The following report was written to provide Charter Review Task Force members with background information on the Home Rule Charter of 1973 and the District's compliance with financial reporting requirements. The report summarizes both fiscal reporting procedures and actual budget and financial performance. Appendices contain summaries of the Control Authority's Strategic Plan (December 1996) and the President's National Capital Revitalization and Self-Government Improvement Plan (January 1997).
The authors and editor wish to thank the numerous individuals who have helped in preparing this report. We are especially grateful for the support and direction of our distinguished panelists; and staff; Jim Gibson and Melissa O'Neill of DC Agenda; and Mary Brady, David Perry, and Ken Sparks of the Federal City Council.
The panel features the following speakers:
- The Honorable Judith Rogers, US Court of Appeals, District of
Columbia Circuit
- A Representative from the Office of Management and Budget, U.S.
Government
- Stephen Harlan, Member of Board, DCFRMA
- Philip Dearborn, Senior Associate, Greater Washington Research
Center
- Michael Rogers, City Administrator, District of Columbia
I. HOME RULE AND FISCAL MANAGEMENT REQUIREMENTS 1
A. Duties And Obligations 1
B. Accounting And Audit 2
C. Borrowing And Bonds 2
D. Federal Payment And Congressional Authority 3
E. Limitations On The District Council 4
F. Adjustments 4
II. THE DISTRICT'S REPORTING OBLIGATIONS TO CONGRESS 5
A. An Annual Balanced Budget 5
B. Supplemental Budgets 6
C. Long Run Financial Plan 6
D. Capital Budget 7
E. Other Reports 7
III. HOME RULE ACT AND FISCAL MANAGEMENT IN PRACTICE 8
A. General Fund Deficits 8
B. Cash Balances 9
C. Debt Borrowing 10
D. Spending Habits 12
IV. SUMMARY 13
V. BIBLIOGRAPHY 16
Appendix
I. Summary of the Control Authority's Strategic Plan (December 1996)
II. "The President's National Capital Revitalization and Self-Government
Improvement Plan" Fact Sheet (January 1997)
I. HOME RULE AND FISCAL MANAGEMENT REQUIREMENTS
The Home Rule Act of 1973 delegated certain legislative powers to local government; authorized the election of certain local officials by the registered qualified electors in the District of Columbia; granted to the inhabitants of the District of Columbia powers of local self-government; power to modernize, reorganize, and otherwise improve the governmental structure of the District of Columbia.
A. Duties And Obligations
Duties and Responsibilities
Under the Home Rule Act of 1973, the Mayor was required to submit an annual budget that reflected the actual financial condition of the District government. The budget was to specify the agencies and purposes for which funds were being requested. The total budget was not to exceed estimated resources. The Mayor was to submit a program performance report comparing actual performance of programs against proposed goals.
The Mayor from time to time could prepare and submit to the Council proposed supplemental or deficiency budget recommendations that in his judgment were necessary. In such instances, the Mayor was to make recommendations as were necessary to increase resources to meet increased expenditures.
The Mayor was to include in the annual budget a multi-year plan and a multi-year capital improvements plan for all agencies based on the experience of the previous three years, on the approved current fiscal year, together with forecast estimates for the four succeeding fiscal years. Moreover, this capital improvement plan would include the status, estimated period of usefulness, and total cost of each capital project. Any change in total cost in excess of 5 percent for any capital project had to be explained.
After the action of the District Council, the Mayor would submit the adopted budget request to the President for transmission to Congress. No amount could be obligated until the budget had been approved by an Act of Congress.
Financial Management Report Requirements
The Home Rule Act of 1973 charged the Mayor with the administration of the financial affairs of the District involving:
- a full disclosure of the financial results of the District government's
activities;
- effective control over and accountability for all funds, property, and
other assets;
- reliable accounting results to serve as the basis for preparing and
supporting agency budget requests and controlling the execution of the
budget;
- supervision and responsibility for the levying and collecting of all taxes,
special assessments, license fees, and other revenues of the District, and all
moneys receivable by the District from the federal government, and
- apportionment of the total of all appropriations and funds made
available during the fiscal year in a manner which would preclude a
necessity for deficiency or supplemental appropriations.
Accounting Supervision And Control
The Mayor under the Home Rule Act of 1973 was to examine and approve all contracts, orders, and other documents by which the District government incurred financial obligations within appropriations limits. The Mayor was to audit and approve before payment all bills, invoices, payrolls, and other charges against the District government.
