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US Congress, House of Representatives, Committee on Government Reform
Hearing on Budget Autonomy for the District of Columbia: Restoring Trust in Our Nation’s Capital”
June 13, 2003




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Chairman Tom Davis Mayor Anthony Williams
Council Chairman Linda Cropp Chief Financial Officer Natwar Gandhi

Congress of the United States
House of Representatives
WASHINGTON, DC 20515-6143

Opening Statement of Chairman Davis
Committee on Government Reform
"Budget Autonomy for the District of Columbia: Restoring Trust in Our Nation's Capital"
June 13, 2003,10:00 a.m., Room 2154 Rayburn House Office Building

Good morning. I would like to welcome everyone to today's hearing to discuss options for expediting congressional consideration on the District of Columbia's local budget. After issuing six consecutive balanced budgets, receiving clean, unqualified financial audits and building up a general surplus and cash reserves of over a billion dollars, I believe the time has come for Congress to consider relaxing some of its oversight controls over the Nation's capital.

The District of Columbia government has come a long way since March of 1995, when this Committee issued a report declaring that "the District of Columbia is insolvent: the city does not have enough cash to pay its bills. It is spending at a rate in fiscal year 1995 that would exceed its mandated expenditure limits by more than $600 million, nearly 20 percent above its congressional appropriation."

Through legislation written in 1995 by me, along with Representative Eleanor Holmes Norton, called the District of Columbia Financial Responsibility and Management Assistance Act, Congress established a Financial Control Board and a Chief Financial Officer essentially to take over city operations until the District could stand on its own. I am pleased to say that, at a time when most municipalities throughout the country are resorting to massive budget cuts in order to balance their budgets, the District has managed to stay its course of relative financial stability.

Now, after six years of governance under the Financial Control Board and two years in a fairly stable post-Control Board environment, it is time for Congress to reconsider its oversight of the District. Every year, the District submits its roughly $5.8 billion budget of locally raised funds to be approved by the United States Congress in conjunction with the approximately $500 million in federal contributions that Congress appropriates to the District annually. While Congress's involvement in the District's budget matters is the result of Congress's responsibility to ensure the financial well being of our Nation's capital, the unfortunate reality is that the city's local budget can get tied up in political stalemates over congressional appropriations that rarely have anything to do with the District's budget.

We are here today to discuss how to develop legislation that would allow the District to submit its local budget to Congress for congressional review and consideration under an expedited review process that would ensure that the District can begin utilizing the next fiscal year's funds when the fiscal year begins. I would also like to discuss with the witnesses how they envision the expedited congressional consideration of the local budget would work. For example, what timelines are appropriate for the submission of the local budget to the Congress? How much say, if any, should the Congress have in the District's budget decisions?

Unlike states, which must first liquidate all assets before turning to the federal government for financial assistance, the federal government is directly responsible for the financial well being of the District of Columbia. Therefore, this legislation must protect Congress's right to intervene with local spending decisions when necessary. Congress will continue to have the constitutional responsibility to make sure the District does not return to the days of fiscal crisis.

The federal government will still be responsible for enacting an annual D.C. appropriations bill to fiend criminal justice and defender supervision' functions, courts and tuition assistance, so Congress will still be intimately involved in the District's operations. In addition, budget autonomy would be rescinded should the District trigger one of the "seven deadly sins" that would trigger the reinstatement of a DC Financial Control Board.

Now that I have laid the general outline of the proposal that we are discussing here today, I would like to recognize other Members of the Committee for their opening statements and then turn to the witnesses for their comments. I welcome the witnesses to today's hearing and I look forward to their testimony.

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Committee on Government Reform
United States House of Representatives

The Honorable Thomas M. Davis, III, Chairman
The Honorable Henry A. Waxman, Ranking Member

Budget Autonomy in the District of Columbia

Statement of
Anthony A. Williams
District of Columbia

Friday, June 13, 2003
2154 Rayburn House Office Building
10:00 a.m.

Thank you Chairman Davis, Ranking Minority Member Waxman, and members of the committee for this opportunity to testify on budget autonomy for the District of Columbia. Chairman Davis, you have truly raised the bar for leadership and commitment to the District, and I feel encouraged that the interests of the District will be well served with you in this position.

