REPORT TO THE SENATE COMMITTEE ON APPROPRIATIONS

 

 

 

 

Issues and Approaches for Addressing the District of Columbia Structural Imbalance Between Public Service Needs and Public Financing Resources

 

 

 

 

 

 

 

SUBMITTED BY THE MAYOR

OF THE DISTRICT OF COLUMBIA

 

 

 

 

 

May 5, 2004

 

 

 

 

 

 

 

 

This report is submitted in response to the recommendation from the Senate Committee on Appropriations contained in its Report on the District of Columbia Appropriations Bill, 2004.

 

 

 

 

Table of Contents

 

 

Overview......................................................................................................................................... 1

The Structural Imbalance................................................................................................................. 1

The Basis for Federal Action to Address the Imbalance................................................................. 1

The District’s Management Improvement Agenda......................................................................... 2

Models Approaches for Addressing the District’s Structural Imbalance....................................... 3

The District of Columbia’s Financial Context............................................................................. 4

Approaches Available to the District for Coping with the Structural Imbalance........................... 6

Management Improvement: Accomplishments and Plans........................................................... 11

Financial Operations...................................................................................................................... 11

Administrative Processes.............................................................................................................. 12

Human Services............................................................................................................................. 13

Health Care.................................................................................................................................... 14

Motor Vehicles.............................................................................................................................. 15

Public Safety.................................................................................................................................. 15

Education....................................................................................................................................... 16

Conclusion..................................................................................................................................... 16

Models for Addressing the District’s Structural Imbalance................................................... 17

Model 1. The Fair Federal Compensation Act of 2004................................................................ 18

Model 2. Unrestricted Federal Payment....................................................................................... 19

Model 3: Federal Assumption of State-Like Functions................................................................ 21

Attachments................................................................................................................................. 25

Attachment A: Fiscal Impact of Proposals to Address Structural Imbalance............................... 26

 

 

 

 

Listing of Graphs

 

 

Graph 1: District of Columbia Population, 1940 - 2003................................................................. 8

Graph 2: School Performance.......................................................................................................... 9

Graph 4: History of Federal Payment........................................................................................... 19

 

 

 

 

 

Listing of Tables

 

 

Table 1: Individuals Who Commute to or From the District of Columbia...................................... 6

Table 2: Estimated Wages and Salaries Earned in D.C. and by D.C. residents............................... 7

Table 3: Mandatory vs. Discretionary Spending, FY 2004 Local Budget...................................... 9

Table 4: Mass Transit Investment Needs (D.C. Share)................................................................ 23

Table 5: Local Roads Infrastructure Needs................................................................................... 24

 

 

 

Overview

 

The Structural Imbalance

 

In its report to the Congress, “District of Columbia: Structural Imbalance and Management Issues (GAO-03-666)”, the General Accounting Office (GAO), using FY 2002 as a base year, found that the District of Columbia government faces a structural financial imbalance of between $470 million and $1.1 billion annually as it attempts to provide government services from within its tax base. In FY 2003 dollars, this gap would be between $504 million and $1.2 billion. The Report revalidates previous reports issued over the years.[1]

 

The GAO defines a financial structural imbalance as an inability to provide a representative array of public services by taxing at representative rates. Using this definition, many municipalities could legitimately claim to have a structural imbalance. However, the District is unique among all municipal governments. It is the only city chartered in the Constitution of the United States and under the legislative jurisdiction of the Congress. It is the only city that has no state to share costs or underwrite expenditures in whole or part. It is the only city whose preponderant employer is a tax-exempt entity – an entity exempt from tax on its property and exempt from tax on its income. Further, by Federal law, the preponderance of workers in the District of Columbia are exempt from D.C. income tax. Lastly, it is the only municipality in the country that must exercise the responsibilities of a city, county, state, and school district. Although the District has the taxing authority for all types of taxes typical of states and local governments combined, these taxes do not give it the tax base sufficient to pay for the services it must provide.

 

The GAO report also found that the District of Columbia has continued to defer significant amounts of infrastructure projects because of constraints in its operating budget. When compared to combined state and local debt across the 50 states, GAO found that the District’s debt ranks as the highest in the nation both per capita and as a percentage of own-source revenue.

 

 

The Basis for Federal Action to Address the Imbalance

 

Because of the District’s unique status, the Federal government – both the legislative and executive branches – has recognized its responsibility to assist the District in meeting its municipal financing needs. For many years, federally appointed commissioners administered the delivery of municipal services under the aegis of the Federal government. With the establishment of limited home rule in 1973, chartering Federal legislation provided for a Federal payment. The basis for such payment was laid out in Section 11601 of the Act, which recognized the special limitations and burdens placed on the District by the Federal Government.[2] These restrictions included limitations on the District’s taxing authority, the costs of providing municipal services to Federal installations in the District, and the special costs imposed on the District because of its status as the capital of the nation.

