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INTRODUCTION

Financing and "Other" comprise the final 15.3% of the DC's budget (but no personnel). Several important areas of concern are bookkept here.

  • Capital investment is an essential part of keeping any city modernized. In 1995 and 1996, there was virtually no major investment in DC's infrastructure, other than a small amount for a new convention center. The depreciation of capital assets within the city is a fact of life--and seldom acknowledged by the city government. NARPAC, Inc. is not aware of any comprehensive study to identify the growing backlog of deferred modernization and equipment replacement. In the school system alone, the capital requirements must now exceed $2 billion.

  • In 1995 $345M was devoted to debt servicing: Until the arrival of the Financial Control Board, the District had been running increasingly large budget deficits for several years. The resulting level of DC indebtedness is three times higher than its surrounding suburbs. A 1995 GAO report predicting worsening deficits helped lead to the formation of the Control Board. In a remarkable turnaround, a balanced budget was unexpectedly achieved in FY97, although little credit can really be given to the city's new management (see DC's budget turnaround. The sad state of DC finances has been a continuing source of local headlines , but the tenor is gradually changing as Chief Financial Officer Williams and his new team of experts, mostly "outsiders", has begun to bring spending under control. The unexpected 1997 windfall was also helped by a) an unexpectedly good economy, raising revenues; b) a one-time sale of surplus property; and c) the inability of the local government to issue contracts for monies appropriated.

  • DC has also had an unusually large unfunded retirement liability- transferred to them by the Congress in 1973 with home rule: this circumstance would not exist within a state jurisdiction. A seminal study on this issue was published by the DC Appleseed Center in June 1996. The new Presidential initiative recommended that this expense be returned at last to the federal government, and that proposal was accepted by the Congress in its 1997 "DC Revitalization Act" legislation.

  • the 1995 budget also contained $106M for pay raises, reflecting the DC government's extremely high personnel levels.

  • To reverse the dwindling tax base, Delegate Eleanor Holmes Norton proposed in 1997 special tax incentives to DC residents, under a DC Economic Recovery Act. NARPAC, Inc.'s assessment is attached.

  • By 1998, however, it was clear that the federal government was prepared to provide very real financial relief to some of DC's worst problems. The benefits of this federal assistance continue to grow.

  • One particularly flagrant violation of good city management involves the abuse of procurement and contracting procedures. To anyone who has been involved in federal procedures for assuring the taxpayers' money is well spent, the District's practices seem to come from another world. NARPAC, Inc's summary of the extensive Control Board examination of these problems is presented immediately below:

  • A separate consultant's report prepared recently for the Control Board also examines the District's difficulties with asset management

  • As a result of these consultants' reports and the many efforts of the Control Board and the city's new Chief Management and Chief Financial Officers, the city's financial processes are beginning to turn around.

  • And NARPAC, Inc. has developed its own list of long range solutions to DC's financial difficulties, updated in Jan 2002.

return to the top of the pageFEDERAL ASSISTANCE TO DC'S FINANCIAL SITUATION
May 1998 Update of the Federal DC Task Force

o Summer Jobs Federal agencies hired 707 youths in summer 1997, and 816 in the summer of 1998 under the DC Federal Jobs Initiative. In addition, the Department of Labor (DoL) allocated $3.5M to DC for the 1997 Summer Youth Employment Program which financed summer jobs for over 3000 economically disadvantaged youths.

o Dislocated Workers: In 1998, DoL is working with a consortium of Job Training Partnership Act (JTPA) administrative entities to plan a project to train eligible dislocated workers and the long-term unemployed for the estimated 20,000 vacancies in the information technology industry in the DC metro area. About $17.5M in JTPA funds will target more than 3000 individuals in this regional effort. The consortium has encouraged the State of Virginia to apply for a $1.2M planning grant, and Maryland is expected to submit the grant application for the operational phases of the project.

o Transfer of DC Pensions to Treasury:Treasury is well along in the process of taking over the estimated $8.9 billion unfunded liability for the retirement programs for law enforcement officers, firefighters, teachers, and judges.

