morphed into what has ever since been called the Control Board.
But that should not obscure our original intention, which is
fully reflected in the various sections of the act. Congress,
without a dissenting vote, backed up by a Presidential bill-
signing ceremony in the Roosevelt Room of the White House,
wanted to assist the city with management issues so that a
higher degree of fiscal responsibility could be achieved, and
that's been done.
As we look to the future with optimism, I can only
reiterate what has been the D.C. Subcommittee's mantra since
its creation in 1995, you can't have a healthy city--or you
can't have a healthy region without a healthy city.
I thank you very much, and my congratulations to all.
[The prepared statement of Hon. Thomas M. Davis follows:]
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Mrs. Morella. The timing is incredible of the distinguished
Senator from Ohio Senator Voinovich.
Senator Voinovich, if you have time to catch your breath, I
could raise you for an opening statement. We have already
commented on your background as mayor of the city that was
undergoing a financial Control Board. So we welcome you. I'll
recognize you for any opening remarks.
Senator Voinovich. Thank you. I'll try to keep my statement
short because of the important people that we have before us
today.
It's a pleasure for me to return to this hearing room. Six
years ago, I was sitting where Mayor Williams sits today at the
witness table testifying on the city of Cleveland's success in
recovering from a 1978 financial default that had ultimately
spurred our economic recovery that continues today.
The purpose of the hearing was to learn how other cities
dealt with their financial troubles in an effort to make the
right choices for the District of Columbia. I was proud to sit
at the witness table that day to boast of our accomplishments
in Cleveland, and I hope, Mayor Williams, you feel the same way
today.
As I mentioned at that hearing, I have always felt that the
District should be a model for the Nation, a shining city on
the hill, and in that regard I'm pleased to note that 6 years
after the city was declared financially insolvent, the District
is well on its way to becoming that shining city on the hill.
Under the leadership of Mayor Williams, former Control Board
chair Andrew Brimmer, and current Control Board chair Alice
Rivlin, the District of Columbia has made great progress. Over
the past 6 years the District has managed to accomplish all
requirements necessary to suspend the Control Board. It has
repaid all outstanding obligations to the Control Board and the
U.S. Treasury, gained access to the short-term and long-term
credit markets, and reported four consecutive balanced budgets.
In addition to achieving these requirements, public and
private investments have sparked an economic revitalization
downtown. It has had a positive impact on every aspect of the
city. Residents have again begun to make an investment in the
city, and home purchasing and development has soared as a
result.
Yet despite these promising advancements, I do not believe
the District is completely out of the woods. Based on reports
from the General Accounting Office and the D.C. inspector
general, as well as the status of the District's health system
and education system, the majority of the District government
still has a rough road in front of them. For example, GAO, in
issuing its report this morning on the District's progress in
adopting a performance-based government in concurrence with the
subcommittee's findings at a hearing this past March, GAO
concluded that District agencies were indeed moving the goal
posts by holding themselves accountable to goals that were
submitted in June, 9 months after the fiscal year began, rather
than the goals established at the beginning of the year. GAO
diplomatically explains that the late submission, ``limits the
use of the performance plans.'' And I want you to know that I
share their concern.
In addition, as discussed at a House Appropriations
subcommittee earlier this month, reports show that the
unqualified opinions of the District's financial statements are
the result of a tremendous amount of work by a few key
individuals rather than lasting institutional reforms in the
financial management system. We're concerned about that.
Sustaining sound financial management practices requires an
investment in the human resources of the agencies that will
allow the training to outlast the efforts of individual
employees. The system has got to be in place. Without this type
of investment in employee training, management advancements
will likely rise and fall with changing administrations.
Finally, the issues facing the District education system,
from the deteriorating facilities at the public elementary
schools to the UDC's difficulties in collecting tuition,
suggest that the District still has progress to make before it
can comfortably boast financial recovery. I'll be interested in
discussing these issues with the witnesses today, and I look
forward to hearing their views on the future of financial
oversight in the District of Columbia.
Thank you, Madam Chair.
Mrs. Morella. Thank you, Senator Voinovich, and thank you
for joining with us in making this a joint subcommittee
hearing.
[The prepared statement of Hon. George V. Voinovich
follows:]
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Mrs. Morella. I'm going to ask the witnesses of this first
panel if they would stand, and in accordance with the rules of
the Government Reform Committee, we swear in all of those who
are going to testify. So if you would raise your right hands.
[Witnesses sworn.]
Mrs. Morella. The record will indicate affirmative response
by all.
Again, a procedure that we have established, not in terms
of concrete, but we have established, is to allow each person
testifying about 5 minutes for testimony to allow us an
opportunity for questioning, and we have a subsequent panel
before us, too. The testimony that you have presented to the
subcommittees will be included in the record in its entirety.
And so, if I could start with Dr. Rivlin.
Incidentally, I want to congratulate you on the honorary
doctorate you received at Harvard yesterday. No small
achievement.
Dr. Rivlin, I'll start with you, then, if you would have
any comments to make.
Ms. Rivlin. Thank you. We have joint testimony here today.
We worked very hard together, the Mayor and the Council chair
and myself. We worked hard at the staff level and at the
principals' level to agree on a set of proposals, and so this
is joint testimony, and we had agreed that the Mayor would
present the testimony.
Mrs. Morella. All right. Splendid. We'll give you more than
5 minutes, Mr. Mayor, if you need that, since you're going to
be testifying for the Control Board as well as the City Council
and yourself as Mayor. You may proceed.
STATEMENTS OF ALICE RIVLIN, CHAIR, FINANCIAL CONTROL BOARD;
ANTHONY WILLIAMS, MAYOR, DISTRICT OF COLUMBIA; LINDA W. CROPP,
CHAIR, COUNCIL OF THE DISTRICT OF COLUMBIA; AND J. CHRISTOPHER
MIHM, DIRECTOR, STRATEGIC ISSUES, GENERAL ACCOUNTING OFFICE
Mayor Williams. I appreciate that, Chairman Morella, and
our own Congresswoman, Eleanor Holmes Norton, thank you as
always for your leadership. Senator Voinovich, thank you for
friendship and partnership with our city, and we value that,
especially given your own leadership in Cleveland as mayor and
certainly in Ohio as Governor.
As Mayor of the District, I am pleased to testify on behalf
of myself, the D.C. Council chair Linda Cropp, and our D.C.
Control Board chairman Alice Rivlin, as well as the citizens of
the District. We're assembled here today at a very important
milestone in the history of the District. Since entering a
control period 6 years ago, the District has transformed itself
from a struggling city on the verge of bankruptcy to a thriving
community reaching reassuring levels of financial security,
making rapid progress in service quality, and reaching new
heights in citizen involvement.
The District achieved this turnaround by rebuilding and
reenergizing the financial management structures of government.
The significance of this change is really threefold: First, we
restored the financial health of this city so that we can now
better respond to the needs of citizens. Second, by
demonstrating our capacity for financial management, we earned
the return of the autonomy we once knew. And third, we set in
place a system that will continue improving services, continue
building financial strength and continue to earn greater levels
of autonomy and self-governance for the citizens of the
District.
The District achieved these advancements in partnership
with the Congress. In order to achieve our greater goals of
prosperity and democracy, we hope to continue to work in
partnership with you. To that end I'll now review these
achievements for the record so that we may find common
understanding upon which to build a common future.
Of all the District's accomplishment, perhaps none stands
above the tremendous financial recovery achieved over the past
6 years. You consider our condition at the outset of the
control period in 1995 and compare the state of affairs today.
In 1995, you saw serious cash shortages because Wall Street
downgraded the District's bond rating to junk bond status. Now
the District's bonds rank as investment grade, and the District
is building hundreds of millions of dollars in cash reserves, 7
percent in cash reserves as a percent of local operations, in
excess of every other State and local government in the
country, as far as I can tell.
In 1995, you saw a $484 million accumulated deficit, which
continued growing through annual budget deficits. Now the
District balances its budget every year, and we have amassed a
$464 million accumulated surplus, and this surplus is still
growing year after year.
Based on these achievements the Control Board has certified
that the District has met the terms required for an end to the
control period, but our achievements don't end there. In 1995,
you saw financial systems and staff incapable of producing
reports that would meet the standards of independent auditors.
Obviously there are still problems, there are still challenges,
but now the District closes and balances its books on a monthly
basis, and we achieve clean unqualified reviews from the
inspector general and our independent financial auditors every
year.
And finally, in 1995, you saw major flaws in basic
financial functions such as paying vendors on time, processing
tax receipts and validating payroll. Now the District maintains
the infrastructure to meet and in many cases exceed industry
standards for financial management. And one indicator I would
give you, for example, is on tax refunds where we exceed many
other jurisdictions across the country and in many instances
the IRS.
In achieving these advancements we did not move from poor
operations to average operations and then end our efforts. We
have strived and continued striving to continuously improve our
operations. Many observers don't realize this, but facing a
crisis can actually strengthen an organization and help it grow
not only to match its peers, but to surpass them. Such is the
case here in the District. To overcome financial crisis, we
developed a tremendous amount of positive momentum. We have
become a learning organization, and we are improving our
flexibility, our use of technology, and our focus on results.
I give you just a tidbit on technology. Our Web site has
gone from essentially nothing to a Web site where last month we
had over 3 million visitors to the District Web site. That's a
lot of visitors to any Web site, let alone a government Web
site, and we're proud of that.
As such our goal is not to return to the pre-Control Board
days. We have set our sights on something much greater. Our
goal is to meet the highest standards of financial strength and
to use that strength as a foundation for building the quality
of services and world-class neighborhoods that our citizens
deserve.
Given that goal, our testimony today, our joint testimony,
seeks to accomplish two things: First, to engage Congress in
devising a rational exit strategy at the end of the control
period, and, second, to look beyond the control era and set a
new course for the District's continued evolution.
To take up the first task, the Council, the Financial
Authority and I have jointly developed a plan to effect the
transition of financial control from the Authority to elected
leadership, the Mayor, yours truly, and the Council under
Chairman Cropp. In order--in recognition of our restored
autonomy, we propose to effect this transition through local
legislation which we have drafted and the Council has
introduced in anticipation of this hearing. Our intention in
doing so was to provide a proposal for your review as we devise
a solution in partnership.
The plan we propose incorporates the infrastructure
developed in the control period into the regular operations of
District government, and in so doing it ensures that the
District will never deviate from the financial discipline
developed during this era. To that end the District's plan is
built on the following provisions: One, insulation of the CFO,
achieving independence for the CFO without creating the CFO as
an outpost outside of the regular affairs and operations and
mission of the District government. First, it maintains the
functions and operations of the chief financial officer. Under
the District's plan the office of the CFO will continue to
manage the treasury, accounting, tax and budget functions of
the government. Rather than reporting to the Control Board,
however, the CFO will now report to the Mayor.
In devising this reporting relationship, the challenge
became finding a balance between, on the one hand, returning
financial authority to the elected officials who must be
accountable for fiscal management and, on the other hand,
insulating the CFO from pressures that may compromise the
execution of his duties. We address this challenge by
incorporating the existing Federal provisions for appointment
and removal of the CFO. For appointment this plan requires a
decision of the Mayor and approval of a Council majority and
allows for renewable appointments. For removal our plan
requires a decision of the Mayor, which can only be for cause,
and the approval of two-thirds of Council members present and
voting. These provisions will allow for the CFO to serve as an
integrated part of the executive branch while necessarily
remaining insulated from undue political pressure from any one
source.
Moreover, our plan strengthens the CFO's role by requiring
him or her to complete fiscal impact statements for all local
legislation and certify funding availability for all labor
agreements. As an additional check and balance, this plan
specifies a 4-year term for the CFO to provide for consistency
in the office's leadership and to ensure the executive fully
assumes accountability for financial operations of government.
We have made special provisions for budget formulation and
revenue estimates, because, as a second provision, the
District's transition plan recognizes that certain financial
processes require special definition. Most important among
these are budget formulation and revenue forecasting. In the
budget formulation process, we will be best served by following
the model used by virtually all governments at the Federal,
State and local level. In this model the executive, supported
by a strong budget staff, develops a budget proposal based on
his or her policy direction. This proposal is then reviewed by
the legislature, which is supported by a strong and separate
budget staff. The creative tension between these two bodies
fosters an environment of full transparency and rigorous review
and accountability. This review in turn results in a process
whereby only the ideas with the greatest merit and broadest
support earn the taxpayers' support and, hence, dollars.
In the District's transition plan, the Office of Budget and
Planning reports to the CFO as part of the executive branch.
For purposes of budget formulation, however, the budget office
executes the dual responsibilities of validating expenditure
projections with an objective analysis and developing the
proposed budget as part of the Mayor's policy agenda. This
provision ensures integrity in the budget numbers and
appropriate resources for the executive's responsibility for
policy formulation. So the Mayor should be able to make a
proposal to the Council on what we want to do with Medicaid
programming and Medicaid expansion as a matter of policy, but
it's up to the CFO to really take responsibility to ensure that
I don't decide, or if some future Mayor decides and proposes to
the Council, that we're going to save money by assuming that
Medicaid will never grow. That would be an example of how that
can and should work.
Like budget formulation, the revenue estimation process
also requires special definition. Revenue forecasting requires
a unique level of advanced and objective analysis where small
changes in growth rates yield large changes in projected
revenues. Given this sensitivity, these projections require the
opposite treatment of the budget formulation process. Although
revenue estimation must be made transparent and be thoroughly
understood by policymakers, we believe this function must
remain insulated from undue influence and, therefore, should
continue to operate under the direct control of the CFO. The
District's transition plan maintains this direct control. And
needless to say, we believe it's in the revenue estimation
where you get into a lot of trouble, and that's why we give
this special definition to that function.
Finally, we want to talk about agency CFOs. The final
provision of the District's transition plan realizes the
reporting relationship of agency CFOs. At the onset of the
control period, I, as CFO, identified a need to position
agency-level CFOs in the largest and most troubled agencies.
While this new structure greatly accelerated the financial
reform of these agencies and certainly helped, needless to say,
in budget control, it also created two side effects. First, and
I witnessed this firsthand, it limited the ability of agency
directors to integrate financial considerations in their
programmatic decisions as effectively as is necessary in a
complex organization. And second, it made it difficult to hold
agency directors directly accountable for the financial
performance of their operations.