 

The District of Columbia Revitalization Act of 1997 restructured responsibilities in a way that resulted in the assumption by the Federal government of prisons, courts and certain D.C. employee pension liabilities. In the absence of a parent state for the District, under the Revitalization Act, the Federal government assumed certain responsibilities that in other localities would be undertaken by the state. At the same time, this Act phased out the annual Federal payment to the District but contained language permitting this issue to be revisited at an appropriate time.[3]

 

Apart from assuming responsibility for courts and prisons, the Federal government annually provides financial assistance to the District for a variety of targeted projects. Apart from pass-throughs to non-governmental entities and formula-driven Federal entitlement payments, this amount has ranged from a high of $167 million in FY 1998 to a low of $24 million in FY 2000 and was $127 million in FY 2003.[4] Notwithstanding the provisions of the Revitalization Act and the continued financial support from the Federal government for earmarked projects, the District still faces an on-going structural imbalance.

 

 

The District’s Management Improvement Agenda

 

The GAO report observed that District of Columbia management improvements in health services, education and public safety could improve the District’s overall ability to deliver public services. The District recognizes that inefficiencies still exist and must be addressed. Much has been done to improve service delivery and reduce costs, and the District has a management agenda for further improvement.

The second section of this report presents District plans for improving services in priority areas. However, as GAO and other independent reviewers before them noted, the District’s structural imbalance cannot be closed merely by more efficiently delivering public services. No amount of management improvement will change the underlying calculus that the District has much higher costs than other municipal governments and will continue to have such higher costs into the foreseeable future.

 

 

Models Approaches for Addressing the District’s Structural Imbalance

 

While the Federal government could use a number of different approaches to address the District’s structural imbalance, or a combination of approaches, three basic models recommend themselves, each having a basis in either law or precedent.

 

 

Model 1: The Fair Federal Compensation Act of 2004

 

The District’s preferred approach for addressing the structural imbalance is the Fair Federal Compensation Act of 2004. Under this approach, the federal government would provide an $800 million infrastructure payment to the District. Funds provided under this Act would be deposited into a dedicated fund which could only be used for transportation activities, information technology improvements, debt service payments, and school facilities investments.

 

 

Model 2. Unrestricted Federal Payment

 

The concept of an annual Federal payment to the District could be reinstated. There is both basis and precedent for such a payment and several ways by which the amount of the payment could be calculated. Such a payment is particularly valuable to the District in addressing the needs of on-going operating programs and provides the District with the greatest flexibility.

 

 

Model 3: Federal Assumption of State-Like Functions

 

The District operates without benefit of a state and, until the Revitalization Act of 1997, absorbed costs that would normally be absorbed in whole or part by a parent state. Under the Revitalization Act, the Federal government took over responsibility for prisons and certain pension liabilities. This principle could be extended to other state-level program responsibilities executed by the District, with the Federal government either assuming program responsibility or reimbursing the District for their operation.

 

 

The District of Columbia’s Financial Context

 

The General Accounting Office, in its report, made note that the District of Columbia faces special circumstances beyond its control that cause the cost of certain D.C. public services to be particularly high. The factors involve both the D.C. labor market and program workload characteristics particular to urban areas. Compared to the states, D.C. is the only jurisdiction that is entirely urban. The cost of funding an average level of services in the District is 75 percent higher than the average for all the states and a third more than the next highest state. The District must be able to pay competitive wages in this market, which is greatly affected by the presence of the Federal government, if it is to be able to attract and retain capable employees.

 

The General Accounting Office made note that the District of Columbia faces other special circumstances that cause the cost of certain D.C. public services to be particularly high.

 

·      Public Education

The District’s costs for education are disproportionately high. The socio-economic background of the preponderance of students in the public school system produces a school population whose overall academic skill level is low and whose educational and socialization needs are high.

 

Further, 16 percent of all D.C. public school students are categorized as special education eligible. Over one-third of the D.C. Public School budget is devoted to providing educational, transportation and therapeutic services to such students.

 

·      Health and Human Services

The District must address the health and human services needs of a population that is proportionately much more vulnerable than that of states and other localities. The GAO report gives specific examples: in 1999 the District had the highest percentage of individuals under age 65 with incomes under the poverty limit covered by Medicaid. Medicaid services in the District of Columbia total $7,200 for the average enrollee. These costs per patient exceed those of Maryland and Virginia by 32 percent and 40 percent respectively.

 

·      Public Safety

The Federal government has recently provided Federal funds in the District’s budget (up to

$15 million annually) for national security events. However, such events represent only a small fraction of all events that are unique to the District because it is the capital of the United States. Demonstrations, gatherings, and special security coverage for Federal officials all cause the District to have a disproportionately large expense for public safety that is in the main paid for from locally raised taxes. The emphasis on homeland security has added a new dimension to public safety, which causes expenses in this area to be even higher.

 

·      Infrastructure

When the District achieved home rule, it inherited an enormous backlog of infrastructure needs that had been unaddressed for years. District policy choices, the pressure to provide operating services and the high cost of borrowing created a situation where this backlog has grown and is now slowly undermining the quality of life in the District. This is true for the environment (e.g., the Anacostia River, sewer system), public buildings (e.g. schools, police and fire stations) and transportation.

 

The GAO Report recognized the District’s deferred maintenance and infrastructure gap. In FY 2003 alone, against the District’s capital improvement plan, about $370 million was deferred. For the five-year period, FY 2003 – FY 2008, more than $2.1 billion in projects will be deferred or extended. Deferred capital investment is a very real outcome of the structural imbalance, because investments in long-term capital assets for the city are necessarily delayed to pay for vital operating services. However, the continued deferral of capital investment could lead to gradual erosion of the economic recovery the District has experienced over the past five years.