o Economic Development: In May 1998, the DC City Council passed legislation to establish the National Capital Revitalization Corporation, under which the President would appoint three of the nine-person board. Treasury is engaged in supporting the related DC Agenda efforts, conducting workshops for key city leaders, and helping suburban officials identify potential development projects. The FY99 federal budget request includes $50M for the Corporation's start-up; $25M for Metro station improvements at the proposed new Convention Center, and $25M for "management reforms to help improve the District's economic development infrastructure".

o Tax incentives: Under the federal Taxpayer Relief Act of 1997, Congress provided an array of tax provisions to stimulate business investment and employment opportunities within a specially designated "Enterprise Zone" in DC (crafted to cover most of the city!). These include tax credits for employment and training, opportunities for zero-percent capital gains taxes, greater flexibility in the use of tax-exempt financing, and expanded section 179 expensing provisions. In addition, Congress also provided a $5000 tax credit for first-time home-buyers. Treasury has helped DC's CFO prepare materials to publicize and market the tax incentives.

o Medicaid Payments: The federal Balanced Budget Act of 1997 increases the federal medical assistance percentage from 50% to 70%, which is expected to save the DC government $900M in the next five years, $2.3 billion over the next ten years. Four major conditions re attached to the legislation requiring the District to: improve its collections; conclude outstanding audit; development a modern management information system; and consolidate several substance abuse and mental health grants. These provisions are still in work in cooperation with federal agencies, and it is possible that DC's "disproportionate share allotments" for FY96 and FY97 may be increased when the final 1995 audits are complete.

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DC GOVERNMENT PERSONNEL LEVELS

No obvious basis is available for judging whether such pay increases are deserved or "normal" compared to other jurisdictions. However, there is nothing reassuring in the available data to suggest that DC worker productivity, motivation, or civility is up to national or regional averages. Compared to its immediate suburban neighbors, however, DC personnel levels beg explanation. Click on comparing DC Gov't to its Neighbors. In several cases, the DC employs more people to perform a government function than the total sum of those required in the four neighboring counties and two neighboring cities with over four times the population. The Control Board's consultant report on Human Resource Management helps explain the breadth and depth of this problem.

Nothing seems to be less certain than how many people are actually carried on the District's payroll, a calculation complicated by the fact that there appear to be a goodly number of parttime employees. Nonetheless, the official count deals with the number of "fulltime equivalent" (FTE) people, and the District's new chief financial officer has been trying to count them. The result is a complicated table on the web site of the DC CFO, that purports to tally the number of FTE's in each major department and sub-department, by each of the four funding categories that pays their salary.

The primary source for DC government salaries is, of course, locally-derived revenues which accounts for 83% of FY97 FTE's. In addition, however, another 3550 jobs are paid for by federal funds (12%), 620 (2%) by private, or "other" funds, and the last 3% (1030) in a mysterious category labeled "intra-district".

The major departmental subdivisions are the same as those used on this web site to categorize major current issues. As of December 31st, 1997, the CFO estimates that there were 1440 FTE's in Government Direction and 1500 in Economic Development. There were some 5360 in Human Services, 1730 in Public Works, and about 160 in the "enterprise funds" (lotteries, water and sewer authority, etc.).

The two biggest departments, of course, are public education with 11,050 FTE's, of whom almost 10,000 were in the DCPS, 680 in the UDC, and 380 in the public libraries. The second largest employer is public safety and justice, with the police payroll at about 4230 FTE's, and the fire and emergency services at 1640. The Corrections system included almost 2900 FTE's, and the City's corporation counsel accounted for another 230.

Furthermore, there are substantial differences in who pays the salaries in each of these departments. While 99% of public safety and justice, and 88% of public education jobs are paid by local funds, only 11% of enterprise funds, 40% of economic development, 63% of human services, and 70% of public works funds are paid by local funds. This clearly complicates the problem of accounting for DC government personnel levels!

Altogether, then, as of the end of 1997, the DC CFO claims a grand total of some 30,600 FTE's, compared to a budgeted allowance of 32,840, and a federally- approved level of 31,276 (after taking "undistributed cuts" of 2411).