As we discuss budget autonomy it is very appropriate that we are doing so under the leadership of the Committee on Government Reform. This is true because the critical outcome of budget autonomy will be to greatly advance the reform of service delivery in the District government. Where service delivery has been hampered by local management issues, we have taken aggressive action, and have made great progress. Now, we must examine where service delivery is hampered by larger constraints such as the federal approval process for our budget.

For the purpose of budgeting, the District has had the dual identity of being a local government and a federal agency. In our federal system of government, this one-of-a-kind structure has created one-of-a-kind challenges. At the root of all of these problems is the need for an appropriate level of managerial discretion and flexibility.

As the front line of government service delivery, no local governments can operate effectively without the ability to respond quickly to changing public needs. In a complicated society such as ours, there are new challenges and new opportunities that arise on a monthly; weekly, and sometimes daily basis. As the primary deliverer of services, local governments can only be effective if they can respond to changing circumstances by changing programs and services in a timely and responsive manner.

All state governments in our nation have this flexibility. They control their own programs and budget allocations without the need for approval from Congress. This allows them to allocate funding in a quick and responsive manner to meet emerging public needs. The District, on the other hand, must develop its budget according to the extremely complicated and lengthy federal appropriations process. This requirement disrupts service delivery in several troublesome ways:

  1. It lengthens the time period between identifying a service need and implementing a solution. In fiscal year 2001, for example, we began cracking down on owners of slum properties to improve living conditions there. As we did so, however, we noted that residents of these properties needed to be relocated during the renovation process. Because of our lack of autonomy, however, we had to wait over a year for the federal government to approve this budgetary change in our local budget.
  2. Service improvements are further hindered by federal delays in the budget approval process. Since 1996, the average Congressional delay has been almost three months, which is almost a full quarter of the fiscal year. During these delays critical new investments cannot be funded.
    In FY 2002, for example, the delay affected service improvements such as new school nurses, prescription drug benefits, police equipment and staffing, fire fighter hires, and the tenant relocation fund discussed earlier. In FY 2003, the Congressional delay lasted through February - almost half a year. That inaction has jeopardized new investments in foster care, public schools, and improved compensation for police and firefighters.
  3. Mid year budget reallocations require an act of Congress, and disrupt service delivery. Local governments need the flexibility to respond to rapid changes in their needs. The District is not allowed to significantly reallocate funds to meet changing needs without an act of Congress. Last year, for example, DC needed to reallocate funds to support the movement of children from foster care to adoption. This transfer of funding could not be complete for months until a supplemental appropriation bill moved through Congress.
  4. Delays negatively affect marketability of District bonds. The uncertainty about whether the District will have a budget at the start of the fiscal year must be disclosed to potential buyers of DC's municipal bonds. In general, greater uncertainty means higher interest rates for DC, which in turn means that more of the budget goes toward paying interest, and less goes to other priorities.
  5. Program managers must "use or lose"funding at the end of each year. Congressional approval for spending expires at the end of the year, which punishes program managers who save funds by not allowing them to carry those funds forward for other purposes.

To provide even more justification to the case for budget autonomy, it is important to note that despite the time-consuming budget review process, recent history shows that neither Congress nor the White House have made any changes to the actual allocation of local funds in the District budget. Instead, they have limited their changes to legislative provisions and direct federal appropriations - two things they can still add under a streamlined process.

In terms of specific changes required, first and foremost is exempting the District from future continuing resolutions. Just last week Chairman Frelinghuysen of our House Appropriations Subcommittee acknowledged the importance of this change, and committed himself to achieving it. As valuable as this change would be, however, an even better solution would be to create a passive review process. In this process, the District's budget is deemed approved unless Congress passes a joint resolution to disapprove it. This solution would not only eliminate delays associated with continuing resolutions, it would allow the District to realign its budget timeline with a more standard state process, thereby providing the flexibility needed to further improve services.

The District has demonstrated its readiness for greater flexibility through a strong record of responsible financial management. For example, since the sunset of the control board, the District has balanced our sixth consecutive budget, and we completed our year-end financial audit with a clean opinion, with a marked reduction in management letter comments, and on a very timely basis.