 

Approaches Available to the District for Coping with the Structural Imbalance

 

Within its own current authority, the District has two possible means of addressing the imbalance between spending needs and available revenue: increase taxes or reduce service expenses.

 

Increasing Taxes

 

The Federal government restricts the District taxing authority in a number of ways. Its property is tax exempt and accounts for 42 percent of all District property by area. Further, by Federal law, the District is precluded from taxing income at source for those workers who are not residents of the District. The result is that 70 percent of income earned in the District cannot be taxed to support District municipal services.

 

According to the 2000 Census, of the 691,678 people who work in D.C., 72 percent are from outside D.C., while 28 percent both live and work in the city. More than 470,000 individuals commuted from Virginia and Maryland into the District. In the same year, approximately 68,000 individuals who lived in the District commuted to work in Maryland or Virginia.

 

Table 1: Individuals Who Commute to or From the District of Columbia

 

Individuals Who Worked in D.C.			Workers Who Lived in D.C.
Residence	Number		Place of Work	Number
All	671,678		All	260,884
D.C.	190,566		D.C.	190,566
Maryland	279,479		Maryland	36,450
Virginia	191,253		Virginia	31,263
W. Virginia	1,350		New York	438
New York	1,054		Non-U.S.	404
Pennsylvania	1,032		Pennsylvania	251
Other	6,944		Other	1,512
Source: 2000 Census

 

 

The distribution of wage and salary income earned both in D.C. and by D.C. residents in calendar year 2001 is shown in Table 2. Commuters earned $30.9 billion, or 77.3 percent, of the $40.0 billion of all wages and salaries earned in the District of Columbia, while D.C. residents earned the remaining $9.1 billion (22.7 percent). In FY 2002, D.C. residents who worked out of the city earned $3.0 billion in wages and salaries, about 25.1 percent of the total earned by D.C. residents. The amount of wages earned by commuters in D.C. is thus more than 10 times greater than the amount of wages earned by D.C. residents outside of the District of Columbia.

 

 

 

 

Table 2: Estimated Wages and Salaries Earned in D.C. and by D.C. residents

 

				Employed in D.C.										D.C. Residents
				$ billion				% of total						$ billion	% of total
Earned in D.C.
by D.C. residents				$9.1				22.7%						$9.1	74.9%
Earned in D.C.				$30.9				77.3%						--	--
by non-D.C. residents
Earned outside D.C.				--				--						$3.0	25.1%
by D.C. residents
Total				$40.0				100.0%						$12.1	100.0%
FY 2002. Estimated by the Office of the Chief Financial Officer (D.C. government) from Bureau of Economic Analysis and U.S. Census Bureau sources.

 

 

From the standpoint of long-term economic viability, the District needs to lower its local taxes, not increase them, in order to maintain a competitive position with surrounding jurisdictions. Today, D.C. compensates for its structural imbalance with tax burdens on residents and businesses that are generally equal to or higher than those in surrounding jurisdictions. For example, households in D.C. earning $150,000 per year pay about 20 percent higher taxes than Arlington County residents. Businesses in D.C. pay as much as 61 percent more in retail taxes than businesses in surrounding jurisdictions. In addition, D.C.’s corporate franchise tax is 9.975 percent of taxable income, while Maryland’s rate is 7 percent and Virginia’s rate is 6 percent.

 

As part of its strategy for economic recovery, the District has been attempting to reduce the tax burden on both its business and individual taxpayers. Raising tax burdens at this juncture will contribute to the loss of both residents and businesses at a time when both lower taxes and improved city services have caused stabilization of the District’s population.

 

Graph 1: District of Columbia Population, 1940 - 2003

 

 

Tax changes that would add $500 million in tax revenue annually, GAO’s lower boundary of what is needed to address the imbalance, would cause the average business and individual tax burden to increase by 15 percent if all taxes were increased proportionately to produce this amount.

 

 

Decreasing Spending

 

The only other option for maintaining a balanced budget is to decrease operating spending on the delivery of public services. For FY 2004, the portion of the District’s budget supported by local funds is $3.8 billion. Of this amount, $2.1 billion, or 56 percent, were for mandatory expenditures that cannot be materially affected over the short-term.

 

Table 3: Mandatory vs. Discretionary Spending, FY 2004 Local Budget

 

($ in Millions)
	Amount	As a % of Budget
Mandatory Expenditure Items
Fixed Costs	185.0	4.8%
Debt Service	438.1	11.4%
Subsidies	238.9	6.2%
Entitlements	344.5	9.0%
Court-Order Agencies	234.3	6.1%
Mandated Education Programs	657.8	17.2%
Cash Reserve	50.0	1.3%
Total Mandatory Expenditures	2,148.7	56.1%
Total Discretionary Expenditures	1,684.0	43.9%
Total FY 2004 Local Budget	3,832.7	100.0%
Source: District of Columbia Office of the Chief Financial Officer, Office of Budget and Planning

 

 

All budget balancing made by budget cuts must, of necessity, come from this remaining fraction of the Local Source budget. A structural imbalance of $470 to $1.1 billion cannot be addressed within the context of the $1.7 billion spent on operating programs. This is especially true because this program funding supports pressing needs. Cuts to these areas will curtail the District’s efforts to improve several poor conditions. For example, recent assessments showed that D.C. students performed worse than the average for all states at fourth and eighth grade levels in reading and mathematics.