Audit
An Office of the District of Columbia Auditor was established under the Home Rule Act of 1973. This office was to conduct a thorough audit of the accounts and operations of the government of the District and have access to all books, accounts, and records. The Auditor was to submit his audit reports to the Congress, the Mayor, and the District Council. In addition, there was to be an annual audit by the General Accounting Office, in such detail as would be prescribed by the Comptroller General of the United States.
C. Borrowing And Bonds
Limitations On Borrowing
The District could incur indebtedness by issuing general obligation bonds to refund indebtedness of the District and to provide for the cost of acquiring or undertaking its various capital projects. No general obligation bonds or Treasury capital project loans were to be issued during any fiscal year in an amount of principal and interest requiring payment to exceed 14 percent of the District revenues. The 14 percent limitation was to be determined by a dollar amount equivalent to 14 percent of the District revenues.
Short-Term Borrowing
In the absence of available revenues to meet appropriations, the Council could by act authorize the issuance of negotiable notes, in a total amount that was not to exceed two percent of total appropriations for the current fiscal year. All such notes and renewals were to be paid by the close of the following fiscal year.
Payment Of Bonds And Notes
The full faith and credit of the District was pledged for the payment of the principal of and the interest on all general obligation bonds and notes of the District. The Mayor was to review the budget to determine whether the amounts set aside and deposited were sufficient to pay the principal of and interest on the general obligation bonds.
Revenue Bonds
The Home Rule Act of 1973 empowered the District Council to issue revenue bonds, notes, or other obligations to assist in the financing of undertakings in the areas of housing, health facilities, transit and utility facilities, recreational facilities, college and university facilities, and industrial and commercial development. These bonds, notes, or other obligations were to be fully negotiable and payable, as to both principal and interest, solely from and secured solely by a pledge of the revenues realized from the property, facilities, developments and improvements whose financing was undertaken by the issuance of such bonds.
D. Federal Payment And Congressional Authority
Federal Payment
In preparing the annual budget, the Mayor was to develop meaningful intercity expenditure and revenue comparisons based on data supplied by the Bureau of the Census, and to identify elements of costs and benefits to the District which result from the unusual role of the District as the Nation's Capital. These reports were to be used by the Federal Office of Management and Budget for their use in reviewing and revising the level of appropriations for the annual Federal payment to the District.
Reservation Of Congressional Authority
The Congress of the United States reserved the right to exercise its constitutional authority to enact legislation for the District on any subject, prior to or after enactment of the Home Rule Act and any act passed by the District Council.
E. Limitations On The District Council
The Council was to have no authority to pass any act that :
- imposed any tax on property of the United States or any of the states;
- imposed any tax on personal income of any individual not a resident of
the District;
- permitted the building of any structure within the District of Columbia
in excess of the height limitations contained in section 5 of the Act of June
1, 1910.
F. Adjustments
The Mayor with the approval of the Council, and the Director of the Office of Management and Budget, was authorized to enter into an agreement concerning the method by which amounts owed by the District to the United States, or by the United States to the District, were to be ascertained and paid.
The United States was to reimburse the District for necessary expenses incurred by the District in connection with assemblages, marches, and other demonstrations in the District which related primarily to the Federal Government.
II. THE DISTRICT'S REPORTING OBLIGATIONS TO
CONGRESS
A. An Annual Balanced Budget
The District is obligated to submit a balanced budget to Congress each year. This annual budget is supposed to show how much each District agency is to receive and for what purpose the annual funds will be used. Although the District has prepared its budget every year, the quality of the budget is questionable. The General Accounting Office states that "while the District has balanced budgets, the budgets have not always reflected historical and future projected trends." What the District projects in its budget and what actually occurs each year have differed significantly over the last several years.
An example of one such difference is the District's estimated revenues from sales and income taxes. Projected sales and income tax revenues are consistently higher than what is collected each year . The figure below presents projected and actual revenues for income taxes, a large portion of the District's total revenues.
The figure shows that the District has traditionally had trouble forecasting its revenue. Although much of this shortfall is due to the continual loss of businesses and middle class taxpayers to the suburbs, it is surprising that the district does not integrate this long standing trend in its annual budget.