On the other hand, if one were to believe the Greater Washington Society of CPAs audit, then there were only 27,250 on DC's payrolls at the end of FY97. Perhaps they exclude federally-funded jobs, though this is not clear. But more important, the GWSCPA has supposedly bookkept its numbers the same way for years, and its numbers would indicate that there are some 6400 less people on the rolls than in FY94, when the total was 33,650. (followed by 30,500 in FY95, and 29,000 in FY96. From this statistic base, one would say that non-federally-funded DC government personnel have been declining at an average rate of roughly 6% per year. This is not an insignificant start, but there is a long way to go to be competitive with neighboring jurisdictions.

CONTROL BOARD REPORTS ON PROCUREMENT AND CONTRACTING

(Summarized from January and March 1997 reports)

During the first year of its existence, the Control Board was forced to focus primarily on crisis management. The District's procurement system and other financial operations and its service delivery were on the verge of collapse. By December, 1996, the Board developed a strategic plan which include a mandate for procurement reform.

    Since its inception, the Board has reviewed more than 4200 contracts. It has concluded that the District's procurement system is inefficient, ineffective, and has the potential for fostering a culture of fraud, waste and abuse--specifically in the following areas:
  • Through its overuse of sole source and emergency contracts, the District overpays for its service delivery. (For instance, in FY95, only competitive bidding was used in only 41% of Dept of Human Services (DHS) contracts; 40% for Dept of Administrative Services; 18% for Dept of Corrections; 21% for smaller, independent agencies. In one dubious case, the Water & Sewer Authority let three sole source consulting contracts to former District employees at considerably higher rates than their former salaries, one of whom had been fired for inability to perform the same services.)
  • Annual contract funding requirements are split to avoid required reviews by executive and legislative officers. (For instance; DC Village forwarded two identical contracts for $900K, to meet a requisition for $1,800K for essential pharmaceuticals). The Public School System, with a non-operational bus fleet, forwarded several requests for short-term service instead of a single $1.8M contract for the year.)
  • The continued use of short-term contracts demonstrates a total lack of advanced planning and frequently increases costs unnecessarily; (For instance, DHS awarded contracts for critical care services at the Johnson Nursing Center 29 days, 3 days, 3 days, 3 days, and 120 days before awarding a 1-year contract).
  • The lack of timely processing of contracts has negatively impacted service delivery; (For instance, DHS entered a series of short-term contracts for school nursing services, failed to include continuation clauses, and almost shut down several schools when the contractor suspended services leaving the schools in an illegal status).
  • Contracting authority is often exceeded; (For instance, UDC forwarded 220 improperly prepared purchase orders for $633K in Law School supplies, without regard for its ability to pay. DC's inspector General cannot verify receipt of over half the contract value, and the issue threatens the accreditation of UDC).
  • The lack of negotiations has resulted in overcharging. (For instance, the Dept of Corrections submitted three contracts for third-party custody services: the Control Board was able to negotiate a single contract for $300K less.)
The Control Board concludes that one primary reason for these deficiencies is that a high percentage of the District's 222 contracting full time equivalent personnel (FTEs) do not have rudimentary contracting knowledge or writing and analysis skills. Although procurement of goods and services now constitutes one-third of the District's budget, procurement personnel are not adequately trained to fulfill the duties of this enormous fiscal obligation. Only one-third have college degrees, but, in fact, less than 1% of DC's procurement workforce is professionally certified in procurement. Neither contract administrators nor contract monitors have experience in their areas of responsibility. Furthermore, there is no comprehensive training program for contracting officers and program managers.

In many DC agencies, such as Department of Human Services, the Metropolitan Police Department and the Department of Public Works, it appears that procurement is seen as a clerical profession and as a consequence is staffed by former clerks.

Despite passage of the Procurement Practices Act in 1985, DC has yet to develop proper implementation policies and procedures. Furthermore, those procedures currently in-place are often ignored. As a result some procurements have been awarded without sufficient funds; requirements were split to avoid dollar limitations; and numerous sole source and emergency contracts were awarded without obtaining proper approval. Moreover, there are no checks and balances in the system, and there is limited accountability for ensuring that District funds are properly spent.