 

Graph 2: School Performance

 

The District also uses these resources to combat very challenging public issues. For example, the District is first nationally in prevalence of AIDS, with 1,377 people living with AIDS per 100,000 residents (1998). This incidence rate is more than three times greater than the highest state; New York is second with a rate of 368 per 100,000.[5] District breast cancer rates are the highest in the country, and lung cancer rates are higher than average.[6] The District’s adults are less likely to be insured than average, which is a problem the District is addressing by spending significant local funds on the Health Care Safety Net. And lastly, over one-third of the District’s families with children are living in poverty, an important indicator of the cost of health care delivery.[7]

 

Program improvements can lead to lower operating costs over time. However, achieving such improvements usually requires front-end investments. As an example, the District’s Office of Tax and Revenue has reduced staffing in FY 2004 from 600 FTE to 500 FTE, a 17 percent reduction. At the same time, collection of delinquent taxes has more than tripled over the

FY 1997 – FY 2003 period, while income returns filed increased by 30,000 despite a stable population. However, this was only accomplished after a complete reengineering and a multi-year, $125 million investment in new systems and equipment.

 

In today’s revenue environment, such an investment, even though it would pay for itself many times over, is not possible for other program areas. The outcome, as noted in the GAO report, is that many operating programs limp along at poor performance levels while needed capital investment is not made.

 

 

Management Improvement: Accomplishments and Plans

 

Over the past eight years District leaders have undertaken a major effort to reform government operations. The focus of this effort is two-fold: first and foremost is to improve the quality of services for residents, businesses, and visitors; and second is to utilize financial resources more efficiently. Although GAO recognizes that the District’s structural imbalance cannot be solved by improved efficiency alone, this remains a major focus.

 

The following section highlights key elements of this reform effort, both in terms of achievements to date and initiatives going forward. Specifically, this report highlights those areas that historically have been identified as areas in need of major improvement, including:

 

·      Financial Operations

·      Administrative processes

o      Technology

o      Property Management

o      Performance Management

·      Human Services

·      Health

·      Motor Vehicles

·      Public Safety

·      Education

 

Each of these areas is examined in turn.

 

Financial Operations

 

The management of financial resources has improved dramatically over the past eight years. In 1996, the District was producing annual deficits, faced a half-billion dollar accumulated deficit, and had a junk bond rating from Wall Street. Since then the District has balanced its budget every year, replaced its deficits with surpluses, and now holds an A- rating from Wall Street.

 

Strong financial management and increasingly disciplined resource usage produced this dramatic turnaround. It may seem that such strong financial performance suggests that the structural imbalance really does not exist, but, in fact, these results were achieved by (a) using resources more efficiently, and (b) foregoing critical investments in major service needs.

 

Going forward, the District will continue on its course of achieving balanced budgets, unqualified audits, improved bond ratings, and improving the efficiency with which programs utilize financial resources. The following sections highlight specific areas targeted for improvement. This list is by no means exhaustive, as continuous improvement efforts are taking place throughout the organization. It is meant to highlight some of the more significant efforts.

 

Administrative Processes

 

Administrative Processes: Technology

 

It goes without saying that technology, when applied strategically, can tremendously improve the efficiency of government operations. Unfortunately, eight years ago, the District government found itself far behind average government operations in the use of personal computers, information databases, and Internet technology. Rotary telephones were not uncommon, for example, and the District Government’s Web site consisted of 20 pages.

 

Having first stabilized the basic infrastructure and then developing data security and access, the District has the platform from which it has begun building integrated enterprise applications. The Web site www.dc.gov now has over 100,000 pages, which allow hundreds of online services ranging from paying parking tickets to registering a business. Thousands of paper-based, time-intensive processes have been fully automated, making service much more reliable, accessible, and efficient. The work to date has brought tremendous efficiencies through a state-of-the-art network, e-mail system, data center, and Web site that enable high-volume, instant communication with virtually no downtime.

 

In the next phase, already underway, the District is systematically reengineering its mission critical business processes (from procurement, budget, and payroll to social services case management and regulatory enforcement) and then automating them. The reengineering efforts alone are realizing efficiencies by streamlining processes; the subsequent automation significantly reduces manual time and effort, magnifying the efficiency gains. The implementation of the first of these enterprise applications (procurement) is complete, and the remainder are underway or planned for completion within the next three years. These systems modernizations will transform the way the District performs most of its basic business processes, which will render them more dynamic, less bureaucratic, and more efficient.

 

Administrative Processes: Office of Property Management

 

Several years ago the Office of Property Management found itself suffering from years of disinvestment; it was often incapable of providing basic maintenance on the District government’s vast inventory of buildings. As a result, many of these buildings had fallen into disrepair and, due to their inefficiency, actually required more funds to maintain as compared to the average well-managed site.