Furthermore, the District has managed the recent economic pressures with great fiscal discipline. States across the country are facing the worst fiscal crisis since World War II, and the District is no exception. Due to the national economic downturn, the District experienced a decline in revenues of approximately $370 million in the first half of FY 2003. This decline equates to a 10% loss in our local operating budget. Because the economy has not yet recovered, these challenges continued into FY 2004, and the District began formulation of that budget with a projected gap of $114 million.

In facing these challenges, however, the District not only continued its record of sound fiscal management, we achieved a level of responsible and conservative budgeting found only among the most financially prudent governments. As a result, the FY 2004 budget transmitted today is balanced in the current and future years. More notably, the District's leaders balanced this budget entirely through budget reductions. No accounting gimmicks were used, no tax increases were adopted, and not one dollar of the $250 million in cash reserves was used.

This tremendous discipline demonstrates that the District is ready for greater budget autonomy. Accountability is a two-sided coin. If the Congress will restrict the District's autonomy when our performance lags, it should also increase our autonomy when our performance is strong.

As assurance that the District will continue its strong financial performance, the Congress has established Public Law 104-8, the Financial Responsibility and Management Assistance Act. This law ensures that the government continues to fulfill its financial obligations in a timely and responsible way. The District will also maintain an independent Chief Financial Officer who can support the continued financial recovery of the District.

In summary, I want to thank this committee for its leadership in promoting budget autonomy for the District. Last January, the President Bush issued a strong statement in favor of budget autonomy. That statement coupled with the support in both the House and Senate, give great cause for hope that the service improvement in the District can be greatly enhanced in the very near future.

Thank you for this opportunity to testify. After the statements of Chairman Cropp and Dr. Gandhi, I will be happy to answer any questions you may have.

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FRIDAY, JUNE 13, 2003
10:00 A.M.
ROOM 2154

Chairman Davis, Congressman Waxman, Congresswoman Norton, and members of the Committee on Government Reform, good morning! Let me begin by thanking you, Mr. Chairman; for holding this public hearing and for cointroducing, with Congresswoman Norton, the legislation under consideration here today -- to provide greater autonomy to the locally elected Mayor and Council over the locally funded portion of the District of Columbia budget. We also very much appreciate the support of the President of the United States for this proposal, and your efforts to make that happen.

If enacted, the "District of Columbia Budget Autonomy Act of 2003" would be the first real advancement of home rule in the District since Congressional enactment of the limited Home Rule Act nearly 30 years ago. And let me add, it's about time! Submitted with my testimony is a proposed resolution signed by all 13 members of the Council in support of budget autonomy for the District, which I will not read but ask that it be included within the record of this hearing.

As you have requested in your letter of invitation to this hearing, let me provide you with a few examples of the fiscal discipline exercised by locally elected officials since the Financial Authority became dormant, and of the mechanisms and safeguards in place to prevent the District from lapsing into a fiscal crisis.

Fiscal Discipline and Safeguards

This past February, we received the annual Comprehensive Annual Financial Report, which certified that the District's fiscal year 2002 budget that ended on September 30, 2002 was our sixth consecutive balanced or surplus budget. Of course, it was our fourth consecutive surplus two years ago that caused the dormancy of the Financial Authority.

Nonetheless, the District is struggling this year to maintain the current Fiscal Year 2003 budget in balance --- due primarily to two factors beyond our control:

(1) the continuing revenue losses (particularly income, but also sales, tax losses) due to the national downturn in the economy, and also due to the continuing aftermath of September l 11th, anthrax, sniper and terrorist alerts; and

(2) the continuing structural inequities in the District's financial relationship with the Federal government, which has been verified by the recently released report by the United States General Accounting Office, and which still exists despite the budgetary benefits provided to the District, under your leadership Mr. Chairman, due to passage of the 1997 Revitalization Act.

In the face of these challenges, the Council took the lead and made tough decisions with the Mayor in closing a $323-million-dollar-plus revenue shortfall in this year's FY 2003 budget on the very first day of the Fiscal Year -- October 1, 2002. Then on April 1 st, six months into the fiscal year, the Council took emergency action to close another $134 million hole in this year's budget. Of course, our counterparts in Virginia and Maryland and all across the country face similar challenges, although we think that the District has acted more quickly, effectively and responsibly to balance our budget without gimmicks or one-time-only savings.