Now that we've undergone a structural reform of the
financial operations across the District, we must now
reintegrate financial and programmatic functions under the
leadership of agency directors. The District's transition plan
accomplishes this by maintaining the agency CFO positions and
creating a dual reporting relationship to the agency director
and District CFO. To ensure that agency CFOs maintain some
independent authority, this plan requires that agency directors
appoint their agency CFOs only with the approval of the
District CFO. Likewise, both the agency director and the
District CFO will be responsible for performance evaluations
and disciplinary action, with each manager devising performance
standards relevant to their scope of responsibility.
In the event of termination, however, an authority must
ultimately lie with the District CFO. We find this provision
necessary because the District CFO carries the greatest
expertise in and the most direct responsibility for preserving
the financial integrity of this government.
Taken together, these provisions for financial leadership
and processes are built on the practices developed by the
Mayor, Council and Financial Authority over the past 6 years.
You will note that this plan institutionalizes at a local level
the strong aspects of the structure established by the
Congress.
Finally, a plan for performance-based autonomy. As your
committees begin their deliberation in this matter, they will
be well served by remaining very conscious of the previous
context and future impact of these decisions. Specifically we
must be aware of how these decisions will impact, affect the
continued evolution of the District government and the citizens
here.
On the issue of self-government, multiple people have
proposed multiple solutions, but unfortunately little has
changed for the more than half-million citizens in the
District. I'm sure we all agree that taxation without
representation is wrong, as it was two centuries ago. The
question now is how to correct this problem. The District, of
course, would welcome a comprehensive solution from the
Congress, but in the absence of that, the end of the control
period at the very least provides an opportunity to
incrementally improve the level of democratic influence that
Americans in the District exercise over their local affairs.
Specifically, we propose that the Congress adopt a performance-
based autonomy plan whereby the District gains incrementally
greater autonomy based on the continuing strengthening of its
management.
Five years ago Congress assumed control of the District's
finances as a result of the District's performance. Now the
control period is ending, again as a result of the District's
performance. This experience, though a difficult one, provides
a new modeling for how the Congress should exercise oversight
of the District based on performance.
Accountability, though, is a two-sided coin. If the
Congress were to restrict the District's autonomy when our
performance lags, it should also increase our autonomy when the
performance is strong. Specifically the Congress should set a
new set of performance targets similar to those set to bring an
end to the control period. We propose the following:
Maintaining a balanced budget, maintaining an investment-grade
bond rating, receiving an unqualified independent financial
audit, and establishing a cash reserve equal to 7 percent of
local operating expenditures, and replenishing any draws within
3 years.
After achieving these targets for 3 consecutive years, the
Congress would exempt the District's budget from the Federal
appropriations process. Upon achieving those targets for
another 3 years, the Congress should exempt the District from
the 30-day legislative review process. If any fiscal year after
a measure of autonomy is earned the District fails to meet any
of those criteria, the Congress could suspend budget autonomy
in order to regain it. This solution allows the Congress to
fulfill its constitutional charge to provide oversight, while
at the same time providing the District with the budgetary
autonomy needed to deliver services effectively.
Although this performance-based autonomy proposal may not
be the primary consideration for these committees at this time,
it represents the critical context for the sunset of the
control period, and it represents a tremendous opportunity for
this body to usher in a new era of greater rationality and
fairness in the congressional oversight of the District of
Columbia.
Likewise, by establishing this provision, the Congress will
create an opportunity for Americans in the District to take a
small but significant step toward achieving what every other
American enjoys, and that is a full voice in electing those who
govern our affairs.
With that thought in mind, and, again, on behalf of myself,
Chairman Cropp, Dr. Rivlin and the citizens of the District, I
conclude my testimony, and all of us are now available for any
questions you may have.
Mrs. Morella. Thank you.
[The joint prepared statement of Mayor Williams, Ms. Rivlin
and Ms. Cropp follows:]
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Mrs. Morella. Ms. Cropp, would you like to make any opening
statement, or do you----
Ms. Cropp. I'll wait for questioning. The Mayor spoke for
the Council.
Mrs. Morella. We'll have order in this hearing room.
It's now my pleasure to recognize J. Christopher Mihm, who
is the Director of Strategic Issues of the General Accounting
Office. Your testimony, sir.
Mr. Mihm. Thank you, Madam Chairwoman, Congresswoman Norton
and Senator Voinovich. I am honored and pleased to be here
today to discuss the outlook for the District of Columbia in a
post-Authority period.
I'll briefly cover three topics this morning. First, I will
note the central elements in the District's financial recovery
since 1995 and the continuing long-term challenges it faces.
Second, I'll discuss some of the new reporting requirements
that Congress has put in place since 1995 to assist it in
oversight and decisionmaking. And finally, as requested, I'll
identify some additional mechanisms that Congress may wish to
consider to ensure that it and the District have the
information needed to help the District maintain its financial
viability.
First, in regards to the city's financial recovery, as has
been widely noted this morning, since 1995, aided by a strong
local economy and through the combined and cooperative efforts
of the Authority, the District government, Congress and the
citizens of the District, the District has experienced a
remarkable turnaround in its financial condition. All of the
Members' opening statements, and as Mayor Williams detailed,
the District has made outstanding progress in dealing with its
deficits and paying down its debts, obtaining access to the
bond markets and obtaining clean financial audit opinions.
It in no way minimizes this remarkable achievement to note,
however, that the District, similar to many other cities,
continues to face a series of substantial long-term challenges
to its financial status. Addressing these challenges requires
continued dedicated and inspired leadership to make the hard
decisions and often painful tradeoffs among equally compelling
needs and priorities. Sound financial and program costs and
performance information is and will be critical to making these
decisions in an economical, efficient and effective manner.
This then gets to the second point I wish to cover this
morning. Since 1995, Congress has put in place a number of
reporting requirements to help provide the financial planning
and performance information that it needs to conduct effective
oversight and make decisions. One of the potentially more
valuable requirements that Congress has put in place for the
District is similar to the requirements Federal agencies have
under the Government Performance and Results Act to produce
annual performance plans and subsequent reports. In that regard
we are--as Senator Voinovich noted, we are releasing today our
assessment of the District's fiscal year 2000 performance
report.
My point here is that we should keep these new reporting
requirements in mind as any additional ones are considered and
debated.
Third and finally, Congress may wish to consider additional
mechanisms to ensure that it and the District have the
information needed to help the District maintain its financial
viability and address its current and emerging challenges. Such
mechanisms must be considered and implemented within a context
that seeks to balance two sets of values, the overriding
importance of home rule and respect for the District's
democratic institutions on the one hand, and Congress's
oversight decisionmaking--oversight decisionmaking
responsibilities for the Nation's Capital on the other.
My written statement details a number of options that have
been widely discussed, including assuring the independence of
the CFO, which was, of course, discussed by the Mayor and the
subject of the District's legislative initiative earlier this
week, maintaining the independence of the inspector general,
and the possibility of forming an audit committee or similar
arrangement. One option that Congress may wish to specifically
consider is requiring the District to notify it if certain
predefined reportable events occur that require the prompt
attention of the District and Congress.
Under the law, an Authority or Control Board could be
reestablished if any number of a specific set of major events
occur, such as the default on the District's borrowing or
failure to meet payroll. The major events that do lead to this
reestablishment are clearly to be avoided at nearly all cost,
but to do so, the District and Congress need information in
time to act before a crisis occurs that would lead to the
return of an Authority. A reportable event notification system
could be designed to provide just such information. Such a
system would be generally consistent with the approaches that
have been taken from other jurisdictions, and my written
statement details some principles that Congress may wish to
keep in mind if it considers such an arrangement.
In summary, the District and its citizens, the Authority
and Congress have jointly achieved an enormous accomplishment
in restoring the District to financial viability. Nevertheless,
the District and Congress must have reliable, accurate and
timely financial and program cost information if they are to
respond to pressures and warning signs that could indicate that
future difficulties lie ahead; in short, if they are to deal
with problems before they become full-blown crises.
Madam Chairwoman, this concludes my prepared statement. I
would be pleased to respond to any questions you or other
members of the subcommittees may have.
Mrs. Morella. I thank you for your statement and want you
to know that your entire statement as submitted will be
included in the record.
[The prepared statement of Mr. Mihm follows:]
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Mrs. Morella. I'll start off with the questioning, and each
of us will have several rounds as necessary, maybe 5 minutes
for each of us to pose questions. I'm going to start off with
Dr. Rivlin.
Two of the purposes of the Control Board were to eliminate
budget deficits and cash shortages of the District of Columbia
through visionary financial planning, sound budgeting, accurate
revenue forecasts and careful spending, and to ensure the long-
term financial, fiscal and economic vitality and operational
efficiency of the District of Columbia. Dr. Rivlin, have these
two purposes of the Control Board Act been met?
Ms. Rivlin. Well, certainly the specific criteria for the
end of the Control Board have been met. The purposes that you
just enunciated are ongoing challenges. The District has, as
you know, a very narrow tax base, and there's certainly a very
strong case, in my opinion, for the Congress looking at the
structural imbalance of the District and deciding what to do
about it in the long run. Even if the District is extremely
well managed and does, as we all hope, improve its economic
situation through economic development, more population, I
believe that the narrowness of the tax base caused by the fact
that the Federal Government is its principal industry is a
serious problem and should be corrected, and there are options
on the table, the principal one being Congresswoman Norton's
bill for a wage tax with a credit against the Federal tax,
which would meet Congressman Davis' criteria that it not be an
undue burden on the States of Maryland and Virginia. So that's
a possibility. So are payments in lieu of taxes.
The other even more challenging problem, I think, is to
improve the services of the District, and that is a continuing
effort that the Mayor and the Council, with the oversight of
the Congress, with the help of the Congress, have to pay
attention to.
But I think that the District is in good shape to take over
that responsibility itself.
Mrs. Morella. Both you and the chief financial officer have
suggested, and you just mentioned, that the District government
has a structural budget imbalance. What are the revenue and
expenditure components of this structural imbalance? And then I
would say--I mean, what is the revenue and expenditure growth
going forward?
Ms. Rivlin. Well, the District does have a 5-year plan now
which projected balanced budgets for the next 5 years, but that
is based on very careful expenditure control and actually very
small amount of growth in revenues anticipated over the next
several years.
The source of the imbalance is basically that the property
sales and income tax base is so drastically narrowed both by
the fact that the Federal Government is the city's principal
industry and by the actions of the Congress to prohibit
taxation of nonresident income.
Mrs. Morella. We will--this subcommittee will be looking at
the kind of long range. We have that on our agenda to look at.
But let me ask you directly. In my opening statement, I
made some statement about the possibility of some special
review of the city's revenue estimate and financial audit, as
the Mayor had suggested and some members of the Council had
supported publicly. I mean, is there some kind of an audit
committee that would be--I don't want the Congress involved in
it if you think there is a place for it--where the Council, the
Mayor would appoint people to kind of do an audit review or be
available? I mean, how do you feel about that?
I have said to everybody--I am going to ask all of you
that. And if my time elapses before I get back to everybody,
but I will get back to you later, but I want for the record to
know how you feel about that.
Ms. Rivlin. Should I start?
Mrs. Morella. Whatever.
Ms. Rivlin. I have mixed feelings about it. We all talked
about this, and when I first thought about it, I thought that
the idea of having a validation group of experts for the chief
financial officer is a very valuable one. And I still think so.
But I believed that the chief financial officer can appoint
such a group. In fact, the current chief financial officer has
such a group to assist in--a group to bounce off the
projections.
The trouble with putting such a group into law and having
it appointed by the elected officials is, I think, the risk of
what do you do if such a group then differs with the chief
financial officer? Then you have a problem. And it is possible,
though one would hope not likely, that a group appointed by an
elected official might in some future years become a political
group itself; and that I think would be unfortunate.
Mrs. Morella. Maybe there would be a different group of a
different composition or whatever.
I know my time has elapsed. I will get back to all of you
to answer that specific question so I know how you really feel
things should be done.
Now I am pleased to defer and recognize the ranking member
of this subcommittee, Ms. Norton.
Ms. Norton. Thank you, Mrs. Morella.
I would just like to clear up a difference between Mrs.
Morella's statement and the Mayor's statement, just so that I
can have the record clarify and have the city officials
clarify.
Her statement says--this is her statement. Her statement
says that the proposal does not require the CFO to prepare
fiscal impact statements on all or even most pieces of
legislation. Now the Mayor testified our plan strengthens the
CFO's role by requiring him or her to complete fiscal impact
statements for all local legislation. Which is the case,
please? I mean, does the CFO have to prepare fiscal impact
statements or not?
Ms. Cropp. Well, I think it is two parts. The fiscal impact
statements on legislation that are submitted by the Mayor, the
CFO would provide fiscal impact statements. The legislation
that is provided by the Council, as the legislation is
currently written, it would not have the fiscal impact
statements. That would be the Budget Office from the Council
that would have to supply the fiscal impact statements.
However, Council legislation requires that all legislation
that is passed must be accompanied with a fiscal impact
statement. And I have been extremely vigilant during my tenure,
and that is part of our Council role. So all legislation will
have fiscal impact statements accompanied with them.
Ms. Norton. So essentially what the city does is to leave
in place, is to take onto itself the function that is now
performed by the Control Board, which, as I understand, looks
at the fiscal impact statements?
Ms. Cropp. Yes. And our Budget Office also works usually in
conjunction with the CFO's office.
Ms. Norton. Just let me give some sense of context here. As
long as there is going to be a local government anywhere--I
address this specifically to the gentleman from the GAO. As
long as there is a government anywhere, especially a city
government, there will never be a time when there will not be
many problems to put on the table, especially today when cities
have been--are bereft of the many people who used to live there
who now moved to the suburbs. So it is a truism that if what
you are doing is looking for problems, you will always find
them in this government and any other government. Can I have
your agreement to that?
Mr. Mihm. Yes, ma'am. I mean, well, there are certainly
issues that we have seen in the D.C. government, Federal
Government and the GAO, we have management challenges that we
deal with. The key is, do you have--are you identifying them?
Do you have an action plan in order to address them and is the
organization moving forward? And that is----
Ms. Norton. Answer those three questions with respect to
the District of Columbia.