 

At present, the District government is undertaking a complete overhaul in order to significantly enhance its capacity to and effectiveness in managing the District’s real property assets. The overhaul is designed to provide accountability in the Office’s core functions; align workforce skills with responsibilities; improve facilities planning, construction, and maintenance; and professionalize all real estate business processes. The Office’s new leadership is restructuring its internal operations under two Deputy Directors to provide leadership for its facilities and real estate functions, which will streamline and rationalize the current organizational structure. A quarter of the Office’s position descriptions are being rewritten to professionalize the organization and ensure people with adequate skills are in the right positions. These and other changes will enable more efficient and effective management of the District’s valuable assets.

 

Administrative Processes: Performance Measurement and Tracking

 

Critical to efficient resource utilization is the ability to set specific outcome goals for every agency, and specifically measure the progress of each agency, manager, and employee toward achieving those goals. An effective performance management system ensures that all resources are focused on achieving critical outcomes, and that any lapses in performance can be identified and quickly corrected.

 

Eight years ago the District had minimal capacity for performance management. Now, the District has a comprehensive performance management system. This system serves as a management tool, an evaluation mechanism, and a customer service reporting vehicle. As a management tool, the system is enabling the District to continuously monitor the performance of all aspects of government, so that efficiency improvements can be readily identified and implemented. It also provides the data necessary for true performance-based budgeting, informing management decisions about the cost effectiveness of government services. As an evaluation mechanism, the system links organizational performance to individual performance to ensure accountability for the effectiveness of service delivery. And as a customer service reporting vehicle, the performance management system provides the District’s customers with transparent information on how the government is performing relative to stated goals and stakeholder expectations.

 

Through these multiple purposes, the District’s performance management system is institutionalizing the means for continuous operating improvement. In the current fiscal year, better measures, more aggressive goals, implementation of an automated tracking system, and an enhanced performance plan/evaluation for department directors will increase the effectiveness of the overall performance management system.

 

Human Services

 

Eight years ago, District courts, citing appalling service lapses that endangered our most vulnerable residents, had assumed control of five major agencies of the District government.[8] As of a year ago, the Mayoral appointments to each of these administrations had made the critical improvements necessary to exit receivership.

 

Going forward, the District must continue to rapidly improve social services to exit the court monitor phase and begin providing high quality services to our most vulnerable residents. Perhaps most important among these efforts is the work at the Youth Services Administration (YSA).

 

YSA is responsible for youth in the juvenile justice system. This Administration, charged with serving youth that are at a critical juncture in their lives, has not been as effective in the past as it could have been. The District has put in place a new leadership team, a new organizational structure, new demands on and training for staff, and is significantly modifying practices to more effectively serve this vulnerable population. These changes, while aimed primarily at enhancing treatment and rehabilitation practices, will yield significant efficiencies as well, through better operational management of facilities and better coordination of professional staff time.

 

Health Care

 

Prior to 2001, the public hospital responsible for serving the District’s lowest-income residents provided substandard care at an exorbitant cost to the District. After a major reform effort, the District now provides quality care through a new health insurance program to thousands of residents at a much more reasonable cost to taxpayers. In fact, the District was recently recognized for having achieved one of the lowest rates of uninsured residents in the country.

 

Going forward, three different efforts are underway to make improvements at the Department of Health, which is one of the District’s largest agencies and consumes $1.5 billion annually:

·      Organizational Management. First, the Executive Office of the Mayor is leading an in-depth analysis of every aspect of the Department’s operations as part of a department-by-department management review. Through this review, already underway, we are looking at the leadership, structure, staffing, and practices as they relate to the achievement of the Department’s mission. This analysis, which will include benchmarking against best practices nationwide, will lead to reforms to improve the efficiency and effectiveness of the $1.5 billion organization.

·      Medicaid. A second effort is reforming the District’s Medicaid system, which is primarily housed in the Department of Health but spans many District departments. The District has established a small unit to lead this reform effort, which is examining the policies, practices, laws, and service delivery mechanisms that define Medicaid in the District. Many improvements to core processes, such as claims administration, have already been identified and implemented, but preliminary work suggests that significant opportunities for improvement in many areas of the system remain. This effort is being prioritized in the current fiscal year, which, as the District’s single largest budget item, will yield significant benefits.

·      Health Care Alliance. The third effort relates to the District’s Healthcare Alliance, a program that provides healthcare for low-income uninsured or underinsured District residents. The Alliance, established to fill the gap left by the closure of D.C. General Hospital, has refocused itself for the next two years by restructuring its contractual relationship with its private sector partner providers. Foremost, the contract has a fixed cost cap for the next two years, with provisions for shared savings that institutionalize incentives to all parties to improve efficiencies and thereby reduce costs. It also provides for more emphasis on primary healthcare service delivery, so that patients avail themselves of preventative care, which reduces the demand for and cost of emergency care and is thus a much more effective use of resources.

 

Through these efforts, the District will continue to reform the largest agency in its portfolio.

 

Motor Vehicles

 

Historically, service at the Department of Motor Vehicles has been characterized by long waits, illogical protocols, and unfriendly treatment. As of recently, however, the Department of Motor Vehicles is being restructured to transform the way residents interact with the Department. Recent initiatives include the creation of full-service neighborhood offices to eliminate the need for trips downtown, creation of online transaction capabilities, and simplification of registration/inspection protocols.