Almost two-thirds of the District's initial revenue shortfall (or about $195 million) this year was closed through spending reductions, and the remainder was closed through revenue increases (but no increases in income, general sales or occupied property tax rates). The most recent budget pressures and revenue shortfalls this year required further programmatic reductions, a hiring freeze, suspension of pay step increases, and other measures.

The Council will continue to squarely face the challenge of fiscal discipline and strict oversight of financial management, while continuing to full our commitment to targeting expenditures and investments on critical priorities. In the Fiscal Year 2004 budget that we just forwarded to Congress, my colleagues and I worked extremely hard to avoid any tax increases. Instead, we scrubbed the budget to identify surgical reductions in the growth of spending, and in the growth of consulting contracts, to a level closer to the 4% level of budget increases that we had said a year ago was a more sustainable annual increase in local spending. For the FY 2005 budget, the Council has mandated that the Mayor limit growth in local funds expenditures to not more than 3.5% over the FY 2004 budget.

The Council has been vigilant in its oversight responsibilities -- holding more oversight hearings than ever before, in an effort to hold officials accountable for living within their means, while delivering the services they are budgeted to deliver to our residents, visitors and businesses.

The Chief Financial Officer has instituted an early warning system that notifies the Council and the Mayor of budget pressures -- whether on the spending or revenue side of the ledger -- in time to consider and take the necessary actions on various identified options to address these pressures before it is too late. Another mechanism utilized by the District has been Pay-Go funding, which allows appropriated dollars to be spent only after certain performance or other measurements are realized and certified. We have also worked with the Mayor and the CFO to craft local legislation to assure the continued independence of the Office of the Chief Financial Officer within the home rule context, which requires amendments to the Home Rule Act which we hope you will consider.

Congressionally imposed reserve requirements -- both budgeted and cash reserves -- have also served to cushion the impact of budget shortfalls or meet unanticipated needs in the District; nonetheless, we think that the positive aspects of these reserves can still be realized with somewhat more flexibility in how these reserves are set up and operate.

Perhaps the best evidence of the fiscal discipline that has continually been exercised by District officials for several years is that we have finally been recognized and rewarded on Wall Street. As you know, the District's bond rating was recently upgraded from "stable" to 'positive, " and there is an expectation for further upgrading. This achievement, which will result in significant savings in our borrowing costs, has occurred at a time when other jurisdictions' bond ratings across the country have been downgraded. Our bond rating upgrades are occurring due to the hard work and positive image of the District that has been fostered by local officials, working in partnership with our Congressional counterparts and the business community.

Mr. Chairman, although I think that the District of Columbia has clearly demonstrated that we have earned the right to local budget autonomy, let me say, and I hope you would agree, that the fundamental right of self-determination in a representative democracy should not have to be earned by "good behavior." Indeed, to be governed by the consent of the governed is the founding principle of the United States of America, and it is what our country preaches around the world as a basic human right that is worth fighting wars about. In fact, increased autonomy for locally elected officials -- both budgetary autonomy as well as legislative autonomy, which we also hope you will consider -- will necessarily increase accountability by locally elected officials for their actions. Autonomy and accountability are what our form of constitutional government is supposed to be all about.

Having the District's local funds budget of $3.8 billion in locally raised revenues be subject to the Federal appropriations process of the U.S. House of Representatives, where we have no vote, and to the process of the U.S. Senate, where we don't even have an elected voice, highlights the undemocratic, separate and unequal treatment of the District by the Federal Government. No other local or state jurisdiction in the United States is burdened by having the expenditure of its locally or state-raised revenues subject to Congressional review and approval. But even if local or state government budgets were subject to Congressional approval, at least their citizens would have voting representation in the body controlling their own purse strings.

The current budget process is not only undemocratic -- which should be enough of a reason by itself to enact budget autonomy legislation; the existing process is also a bad way to run a government. Requiring submission of the District's local funds budget as part of the Congressional appropriations process requires the District to formulate a budget too far in advance of revised revenue estimates and expenditure needs that would otherwise be known and lead to more responsible and responsive decision-making. And requiring affirmative Congressional approval of the District's local funds budget has often led to the absurd result of the District getting caught up in national policy disputes that typically delay our local budget's enactment for several months into the fiscal year -- delaying new initiatives, preventing organizational reforms and creating uncertainty about different, often lower, allocations of spending.