In addition to revenue shortfalls, the District's actual expenditures have exceeded budgeted amounts in recent years, according to the General Accounting Office. For example, in fiscal year 1992, human support services in the District exceeded budgeted amounts by $21 million. Interest and fiscal charges also exceeded budgeted amounts by $8 million in the same year. The General Accounting Office in summary found overall that actual expenditures exceeded budgeted amounts because of "overexpenditures in both personnel services, such as salaries and benefits, and nonpersonal services, such as supplies,...,equipment and debt service."
B. Supplemental Budgets
As a result of both the revenue shortfalls and overspending on the part of the District, the District has submitted supplemental budgets to address insufficient funding of District services and programs. These supplemental budgets contain significant revenue increases that help balance the budget each year. Examples of revenue increases authorized through supplemental budgets include:
- In fiscal year 1991, there was an emergency increase to the federal
payment;
- In fiscal year 1992, a transfer of $28 million from the Water and Sewer
Fund to the General Fund;
- In fiscal year 1993, a change in the property tax year, resulting in
approximately $174 million more in revenues in that year;
- In fiscal year 1994, tax increases were implemented, including raising
the sales tax by 1%.
C. Long Run Financial Plan
The District also is required to submit a multi-year financial plan that provides projections for the financial future of the District. According to the General Accounting Office, "the District's multi-year projections show the long-term financial crisis with a growing shortfall between expected revenues and expenditures increasing to $742 million by fiscal year 2000." In addition to the overall shortfall, the multi-year projections do not include deficits from the Water and Sewer Fund or D General Hospital, or the costs of complying with court orders and consent decrees. The General Accounting Office states that the financial plan does not include fines of over $221 million resulting from the District's failure to reduce the overcrowding of juvenile facilities.
D. Capital Budget
In addition to the general budget that the District submits to Congress each year, the District must submit a multi-year capital improvement plan that would include the status, period of usefulness and the total cost of each project. However, the recent court orders closing some of the District schools because of violations, the concern over unsafe drinking water in the District and the numerous roads in disrepair, indicate a need for a long term accurate capital budget. The District's fiscal year 1994-2000 capital budget according to the General Accounting Office "does not include amounts for many already authorized projects or for projects that are likely to be needed." The General Accounting Office states that this recent capital budget (FY 1994-2000) does not include nearly $1 billion that will be needed for improvements to Water and Sewer plants and D Public Schools. According to the General Accounting Office, there are other problems with the current capital budget, including:
- Of the $4 billion in planned capital improvements projects, only $1.5
billion have financing;
- Although the EPA has required over $326 billion in improvements, less
than 60% of the costs for such repairs have been included in the planned
spending;
- Repairs and renovation on District schools are estimated between $500
and $600 million, while only $30 million is budgeted.
In addition to the various budgets and plans that the District is required to submit, as authorized by the Home Rule Act, the Appropriation Act of 1995 and the Federal Payment Reauthorization Act of 1994 require the Mayor to submit additional quarterly financial reports on the financial and budgetary status of the District. The reports are to include:
- a cash flow statement that includes a comparison of actual to forecasted
cash receipts
- expectations of the difference between actual and forecasted amounts;
- an aging of accounts receivable and accounts payable;
- number of full-time equivalent position by type of position and funding
source.
The District's second quarter financial report for 1995 also had many faults, according to the General Accounting Office. The report did not include $80 million in Department of Human Services expenditures. In addition, the report equated the District's accounts payable at $41.2 million. However, this number reflects only paid invoices accepted into the financial management system as of March 31,1995. It is estimated that tens of millions of dollars in unknown accounts payable exist outside of the management system, according to the General Accounting Office. According to the General Accounting Office, these reports are another example of inaccurate financial information generated by the District.
III. HOME RULE ACT AND FISCAL MANAGEMENT IN
PRACTICE
A. General Fund Deficits
Between 1981 and 1993, the District's general fund operated with revenues in excess of expenditures in 11 of the 13 years. Deficiencies of $14 million and $118 million were recorded in fiscal years 1988 and 1990, respectively. From 1991 through 1993, the District balanced its budgets. However, even though the budgets were balanced and despite receiving cash from a $331 million general obligation bond in 1991, the city's cash position declined substantially. During this period various factors helped the District balance its budget, including nearly $400 million in increased federal payments and $225 million in additional budgetary authority from various measures including changing the legal definition of the property tax year. After three years of positive general fund balances, the District recorded a $335 million dollar deficiency in fiscal year 1994; $116 million in appropriated funds and $218.6 million in nonappropriated funds.