Mr. Mihm. With the District, we have been very pleased with
the types of relationships we have had with them with their
understandings of the challenges that we faced. We work very
closely with the Mayor's office and in particular the Deputy
Mayor's office and his staff on the issues that concern us.
They clearly understand some of the substantial challenges that
they face and financial management and performance management,
have taken the hard recommendations and are taking actions to
address those.
Ms. Norton. Do you see any operational problems that the
District government has now that a competent and committed
government cannot or will not deal with on its own?
Mr. Mihm. Operational problems?
Ms. Norton. Yes.
Mr. Mihm. No, ma'am. Our concern is--is that as we look at
the--as has been discussed, some of the longer term fiscal
challenges that the District faces, in order to address those
challenges the District and Congress need to have good
performance and financial information in place in order to
address those.
Our concerns have been when we have looked at the financial
management system that is still a work in progress. They are
working real hard at it, but it is a work in progress.
The performance information is still a work in progress,
again working very hard at it. The concern we have is making
sure that we continue to make progress in getting this good
information in place so that the District leadership and others
can make the decisions that need to be made.
Ms. Norton. You are quick to point out what you, yourself,
say the District is already doing. And I appreciate the balance
in your testimony. But you say nothing about structural
imbalances that the District can do nothing about.
Suppose the District were to do everything it is supposed
to do. Would there be structural imbalances in its tax
structure imposed on it by the Federal Government that it could
do nothing about and that threatens the future viability of the
city?
Mr. Mihm. I understand your question, ma'am, and I
understand the importance of that question. But the work that
we would need to do in order to answer that question has been--
was beyond the scope of the work that we do.
Ms. Norton. It is not beyond the scope of common sense, if
I may say so. I put it on the table because the District has
come here as good soldiers, and I appreciate it, saying this is
what we have done and, please, Congress, let us continue to do
what we are doing on our own, and has had little to say about
its own structural revenue challenges.
I would like to invite the District to speak further about
its structural revenue challenges. Because if those challenges
are to be met, it will put this Member of Congress in the
position of having to prepare the Congress, perhaps in too
short a time, to understand that if the District itself does
not give the same early warning to the Congress that the GAO
keeps telling us we need from you--in other words, somehow we
need you to warn us that you are in trouble.
Who is to warn the Congress if structural revenue problems
are, in fact, overtaking all that the District can do? What is
in place now to keep another financial crisis from coming to
the District based on pressures outside of the control of the
District imposed on it by the requirements that the Congress
has put upon the city?
Mrs. Morella. Actually, the gentlewoman's time has expired.
If you can all remember that when we get back to you for the
next round, I would appreciate that.
Senator.
Senator Voinovich. Thank you very much.
First of all, I would like to congratulate Dr. Rivlin and
the Mayor and the chairwoman for coming together and joining in
your testimony. I am very interested in the proposal that you
have put together for continued solvency and recovery of the
District in terms of the CFO and its relationship to the
Council and to the Mayor and so forth.
I would like very much for Mr. Mihm to look at the proposal
that the city has put together, to opine, from the GAO's
opinion as to whether or not it does the kind of thing that is
being presented here in terms of continued fiscal
responsibility and financial management on the part of the
city.
Mr. Mihm. Yes, sir.
Senator Voinovich. Mr. Mihm has also raised some issues
today in terms of the District's plans, and I would ask you,
Mayor, to sit down and look at some of his suggestions and to
come back to see what you think of them and how, perhaps, you
could incorporate some of his concerns into what you are doing.
We are very interested in just seeing progress and doing
something that is very realistic, and as far as I am concerned
you are the ones that are closest to the problem and most
responsible, and we want to cooperate with you.
Mayor, you were interviewed in ``the Hill'' a Capitol Hill
newspaper and said, ``it makes sense to have strength in
oversight controls, that we ought to have special review of our
revenue estimate in the city and a special review of our
audit,'' and I strongly support that.
You didn't specifically mention that in your testimony. And
when you did talk about this independent, unbiased review of
the District's financial numbers, is the plan that you
submitted or discussed today what you were considering when you
made that statement in the newspaper?
Mayor Williams. Yes, it is, Senator. I believe that having
the CFO have direct support for the revenue estimate
accomplishes an important goal of sequestering or segregating
the revenue estimate from political influence. I believe that
is where we get into trouble.
And I believe that, if I can kind of partner questions, if
our 5-year plan, based on an objective revenue estimate of the
CFO, and right now the outstanding forecasting of Julia
Freedman, who does an outstanding job as our chief economist,
shows that we are in trouble, it is going to be reflected in
the 5-year plan.
And, believe me, everybody will hear the chorus of voices
complaining about us elected officials not doing A, B or C,
because we don't have the money, because we are operating under
legitimate revenue constraints.
As to the audit function, I believe that we have a very
strong inspector general. We support continuing the
independence of the inspector general and the special autonomy
that he or she has; and we believe that the inspector general,
with the responsibility for the audit, presenting it to the
Mayor, the Council Chair, and the Chair of the Finance and
Revenue Committee of the Council, can form that audit committee
function in a transparent way.
Senator Voinovich. What is your response to Mr. Mihm's
testimony that the GAO noted that last year's unqualified
opinion was largely the result of the extraordinary efforts of
a few key individuals, despite serious weaknesses in the
District's financial system? What's your response to that?
That basically says you have some really good people that
busted their back to put together and get it done, but the
financial management system itself is not yet in place to have
this occur on a regular basis without extraordinary work on the
part of special individuals.
Mayor Williams. I believe that when we look at systems, our
city administrator, Deputy Mayor, John Koskinen and Nat Gandhi,
when we look at a system, we look always at not just hardware
and software but organization processes and, very importantly,
people.
John Koskinen and the Chair of the Finance and Revenue
Committee, Jack Evans, serve on a committee called the SOAR,
which is an intergovernmental committee, with everybody
involved responsible for seeing that this system gets
implemented, working, with managers taking responsibility for
the implementation of a system. And we are confident that we
are going to be--continue to make advances in the area of
reorganizing our operations and procedures so this system can
work.
To give you an example, in our labor negotiations, we are
working in cooperation with labor to reduce dramatically the
number of bargaining units in the city. Why is that important?
Because the more bargaining units you have, permutations,
combinations and more pay tables you have, if you have the
infinite number of pay tables we have, there's no way that any
payroll system is going to pay reliably because you have so
much complication.
We are trying to reengine our processes down to an off-the-
shelf system as opposed to vice versa that we have been doing
in the past.
Senator Voinovich. Now, you agree that the financial
management system isn't yet in place?
Mayor Williams. It isn't yet in place, but I believe we are
putting the systematic--have put in and are putting in the
systematic tactics and strategies in place to see that it gets
implemented right. And we get full advantage of this system,
particularly in the area of cost accounting, which is critical,
as you know, to linking performance information and budget
information.
Mrs. Morella. The gentleman's time is expired.
I want to pick up--and I know that, Mayor Williams, you
seem to have been answering in response to the Senator's
questioning that you do not think that any separate audit
committee appointed by the Council or whatever would be
necessary for revenue estimates.
Mayor Williams. Chairman Cropp and Dr. Rivlin can speak for
themselves, but in my approach or our joint approach to this
has been to look at what is the function we are trying to serve
and how can we reach agreement on serving that important
function.
To achieve authenticity, validity, credibility in your
audit, there are a number of different ways to do that.
Certainly in a lot of organizations, an audit committee does
that. We believe, given our circumstances and given where we
are, having again an indispensable, independent Inspector
General with overall responsibility for the audit, working with
an outside accounting firm, reporting to the elected officials
in committee can serve that function of transparency and
accountability.
We have one of the strongest IGs in the country now, and we
want to keep it that way.
Mrs. Morella. I am impressed with the IG, with whom I met
and who will be on the next panel, too.
Councilwoman Cropp, let's hear from you about that specific
item.
Ms. Cropp. Congresswoman, the issue of the revenue
commission was one that we probably had the largest amount of
debate. If I was sitting here 2 months ago, I probably would
have been more supportive and gung ho and said, yes, we must
have that revenue commission.
There has been another bill that was introduced to the
Council to form a revenue commission; and at the time that we
have the hearing on our CFO legislation we are going to also
have it on this revenue commission bill that was introduced by
Councilmember Patterson. Our hearing is scheduled for June 19th
at 2 p.m., because we want to move quickly.
That is an issue that I think we worked very diligently on
in our joint presentation to you, that we agreed that we wanted
to leave that issue open a little more and get some more
information and testimony. So I hope that we will come to a
resolution on that issue after that June 19th hearing.
We did have great concern, however, that as we have this
revenue commission, that it could become extremely political in
the final analysis. If that estimate is quite different from
the estimate of the CFO who has some independence, then what?
Then we create a whole new set of political problems; and we
may, in fact, be shooting ourselves in the foot with that.
That was one of the greatest concerns that we had. We have
been extremely fortunate in the District of Columbia to have
CFOs to give revenue estimates under Julia Freedman, and I am
going to tell you sometimes we have not been happy with them.
But the conservative estimates that have come, I think, have
bode well for the District of Columbia, and I think it will
continue in that mechanism.
Mrs. Morella. OK. I am pleased to hear about the hearing.
You will have to, of course, apprise us of the results of it.
It is really important that I hear from GAO, Mr. Mihm, your
response to the possibility of the audit committee of some
sort.
Mr. Mihm. I think there's two things here, Madam
Chairwoman. One is, as Dr. Rivlin pointed out, we are all in
agreement that revenue estimates are strengthened by a level of
external revenue. And, indeed, we are very pleased to see that
the CFO is reaching out to professionals to help them in that
regard, both in terms of looking at the assumptions--the
particular assumption and then in the broader methodology.
Revenue--doing revenue estimates is very difficult and
technical, but it is something that is done frequently around
the country, so there is certainly best practice that can be
learned from that.
The second point I would make, though, and the challenge is
not just in making an initial estimate that is accurate. The
challenge is also in making sure that you routinely have the
information that you can check on. How is that revenue estimate
going? What sort of adjustments do we need to make? And that is
where we get back into the questions about--or the importance
of the District carrying through on the implementation of its
financial management system.
In terms of an audit committee, they typically have a
separate set of functions and are not typically involved in
revenue estimates. Rather, they are typically responsible for
overseeing the independent financial audit, that is, the
selection of the auditor and making sure that they carry out
the audit correctly and that there is resolution of the
auditor's findings.
And there's a wide range of how this model is actually
implemented across the country. Most typically, they are a
function or--rather, they are part of, in this case, what would
be the City Council, and do the financial--rather oversee the
financial audit of what would be the executive branch.
Mrs. Morella. I note accurately my time has just expired.
So I will be back for the next round.
Now I am pleased to recognize Congresswoman Norton. I hope
you remember her question. I won't count the time if she
repeats it.
Ms. Norton. No, frankly, because you didn't get to answer
it, rather than to go back over that, I think I will save that
question on the structural revenue problems that may be flowing
to the District that you did not speak in detail to, to the
chief financial officer, whose job it is to look at the
outyears. The GAO tells me that is not even a part of what
Congress, what it's to look at. So perhaps no one can
authoritatively speak to that at the table.
Ms. Cropp, you speak--on this question about a revenue
commission--which the Mayor kind of threw out off the top of
his head. Watch out what you ask for, Mayor, you may get it, if
we 1 day are speaking out loud--was something I was completely
open to.
May I compliment you on the way that you are looking at it?
By listening to you, I have learned the pros and cons. And when
you talk about how political it could be, that strikes a real
note in this Member who has watched the District through her
entire life.
I also am concerned--again, I am completely neutral on it
until I hear your discussion. I am concerned. But what I think
you have been fortunate in is not only that you had very good
financial officers but that the financial officer has been
independent and had nothing to fear but fear itself.
I don't know what it is that would keep somebody appointed
by the Mayor or, for that matter, or somebody on the City
Council, people on the City Council, what would make them
independent.
I don't understand why they would feel the same
independence the CFO feels or why somebody from the private
sector would necessarily--or, for that matter, some parts of
the public sector--would necessarily bring to the table
anything but an adversarial and redundance process for somebody
to figure out.
Again, you would be asking the Congress to figure it out if
there were a difference here. So I think for every provision we
have to do a costs benefit and find out, weigh both sides and
find out where we come.
I would like to ask Mr. Mihm. Your testimony calls for,
again, this notion of an early warning so that Congress and
presumably the District will know that financial problems are
coming up. But isn't that the job of the CFO? I mean, why would
you need anything more than an independent CFO with a term,
they can't be fired, who is competent to do that?
I mean, sometimes I think we don't have anything to do but
think of things for people to do. One of the things we are
supposed to be doing is streamlining the government, not
thinking of revenue commissions on top of things just to have
them, but thinking, do we need this? Is there somebody who does
this? Every time we put in a bill, someone asks us, are you
putting in a new bureaucracy? Are you putting in a new
structure for the Congress to pay for?
Well, I am asking you, what in the world is the job of the
CFO if it is not to give the District years out, early
warnings? And I will ask you further, if not--whether or not
the CFO has, indeed, been doing that.
It is my recollection that, just by reading the newspaper,
that as the fiscal year began, even though there was plenty of
time to alert people much later in the year, the fiscal year
just began, and he alerted the whole city to the fact that
there was some agency spending beyond their budget. And, of
course, everyone apparently took care of it, because I haven't
heard another thing. So I want to know why you think, in
addition to an independent CFO now who would have a term, you
would need some other mechanism to give an early warning.
Mr. Mihm. I think--ma'am, I would agree with certainly the
first part of your statement in that--about the importance of
an independent and qualified CFO. In fact, an early warning
system, the success of that is predicated, absolutely, on the
existence of that CFO.
And as we note in the statement, presumably much of the
information that would be in an early warning system is already
tracked and monitored and examined by the CFO; and, I would
agree with you that much of that information is certainly
there.
The idea here would be for Congress and the District to try
and work together and say are there a select few, and we would
call them in the statement the ``vital few,'' types of
indicators that we could all agree to focus on, that if this
type of event occurs it will lead--if we don't deal with it, 6,
8, 10 months, a year down the road, it could lead to a turning
event.
Ms. Norton. I don't understand why the CFO's job would not
be to do just that. If you are looking for work for us to do,
let us know, but I don't know why that is not the CFO's job.