 

Going forward, the Department will continue to improve services by improving fiscal and operational controls, and by simplifying and streamlining business processes to increase efficiency. Guided by a “one-done” philosophy, the Department is changing its service delivery such that most types of transactions can be executed at all facilities. Simple changes such as aligning inspection dates with registration dates will not only be easier for customers, but will reduce administrative processes, enabling employees to serve customers more quickly. Other changes in policies and procedures will streamline operations to reduce wait times and paperwork, and eliminate mistakes and repeat visits. Most of these changes will be implemented in the current fiscal year, bringing both tangible improvements in customer service, as well as significant management efficiency.

 

Public Safety

 

Eight years ago the Metropolitan Police Department deployed an aged, poorly managed fleet of vehicles, could not manage its evidence warehouse, and lacked funds for basic elements such as gasoline and ammunition. Now the department deploys a new fleet of vehicles, state-of-the art protective and communications gear, and is renovating its facilities to ensure the highest standards of capacity and support.

 

Likewise, the Fire and Emergency Medical Services Department and the Emergency Management Agency have significantly upgraded their equipment, staffing, and training to enhance emergency response services across the city. In recognition of the District’s tremendous advancements in this area, the District has become the first and only jurisdiction in the nation to receive full certification under the new federal homeland security standards.

 

Going forward the District will focus its efforts on new crime reduction strategies and reducing emergency response times. The number of uniformed officers will be increased during fiscal year 2004, and all officers will be deployed under a new strategy that will increase the flexibility of deployment and quality of leadership. To improve emergency response times the government is installing new technology, increasing staffing of call-takers, and cross-training call-takers to respond more promptly to diverse calls.

 

Education

 

Perhaps the most important task – and greatest challenge – of the District government is improving the quality of public education. The average achievement of D.C. Public Schools students remains abysmal – below national average for most students in reading and math across grades, with graduation rates remaining below 60 percent.

 

Recent years have seen significant initiatives outside of the D.C. Public Schools that are showing great promise. The creation of 44 charter schools has created a remarkable level of creativity and innovation. In addition, the new scholarships program should expand the choices available to low-income students even further.

 

Despite these efforts, however, there still remains the major challenge of improving the system that still serves – or fails to serve – the vast majority of D.C.’s youth: the D.C. Public Schools. This system continues to face challenges in the most basic areas of fiscal control, facility maintenance, and personnel management. Going forward, the Mayor will offer a dramatic proposal to transform this system. Only through cooperation of the Council and other stakeholders, however, will such a proposal succeed.

 

Conclusion

 

Through these and many other efforts, the District government will continue its dramatic reform of government operations. Without relief from its structural imbalance, however, true reform can never come about. The massive disinvestment that has taken place has left many District operations with inadequate information systems, buildings, staff training, and compensation – all problems that will certainly prevent these organizations from becoming high-performing operations. At the same time, District taxpayers remain among the most heavily taxed in the nation, and the mounting pressure on them could quickly result in significant population loss and divestment.

 

For these reasons, it is essential that the Federal government reconcile its inconsistent policy toward the District. Either the District should be allowed to tax earned income as can any other state/locality, or the Federal government should assume the cost for the state-level expenses incurred by District taxpayers.

 

 

Models for Addressing the District’s Structural Imbalance

 

As mentioned in the overview, there are several broad approaches that could be used by the Federal government to address the structural imbalance. Each of these approaches can be designed such that it results in a transfer of $800 million to the District of Columbia, a middle point within the GAO’s structural imbalance range of $470 million to $1.1 billion. In addition, each proposal provides ongoing funding that retains its real value over time.

 

One approach is for the federal government to pass the Fair Federal Compensation Act of 2004, which has bipartisan support and provides a restricted federal payment that is a comprehensive solution to the structural imbalance, targeted to the areas of need specifically cited by the GAO report. These areas include transportation and infrastructure improvement projects that benefit the entire Washington region, debt service payments, information technology improvements, and capital improvement funds for the District of Columbia Public Schools.

 

A second approach would be for the Federal government to recognize that its charter and presence restrict the District’s taxing authority and also impose additional costs on the District. To offset these restrictions and costs, the Federal government could reinstitute a formula-driven Federal payment.

 

A final approach is for the Federal government to recognize the extraordinary financial burdens placed on the District because it does not have a parent state. The District must incur the infrastructure and operating costs for a wide range of programs that would normally be undertaken by or underwritten in whole or part by the state. Included are such activities as income tax administration, Department of Motor Vehicles, Alcohol Beverage Control, State University (University of the District of Columbia), regulatory commissions (public utilities, securities, insurance), and mental health facilities. In this first approach, the Federal government would either assume responsibility for the operation of state type functions, as it has with the incarceration of felons, or reimburse the District for the operation of such functions.

 

Model 1. The Fair Federal Compensation Act of 2004

 

The District’s preferred approach for addressing the structural imbalance is the Fair Federal Compensation Act of 2004. This approach provides a comprehensive solution of $800 million annually to the problem identified by the GAO. In addition, the Act been designed to offset the fiscal costs of the specific federal policies that contribute to the structural imbalance.

 

The Act establishes a dedicated infrastructure account within the District of Columbia. This account serves as the repository for funding transferred to the District under the Act, which totals $800 million in the first year and is adjusted annually for inflation thereafter. The use of this fund is restricted to transportation activities, information technology improvements, debt service payments, and building and facility maintenance and capital improvements for the District of Columbia public schools and public charter schools.