B. Cash Balances
The District prepares its forecasted cash balances using its annual budget as the basis. The budgeted revenues and expenditures are then adjusted to reflect the District's estimate of when revenues will be received in cash and checks written for expenditures. Forecasted cash balances can be overstated if budget amounts are not realistic or the timing of receipts and disbursements does not correspond to estimates. Past experience indicates that the District's actual revenues and expenditures often differ significantly from budgeted amounts.
Figure 3 presents forecasted and actual cash balances. For the entire period projected balances exceed actual balances. The District's projections are inaccurate.
The District's year-end cash position is also affected by the District's ability to successfully execute its budget and its limited authority to obtain short-term borrowings at fiscal year-end. The District prepares its forecasted cash balance using its budget as the basis. Revenues and expenditures are then adjusted to reflect the timing of actual cash receipts and disbursements. The District's actual revenues have fallen short and expenditures have exceeded budgeted amounts in recent years. In addition, budgets under current congressional consideration may not fully reflect the costs of the District's programs.
C. Debt Borrowing
Over the last three fiscal years, the District has borrowed short-term against future federal payments from the U.S. Treasury to finance operations and capital projects. Fiscal year 1996 borrowings against the fiscal year 1997 federal payment are estimated to total $639 million of the $660 million fiscal year 1997 payment. By borrowing against future revenue to pay for goods and services already received, the District has not resolved its cash flow problems but has only postponed them.
During fiscal year 1995, the District's investment grade general obligation debt was down-graded to noninvestment grade. Because of this non-investment grade rating, the District's sources for obtaining short-term and long-term financing are limited and the interest cost of obtaining financing in the capital markets could be very costly.
To help solve the District finances there needs to be a borrowing plan. One option is for the District to continue to borrow short-term from the U.S. Treasury using the subsequent year's federal payment as collateral to fund its operations and capital projects. This option however does not solve the problem, it simply defers it. Another option includes the District borrowing $500 million for accumulated deficit financing and $900 million (that is, $150 million in each of the next six years, starting in fiscal year 1997) to meet its capital needs.
Under the first option mentioned above, the District projects that by April 1998, it will have borrowed against the entire fiscal year 1998 federal payment and will not have cash sufficient to meet its operating needs. Under current law, the District may borrow from the U.S. Treasury to meet its capital and cash flow needs, and such borrowings are payable from the subsequent fiscal year's federal payment.
There are limiting provisions in the current law for long-term borrowing from the U.S. Treasury or for deficit financing of the District's operating deficits. At present, the District must repay Treasury loans within 12 months. Also, section 461 of the Home Rule Act authorizes the District to enter into long-term borrowing by issuing general obligation bonds only for capital improvements or to refund outstanding indebtedness. The District of Columbia Emergency Deficit Reduction Act of 1991, Public Law 102-106, authorized the District (on a temporary basis ending on September 30, 1992) to issue general obligation bonds to finance payment of the $332 million accumulated operating deficit in the general fund at the end of fiscal year 1991. In addition, section 603(b) of the Home Rule Act states that the District may not issue general obligation bonds (other than to refund outstanding indebtedness) if the District's debt service in a fiscal year exceeds 14 percent of the estimated revenues during the year the bonds are issued.
By the end of fiscal year 1996, the District's debt service is forecasted to be at approximately 11.9 percent of estimated revenues. Thus, the District at that point would need to seek additional legislative authority before plans to issue long-term bonds to fund capital improvements or to finance the District's accumulated operating deficit would become viable options.
D. Spending Habits
The District Does Not Know The Total Amount Of Bills Owed
According to the General Accounting Office, the District does not know how many bills it has that are unpaid. Bills are first received by agency program managers that could be held for an inordinate length of time before being forwarded to the agency's controller. Then, the bills are recorded in the Financial Management System (FMS) and eventually paid. The only time during the year the District attempts to identify all its bills is at the end of the fiscal year and even at this time not all unpaid bills are discovered. For example, as a part of the annual financial audit, more than $20 million in unrecorded liabilities (bills held, but not paid) were "discovered" at the Department of Human Services. But the annual financial audit has not included a search for unrecorded liabilities in most District agencies.