I don't disagree with you at all. I am just trying to find
out whether you need another mechanism, whether somebody needs
to spell out because the CFO hasn't been doing its job, or you
think there should have been some things spelled out that have
not been spelled out.
Mr. Mihm. No. This is not based in any way on a belief that
the CFO has not been doing its job. What it is based on is a
belief that there are--or a hope that there is a way that
Congress and the District could agree to focus on some vital
few indicators.
Ms. Norton. Give me an example of a vital few indicators.
Mr. Mihm. We identify some potential ones, and this is one
of the things that our first principle is that Congress and--
hopefully, Congress and the District could come together and
agree on some.
But I am flipping to page 10 of our statement. We provide
some of those cash-flow pressures that show projected
difficulties in meeting any of the District's financial
responsibilities, projected difficulties in meeting any of the
District's operational programs, service obligations to
citizens.
The idea would be to take the seven deadly sins, I think as
referred to earlier, that lead to the imposition of a new
authority, move back off of those and say what are the types of
things that would warn us about that in the future, agree that
those--get Congress and the District to agree, OK, these are
the ones that we are going to focus on.
And I should add what that allows then, at least the
potential, is the opportunity to then reach agreement, OK, we
are not going to focus on other things. We will not necessarily
need congressional notification on other things.
Ms. Norton. I will save my questions for the CFO, because I
think that the real issue now becomes what does the CFO do with
respect to the indicators you have named.
Thank you, Madam Chair.
Mrs. Morella. Senator Voinovich.
Senator Voinovich. Ms. Rivlin, you have done an outstanding
job with your responsibilities as the Chair of the District of
Columbia Financial Responsibility and Management Authority; and
you joined in the testimony here this morning.
You can well imagine that, as a Member of Congress, I am
concerned that, at least during my watch, that the District
doesn't fall back into a situation where the supervisory
commission would have to be reinstated. Are you satisfied that
the things that the Mayor talked about today will provide the
safeguards and the warnings that are necessary so that doesn't
occur?
Ms. Rivlin. I am, Senator. But let me add a couple of
strengthening points.
I think that the early warning indicators idea is a good
one and that most of those things would be normally coming out
of the CFO's office, but I think agreement that these would be
regularly transmitted to Congress seems to me perfectly good
reinforcement.
The important thing about the CFO, it seems to me, is not
just the independence but that the CFO be able to build a
strong, continuing professional staff that is respected by
everybody and known to do a good job. Without that, it won't
work. And the protection of the CFO is partly to protect the
ability of the CFO to build such a strong professional staff
over time.
I also think that the Council needs to have a strong
professional staff. And if you are thinking about how the
revenue estimates should be reviewed, one model I think that
the District ought to think about is, similar to what the
Congress does with the Joint Committee on Taxation, staff a
good, strong staff on the legislative side to review the
revenue estimates.
There's nothing like having both the executive branch and
the legislative branch have good professional staffs to ensure
that you get adequate warning and nonpolitical estimates on
both revenues and expenditures.
Senator Voinovich. In putting together your
recommendations, Mayor, on some of the things that you do in
relationship to the CFO, have you discussed this at all with
any of the rating agencies?
What I found many times you have had your bond rating
increased, but one of things I've always tried to do is try and
make sure that the rating agencies are happy with what I am
doing, because they are real important, and I'm sure you would
like to see your rating increased. Have you got any response
back from them in terms of what they think you ought to do?
Mayor Williams. No. Our conversations with our rating
agencies, staff of the Control Board, Chairman Cropp and I, we
assure the rating agencies that we all are steadfast in our
support for a strong, independent CFO and for a strong,
independent CFO relationship with the agencies. But we didn't
get into the detail of exactly how evaluations were done and
terminations would be done, but we definitely share with them
our commitment to strong, autonomous CFO function.
Senator Voinovich. One of the things when I was Governor,
we had a strong Office of Management and Budget; and the
legislature also had some very strong people that worked for
them. But we did meet twice a year with economic experts that
represented a cross-section of businesses in our State to get
their feel on terms of where we were going as far as our
estimates and what was happening to the economy. We just
thought that was an additional help for us.
And it seems to me that you might give some consideration
to having something like that in place. Though Dr. Gandhi said
he had some folks, that do meet with him, but that might be
something that you might give some thought to.
Chairwoman Cropp, I was pleased to see that the Council
held hearings earlier this year on the implementation of the
Mayor's performance management system. It has been a focus of
my subcommittee, and I applaud Council's focusing in on that.
What do you think are of the most significant problems that
the Mayor faces in implementing an effective performance
management system and how do you intend to help him get it
done?
Ms. Cropp. Our hearing process, I think, has been very
helpful to try to focus on what the concerns are. I think the
new approach that you will see in our 2002 budget process will
be one that will help us considerably.
We will look at the budget and actually--we are budgeting
now based on activity-based budgeting. And as we do an
activity-based budget we can very clearly see, for example, if
the Mayor is stating in his performance objective that I will
now cut 10 lawns, the new budgeting process that was developed
by the office in conjunction with the Mayor and part of our
hearing process on the legislative side, we will now be able to
look and see whether or not this activity was actually
achieved.
The Council is committed to continue to hold these
performance-based hearings outside of the budget, but you see
whether or not the government is really doing what we said that
we were going to do. And in this 2002 budget you will see
additional staff and programs being developed for us to do this
type of activity-based budgeting that will help us in looking
at our performance of the government.
Senator Voinovich. In other words, you are in sync with
what the new performance goals that have been put together by
Mr. Koskinen and others are?
Ms. Cropp. Very much in support, and we have been working
together in trying to help to develop it.
Our whole budget process this year was extremely smooth.
There has been much better dialog between the executive and the
legislative branch as we all try to work to try to make sure
that whatever activities the government is stating that it is
going to achieve that we all work together to help it get
completed.
Senator Voinovich. Thank you.
Ms. Cropp. We are learning, and we have a long way to go
with it, but we are learning. And I think we are moving in the
right direction.
Senator Voinovich. It is really important that you agree to
the performance goals that the administration is talking about,
because that is the only way that--our problem is that we have
changed the goalposts several times, and it has been difficult
for our subcommittee that is doing the oversight to find out
whether or not things are really being achieved.
I think it is time that you agree and the city agree, the
administrative branch, so that we are using the same numbers
and the same standards in terms of evaluation.
Ms. Cropp. Senator, if I could add, the Council for the
past 2 years has developed--4 years actually--developed a
legislative agenda. And this year, as we develop the budget,
the executive branch also looked at the legislative agenda of
the Council, and you will see there is great agreement as to
what the goals are, and the budget reflects that.
Now, whether or not we agree on 100 percent of the--I've
been married 31 years, and I don't agree with my husband 100
percent, but, for most of it, we are on the same wavelength.
Senator Voinovich. Thank you.
Mrs. Morella. And this subcommittee, obviously, would agree
with the Senator's comments and your response to it, so do keep
us posted.
I wanted to ask--in my opening statement, first of all, we
all have recognized and everybody I think has mentioned about
the fact that the current CFO has done an admirable job of
recognizing and publicizing the early warning signs and the
importance of good staffing.
Under the legislation that you have submitted, which I find
very interesting and would concur with a lot of it, just having
read your draft, the CFO's term would run concurrently with the
term of the Mayor. And I just wonder, is there a possibility
that a CFO in the future could be beholden to a mayor and to a
council and not have that kind of independence we have talked
about throughout this hearing?
The IG, the inspector general, has a 6-year term. Would it
not be advisable to make that term for the CFO also 6 years?
Ms. Cropp. Let me assure you that the intent of all of us
was to try to have the independence of the CFO. We were not
trying to negate that by putting the term concurrent with the
Mayor. In fact, at that point all data that we received seemed
somewhat--showed that would be supportive.
During this hearing process, I think we are open to looking
at that issue to see whether or not that approach would be much
better, because all of us sitting at this table certainly
supported the idea for there to be independence with the CFO.
So we can certainly look at that issue, and we hope that
our whole hearing process will give us information so that the
final piece of legislation that comes out will be even stronger
and more comprehensive than the one that we introduced.
I do want to also just add that another important component
of the legislation is that it requires the CFO to develop
standards by which the deputy CFOs and the agencies would be
able to live by, and that has been something that I think has
been lacking in the past.
It also enables the CFO to develop a pool of potential CFOs
for the agencies, and then the agency heads would be able to
select from that pool. And, once again, I think it will solve a
couple of the issues that we have faced with the city in the
past.
Mrs. Morella. I also mentioned in my opening comments, too,
with regard to that, that the CFOs of the various government
agencies would not be appointed by or report to the District's
CFO. Yes, there would be a list that would be submitted but
would not be directly appointed by or reported. Would you like
to comment on that?
Ms. Cropp. That was a very important issue that we looked
at, because we were looking at approaches where we needed to
have an integrated government. Even though we want the
independence of the CFO, the CFO still has the function to
function within the government.
So we are trying to figure out approaches that would make
sure that we had financial stability. And by having the CFO,
the directors chose from--select from a pool that was developed
by the CFO, it would ensure that those agency-level CFOs met
the standards, met the qualifications. But it would also allow
input from the agency heads.
That was, Madam Chair, extremely important as we looked at
some of the potential problems. But it will also enable the CFO
to terminate that deputy CFO if, in fact, the deputy CFO did
not meet the standards; and that termination would be in
consultation with the Mayor and with the Council.
So I think that addresses the concerns that you raised,
while, at the same time, addressing very legitimate concerns
that agencies have in that the CFO needs to be able to also
work well with the agency director.
And, on the term piece, the legislation allows for the term
of the CFO to start July 1st, so not immediately after the
Mayor would take office. The existing CFO would continue in
office if a Mayor comes in in January until July, and then July
1st the new one would come in.
Mrs. Morella. Mayor Williams.
Mayor Williams. If I could just--from my own personal
experience, having been the CFO and been a CFO in different
levels of government and now an executive, I think that there
really are two extremes that we are trying to avoid.
We are trying to avoid one extreme, and this is obvious.
The CFO is a model--the CFO is dormant, basically whatever you
want. The CFO gives you drive-up service. We don't want that.
But, on the other hand, I don't think we want a situation
where the CFO is reigning king or queen and everybody else is
subservient to the CFO, and the CFO feels no responsibility for
helping the government meet legitimate performance goals on
which this government is selected and which the government has
got to serve.
An example would be, let's say the CFO is too removed and
too sequestered. We are trying to get an economic development
project done. And let's say the CFO doesn't like TIF or does
like TIF for this kind of project versus this kind of project,
clearly into a policy area.
Or let's say that the CFO decides that the Police
Department has got a budget problem, but it is very, very
relaxed and very, very processional and less than aggressive
about helping the Police Department solve that problem.
Somehow or another we have--we are trying to find out a way
jointly where the CFO has the necessary level of independence
without being completely independent of legitimate performance
goals of the government. And I think that we have struck that
balance here.
So, for example, if you are the agency, we don't want a
situation where the agency head can say, well, I don't know
what my budget was, because the CFO didn't tell me. Because the
CFO is completely independent. They don't report to me, and
they don't care whether I know about the budget or the
financial system. Well, I don't care what happens with the
financial system. That is the CFO's problem.
Well, it is everybody's problem, getting a financial system
done.
Mrs. Morella. It is like the whole world is a balancing act
in some way. I understand what you are saying. It just seems
the 6-year term might be good, and, also, from what you say, it
also sounds like some kind of an audit advisory group would
kind of take it out of any political situation. But this is all
a work in progress. And my time has expired.
Congresswoman Norton.
Ms. Norton. Thank you, Mrs. Morella.
Mayor Williams, you testified before the Appropriations
Subcommittee that the District should have budget autonomy,
that it would simplify the process and reduce the costs, and
you have so testified here today.
When you say there should be--after you met these targets
for 3 consecutive years, I assume that you are counting the 4
years you have already met them and that the 3 consecutive
years is included within that period?
Mayor Williams. Yes, I would include them.
Ms. Norton. When it comes to the 30-day legislative
process, as cumbersome as that is, that is a process for which
you almost already have complete freedom.
To the credit of Chairman Tom Davis, not once did he agree
to use the 30-day period in order to override a provision of
District law; and in more than almost 25 years of home rule,
there have not been a half a dozen laws that have been
overturned. The way in which laws have been overturned has been
misuse of the budget process, not the 30-day layover process.
Therefore, I can't understand--since you are almost free of
it anyway and all you are left with is the most tortious
process I have ever seen, where law gets delayed, people refuse
to come on board because they are not sure whether or not in
the--it may take 4, 5 months, somebody will jump up, for the
life of me I can't understand why you put a more stringent
requirement on the 30-day layover period, which you almost
already have, than on the budget period.
And I want to know whether you think the District--I want
to know whether you all think that the District needs--what
purpose the 30-day layover period now serves, on the one hand,
and what burdens it adds to the District of Columbia, on the
other.
First of all, Mr. Mihm, let me ask you, since you are the
one that put this thing in your testimony.
Mayor. Williams. No. Since you're upset, this is joint
testimony.
Ms. Norton. If you all want to--if the Council Chair wants
to take responsibility for that, I would like to hear it. All
I've heard are complaints from the District about this process.
Ms. Cropp. Let me join with you in saying that if we can
eliminate the layover period it would be most welcome. You
know, from the Council's viewpoint, constantly one of the
things that we have been criticized about is so much of our
legislation.
I would like to present to you a lot of our congressional
review legislation and just give you the numbers of how much
legislation we have to keep passing over and over again as
emergency legislation because we are just waiting for the
congressional review time period to come by.
We have to pass emergency legislation because sometimes the
government just doesn't say you can't function in 60 days, we
have to make some decisions immediately. And in order to be
able to make the immediate decisions we have had to pass
emergency legislation, because that is the only way we could
get something done right away.
I would applaud any effort and support any effort that
would eliminate that need. I think there are enough safeguards
that if there's something that the District is doing that
article 1 section 8 would come up, that they are there without
us having to have the 30-day layover or 60-day layover.
Ms. Norton. We all understand this to be a holdover period.
It puts the District on hold. The District--the Congress can
get up right now and say that a law you passed 20 years ago is
null and void. So the only question before us is, is it worth
the wait, again, given the notion of weighing the benefits
against the costs to a local jurisdiction, not to mention the
paternalism?