In addition to being counter to principles of democracy and good government -- as if that also were not enough, Congressional review and approval of the District's local budget -- and local legislation for that matter -- is simply not necessary. Congress, as we are reminded constantly, retains exclusive jurisdiction over the District pursuant to section 8 of Article I of the U.S. Constitution. As such, Congress can enact legislation at any time affecting local policy and budgetary matters in the District.

Moreover, Congress itself, in enacting the Financial Responsibility and Management Assistance Act of 1995, established the fiscal criteria that would lead to the re-activation of the Financial Authority. That is more than enough "hammer" hanging over locally elected officials' heads to take fiscally responsible actions in the best interests of the citizens of the District of Columbia.

Finally, let me note that the Council has imposed upon itself stringent fiscal impact requirements for the enactment of legislation. Council Rule 443(c) provides:

" ....no bill, resolution, or an amendment to a bill or resolution may be enacted or approved by the Council without a Council fiscal impact statement and worksheet, if applicable, which has been approved by the Council Budget Director or the Chief Financial Officer in the measure or committee report, presented to the Council, at the time of its consideration. The Council fiscal impact statement shall include the estimate of costs which will be incurred by the District as a result of enactment of the measure in the current and each of the first 4 fiscal years for which the act or resolution is in effect, together with a statement of the basis for such estimate. The statement shall include the following:

"(1) A general statement of the effects the measure will have on the operating and capital budgets for the current and next 4 fiscal years;

"(2) A quantitative estimate of the expenditures needed to implement the measures;

"(3) An identification of the revenues and funds currently available, or likely to be available from existing revenue sources to implement the measure, if it is to be implemented within the current fiscal year;

"(4) A statement on the extent to which current appropriations are available to finance implementation of the measure, if it is to be implemented within the current fiscal year; and

"(5) An identification of the specific funding source to be recommended in the forthcoming fiscal years to implement the measure, if the cost of implementation is estimated to exceed $100,000 in that fiscal year."

In summary, because Congressional review and approval of the District's local funds budget and local legislation is undemocratic, unnecessary, and runs counter to principles of good government, I urge this Committee and the Congress to take expeditious action to provide both budgetary and legislative autonomy to the Mayor and the Council of the District of Columbia.

Thank you again for holding this hearing today, and for the opportunity to testify in favor of greater self-determination for the citizens of the District of Columbia.

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Before the
US House of Representatives
Committee on Government Reform
The Honorable Tom Davis, Chairman

June 13, 2003,10:00 a.m.
Room 2154, Rayburn Building

Natwar M. Gandhi
Chief Financial Officer
Government of the District of Columbia

Good morning, Mr. Chairman and members of the Committee. My name is Natwar M. Gandhi, and I am the Chief Financial Officer for the Government of the District of Columbia. I am here today to testify on the issue of budget autonomy for the District of Columbia. At the outset, I want to express my view that, both as a citizen of the District of Columbia and the District's senior financial manager, I wholeheartedly endorse expanding the authority of the District to manage its own financial affairs.

In anticipation of this hearing, I re-read clauses 17 and 18 of Article I, Section 8 of the Constitution of the United States:

Clause 17. (The Congress shall have power) to exercise exclusive Legislation in all Cases whatsoever, over such District ...as may by the Cession of particular States, and the Acceptance of the Congress, become the Seat of Government of the United States... and 

Clause 18. (The Congress shall have power) to make all Laws which shall be necessary for carrying into Execution the foregoing Powers, and all other Powers vested by this Constitution in the Government of the United States, or in any Department or Officer thereof.

This language is unambiguous with respect to congressional authority over the legislative affairs of the District of Columbia. However, it gives the Congress wide latitude with respect to the execution of its constitutional mandate. With this in mind, let me speak to why I believe, from a financial management perspective, the District should have discretion with respect to the allocation of funds raised from local sources and, further, how changes to current law would not affect Congress' constitutional role.