The District's Spending Problem
Even though mandated by the Congress to cut its spending by $140 million from its fiscal year 1995 budget, the District has not reduced spending. Congress required that total appropriated expenditures not exceed $3.25 billion in fiscal year 1995, but according to the District's own estimates, District appropriated expenditures in 1995 were nearly $3.9 billion. Various actions have been taken by the previous and current Mayor and the District Council to address overspending, but very little actual spending reduction has occurred.
Although the District has said that $224 million in cuts are outlined in plans, the plans contain specific initiatives that total only $190 million. The remaining $34 million in cuts are not specifically outlined in the plans. Other initiatives that are specific would generate little cash savings or simply transfer costs to other funds. According to the General Accounting Office, 25 agencies plan to generate savings by eliminating 221 vacant positions; 4 agencies were generating "savings" by transferring positions from appropriated to non-appropriated funds, and 2 agencies were transferring costs to other funds or agencies within the District, according to the General Accounting Office.
The General Accounting Office reviewed selected initiatives and noted that much of the savings would not be realized in 1995, if ever, and a significant number of initiatives have been dropped. For example, the $70 million savings from refinancing the debt was abandoned, and the projected personnel savings have been reduced by $6 million from their original estimate. In addition, the District's projection of savings from agency management initiatives has been reduced by $39.6 million to $184.4 million. District officials stated that 121 of the initiatives have been completed, saving $89.6 million, and another 100 initiatives are still being implemented, with the estimated savings for these pegged at $94.8 million. However, the General Accounting Office believes that completed and remaining initiatives may not result in the level of savings projected.
IV. SUMMARY
Congress in passing the Home Rule Act mandated an imposing and challenging list of comprehensive financial reports, budget documents, program reviews, future revenue and expenditures projections, capital spending priorities and analyses, and prompt accountability reports that in 1973 may have been stringent vis-a-vis usual relations between states and their respective municipalities.
Whatever the motivations and circumstances for the mandates to provide these reports to Congress, the General Accounting Office and other auditors have noted that financial reports that have been forwarded by the District have been incomplete, inaccurate and irreconcilable with one another. The formal submitted budget is liberally adjusted to transfer funds among functions and even from a capital budget items into current payroll. The District's projected cash balances have been inaccurate when compared to actual balances. In addition, the long run financial plan and capital budget of the District lack important components, including funding for mandated school and water and sewer plant repairs.
Financial management reports aside, the District's fiscal performance has been catastrophic. With the exception of the years 1991 through 1993 where the District had no accumulated debt, the District has been faced with an accumulated debt since 1980. The District presently borrows short term from the Treasury using future federal payments as collateral. As a result, the District has not solved cash flow and borrowing problems, but rather has postponed the problem. As part of an effort to curtail spending in the District, many initiatives to cut costs have been implemented. According to the General Accounting Office, these "initiatives may not result in the level of savings projected." The District should consider expanding these initiatives if it is to succeed at responsibly managing its finances. Endnotes
V. BIBLIOGRAPHY
Congress. Senate. District of Columbia Self-Government and Governmental Reorganization Act, Public Law 93-198, 93rd Cong., 1973.
General Accounting Office. Financial Status: District of Columbia Finances. GAO/AIMD/GGD-94-172BR. GAO, Washington, D, 1994.
General Accounting Office. District of Columbia: Information on the District's Debt. GAO/AIMD-95-19. GAO, Washington, D, 1994.
General Accounting Office. District of Columbia: Financial Crisis. GAO/T-AIMD-95-88. GAO, Washington, D, 1995.
General Accounting Office. District of Columbia: Deteriorating Financial Condition. GAO/T-AIMD-95-89. GAO, Washington, D, 1995.
General Accounting Office. District of Columbia: Improved Financial Information and Controls Are Essential to Address the Financial Crisis. GAO/T-AIMD-95-176. GAO, Washington, D, 1995.
General Accounting Office. District of Columbia: Information on the District's Financial Crisis. GAO/AIMD-95-210. GAO, Washington, D, 1995.
General Accounting Office. District Government: Information on Its Fiscal Condition and the Authority's First Year of Operations. GAO/T-AIMD-96-126. GAO, Washington, D, 1996.
White House. The President's National Capital Revitalization and Self-Government Improvement Plan: Fact Sheet. Office of the Press Secretary, Washington, D, 1997.