In short, this report concludes that: "the District's procurement system is dysfunctional. It is marred by clear systemic weaknesses that derive from management inattention, failure to recognize a continuing problem, and failure to implement even the most rudimentary improvements"

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page CONTROL BOARD REPORT ON DC ASSET MANAGEMENT

(Summarized from Arthur Andersen Report of October 8, 1997)

This interesting report takes yet a different slice through the affairs of the DC government, focusing on two distinct functions: real property asset management and financial asset management--issues that cross most DC government agencies and authorities. The offices and departments identified as "key" to these tasks are the Chief Financial Officer, Treasury, Administrative Services, Housing and Community Development, Public Works, the Homestead Housing Program, and the Redevelopment Land Authority.

In the areas of property acquisition and disposition similar problems were identified: unclear roles and responsibilities; no comprehensive strategies; cumbersome legal requirements; and unclear titles for many previously-owned federal properties now District- owned.

In the realm of property management, District owned property has not been viewed or managed as a valuable asset, and leasing management has been inadequate.

In the realm of property maintenance, meaningful and accurate cost information is lacking, and the quality and efficiency of maintenance services is lacking and hampered by a cumbersome procurement process. The report finds that the District simply has not invested in maintenance and improvements to protect the value of its properties.

On the financial assets side of the ledger, the litany of failures is longer. Under cash management, the consultants found: inadequate internal controls; no formal performance measures; decentralized cashiering function control; too many active bank accounts; noncompetitive fees charged by current banks; lack of automation; and an excessive number of checks issued.

Regarding investment management, there is a lack of automated cash flow and investment management tools, the positions are understaffed and have questionable technical skill levels. Under receivables management, there is no central management, nonexistent collection policies, a lack of automated record keeping and tracking, and no policy or procedure for garnishment of wages or collection of receivables for delinquencies in areas such as child support. Similar problems were found regarding asset securitization, dishonored checks, and unclaimed property.

And finally, pension administration lacks: investment options for employees; thorough review of all plans for Department of Labor, and IRS compliance; and a centralized approach to management and administration. To complicate matters further, the report concludes that "the District cannot address all issues affecting this (pension administration) area because of laws and areas outside of the District's realm of authority and control"-- doubtless intended to implicate the dubious role of Congress in DC affairs.

return to the top of the page TURNING DC'S FINANCIAL PROCESSES AROUND

DC's most basic financial problem, of course, was a runaway budget deficit that promised to bankrupt the city, and resulted in the Control Board being established. Since then the budget has been balanced for two consecutive years (FY98-99), and financial disaster is no longer the key problem. The details of the budget turnaround can be found in a separate section on the DC Budget. However, lesser management and administrative problems remain, as indicated in the foregoing consultants' reports. By the fall of 1998, it was possible to report on significant progress.

New Financial Systems Computer Goes on Line

In October of 1998, the city began to use its new modern computer-based System of Accounting and Reporting (SOAR) by which to keep track of government spending, bill paying, potential overruns, etc. In the works for more than a year, more than 1000 DC workers have been trained in its use. It represents the first major upgrade of DC's account systems in more than twenty years. The main vendor KPMG Peat Marwick has been responsible for instituting the system under a $25M contract, and "will continue to provide training as the financial system is linked to other new systems", according to the Washington Post.

Bond Rating No Longer "Junk"

In April of 1999, the new mayor visited Wall Street to report on the state of DC's finances, and was rewarded shortly thereafter by a new Standard and Poor bond rating of "BBB"--just enough of an improvement to take DC borrowing instruments out of the "junk bond" category. In June, 1999, Moody's raises DC's credit rating from speculative (Ba1) to 'adequate' (Baa3), and shortly thereafter, Fithc IBCA followed suit by awarding their rating to 'medium quality' (BBB). These ratings are still well below those of well-run US cities, but this is an important step in the right direction. A significant reduction in interest will result as DC continues to struggle to reduce its very large long-term debt.

return to the top of the page HEADLINES CONCERNING DC'S FINANCIAL PROBLEMS

Each month brings additional headlines in the local papers about problems in all aspects of the city's finances and financial management. Click here to bring up a chronological listing of Washington Post stories about these problems since the beginning of 1997.


