D.C. Is Called Insolvent; Federal Action Expected

On the 263rd anniversary of George Washington’s birth, federal examiners told Congress on Wednesday that the capital that bears his name is virtually broke--a stark verdict that lawmakers predicted will hasten a federal takeover of the city’s mismanaged finances.

“The District is insolvent. It does not have enough cash to pay all its bills,” John Hall, an examiner with General Accounting Office, told a joint hearing of the two House subcommittees charged with overseeing the District of Columbia’s finances.

Unless the city sharply cuts spending or the federal government steps in, Hall testified, the capital will be flat on its back “as early as this summer.”

House Republicans, alarmed by the scale of mismanagement described by the GAO, said no more federal aid will be granted without massive District spending cuts. They also warned that federal intervention will come with strings attached to ensure that the city balances its budget in the future.

“Congress will not allow the city government to throw up its hands and say that ‘the problem is too big and we can’t fix it so we choose to do next to nothing,’ ” said Rep. Thomas M. Davis III (R-Va.), chairman of the District’s principal oversight subcommittee. Congress will intervene, he added, but mismanagement “will no longer be tolerated.”

Testifying before the subcommittees for the first time since he took office in January, District Mayor Marion Barry acknowledged the crisis but blamed most of it on his predecessor and on the inequities of the home rule charter under which the District receives limited autonomy from Congress.

He pledged Draconian budget and staff cuts but appealed for more federal aid and called on Congress to guarantee the city’s municipal bonds, which Wall Street recently downgraded to junk bond status.

The home rule charter under which the capital’s 600,000 residents have managed their affairs since 1973 has been unworkable, Barry said, in part because of the large federal debt that the District assumed at the outset of home rule and restrictions placed on its tax base. Exemptions for federal- and foreign-owned properties, for instance, make 57% of the city’s real estate immune from taxation and cost the municipal government $450 million a year, Barry said.

Adding to the burden, he said, are a $2.2-billion unfunded pension liability transferred to the district by the federal government and rules prohibiting the city from taxing the incomes of more than half a million people who work in Washington, but live in neighboring Maryland or Virginia.

But the GAO’s analysis painted a somewhat different portrait of the city’s tangled finances. Its bookkeeping is so sloppy that it cannot tell auditors how many of its checks are outstanding or even furnish them with reliable information on the number of people it employs, the GAO said.

Budget cuts mandated by Congress last year have not been carried out, accounting gimmicks have been used to cover up shortfalls and the federal government’s annual $660-million payment to the city now goes to cover bills from the previous year, Hall testified. Despite this, the city “only has cash now because (it) is not paying hundreds of millions in bills,” the GAO report added.

About the only good news the GAO found was that the city seems to have overstated the size of its budget shortfall, recently estimated at $722 million.

Urging Congress to form a partnership with him, Barry asked the lawmakers to assume responsibility for $549 million in Medicaid expenses over the next three years, guarantee the city’s credit so that it can get back into the bond market and eventually to assume control of many services, such as Medicaid, which are normally funded by state governments, not cities.

House Speaker Newt Gingrich (R-Ga.) has said that Congress likely will intervene by creating an independent financial control board to take charge of the District’s finances--a step that other sources said would probably be taken within the next few weeks.