Under current law, all District of Columbia spending is authorized by the Congress through the federal appropriations process, irrespective of the source of revenue underwriting such spending. In the District's FY 2003 gross budget of $5.573 billion, enacted by Congress on February 20, 2003, about $3.813 billion, or 68 percent, was comprised -of revenues raised through local taxes, fees, fines, and user charges ($3.602 billion + $211 million in private and other revenue). Of the remaining $1.76 billion in federal funds, $1.713 billion was comprised of federal transfer payments and grants. Only $47 million was uniquely and especially appropriated from federal revenues for programs and projects peculiar to the District of Columbia.

I would argue that only the federal funds that are specifically and uniquely earmarked for District programs or projects must be appropriated by the Congress - for example, funds provided to support federal events such as the inauguration or funds for tuition assistance. In the case of local funds, the Congress rarely alters an allocation made by the District. Federal transfer and grant payments to the District have already been appropriated to the federal agency responsible for program administration, and are reflected in the District budget for the sole purpose of showing a complete accounting of planned District spending. Having already been appropriated to a federal transferring agency, these federal funds do not need to be "reappropriated" to the District.

Were the Congress to modify current law in the direction of reducing its role in the District's appropriation process, a range of possibilities would still remain to exercise oversight over the District's budget and operations. These might include periodic audits, after-the-fact review of the District's locally enacted budget, or review of the District's locally enacted budget by the appropriate oversight group in the Congress. Federal funds directly appropriated to the District would remain within the federal appropriations process.

Benefits to the District 

Faster enactment of budgets. Because the District currently receives all its authority to spend funds through the federal appropriations process, the District cannot enact the budget approved by its elected representatives until Congress passes and the President signs its appropriations bill. This situation guarantees a five-month lag between local approval and federal enactment. However, federal appropriations bills are often delayed beyond this period. There are adverse consequences for the District since it is tied to the federal appropriations cycle. Bond rating agencies take the uncertainties of the federal process into account in assessing the District's finances for a bond rating. In the case of new or expanded programs approved and financed locally, no action can be taken during the fiscal year until Congress passes its appropriations act. This unnecessarily delays the start of programs and virtually guarantees programs will not be executed as planned. Also, the more time that elapses between the formulation of a budget and its execution, the more likely the operating assumptions underlying that budget will not hold true.

Conformance to the Standard Local Government Fiscal Year. Further, the federal appropriations cycle runs on an October-September fiscal year, a fiscal cycle unsuited to local government. Were the District to have autonomy to appropriate its own funds like other local jurisdictions, my recommendation to the Mayor and Council would be to revise the fiscal year to a July 1-June 30 fiscal year. This would have immediate advantages.

First, it would conform the fiscal year to the school year, greatly enhancing the ability of D.C. Public Schools (DCPS) and the University of the District of Columbia to manage their funds effectively. This is important because public education spending accounts for nearly 25% percent of District general fund expenditures. In the DCPS planning cycle, the JulySeptember period is the largest spending quarter. Under current budget law, this period falls at the end of the fiscal year, after DCPS has had to deal with all the exigencies of the prior three quarters. In fact, in recent years, DCPS has had to rely on funds advanced from the upcoming year's expected appropriation to support start-up costs for the upcoming school year. Thus, it would clearly be better for DCPS management, and make greater budgetary sense, to fund school year start-up costs - purchase of books, start-up maintenance and the like - at the beginning of the year and with current fiscal year funds, and then cope with remaining issues as they occur.

Second, it would more closely conform the District's fiscal year to its revenue cycle. The annual income tax payments are due in April, and the first semiannual real property tax payment is due on March 31. Data on these payments is key to updated revenue projections for the upcoming fiscal year. Were the District to execute its fiscal year budget beginning in July, it would be proceeding on the most recently available, and therefore most accurate, revenue information.

Currently, budgets are based in large part on revenue estimates completed in February, some seven months before the start of the new fiscal year in October and a total of 19 months before the end of that fiscal year. The District does not get actual data on how accurate these revenue estimates were, and whether budgeted expenditures were fully covered, until after the end of that fiscal year, perhaps 24 months after the original revenue estimates were made.