 

In addition to providing a funding level sufficient to address the structural imbalance, this proposal specifically addresses the District’s deferred infrastructure needs as identified in the GAO report. The District has a limited capacity to address these needs on its own because the District’s debt per capita is already among the highest in the nation and further increases in the District’s outstanding debt could negatively impact the District’s bond rating. Federal assistance in this area is justified because District capital improvement investments not only support the infrastructure needs of the federal government, but they support the needs of the entire Washington region.

 

Model 2. Unrestricted Federal Payment

 

For many years, the Federal government made an unrestricted annual payment to the District of Columbia. In FY 1996, this payment was $660 million. The District’s chartering Federal legislation, the Home Rule Act of 1973, sec. 11601, describes at length the basis for such payment. The Revitalization Act of 1997 phased out the Federal payment as part of the assumption by the Federal government of the District’s courts, prison and certain pension liabilities. The following graph shows the District’s historical Federal payment through the last year of the phase-out of the payment in FY 1999.

 

Graph 4: History of Federal Payment

 

To redress the structural imbalance, an unrestricted Federal payment could be reestablished. Rather than apply Federal funds to specifically designated program areas, the District would direct payment amounts to its primary priorities in each year’s budget. Various calculators could be used to determine the appropriate amount.

 

 

Federal Payment in Lieu of Non-Resident Income Taxed at Source              Revenue Impact:

$600 million (est)

 

Using the Bureau of Economic Analysis estimates of residence-adjusted earnings for the District, a Federal payment equal to 2 percent of non-resident income earned in the District of Columbia could form the basis of an annual payment to the District. Such calculated amount could be certified by the Office of Management and Budget and included in president’s annual budget submission.

 

 

Real Property Tax Pilot                                                                                  Revenue Impact:

$250 million (est)

 

District real commercial property is dominated by tax-exempt Federal buildings. Paralleling arrangements made by tax exempt institutions and local governments around the country, the Federal government could make a payment to the District in lieu of taxes, basing the amount on the estimated assessed value of federally owned commercial property. The District of Columbia and General Services Administration (GSA) could agree on property subject to coverage and the assessment methodology. The GSA master list of federal properties or the D.C. master list of properties could be used as a data source. By itself, such a pilot payment would not close the District’s structural imbalance, but it could be used in combination with other approaches.

 

 

 

Model 3: Federal Assumption of State-Like Functions

 

The District, unlike all other U.S. municipalities, supports program operations of both a state and a local government. In effect, the Federal government is the District’s state.[9] Under the District of Columbia Revitalization Act of 1997, the Federal government assumed responsibility from the District for two functions that, in the rest of the country, are state functions – prisons and courts. In actions since the Revitalization Act, the Federal government has built on this approach when providing state-like assistance to the District. For example, Federal support for tuition assistance for D.C. residents for attendance at colleges and universities is state-like assistance, as is underwriting certain costs for environmental remediation.

 

The Federal government could further extend this concept to other state-like functions in the District – either underwriting the cost of those operations by using the District government as its agent or by assuming program management responsibility. Certain program areas particularly lend themselves to this approach.

 

Health and Human Services Functions

 

Medicaid                                                                                                         Revenue Impact:                        $380 million (est)

 

In the 50 states, the state government is responsible for the non-federal portion of Medicaid payments. For FY 2004, the Federal proportion of Medicaid funding is $880 million – 70 per-cent of total program cost. However, the remaining 30 percent – $377 million in FY 2004 – is borne locally. As part of a redefinition of the Federal/D.C. relationship, the Federal government could assume this 30 percent as an on-going, state-like responsibility.

 

 

Medicaid Reimbursement                                                                               Revenue Impact:

$64 million (est)

 

As an alternative to the Federal government explicitly assuming the District’s state responsibilities with respect to Medicaid, it could recognize the District’s special problem in this program area by raising the current Medicaid reimbursement rate from 70 percent to 75 percent.

 

 

Mental Health                                                                                                 Revenue Impact:                        $170 million (est)

 

State funding and management is the prevailing model for mental health hospitals throughout the country. Here too, the Federal government could assume this management responsibility or use the District as its management agent. Annual costs to the District for funding the District’s mental health expenditures are $165 million. Among the District’s mental health expenditures, there are some expenditures that are federal in nature. Some individuals in need of mental health services seek out Washington, D.C. because it is the nation’s capital. While the federal government pays for some of the costs of these individuals, the District has incurred expenses of approximately $5 million for treating patients received from the Secret Service that the federal government has not reimbursed.

 

 

Foster Care and Adoption                                                                              Revenue Impact:

$30 million (est)

 

Like the Medicaid program, funding for the local match for the foster care and adoption programs (also know as Title IV-E) is a state-level expense. The Federal government could help the District fund this expense to conform to the current or proposed reimbursement rate, which would help the District meet rising costs in this program.