Let me ask, Mr. Mihm, you have testified that the District
has, indeed--you put in your appendix many reported
requirements. You lay them out, the many committees that
require them. What burden in financial terms, perhaps diversion
of resources, do these requirements place on the District? Can
you think of any way to streamline these multiple requirements
on the District of Columbia?
Mr. Mihm. In terms of the first part of your question, we
haven't looked and worked with the District about the financial
burden that it places on them. We have done similar work,
though, on multiple reporting requirements placed on Federal
agencies and can tell you that it sometimes can be quite
expensive to report on these things.
One--not to reopen an issue, ma'am, but one of the things
that reportable events could help do is, if it is done as part
of a sorting-through of the cumulative burden that is placed on
the District for reporting, it could offer an opportunity to
say, OK, these are the things that we are agreeing on and, as
part of that, here's the things that we are going to eliminate.
There is--for example, there's a report--there's a
requirement for the emergency reserve fund use that Congress be
notified within 30 days. I call that a reportable event. I
would assume that--you know, pending agreement between Congress
and the District, that is exactly the type of thing that would
be rolled into a reportable event system.
So the cumulative effect, I mean, can be burdensome; and
the idea of a reportable event would be to try and just let's
all focus on the vital few so that we really know we are
focusing on what is important and not just everything.
Ms. Norton. Well, I very much appreciate that, Mr. Mihm.
And since you have been working with the District on an ongoing
basis and have laid these out and have indicated that there
should be these early warnings, perhaps you can work with the
District to sort out which of these might be eliminated or
rolled into others as a part of the Congress' contribution to
the streamlining of the District government.
Mr. Mihm. We would be pleased to work with your office on
that, yes, ma'am.
Mrs. Morella. I am not going to hold you up, if it is OK
with Congresswoman Norton. We will be submitting questions to
you for your response.
I must say, in reading the legislation that you submitted
to us, the draft, I was pleased to note that your 3-year period
for then allowing the District of Columbia to spend its own
money is as it deems appropriate was very sound, very accurate.
I also question why we have to wait 6 years in order to get
rid of the 30-day holdover. So, again, if something can be
worked out, I think that 30-day period for 6 years is pretty
lengthy. Maybe that could be in some way accommodated.
I want to thank you very much for being so patient, being
here.
I know, Councilwoman Cropp, you wanted to make a comment.
Ms. Cropp. Madam Chair, if you could just indulge me for 1
further second.
Mrs. Morella. Yes, ma'am.
Ms. Cropp. When you asked about structural problems that
the District has, I don't think I can leave this table without
also talking about the issue of rollover funds.
In other business, if you have excess dollars at the end of
your fiscal year, you have the ability to roll them over into
your next year. We don't have that. It creates--it encourages
bad behavior. It encourages you to try to spend absolutely
every penny so that you won't have anything left over.
I implore the committee to support the idea of the District
having the ability to roll over excess funds so that we will be
able to utilize them in the appropriate programs and do it in a
reasoned and comprehensive approach to it.
Mrs. Morella. I appreciate your mentioning that. You and I
in our discussions have commented on it; and I know that
Congressman Knollenberg is also interested in pursuing that, as
is Congresswoman Norton. That will be an area we will be
looking at.
Again, I want to thank the panel. You have been terrific.
Thank you for the work that you have done through the years to
bring us to this point where we really are celebrating and
planning ahead.
Dr. Rivlin, thank you. Mayor Williams, thank you.
Councilwoman Cropp, thank you. I want to thank you, Mr. GAO
Director Mihm. Thank you. Thank you all.
Now the second panel. We should have been serving boxed
lunches, but, unfortunately, the budget didn't provide that.
The second panel will come forward.
Our second panel consists of Dr. Natwar Gandhi, the chief
financial officer of the District of Columbia, about whom we
have heard so much with regard to responsibility in the future,
as well as past achievements. Charles Maddox, who is the
inspector general of the District of Columbia. He comes with a
great deal of experience. Joshua Wyner, the executive director
of the DC Appleseed Center, thank you for being here. Renee
Boicourt, the managing director, Moody's Investors Service. We
are very pleased to have you and to have Parry Young, the
director of public finance, Standard & Poors.
Again, as we did with the first panel, if you would rise
and raise your right hands for swearing in.
[Witness sworn.]
Mrs. Morella. The record will reflect an affirmative
response.
Again, we will try to stick with our 5-minute rule and get
to our questions quickly. Thank you.
Dr. Gandhi, do you feel overwhelmed with the fact that you
have been in our discussion so much, so predominantly?
STATEMENTS OF NATWAR M. GANDHI, CHIEF FINANCIAL OFFICER,
DISTRICT OF COLUMBIA; CHARLES C. MADDOX, INSPECTOR GENERAL,
DISTRICT OF COLUMBIA; JOSHUA S. WYNER, EXECUTIVE DIRECTOR, DC
APPLESEED CENTER; RENEE BOICOURT, MANAGING DIRECTOR, MOODY'S
INVESTORS SERVICE; AND PARRY YOUNG, DIRECTOR, PUBLIC FINANCE
DEPARTMENT, STANDARD & POOR'S
Mr. Gandhi. Thank you, Madam Chair.
Madam Chair, Ms. Norton, members of the committee, I am
Natwar M. Gandhi, chief financial officer for the District of
Columbia. I appreciate the opportunity to appear before you
today to testify about the outlook for the District's post-
control period.
I will summarize my prepared statement here and request
that it will be made a part of the record in its entirety.
Mrs. Morella. Without objection, it is so ordered.
Mr. Gandhi. In my summary, I want to focus on the key
contributing factors in the financial turnaround of the
District of Columbia that we have seen over the last 5 years. I
will speak in terms of ``factors'' rather than any particular
organizational arrangement for two reasons. First, I believe,
these factors are essential, and, if they are present, a number
of organizational arrangements could be effective; and, second,
the organization of the District government in the post-control
period is properly a matter for the elected leaders of the
District and the Congress.
Having said that, I will also tell you that it is my
opinion that the District would best be served by an
independent CFO who is still an integral part of the District
government, consistent with home rule. What factors make any
CFO independent? I mean that the CFO as well as the CFO cluster
and its work in all aspects of financial review and analysis
are separate and insulated from the every day political
environment. In this regard I believe I'm in agreement with the
Mayor, the Council and the Authority. They have expressed
similar opinions about the need for the CFO to render financial
judgments and share information without prior approval of the
other District officials. Among others, the District's business
community and the New York financial markets are sensitive to
these issues as well.
This kind of independence can be implemented by making the
CFO a scorekeeper, so to speak, for financial purposes rather
than a gatekeeper, a role that is currently played by the
Authority. The CFO would be the transparent developer and
certifier of financial data, such as revenue estimates, fiscal
or contractual impact statements and the budget costing and
budget monitoring. The CFO, in part, would become a city
version of the Congressional Budget Office with respect to
assessing revenues and reviewing the costs of legislation. This
would allow elected leaders to focus on the direction of the
government knowing that the financial picture was portrayed by
a nonpartisan, independent entity with no vested interest in
the policy outcomes.
It is also important to remember what independence is not.
I believe the CFO should not be independent from the District
government in the same sense that the Authority is currently
independent. After all, it is one government under home rule.
With that in mind, we have already begun the process of
reintegrating the CFO cluster into District government.
For example, we are working with the chief technology
officer on information technology decisions; we participate
directly in executive meetings, and in almost all cases, we act
in parallel with other components of the District government on
issues like pay and personnel policy. We are also working very
closely with the City administrator on restructuring the
District's system of accounts and the introduction of
performance-based budgeting.
Overall, the CFO is a resource for both the executive and
legislative branches of the city government, the Congress, and
other stakeholders, such as bond investors. We work with
everyone as an equal opportunity sharer of information and
analysis, and I believe this positive role can best be
maintained by the sort of independence that I have described
here today. But retaining that independence requires a positive
action by the Congress and the District by the end of the
control period, because with that event, the prior law will
come back into effect.
I would be pleased to answer any questions you and Ms.
Norton may have. Thank you.
[The prepared statement of Mr. Gandhi follows:]
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Mrs. Morella. Thank you, Dr. Gandhi.
And I'm pleased now to recognize our inspector general for
the District of Columbia, Director Maddox.
Mr. Maddox. Good afternoon, Chairwoman Morella, Chairman
Voinovich and councilwoman--Committee woman Norton.
I appreciate the opportunity to share my views on the
position of the Office of the Inspector General [OIG], in its
respective role in the District once the Control Board is
suspended on September 30, 2001. My testimony today will point
out that the D.C. Office of the Inspector General has become a
key component of the District governance for two primary
reasons.
First, during the Control Board period we have been
provided with the critical resources necessary to address a
wide range of fiscal and managerial deficiencies that affect
the city.
Second, we strive to be an independent organization that is
guided by strict adherence to principles of objectivity as
clearly established by generally accepted auditing inspections
and investigative standards.
The recommendations that I will urge this committee and
others to consider today relate directly to these two
imperatives. I will share with you my perspective about what I
think our organizational long-term strategic vision should be
for helping to mitigate risk in critical areas. A description
of actions already under way to mitigate risk is included in
the longer version of this testimony for the record. I also
will suggest legislative changes that I believe will enhance
and clarify our authority and independence.
As the Office of Inspector General evolves, my vision for
helping to foster accountability and the integrity of the
District government rests on a commitment to strategically
focus our limited resources. Accordingly, I believe strongly
that the Office of Inspector General's oversight of District
affairs does not and should not include the policymaking
authority and managerial role that has been exercised by the
Control Board. Instead, I believe the effectiveness of the OIG
is tied to our ability to be perceived as and utilized as a
source of independent, objective analysis that can be
considered by all stakeholders. Therefore, I would like to
share several ideas which comport with the unique and specific
functions of our office as we move forward.
In the area of procurement, the OIG should develop a long-
range plan to cover procurement and contract administration.
Specifically, we should conduct audits which accomplish the
following: identify systemic problems and the potential for
monetary and management benefits, focus on single audits and
determine whether the cost of contracts is being properly
estimated and negotiated. We plan to create a pilot program for
the establishment of an Office of Inspector General resident
audit sites at various agencies. Our resident auditors will
provide an independent audit function to ensure that
appropriated funds are properly controlled and accounted for
and provide continual feedback on efficiency and effectiveness.
Based on our early analysis by choosing five or six of the
agencies with the largest budgets and most complex operations,
the OIG could cover approximately 50 percent of the District's
operating budget. We plan to intensify our inspections of
selected agencies in accordance with the standards for eternal
control recently promulgated by the General Accounting Office
for Federal agencies. Again, we will concentrate on agencies
which deliver key services to the city and which have the
greatest fiscal impact on their budget.
We believe that it is necessary to create a contractor
integrity group comprised of representatives from the Office of
the Inspector General, the Office of Contracting and
Procurement, the FBI, U.S. Attorney's Office and the Office of
Corporation Counsel, which would conduct background and
prequalification checks of contractors seeking to do business
with the District.
It is important to note today that the Federal legislation
that created the Control Board also had a significant impact on
the role of the Inspector General's Office to enable the IG to
assist the Control Board in addressing budget deficits and
management deficiencies in the District government.
Section 303 of Public Law 104-8, the D.C. Financial
Responsibility and Management Assistance Act of 1995 provided
the IG with duties crucial to determining the District's fiscal
stability. Among those duties are contracting authority, to
audit the complete financial statement of the District's
government each year and development of an annual plan for
audits by the IG to be conducted in consultation with the
Authority, the Mayor and the Council.
These two responsibilities provided us with a unique
perspective of the District's fiscal health. For this reason,
section 209 of Public Law 104-8 places a duty on the IG to
provide warnings concerning the emergence of certain fiscal
weaknesses, such as the failure to make timely payroll or
pension payments that could trigger the initiation of a control
period. I can assure this body that my office will remain
watchful of these conditions which are set forth in Federal law
very specifically and report on them accordingly.
I also would like to note that the City Council has amended
the IG statute several times since the Federal legislation was
passed in 1995. On each occasion these amendments have
strengthened our authorities and clarified our mission.
Again, I would like to commend--recommend a number of
additional legislative changes that I believe will assist my
office in addressing risk to the District in the post-Control
Board years. These recommendations are summarized in attachment
A and are set forth in detail in the longer version of my
statement.
With the exception of two proposals regarding the Federal
Ethics in Government Act and the Federal false statement
statute, all of my legislative proposals can be addressed by
making changes in the DC Code. I have had preliminary
discussions with the Mayor and with Chairwoman Cropp, and I am
pleased to say that I believe they are supportive of these
recommendations. In the coming weeks, I plan to submit these
proposals directly to the Mayor and to Chairwoman Cropp for
their review and legislative action.
Again, thank you for the opportunity to share my views
today. I look forward to working with the committee and with
others as
we do all we can to ensure the fiscal health of the District in
years to come. I will be pleased to respond to any of your
questions at this time.
Mrs. Morella. Thank you very much, Mr. Maddox.
[The prepared statement of Mr. Maddox follows:]
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Mrs. Morella. I'm pleased now to recognize Joshua Wyner who
is the executive director of the DC Appleseed Center. Thank
you, Mr. Wyner.
Mr. Wyner. Thank you, Madam Chairman.
The DC Appleseed Center, as you may know, is an
independent, nonprofit organization that performs research and
analysis on DC issues and also advocates for DC government
reform. Earlier this week, after 8 months of study, DC
Appleseed released a report about the chief financial officer
and financial management in the District of Columbia, and I
appreciate the opportunity to say a few words here today about
our findings and recommendations.
The DC Appleseed report was researched and written by a
team of volunteer professionals who are quite knowledgeable
about financial management in general and the District's
finances in particular. Among the volunteers you may be
familiar with are Ed DeSeve, former Controller of the U.S.
Office of Management and Budget; Bert Edwards, former CFO of
the State Department and the first external auditor for the
District after home rule in the mid-70's; and Michael Rogers,
former city administrator for the District of Columbia.
I would like to say a few words about the context here.
There were many reasons for the District's financial collapse
in the early to mid-1990's; and DC Appleseed strongly agrees
with Congresswoman Norton and Control Board Chair Rivlin that
much of it had to do with the structural impediments to raising
revenue, and we applaud the efforts to address those issues,
and we have addressed them in prior reports as well.