Finally, changing the fiscal year also could improve cash flow management and reduce some budgeting risks. Larger tax payments received in September, particularly the local half-year real property taxes due on September 15, essentially "back load" the cash stream toward the end of the fiscal year. Even as some $5.6 billion in cash flows through our financial systems to pay for the budgeted $5.6 billion in District expenditures, the District needs additional cash to negotiate the timing of expected tax receipts during the year. Changing the fiscal year mitigates this by reducing uncertainty about year-end revenue accounting, particularly for real estate payments received after September 30, and by reducing the impact of the distribution of this revenue between fiscal years.

Increased Local Financial Flexibility. Providing the District with the authority to direct the spending of its locally raised revenue would substantially increase the District's ability to react to changing program and financial conditions. Under current law, the District must follow the federal supplemental appropriation process to appropriate additional revenues that become available during the course of the fiscal year or to make any significant realignment in resources among its appropriations. All program plans premised on supplemental appropriations are held in abeyance while Congress considers the request. The same problem is encountered on more mundane financial transactions, such as interappropriation transfers and reprogramming requests. For example, all reprogrammings from one object class of expense to another in excess of $1 million require a congressional review period of one month before enactment. In addition, opportunities to increase revenue arise occasionally, but require spending additional funds. Particularly in tight budget circumstances, it is difficult for the District to wait as long as 18 months for a new budget cycle to begin.

Mechanisms and Safeguards for Assuring Financial Integrity

The District of Columbia Financial Responsibility and Management Assistance Act of 1995 (the Act), coupled with the continuation of an independent Office of the Chief Financial Officer, provides the framework for assuring financial integrity without the need for imposing the federal appropriation process on local fund budgets. The Act provides for the reinstitution of a control board and other constraints should the District fail to meet major financial obligations. By itself, the Act has been a powerful motivator for our elected officials to maintain a balanced budget and strong financial controls at all times.

Further, under current law, the Office of the Chief Financial Officer provides an independent assessment of key financial data - annual comprehensive financial reports, revenue estimates, fiscal impact statements, and all other consequential financial data. I believe that a necessary corollary to increased local financial autonomy is the inclusion of the authorities and responsibilities of the Office of the Chief Financial Officer in organic law. Taken together, this legislative framework should be sufficient to ensure fiscal discipline without the added complexity of putting local spending plans through the federal appropriations process.

Were the District to be permitted local spending autonomy, my recommendation to the Mayor and Council would be that we adapt existing federal appropriations law for local use. The District is already accustomed to working within this framework - one that prescribes rules for the treatment of funds, realignment of funds and other matters related to the formulation and execution of budgets. I should note in this regard that the District recently enacted a local anti-deficiency law to stipulate the responsibilities of management officials in the financial arena and provide sanctions for those that are not in compliance.

Fiscal Condition and Financial Improvements

I believe the District has the financial infrastructure to permit it to manage its local funds effectively. We have a strong accounting system linked to our budget oversight processes. Monthly closings and cash reconciliation are in place. Financial managers have a clear understanding of expectations. Unqualified opinions by the District's independent auditors have become routine and the number of management findings substantially reduced.

In the budget area, the District has enhanced its analytical capabilities, moving toward performance budgeting to link agency outputs to cost. Automated budget monitoring systems have been put in place to give program and financial managers the capability to review their financial posture daily.

Further, the District is well along on a project that will integrate all its significant administrative systems - personnel, payroll, procurement, budget, accounting, property management, and pension administration. This integration will substantially enhance both information on and controls over all transactions affecting expenditures and do so at lower cost.

The Continuing Role of the Federal Government in District Finances

Notwithstanding the clear advantages to the District of having local autonomy in the appropriation of locally raised revenue, there remains the question of the federal government's role in assisting the District in attaining a structural balance between spending needs and its revenue raising capability. In its report on Structural Imbalance and Management Issues in the District of Columbia (GAO03-666), the General Accounting Office (GAO) clearly demonstrates, using objective, quantifiable criteria, that the District of Columbia has a substantial gap between its spending needs and its local revenue resources. This gap is calculated to be between $470 million and $1.1 billion annually, based on FY 2000 information. In all likelihood, the gap is toward the upper end of this spectrum, which more closely represents the economic circumstances of a city like the District.