return to the top of the pageTHE DC ECONOMIC RECOVERY ACT

One of the most controversial issues (other than in the institution of the Control Board and School Trustees) has been a proposal by DC Delegate Eleanor Holmes Norton to provide major federal tax relief to entice departing residents to stay. The claim was made that the city's tax base was rapidly declining. NARPAC, Inc. found many of the assumptions in her proposal to be dubious, and finds nothing to be proud of in the notion of bribing Americans--regardless of economic strata--to live in the shadow of their capitol buildings. NARPAC, Inc. prepared a detailed report to this effect. Click here to read this NARPAC report on the DCERA

Although the Norton bill was not seriously considered, other proposals to provide businesses and residents to stay in--or return to--the District continue to arise. According to Rudy Pyatt in the Washington Post in early September, 1998, big businesses are trying to lobby Congress for more federal tax breaks to induce them to move their businesses inside the District limits...a benefit to be derived only for companies willing to invest at least $25 million in the city to provide a place of employment for at least 400 employees, in some poorly defined "empowerment zones". NARPAC finds it difficult to believe that there are many corporations in this category, that they would bring the kind of employment that DC most badly needs, or that such a move sends the right message. We do not find a source of pride in a headline reading:

"Congress Makes Taxpayers Bribe Big Business to Move into Nation's Capital"

In fact, our objective should be to rejuvenate the District of Columbia so that big business will pay a premium to be located here. And in fact, another longtime Washington lobbying office has recently announced plans to relocate its offices to Capitol Hill from just across the Potomac "to be closer to legislators and regulators"--with no inducements from the DC Government.

return to the top of the pageTABLE OF PROPOSED LONG-RANGE SOLUTIONS--FINANCIAL OPERATIONS

The table below presents NARPAC, Inc.'s updated listing of functions and aims within this general category, offering simple goals and approaches for achieving them, and noting the progress (if any) to date. The tabulations and entries are clearly preliminary, but are intended to indicate the full range of steps needed to assure long-range solutions to the District's systemic problems.

DC FINANCIAL OPERATIONS

Revised Version -- January, 2002 -- changes from original in green

Function/Aim (o)NARPAC goal
(>>>)approaches to solution
Progress to Date
BUDGET PLANNING o Establish Competitive Basis for Level of Revenues/Expenditures .
Proper City Functions >>> Strive to shed all state-level functions many remain
. >>> Account for net services provided by DC to fed gov't no action
. >>> Relate functions and spending to those of neighboring jurisdictions budget benchmarks/perf. measures developing
. >>> Develop official estimates of "net productivity" from residential and commercial properties preference for residents probably misplaced
FISCAL OPERATIONS o Develop Professional Approach to City Finances .
Management >>> Develop new, professional, independent financial office done--well
Debt Control >>> Target city debt at no more than 25% of annual budget being reduced, but no target
Deficit Control >>> Maintain 'balanced' budget on 3-year average achieved 4 years straight
. >>> Develop disciplines for keeping within approved budgets actions taken
Revenues >>> Vastly simplify tax code, peg to federal wherever possible Tax studies done
. >>> Adopt broader business tax--such as gross receipts suggested by Tax Commission no action
. >>> Press for continued federal payment--differently appropriated DC delegate pushing in Congress
. >>> Develop innovative mechanisms for intra-regional transfers no action
. >>> Review legitimacy of all tax-exempt properties CFO taking some action
. >>> Develop robust plan for phasing out rent controls no action
. >>> Adopt positive incentives for neighborhood gentrification hot potato--no action
Opn Expenditures >>> Develop basis for 'steady-state' long-term expenditures no action?
Capital Expenditures >>> Develop basis for capital expenditures (depreciation, etc.) good progress
Asset Management >>> Square away property mgmt, maintenance, and disposition progress
. >>> Get professional system for cash, and investment management CFO working
Bond Rating >>> Re-establish favorable (AA) bond ratings for essential borrowing good progress

KEY:
CFO = Chief Financial Officer

This page was updated on Jan 5, 2002


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