Another reason, however, was the structure of financial
management under the original Home Rule Act. In the 20 years
before the Control Board was created, the Mayor of the District
of Columbia had sole responsibility under the Home Rule Act for
financial management. That meant that the Mayor had complete
control over the personnel who fulfilled financial management
functions. They served at the pleasure of the Mayor.
The poor financial management practices that existed under
Mayoral control contributed to the District's financial
collapse; there is little doubt about that. Over the past 6
years, with an independent CFO in, the District financial
management has improved.
I agree with GAO that challenges remain; our research
revealed that. But it's clear to us that with the Control Board
going out of place, the challenge is how do we devise a
structure for future financial management that builds on the
progress made over the last 6 years, but also does so in a
manner consistent with a return to home rule government.
Our report addresses this question in three general areas.
First, what should be the particular responsibilities of the
CFO? Second, how should the CFO's independence be guaranteed?
And finally how extensive should the CFO's control be over
financial personnel in the District's agencies? Let me start
with the CFO's responsibilities.
We are in agreement with the Council legislation on the
particular responsibilities of the CFO, by and large. The CFO
ought to estimate revenue, prepare the annual budget, working
with the Mayor, perform the Treasurer and Controller functions
of the system, assess and collect taxes, maintain financial
systems. The bottom line here is that an independent CFO, we
believe, is the government official most likely to maintain
professional financial operations and least likely to be unduly
influenced to take actions inconsistent with sound financial
management principles.
DC Appleseed also recommends that the CFO play a role in
certifying fiscal impact statements, and I know, Congresswoman
Morella, that this was one of the areas that you expressed
concern about. We do believe that for Council-enacted
legislation, the CFO ought to certify the consistency of that
legislation with the budget and financial plan of the District
before it's signed by the Mayor, and we will make those views
clear to the Council in the hearing the third week of June.
The second area that I'd like to cover is financial
personnel. Again here, we believe the CFO should have direct
responsibility for the financial personnel that work in
agencies. We believe that some of that ought to be delegated to
the agency directors, and we think that's exactly what's done
in the Council legislation. So we're supportive of that.
The important principle here--it's embedded in both DC
Appleseed's report and the Council legislation--is that agency
financial personnel have to have adequate incentives not only
to maintain sound financial management--and the Mayor alluded
to this earlier--but also to provide agency directors with the
information and services they need to implement programs. Those
are the issues that we are trying to balance in our set of
recommendations there, and we believe the Council effectively
does in its legislation.
Finally, DC Appleseed strongly supports continuing
independence for the CFO after the Control Board becomes
dormant. To enable this to happen, DC Appleseed recommends that
the Mayor have the authority to appoint the CFO to a fixed,
renewable 4-year term. We decided it ought to be coterminous.
The 6-month stagger in the legislation introduced by the
Council seems to us reasonable, as well, although there are
arguments for having a staggered term.
Our belief is that a 4-year term makes sense, rather than a
5- or 6-year term so that it's happenstance as to whether the
Mayor gets to appoint the CFO or not. Our view is that you
should have at least the length of the term be similar, and we
err on the side of coterminous with the Mayor's, but we would
understand a 1-year stagger and certainly it is not something
we would oppose.
We think the Mayor should have the authority to remove the
CFO for cause, subject not to two-thirds confirmation by the
Council--we think that would overly politicize matters--but
rather to a 10-day period within which the Council may prevent
the removal.
And then the final indication of independence is not
whether you can hire and fire somebody, but whether you can
affect their ability to procure supplies, to hire their own
personnel and to budget. We believe that the CFO ought to
retain separate and independent procurement personnel and legal
council authority. Legal council is not addressed in the
Council's bill, and again we will make our views clear when the
Council holds its hearing on that. And we believe that the
budget authority for the CFO ought to be somewhat different
than it is for other agencies, as indicated in our report.
Finally, let me just say a thing or two about one other
section of the DC Appleseed report that's really supportive of
a number of things that were said earlier. During our research,
an issue that kept coming up with everybody we spoke with and
in looking at other jurisdictions is that the timing of the
congressional appropriations process makes it unduly difficult
and uniquely difficult for the District to estimate revenue
accurately, to prepare its budget thoughtfully and to establish
government programs in a timely manner. With the District's
improved financial condition and a well-functioning CFO in
place, Congress may want to consider providing the District
greater budget autonomy.
And certainly Congresswoman Norton is working on a bill; we
will wait to comment further on that until we have a copy of
that.
Overall, our recommendations seek to establish financial
operations for the District that are independent, professional,
transparent and responsive to the policy and program goals of
locally elected leaders. We'll continue to be available to
support the work of this committee and the District's elected
leaders as the structure for the District's future financial
operations is devised.
I appreciate the opportunity to appear before you today,
and would be happy to answer questions later on.
Mrs. Morella. I appreciate you appearing before us and your
succinct testimony.
[The prepared statement of Mr. Wyner follows:]
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Mrs. Morella. I'm now pleased to recognize Renee Boicourt,
Managing Director of Moody's Investors Service. Thank you for
being with us.
Ms. Boicourt. Thank you.
Madam Chairman, Congresswoman Norton, thank you for the
opportunity to speak today. I am Renee Boicourt, managing
director of Moody's Investors Service, and I'm pleased to join
you here today to discuss the views of our firm on the credit
condition of the District of Columbia. As you know, Moody's is
a leading global credit rating research and analysis firm which
publishes credit opinions, research and ratings on fixed income
securities throughout the world.
As the Authority prepares to wind down its operations, we
look back at the accomplishments over the last 6 years and
ahead to the challenges the District faces in the future. We
will focus our comments on issues that play a prominent role in
the rating, both its history and its future. As requested by
the subcommittees, our testimony will consider the purposes set
out in the District of Columbia Financial Responsibility and
Management Assistance Act of 1995, the financial management
improvements made by the District government and the role of
oversight mechanisms during the post-control period.
As we testify here today, it's clear that the credit
condition of the District is very different from what it was 6
years ago. In 1995, we had just lowered the District's rating
to noninvestment grade or junk status. The District had posted
years of either deficit or barely balanced operations and had
relied on the Federal Government for the cash to barely supply
the necessary services.
Today, in contrast, Moody's rates the District's general
obligation bonds Baa1, four rating levels higher than in 1995.
The accumulated deficit has been eliminated without the need
for deficit funding bonds, and the District has balanced its
budget for 4 years. In summary, we can say that many, although
not all, of the goals of the 1995 legislation have been
realized.
First, let me focus on the financial arena. We see
substantial progress in this aspect of the 1995 legislative
goals. Budget deficits, once a chronic feature, have been
absent since 1997 and cash reserves are more than adequate.
Largely because of this turnaround, the District's access to
the capital markets is solid. While the District was never
completely denied market access, costly credit support from
commercial bank facilities was necessary to market some of the
District's offerings. Now, the relatively strong Baa1 rating
produces wide market interest in the District's bonds.
Another goal of the 1995 legislation was the role between
the District and the Federal Government with respect to service
responsibilities and revenues, and here again, we see
significant positive results. The 1997 Revitalization Act did
much to refine the District's relationship to the Federal
Government, such that it could balance its budget on a
recurring basis. By taking action such as removing the unfunded
pension liability from the District's balance sheet and
removing funding responsibility for certain services such as
courts, the 1997 legislation did much to improve the District's
structural budget balance position.
Among the key goals of the 1995 legislation was to ensure
the economic vitality of the District. Today, the District
economy is clearly much stronger than in 1995, and you can see
that in a number of indicators, including employment, personal
income, the real estate market and the construction industry.
Moreover, District forecasters are actually expecting a modest
increase in population by 2004, a very significant milestone if
borne out.
Although the District economy has shown improvement,
continued economic progress will be closely linked to improving
the quality and efficiency of service delivery as others have
addressed today. The District continues to pursue the goal of
improving the quality and efficiency of public services, and
this option has been made possible by its recent financial
stability.
Before the District could put its primary focus on this
goal, it needed first to establish a baseline degree of
financial control and accountability. With that foundation now
reasonably well established, service delivery objectives have
moved to the forefront of the District's agenda. Performance
measures were developed quickly and early in the Clinton
administration and resulted in a number of short-term projects,
measured.
But in some service areas, limited management information
on agency performance has made it extremely difficult to set
goals and measure progress. Increasing the degree of management
accountability, a building block toward improving services, has
been a central target in these last few years with some
success, but again, the inadequacy of the information systems,
including accounting, procurement and personnel is a major
obstacle. These limitations have been thoroughly reported on by
the USGAO. The District's plans to continue to invest in
management information systems will be key to continued credit
improvement.
Over the past 6 years, the District has made improvements
in all of the dimensions that drive the bond rating, debt level
and structure, finance, economic growth and administrative
issues. However, the financial dimension has been the most
dramatic, and our written testimony details the progress in
this area, and I invite you to read that in full.
In brief summary, we see budgets balanced, cash liquidity
restored, chronic overspending patterns reversed and realistic
revenue projections established, and these have been key to our
ratings upgrades.
Let me turn now to our thoughts regarding the post-Control
Board era. In many ways, the District is in a similar position
to that other formerly distressed cities found themselves in at
this stage of financial recovery. Having emerged from a cash
crisis, established financial control and accountability, and
posted a multiyear record of successful budget results, the
District is now deeply engaged in the challenge of improving
services and ultimately the economic prospects of its citizens.
However, a difference in the pattern of the District's
financial recovery which others have noted today is the absence
of long-term deficit funding bonds and a corresponding slow
phaseout of Control Board oversight. In other cities, we've
seen a slow phaseout, and during that period, for the most
part, the role of the control boards has been focused on
commentary, analysis and monitoring.
Under the District's recovery legislation, which was
modeled, in part, after the laws in those cities the absence of
deficit funding bonds means that a slow phaseout of the Control
Board's oversight role is not provided for. On the other hand,
the role of Congress in the District's budget process is
unique, and oversight from bodies such as the U.S. General
Accounting Office is not found in other cities.
In Moody's view, certain activities have been important to
the continuing financial and economic recovery as they have
exited financial control periods, and those will be important
here. They include multiyear financial planning along the lines
of the District financial plan; multiyear fiscal analysis of
proposed legislative actions, what people today have been
referring to as ``fiscal impact analysis''; frequent and prompt
reporting regarding actual expenditure and revenue performance
throughout the fiscal year; and a thorough public vetting of
revenue and spending forecasts. These activities have created
the capacity incentive for the financial policymakers in
various cities to enact sound budgets and financial plans and
to take the necessary steps to keep financial operations on
balance when unexpected hurdles emerge.
In summary, Moody's sees tremendous improvement in the
District's credit condition as evidenced by the upgrades from
junk status to Baa1, but we also see significant challenges. A
number of the goals of the 1995 act have been achieved; others
are moving forward on the building blocks of improved financial
control and accountability.
Thank you for giving us an opportunity to share our views
regarding the credit condition of the District at this
important time. We'd be happy to field questions.
Mrs. Morella. Thank you Ms. Boicourt. We appreciate your
being here for this hearing.
[The prepared statement of Ms. Boincourt follows:]
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Mrs. Morella. I'm pleased to recognize Parry Young.
Mr. Young. Thank you.
Mrs. Morella. Public finance, Standard & Poor's.
Mr. Young. Madam Chairwoman, and members of the
subcommittee, thank you for inviting Standard & Poor's to
participate in today's hearing. My name is Parry Young. I am a
director in Standard & Poor's Public Finance Department and
have been a lead analyst on the District of Columbia's credit
rating for more than 10 years. Standard & Poor's provides
independent financial information, analytical services and
credit ratings to the world's financial markets. We are a
division of the McGraw-Hill Companies. I would like to
summarize the written testimony which has been submitted.
Standard & Poor's long-term issue credit ratings cover a
range from AAA, highest, to D, lowest and includes default. The
District's general obligation or G.O. bonds were initially
assigned a single A rating in 1984, signifying S&P's opinion
that the District had a strong capacity to meet its
obligations. Today, the District's bonds are rated BBB-plus,
which is just below the single A category and is defined as
adequate capacity to meet obligations.
I would like to use the rest of my time to summarize the
key rating actions and factors for the District from the
initial rating in 1984 to today.
The 1984 single A rating of the District bond was based on
a number of factors, including the District's special economic
and financial relations with the Federal Government, such as
access to the Treasury advances to meet operating expenses and
debt service. Three years of strong revenue growth followed
along with a reduction in accumulated deficit, and in fiscal
1998 the District reported a $14 million deficit caused largely
by increasing human services expenditures.
Over the next few years, actual and projected budgetary
stress caused by a structural imbalance of revenues and
expenditures, which continued and culminated in a lowering of
the District's rating to single A-minus in 1990. A plus or a
minus sign in the rating denotes relative position within the
category.
The District sold G.O. bonds in 1991 to eliminate its
accumulated deficit. However, the District's finances continued
to be under stress, which was exacerbated by growing
expenditures and sluggish economic indicators. In February
1995, S&P lowered the district's rating to BBB-minus after the
reporting of a much-larger-than-anticipated deficit for fiscal
1994.
In April 1995, Standard & Poor's again lowered the rating
of the District's G.O. bonds to single B, due primarily to
weakening of the District's ability to requisition advances
from the U.S. Treasury under the provisions of the newly
enacted Control Board Act. While the act initially had an
adverse effect on the District's rating, it contained the
potential to be a positive force for the District's
creditworthiness, which we have seen.
The Control Board Act and the 1997 National Capital
Revitalization Act, along with strengthening economic factors,
were significant factors in the District's improved financial
and administrative position. The Control Board provided
managerial oversight while under the Revitalization Act had the
Federal Government assumed the District's unfunded pension
liability and the cost of certain District operations.
By fiscal 1998, the District had entirely eliminated its
accumulated deficit, and in April 1999, Standard & Poor's
raised the District's rating from BB to an investment grade
rating of BBB which has been raised to BBB-plus in February of
this year, due to the District's improved financial operations,
enhanced debt position and the expectation of continued
strengthening of its credit fundamentals.
The current rating reflects the assumption that the
District's overall credit quality would maintain its positive
momentum and included the expectation of the imminent phaseout
of the Control Board at the end of 2001. We believe that the
rating is not likely to change over the medium to longer term.