 

 

 

Education Functions

 

State-level Education Expenses                                                                      Revenue Impact:                        $246 - $525 M (est)

           

Cities and localities generally share the responsibility for funding education with their states. Nationwide, states fund about half the cost of secondary and primary education (localities fund 43 percent and the Federal government funds the remaining 7 percent). As part of a redefinition of the D.C. schools governance charter, the Federal government could take responsibility for underwriting District costs in the following areas:

 

·      Special Education. The District has unusually high special education costs and no state backstop to assist with respect to either funding or facilities. These expenses will be as much as $246 million.

·      State-like Education Assistance. Across the country, states fund an average of half of the education expenses within their borders. If the Federal government were to fund 50 percent of the District’s education expenses, the payment would amount to approximately $525 million.

 

 

Transportation Functions

 

Washington Metropolitan Area Transportation Authority                           Revenue Impact:

Operating Costs                                                                                              $163 million (est)

 

Among all the partner jurisdictions that fund the Washington Metropolitan Area Transportation Authority (WMATA), the District of Columbia is the only partner that funds its local subsidy without state assistance. The State of Maryland funds the entire subsidy for its partner jurisdictions, and the Commonwealth of Virginia funds about half of its localities’ subsidy expenses. If the Federal government were to fund the District’s subsidy expense, the Federal government would pay approximately $163 million in FY 2004.

 

In addition to helping the District, this change would help the Federal government itself, because federal workers are principle beneficiaries of WMATA’s services. One-third of all WMATA riders are federal employees. During peak hours, federal employees represent between 45 and 50 percent of WMATA’s ridership. In addition, several Metrorail stations predominantly serve federal employment centers, including Federal Center SW, Federal Triangle, Pentagon, and L’Enfant Plaza. The Federal government benefits from subsidized transit costs for its employees. These subsidies lower federal commuter’s transportation costs, reducing the Federal government’s employment expenses.

 

 

 

 

 

Mass Transit Capital Investment                                                                   Revenue Impact:

$249 million

 

Within the WMATA system, most partner jurisdictions share the cost of WMATA with their parent states. The District, with no parent state, bears the entire cost of WMATA itself. This burden is compounded by the high charges that WMATA’s subsidy mechanism allocates to the District. The Federal government is a primary beneficiary but makes no contribution to its operating expenses, resulting in system-wide disinvestments.

 

The District’s current capital commitments to WMATA are listed in the District’s CIP and total $446 million over the FY 2004 through FY 2007 period. Current unfunded capital needs include aspects of the Infrastructure Renewal Program, the System Access and Capacity Program, and the System Expansion Program. Total unfunded capital needs are $1.028 billion over the

FY 2004 through FY 2007 period. These figures were provided by the District Department of Transportation.

 

Table 4: Mass Transit Investment Needs (D.C. Share)

 

		FY 2004		FY 2005	FY 2006		FY 2007	4-year Total
Total WMATA Needs		249		420	337		468	1,474
Planned WMATA Investment		45		206	101		94	446
Unfunded WMATA Needs		204		214	236		374	1,028

 

 

Local Roads Infrastructure                                                                             Revenue Impact:

$220 million

 

The District of Columbia is requesting TEA-3 funding to repair, rebuild and modernize the transportation system of the nation’s capital to meet homeland security and regional and local transportation needs. TEA-3 refers to the reauthorization of TEA-21 (Transportation Equity Act for the 21st Century); TEA-3 has been used to reference its replacement. The Bush Administration’s draft was titled SAFETEA (Safe, Accountable, Flexible, and Efficient Transportation Equity Act). Unfunded needs over the FY 2004 through FY 2007 period total $876 million (see table below).

 

Table 5: Local Roads Infrastructure Needs

		FY 2004		FY 2005	FY 2006		FY 2007	4-year Total
Bridges		113		139	88		50	390
Transit		7		191	58		0	256
Traffic & Bicycles		100		130	0		0	230
Total Needs		220		460	146		50	876

 

Public Safety and Justice Functions

 

D.C. National Guard                                                                                       Revenue Impact:                        $2 million (est)

 

The responsibility for managing and financing the National Guard is everywhere a state responsibility. The District’ annual outlay to support the Guard is approximately $2 million. Unlike state governors, the Mayor is not authorized to call up the Guard. This right is reserved to the Federal government.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Attachments

 

Attachment A: Fiscal Impact of Proposals to Address Structural Imbalance

 

($ Millions)

 

 

Issue                                                                                 FY04    FY05    FY06    FY07    Total

Model 1: Fair Federal Compensation Act of 2004

Fair Federal Compensation Act of 2004 ........................... 800      832      865      900   3,397

Model 2: Unrestricted Federal Payment  

Payment in Lieu of Non-Resident Taxation Authority .... 600      612      624      637   2,473

Payment in Lieu of Taxes (PILOT).................................. 250      273      292      311   1,126

Model 3: Federal Assumption of State Functions                        

Medicaid Assumption........................................................ 386      409      434      460   1,689

Medicaid Reimbursement: ................................................... 64        68        72        77      281

Mental Health .................................................................. 165      169      173      177      684

Foster Care and Adoption .................................................. 30        31        31        32      124

State-Like Education Contribution.................................... 525      537      551      565   2,178

WMATA Operating Expenditures..................................... 163      171      179      188      701

Mass Transit Capital Needs ............................................. 249      420      337      468   1,474

Local Roads Infrastructure................................................ 222      320      146        50      738

D.C. National Guard ............................................................. 2          2          2          2          8