The report clarifies four fundamental features of the District's fiscal problems:

1. The District's expenditure requirements for providing a standard group of services are far higher than any state fiscal system. The District faces these high expenditure requirements because it provides public services in a market with high labor costs, it provides services to a large commuter population, and it has many residents with high service needs. The report identifies areas where the District has the potential to improve the efficiency of operations. Even so, the District's higher costs of providing average services are determined by factors beyond its control and far beyond possible savings from greater efficiencies, many of which are now in place, and more of which we intend to achieve.

2. The District taxes itself very heavily. The District's tax effort is much higher than that of the average state. Although the District's tax capacity is large - more than 47 percent above the national average - because of its large expenditure requirements, the District must compensate with a tax effort that is about 50 percent above that, among the highest, if not the highest, in the nation.

3. Even with high taxes, the District cannot pay for average levels of service to residents, commuters, and visitors. The District's additional tax capacity is not enough to compensate for the District's higher expenditure burden. The urban composition of the District's population, and the standard services needed by such a population, overwhelm even the District's high tax effort.

4. The District has a serious infrastructure problem. The District faces an accumulated infrastructure backlog of at least $2.5 billion. The District has deferred capital investment to avert the operating costs associated with debt service. The problem is obvious when you consider that the District's general obligation debt service is about 10 percent of local revenues, and rising. Further, the problem is acute because our debt levels already are near the ceiling for maintaining credit-worthy debt ratings. Our capital borrowing analysis shows that only moderate additional borrowing would be acceptable to the agencies that rate the District's credit-worthiness. Whether expressed in per capita terms or in relation to revenue, the District's current outstanding debt is greater than any state fiscal system.

The report also recognizes that the federal presence imposes costs and limitations as well. To the extent that the federal government's property and purchases are off the tax rolls, or that non-resident income earned in the District cannot be taxed, these limitations are reflected in the tax base. Given these limitations, in order to try to pay for even an average level of service from the operating budget, District tax rates on the tax base available to it must be high. While the report does not quantify the actual costs of services provided to the federal government or incurred as a result of being the nation's capital, it puts these costs in perspective. When millions of dollars of expenditures related to being the nation's capital are absorbed by the city, this diverts resources from ordinary services to residents, commuters, and visitors.

The District has made operating budget reductions of over $190 million in FY 2003, in part to balance expenditures and revenues, but also as part of a larger effort to deliver services more efficiently. While significant opportunities for efficiency improvements exist within District programs, even with such improvements, the GAO report points out that the District would still face a structural deficit.

By law, the District must balance its budget each year, but making the spending or revenue adjustments needed to do this is not the same as solving a structural deficit. Due to this structural deficit, the District is forced to choose between tax levels that are even higher than the national average, service levels that are lower than the national average, or combinations of both in order to balance its budgets.

Although the GAO report makes no recommendations, it provides a strong case for federal action to assist the District of Columbia, the nation's capital. As noted, the structural imbalances in both the operating and capital areas result primarily from cost and workload factors that are beyond the District's control, and, in addition, the District must provide services to the federal government.

With tax and debt burdens higher than other jurisdictions, it is not feasible for the District to solve the problem through more taxes or borrowing. One option noted in the report is for the federal government to relax taxing restrictions on the District to compensate it for its special status as the capital city.

The GAO report indicates that providing federal assistance to the District may encourage state fiscal systems with structural deficits to request the same or similar treatment. However, a strong case can be made that the District of Columbia is unique among all local and state jurisdictions and that unique conditions dictate unique solutions. All states have federally tax-exempt property, but the District has more in terms of value relative to the size of the economy. All states may forego some tax activity due to federal commercial activity, but the District certainly loses much more in relation to the size of its economy. The District also is subject to revenue and other constraints that are not imposed by the federal government on any other jurisdiction. These factors have been many times documented and indicate that the District merits a unique fiscal relationship with the federal government that corresponds to its unique operational arrangement.

There is a wide range of options available to the federal government for assisting the District in overcoming its structural deficit and in providing a level of service quality that befits the nation's capital. In contemplating budget autonomy for the District, the Congress would be well served to also examine its financial relationship with the District. Unless a change is made, one can predict a gradual deterioration of services provided by the District to residents, commuters and visitors. This would be unfortunate in the extreme, especially in light of the major progress made in all aspects of District quality of life over the past eight years.

Mr. Chairman, this concludes my remarks. I would be pleased to answer any questions you might have.

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