The direction of any further rating action depends on the
District's ability to demonstrate that it is adequately
balancing its social and capital costs with available resources
and that financial and management controls and improvements
have been institutionalized.
This concludes my statement. Thank you for inviting us
here. I would be very happy to answer any questions.
[The prepared statement of Mr. Young follows:]
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Mrs. Morella. I want to thank you all.
I think I will start off with the two rating agencies,
asking you, what challenges do you see facing the District
government that will impact credit evaluation? What are the key
factors that the District has to address in order to receive
upgrades in its credit ratings? And if you would also comment,
what actions, including the establishment of oversight
mechanisms, do you recommend should be put in place during the
post-Control Board period?
Let me start off with you then, Ms. Boicourt.
Ms. Boicourt. Thank you. Let me address your--I think your
second question first, which is what will it take for the
rating to continue to improve.
We see the District as having substantial momentum in its
improvement. In our view, we think the rating can go higher if
the District meets the goals that it itself has laid out,
continuing to improve reserves toward--they have a self-imposed
7 percent goal, continuing to post balanced budgets; we would
add to that, from our point of view, continuing reporting at
the frequency, and ideally of an improved quality, as
information technology systems continue to improve, with the
investments that they have planned
We do see substantial challenges toward that improvement,
principally in the short term in the form of information
systems and technology. This is not unique to District of
Columbia. We find this in many cities, that the ability to
produce the information one needs to manage toward an improved
financial result is often a very important obstacle.
In the longer term, in terms of higher ratings beyond the A
range into the AA range, it's--we do see the structural budget
balance issues as becoming more germane when you enter the AA
range. It's not an accident that AA-rated cities have a much
more favorable balance between the service responsibility and
demographics of the population on the one hand and the
resources in the form of their economy and their tax authority
on the other. That's not to say this is an impossible goal for
the District, but it's one where the challenge has become more
serious.
Your third question, I believe had to do with our
recommendations regarding the post-control era, if you will. We
really don't see it as our role to make policy recommendations,
particularly those that go to kind of fundamental governance
issues. We see a lot of different models of governance across
the country from city to city, State to State, widely varying
models. Rather, I think our focus is on process, and financial
process in particular, and I think our emphasis is on
information, the transparency of information, the quality of
information, the frequency of information.
The thing that I think bothers us the most, and Wall Street
in general, is radio silence. I mean, I think that investors
are very comforted by lots of good, frequent information.
That's why you see so much attention by the analysts in general
on quarterly reporting of corporations.
It's no different with municipalities. So our--I think our
interest is--it echoes a little bit what Nat Gandhi said about,
I think he said, activities rather than organization. I think
that's factors rather than organizational form, and I think
that's true of our point of view that we're very interested in
outcome and in information, and that we see by rating cities
across the country that can be accomplished in many different
forms of governance.
Mrs. Morella. Very good answer.
Let's hear from Mr. Young before my time is up.
Mr. Young. Well, as far as the first part of your question,
the challenges facing the District going forward, we feel that
the District is still assimilating the certain factors of the
Revitalization Act and the Tax Parity Act. There are a lot of
things going on that still have to flow through the system. So
over the near term--and also the change of the Control Board
going away. So over the near term, we will be looking at what,
how the District manages all these events, along with any
changes that may occur in the economy, and as far as what they
might do in the same vein.
As Renee said, we really don't see it as our role to
recommend what political jurisdiction should do, but there are
things that we have pointed out in the past that can help to
improve creditworthiness, such as increasing reserves,
improving financial management and those types of things. But
that's about it.
Mrs. Morella. Thank you.
I now recognize Ms. Norton for her questioning.
Ms. Norton. Thank you very much, Mrs. Morella. I want to
turn, as well, to the two bond advisers, bond representatives.
All the testimony we have received today has been most
important for the committee. We've listened to it closely. It
seems to me you learn something from each and every one of
those who has testified. It's very valuable to hear from the
District, for example, who lives with this stuff every day. But
in a real sense, your testimony is probably the most important
because you're the most independent, because all of you are
structurally required to be objective and because, in a very
real sense, your testimony matters most to the implications for
everything that the District does.
You have each offered a critique of what the District does.
What is probably most noteworthy is how encouraging your
testimony has been about the District's financial condition.
I'd like to ask you, because our concern is less with today
than what will happen tomorrow, particularly given the
surpluses the District had been running today, are there any
early warning signs that the District's bond rate will decline;
and looking at it from the other end, how much does it cost the
District that, for reasons you have said are partly
structural--they are operational reasons as well--how much does
it cost the District to have a, is it a BBB-plus rating rather
than the A rating that it had in 1984?
First, do you see any early warning signs that the rating
will decline, or is it on an upward movement as far as you can
see, whenever that will occur, and that of course we can't
know.
Ms. Boicourt. Sure. At the moment, as I said before, we see
some positive momentum that if it's sustained in the post-
Control Board era, whatever form that takes, offers the
potential for the rating to rise again. The sorts of early
warning indicators that we watch are both economic and
financial. It's one of the reasons that the interim reporting
on actual revenues and expenditures is so key to us.
Throughout the last couple of years there's been what we
have viewed as a very valuable process of surfacing potential
budget risks and then managing those down. We expect to
continue to see that and continued practices along those lines
would be important to us. If we saw an early warning in the
form of surfacing budget problems that were too big to manage
down, that might slow down some of this momentum.
I would say the other financial management sort of early
warning signals that we watch have to do with cash condition.
We are very interested in cash condition, and the District
reports to us on a frequent basis. On the economy side, the
District has been doing better than many parts of the country
in terms of the immediate business cycle softening that we're
seeing in other regions.
Ms. Norton. Why is that?
Ms. Boicourt. I think that this part of the country, in
general, is doing better. In addition, there's a fair amount of
momentum in commercial activity and development-oriented
projects that are getting traction in the District. But
nevertheless we do still see some downside risks there, and
that's something we're watching quite carefully. And we're very
interested in just the fundamental trends of job growth, of
property values, when we can get data on population. It's hard
to wait 10 years for good data, but we do try to watch what we
can.
So those are the kinds of warning signals we look at, both
economic and fiscal.
Ms. Norton. Mr. Young.
Mr. Young. From our standpoint, we have a stable outlook on
the District's rating, which means we expect that the
District's rating will remain the same over an intermediate
term. If we thought there was, that it was going to go down, we
would have a negative outlook on it, and positive, if it were
going to go up; but right now we think that the District's
rating will remain the same.
And as far as looking for early warning signals, we use
many of the same sources that Renee mentioned, plus the
District also is very good at calling us when there is a
potential problem or the appearance of a problem that could
affect credit quality. Also their Web site helps. The
improvements in financial management every day should make more
and better information available to everyone.
Ms. Norton. My time is up, Madam Chairman.
Mrs. Morella. Thank you. Picking up on our line of
questioning, I would go to Inspector General. You have come up
with a list of very laudatory recommendations, pilot programs,
auditing system that you will be putting into effect. Do they
link up with what you have heard--have they linked up to what
you--with what they have noted as being important to the future
direction with regard to bond rating and all?
Mr. Maddox. Yes, Madam Chairman, they do; and in addition
to that, let me just add some of the policies and procedures
that we've put in place.
As you may know, from the beginning we instituted reports
like MARs and MIRs, MARs being management alert reports and
MIRs being management implication reports, and fraud reports.
The first two are very important because in the process of our
inspecting or auditing an agency, if we find systemic problems
that relate to these deficiencies, we alert the agency right
then and there to make those corrections; and that's a part of
our final report when we do a final draft.
In those instances where we issue the management
implication reports, when we find systemic problems that are
common probably across the District line, we alert the entire
city, the Council, in the past, the Control Board and this--the
Hill, as well, as to our recommendations and the systemic
problems that we've found in one agency without naming that
agency for them to correct.
The CAFR process, we examine the management letter that
comes after the dependency of the CAFR process and we monitor
those deficiencies to make sure that the recommendations are
carried out, and if they are not carried out, we bring that to
the attention of the appropriate officials.
One of the things that I alluded to in my statement, or one
of the things in the future that I think will be beneficial, is
putting audit--deputy auditors in different key departments
which control the greater part of the budget and have a better
impact on the financial situation. I think that a continuous
auditing process in place will alert the appropriate officials
of these triggers that may bring in a control period.
Mrs. Morella. Do you need to get legislative authority from
the Council, or whatever authority, to come up with these
projects you talk about: We should develop a long-range plan
procurement and contract administration, the resident auditors,
more inspection? Do you need further authority, or do you
automatically have the authority to do that, sir?
Mr. Maddox. That, I believe, I can do on my own. Of course,
that will require probably additional resources, which I have
not analyzed what that would be, but deploying my resources and
my auditors in areas that significant, I can use my discretion
on that, and I don't need the additional legislation to do
that.
Mrs. Morella. I have to get to the chief financial officer.
Dr. Gandhi, a lot has been discussed about your role and,
of course, we all feel the Mayor and the Council and the
Control Board recommending the establishment of an independent
CFO--one of the points that I brought out in my opening
statement and I wanted to ask about is the specific provisions
of the proposal to ask you, first of all, will they ensure
sufficient financial oversight and your independence? For
instance, should the agency CFOs be hired and fired by you, and
what provisions of the current Control Board Act should be
retained to ensure that your independent nature is maintained
and why?
Mr. Gandhi. The overall comment that I would like to make
is that I'm in complete correspondence with the Mayor, the
Council and the Authority in their statement that CFO should be
independent, but should be part of the District government and
the home rule.
Second, as to what organizational structure it should take,
I would simply leave that to the elected leaders of the
District and the Congress.
Third is that, overall, the CFO role, as it was developed
in the law or authorities, the Control Act, I think it has
worked extremely well in terms of improving cities' financial
fortunes. I think CFO should not be viewed merely in terms of
the District CFO, but also should be viewed in terms of the
entire cluster, meaning the agencies' CFOs as well.
My guidance to the agency CFOs on a regular basis is that
we have to work with the agency directors. There's no way
around that. The primary reason is that, without their help,
the agency directors will not be able to achieve their goals
and the objectives as specified by the Mayor.
The financial cluster and CFO should not be adversaries
with the agency directors. They have to work in congruence. But
at the same time, the most important view, most important
responsibility that I envision for the CFO and members of the
CFO cluster is to maintain the District's financial viability.
That is an absolute must, and whatever it takes to do that we
will do it.
Mrs. Morella. My time has expired, but it appears as though
you're leaving it to the Mayor and the Council to make some of
those little decisions with regard to how it will be employed.
I will be interested also to submit some questions to you with
regard to that proposed legislation.
Congresswoman Norton.
Ms. Norton. Thank you, Mrs. Morella. I would like to ask
Mr. Gandhi and our two investment bond leaders, why do the
District's expenditures continue to rise faster than revenue,
given these extraordinary surpluses and the fact that the
District apparently has come back faster than other cities that
were in financial difficulty?
Mr. Gandhi.
Mr. Gandhi. Yes, I think the point we want to keep in mind
here is that--that it is not that the expenditures rise faster
than the revenue, which they do. The most important fact that
you yourself pointed out is that there is a constraint on a
revenue basis, and that----
Ms. Norton. So it's not cost of government that is doing
it, in other words?
Mr. Gandhi. No. I think the District will never let its
expenditures rise more than its revenue for balanced budget
purposes, because nobody wants the Control Board here again. If
that would mean that we had to stall all the services, I think
the District would do that. We are committed to making sure
that there are balanced budgets, that there is a financial
viability, that our friends on Wall Street are not concerned
about that particular aspect.
But is that good government? I think a fundamental problem
as you yourself pointed out, Ms. Norton, is that revenue basis
constraint; and second is that when the economy is good out
there, we do well. There is no question about that. In our last
4 or 5 years, the economy has done extremely well. It is an
unprecedented level of prosperity that we had and we enjoyed
it.
But just imagine for a moment, heaven forbid, that there is
a recession out there, a sustained slowdown; that will be a
serious problem for the District, given the kind of limited tax
base that we have.
Ms. Norton. So given the sources of revenue and the
constraints on the sources of revenue, constraints that are
beyond the District's control----
Mr. Gandhi. Absolutely.
Ms. Norton [continuing]. No one can forecast, if there were
serious recession, the District would have at its hands the
ability to control its own expenditures. Yes?
Could I ask you both to comment on that it? Why you think
it----
Ms. Boicourt. Yes, I think inherent in your question is the
notion of there being some fundamental expenditure trend that
is on autopilot, that is inexorable; and of course, over the
last few years, we've seen that's not the case, to some degree.
To a large degree, that's a managed number, and the District in
the last couple of years has managed it to a level that it has
been able to eliminate the accumulated deficit and produce an
accumulated surplus.
Ms. Norton. Well, there are expenditures that are on
automatic pilot. My question does not imply that--as the CFO
says, that things can't be cut. At the same time, I would not
agree with you that there are not some expenditures that this
government has that are not on automatic pilot.
Ms. Boicourt. And I would agree with you. Demographically
driven expenditures to a large degree, in the face of both a
policy desire and in many cases mandates to serve a population,
are on autopilot, but there is----
Ms. Norton. We've taken the District's Medicaid off of the
terrible formula it had, but it can't get that Medicaid money
if it can't come up with its match.
Ms. Boicourt. And it still has an autopilot. It is just an
autopilot on a more favorable formula than it was on before. So
I think we agree with you that there is a component of the
District's expenditures that are on autopilot.
On the revenue side, the District does have less revenue
authority than many cities, and it does not have the ability to
tax its commuters. Many of the highly rated cities in the West
have the power to annex their growth boundary, and so they pick
up that tax base. They also pick up that service
responsibility, but they have a better structural balance.
To answer your question of how can it be that there's this
imbalance yet there's all this money in the bank, I think the
money in the bank was a deliberate target, aided by deliberate
spending management and a good economy.
Ms. Norton. Yes.
Mr. Young.
Mr. Young. Getting to the issue of structural balance, the
District was established with certain responsibilities and
certain resources. And for the last 25 years it's been
attempting to get those two factors into balance. The
Revitalization Act was a step to lower the cost base of the
District to help bring balance, but whether the District has
achieved true structural balance remains to be seen. The
revenue that we've talked about, the revenue sources are fixed,
and property taxes and sales taxes and income taxes are
probably at their limits for economic reasons. And some of the
expenses are on autopilot.
As Dr. Gandhi said, the strong economy has helped to--the
Control Board has had the wind at its back for the last 4 or 5
years. So that's why the years going forward may not be quite
as easy and something may have to be done to increase the
revenue sources of the District or something about
expenditures.
Mr. Gandhi. May I add one point, Ms. Norton?
The kind of arrangement that we just heard about, one
additional factor that we ought to think about in the District
is that we are accounting for expenditures which are generally
State-like expenditures, about half a billion dollars or so. In
any other jurisdiction, expenditures----
Ms. Norton. You say that in spite of the fact that the
Federal Government took over many costly State functions, the
District still carries half a billion dollars----
Mr. Gandhi. Yes, ma'am.
Ms. Norton [continuing]. In State functions?
Mr. Gandhi. And I'll give you an example. DCRA, for
example, or the Office of Tax and Revenue or the University of
District of Columbia; in any other jurisdiction, these are
State-like expenditures. Now, this is the arrangement that we
have, and in addition to this autopilot expenditure that we
have, like Medicaid, you know we had to take care of these
expenditures. There is no way around that.
Ms. Norton. Thank you, Madam Chairman.
Mrs. Morella. Thank you.
I'm going to just ask maybe one last question, to all of
you but particularly to--we've already taken care of our rating
agencies--but particularly to the inspector general and the DC
Appleseed Center and our CFO.
For the record, I still have the question about whether or
not you would suggest or advise that we do need to have some
kind of an audit advisory committee board, whatever you want to
call it. We heard from the first panel the response that if you
have some experienced people working for the CFO and working
for the Council, that is adequate. I'm just wondering about
whether or not--how does one involve the financial experts in
being there for the revenue audits and for the other expertise
that would be needed? And maybe it isn't necessary, but it just
seems to me that this would be something that would be
desirable, and perhaps you have some comments.
And also Dr. Gandhi, I would, and I don't know whether you
will have a chance now, but I would, for the record, like to
know how you respond to that legislation in terms of, like, the
fiscal notes, remember. You know there was a comment made in
the first panel, and I don't think it was completely responded
to in terms of, would the CFO prepare fiscal notes for Council
legislation for the term and for--as I say, the external review
and for the term of office, right.
Mr. Gandhi. Right. First, the fiscal impact statement:
Currently the Control Board requires that we need to get a
fiscal impact statement for every legislation that goes to the
Council, and we do that. I think it is prudent for any
legislative body to assess what are the costs--not just costs
in this year, but multiyear costing of a given legislation--and
that will give them and the Mayor a proper chance to evaluate
the legislation.
The legislation may be good in itself. The question is, it
has to be weighed in terms of its financial imperatives,
financial costs.
On the question of the advisory bodies, I entirely agree
with you. We have recognized that need. You know, ever since I
was the head of the Office of Tax and Revenue, I had an
advisory committee there. As soon as I became the chief
financial officer, particularly related to the revenue
estimation, we have a technical advisory panel of experts who
know the District economy--people from the CBO, people from the
OMB, people from the Federal Reserve--and they come to us every
3 months or so, and we talk about revenue exemptions--you know,
are we doing the right way, are these the right exemptions,
what do you know.
We talk with--on that panel we have people from Virginia
and Maryland, so we know--and then the counties also. And so we
want to be properly informed as to how we do our job. So I
really don't see any problem on taking technical experts'
advice, not that they have to agree with us, but I would like
to listen to what they have to say.
On the audit committee which is--which has basic overview--
oversight on the CAFR process the inspector general has run,
and any other--any large operation would have an audit
committee consisting of a few directors who would overview the
annual report and its audit. Again, I see no problem there; and
in any case, I keep the members of the audit committee
otherwise informed as to how the audit is going. After all,
they constitute from the Council, the Mayor's office, the
Control Board, people from the Hill and General Accounting
Office.
So we are doing it on our own. The question is, how do you
formalize that, and whether that constitutes--in some way, it
can overshadow Control Board.
Mrs. Morella. Don't use that word.
Mr. Gandhi. I'm sorry.
And I would say, I would leave that to the decisionmakers,
whether they want to formalize something like that or not. But
I see nothing wrong in getting advice from technical people,
because I would like to learn. We would like to do a process
that is better.
Mrs. Morella. Mr. Maddox, with regard to----
Mr. Maddox. Yes, Madam Chair.
Fundamentally, I would agree with the concept, I think we
need to--first, we're talking about two different things. The
CAFR oversight committee which requires the--first of all, the
inspector general to pick independently the auditor to do the
audit of the city's financial statement. My role as the IG is
to independently select, competitively, that process.
We have from the beginning placed representatives from my
office, Dr. Gandhi's office, CFO, from the Mayor's office, from
the Council as representatives, and GAO has also sat on that
committee; and we meet or have met every other week to discuss
the process of the CAFR and the end goal of having it completed
by the statutory date of February 1. That has worked. It has
worked successfully in the past.
Now, whether or not you want to modify that committee and
put in the so-called ``audit committee,'' I really don't have
any problems with that fundamentally, as long as the
independence and the function of the committee as it has worked
in the past 3 years is not compromised.
Now, they do different things. The CAFR committee for the
oversight of the workings of the CAFR, to make sure that the
auditor is getting the information that he or she needs from
the agency, is making sure the agencies don't have a problem
with the reasonableness of the request. I'm sort of a broker;
I'm a referee in that sense. Everyone is informed. If there are
critical areas or hiccups that happen along the way, everyone
is informed. That's what has happened in the past.
Now, if there are experts that the government or the city
feels as a security blanket they need to be a part of this
process, then it could either be folded under the umbrella of
the existing CAFR committee with the caveat that the
independence with which I work is not compromised; and the--as
an advisoree to the committee, the CAFR committee, and to the
Congress and to the city, as long as that process is
facilitated, I have no problem with that.
Now, it could also work as a separate committee where they
can do their thing separately, and the IG could have a role as
an observer. Whatever process works, I'm in favor of, but the
main thing is, I would be troubled, and I would respectfully
suggest that nothing is adopted that would hinder the
independence of the IG to supervise the CAFR process.
Mr. Gandhi. If I may supplement a comment that I made, it's
well and good to get technical advise. That is to say, I
welcome all that; but I think the most important point, which I
have already pointed out, is to build a professional technical
staff within the Office of Chief Financial Officer.
A good example is the Congressional Budget Office. You
know, we have a technical professional staff there. Nobody
talks about giving them that advice even though they have
established themselves as a very well-respected staff. I think
we can do the same thing with the chief financial officer,
build that staff so that people can come and go, the chief
financial officer can come and go, but the staff will remain
there and would have achieved such a level of technical
expertise and respect so that anytime they put out a number,
they put out information, people know it is transparent, it is
expert, it's reliable, it is dependable and you can count on
it.
Mrs. Morella. We're trying very hard to get OMB and CBO to
have the same number so there could be some progress.
I defer to Congresswoman Norton for questioning.
Ms. Norton. Thank you, Mrs. Morella.
What you just said, I must say, I found very informative
because it is true that CBO, unlike the OMB, has built up the
kind of reputation you're speaking of; and much of it does have
to do with the staff who was there. Because sometimes Democrats
have appointed the CBO, the Director of the CBO, and sometimes
Republicans have and yet the reputation has not suffered. So
the notion that there can be no substitute for taking our
current CFO and building it into a strong, independent office
is a point I take after hearing from you.
I think the Chair's concern about getting the proper
technical advice is a concern well taken. I hear you saying
that you--almost that it would be a matter of incompetence not
to get technical advice from people in the private sector, in
the public sector and in the region. If the city does, perhaps
there should be something more formal in D.C. law that says
that there should be some technical advice that the CFO, or the
IG, always makes available to himself, and he is required to
make such advice available to himself.
The one thing I have not heard anyone overcome is the
notion put forward in testimony presented by the prior panel
that if there were a difference between the panel and the
independent office with responsibility, there would be nobody
who could, in fact, sort out that difference. I'd be very
concerned with a Congress who keeps telling the District,
streamline the government, don't have redundant layers, to have
a layer that also could be adversarial and present more
problems than it would solve, when you could simply have a
group of people of the kind that you already have to do the
same job.
I have one last question, and that's for Mr. Wyner.
You have testified that counsel review of contracts in
excess of $1 million should be eliminated. And this is
something the Congress should be interested in because this
constraint was added by the Congress before there was a Control
Board, as I recall. Would you speak to your advice concerning
the notion of eliminating that provision?
Mr. Wyner. Yes. Our research, we interviewed 15 to 20
groups or individuals who were quite familiar with the
District's finances. And an issue that kept coming up was that
the Council's review of contracts at $1 million, which is a lot
of contracts in today's dollars, in today's economy, really
doesn't add a tremendous amount of value; that the Council does
not have the expertise on staff--and this goes back to an issue
that was raised by Dr. Rivlin earlier--which is that the
Council does need to beef up its budget and financial staff, a
point that we've made previously, and second, that it slows
down the process of procurement.
And so if you don't get much benefit and you have
substantial costs, it's something that you need to look at.
That's not to say that we don't think contracts should be
examined before they're executed.
We believe that the CFO, the current responsibility of the
CFO to certify the availability of funds before contracts are
executed should continue. We believe that the chief procurement
officer should continue to certify that the proper contracting
procedure has been gone through and, indeed, that the Council,
when they think there's something amiss, should hold hearings
and should, during the budget process, try to uncover any
problems that may exist.
The inspector general officer can look into those things.
It's the required review of every contract over $1 million that
strikes us as an unnecessary layer of bureaucracy.
Ms. Norton. As far as I know, there is no other
jurisdiction that requires a legislative body to look at
contracts in this way.
Mr. Wyner. We looked at a number of other jurisdictions,
and I think there are a few. But obviously it's less common in
the jurisdictions that we looked at for legislatures to review
individual contracts.
Ms. Norton. On early warnings, or should I say ``late
warnings'' in that regard, this is something that has come to
my attention. First of all, let me say that it obviously has
the potential to become terribly political. I don't know that
it has. I haven't heard those complaints, but if you keep
putting million dollar contracts in front of people who are
political animals and say, tell us what to do, at some point
they're going to tell you what to do.
The problems I have seen in it have been when they have
arisen, and I don't know anything about the day-to-day
problems, not being a member of the City Council, but I can
tell you about the Y2K problem and I can tell you happened to
highway money. I had to get a waiver, something that is almost
never done, in order for D.C. to qualify for highway funds. And
the Congress put on a whole bunch of constraints about highway
funds as a result of that. And come to find out that after all
those constraints were put on, the great problem of the million
dollar over. So Maryland and Virginia get their contracting out
on the street within 60 to 90 days.
I met with some business people from the area recently, and
they told me that it still takes the District as much as a year
to get contracts, the season is over. Y2K almost didn't happen
because the Congress--the Council was just doing what we told
them to do, hold it for 45 days, and if nobody says anything,
fine.
Well, they weren't saying anything for the most part. But
if you hold a contract and the Y2K clock is running for 45
days, then that clock really does not wait for anyone.
So I do believe that we need to look at that, given that
provision, since we impose that on the District for good
reason. By the way, that is something that I totally agreed
with, when the contracting power was--had constraints on it.
Only the Mayor had it; there was no Control Board. I totally
agreed with it; that was a fail-safe that was necessary.
Now you have described a whole set of constraints that are
there, and this is the kind of thing that I think we ought to
look at, government ought to look at itself continually to say
things like, is the constraint that we put in 5 years ago for a
purpose still needed, or is it doing more harm than good. I
haven't heard value added here, and I think that's something
that the Congress itself should look at.
Thank you very much, Madam Chair, I have no further
questions.
Mrs. Morella. Thank you, Congresswoman Norton.
I didn't ask you anything, Mr. Wyner, but may I just have
for the record your response to the Council's legislative
draft?
Mr. Wyner. We think that it's strong. In broad-brush
strokes, we think it covers most of the areas that need to be
covered. We think there are several improvements that need to
be made.
As mentioned, we think that the Council should not review
contracts. We believe that fiscal impact statements should be
reviewed by the CFO before being signed by the Mayor. We think
that the two-thirds requirement in the Council again is overly
political. And probably--I mean, if you imagine a scenario
where the Mayor has decided to remove a CFO for cause, and we
believe the standard should not be what's in the D.C. municipal
regulations now, but cause with real teeth, and then it has to
go before the Council and two-thirds of them have to say,
well----
Mrs. Morella. Let me interrupt. In fact, it even says
``two-thirds of those present and voting.'' I mean, I could
imagine that you have someone who might be there who does not
vote and you might have one person who shows up. I mean--go on.
Mr. Wyner. It just strikes us that is a recipe for
politicizing this.
And then, finally, we actually think in other respects the
CFO needs greater independence for legal counsel, for setting
the salary for agency CFOs, at least over the next 2 years, for
procurement and personnel to transition back to centralize the
systems. But we think those are relatively small changes.
They're important, but if you look at most of the
provisions, in 90 percent of the cases we're in agreement with
the Council, and we're pleased that they've stepped forward and
taken a role in this. And we think that they've gotten it right
in most respects.
Mrs. Morella. I want to thank all of you for your patience
in waiting. I know everybody is probably very hungry, but we
have gotten a lot of nourishment from your offerings today.
Thank you for your commitment to the fiscal and financial and
social well-being of the District of Columbia. Dr. Gandhi, Mr.
Maddox, Mr. Wyner, Ms. Boicourt and Mr. Young, we very much
appreciate your testimony. We may be asking you questions.
So as I adjourn the joint subcommittee's hearing, let me
just acknowledge staff: Senator Voinovich's staff, Andrew
Richardson, Mason Alinger, Julie Vincent; Delegate Norton's
staff, Jon Bouker, Cheryl Williams; Senator Durbin's staff,
Marianne Upton; Congressman Davis' staff, Howard Dennis,
Melissa Wojciak, Victoria Proctor; my staff, Russell Smith,
staff director, Matthew Batt, Robert White, Heea Vazirani-
Fales, Jean Gosa, and Andrea Abrams. We gave you the whole
list. So I want to thank all of you again and look forward to
working with you.
So the subcommittee is now adjourned.
[Whereupon, at 2:23 p.m., the joint subcommittees were
adjourned.]
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