However, according to District officials, this  assistance is inadequate. In September 2002, we published an interim report that concluded that the  District had not provided sufficient data and analysis for us to determine  whether, or to what extent, the District is, in fact, facing a fiscal structural  imbalance. To help inform this debate about the proper level of federal  assistance, this report (1) assesses whether, or to what extent, the District  faces a structural imbalance between its revenue capacity and the cost of  providing residents and visitors with average levels of public services,   (2) identifies significant constraints on the District’s revenue capacity,   (3) examines cost conditions and management problems in key program  areas, and (4) studies the effects of the District’s fiscal situation on its  ability to fund infrastructure projects and repay related debt. Reports on the District’s Unique Circumstances, Fiscal Health, and Management Problems

Several recent reports address some of the unique challenges the District  faces as the nation’s capital, the status of its fiscal health, and the  management inefficiencies that continue to affect its programs, costs, and  service delivery. However, since other states may  tax nonresidents’ incomes, those incomes are included in their tax bases. We reviewed the  data that the District had available in its annual budget and financial plans  and CAFRs, and other documents. The District’s Cost of Meeting Its Public Service Responsibilities Exceeds Its Revenue Capacity, Resulting in a Structural Deficit

To determine if a jurisdiction has a structural deficit, we estimated, for the  District of Columbia and the 50 state fiscal systems, the spending needed to  provide an average level of public services, the revenues that could be  raised with average tax rates and the amount of grant funding the  jurisdiction can expect to receive. Our analysis indicated that the District’s  cost of delivering an average level of services per capita is the highest in the  nation due to factors such as high poverty, crime, and a high cost of living. Our analysis also indicated that the District’s total revenue capacity (own- source revenues plus grants) is higher than all state fiscal systems, but not  to the same extent that its costs are higher. The primary reason for the structural deficit is high costs due to  conditions beyond District officials’ direct control. The Spending Necessary to Fund an Average Basket of Public Services Exceeds That of All State Fiscal Systems

Using an average of the 50 state fiscal systems as a benchmark, our analysis  indicates that the per capita cost of funding an average level of services in  the District exceeds that of the average state fiscal system by  approximately 75 percent (and is over a third more than the second highest  cost fiscal system, New York). The District’s High Tax Burden Yields Revenues That Could Only Support an Average Level of Services

The District’s tax burden (actual revenues collected from local resources  relative to their own-source revenue capacity) is among the highest of all  fiscal systems, but that burden yields revenues that are only sufficient to  fund an average level of services. However,  when the District’s high cost circumstances are taken into account, this  high spending level would only be sufficient to provide an average level of  services if those services were delivered with average efficiency. Nevertheless, even if the  District were to provide its public services as efficiently as a typical state  fiscal system, it would still face a structural deficit of $470 million or more. The District’s Revenue Capacity Would Be Even Higher in the Absence of Several Constraints on Its Taxing Authority

Although the District of Columbia’s (District) own-source revenue capacity  per capita appears to be large relative to those of most state fiscal systems,  it would be even larger in the absence of several existing constraints on the  District’s taxing authority. The District’s Property Tax Base Is Relatively Large despite the Disproportionate Presence of Properties Owned by the Federal and Foreign Governments

Like all state and local governments, the District is unable to tax property  owned by the federal government and foreign governments. In addition, in each of the three key program areas we identified significant  management problems, such as inadequate financial management, billing  systems and internal controls that result in unnecessary spending, which  draw scarce resources away from program services. Steps to Address Management Problems

District officials have acknowledged the severity of the District’s Medicaid  management problems and have taken steps to remedy them. It also makes it difficult to plan or budget for federally  related expenses. District Infrastructure Continues to Be Deferred

The District is deferring significant amounts of capital projects by not  funding or taking action on specific repairs and improvements to the  District’s infrastructure.
Why GAO Did This Study

District officials have recently reported both a budget gap and a more permanent structural imbalance between costs and revenue raising capacity. They maintain that the structural imbalance largely stems from the federal government's presence and restrictions on the District's tax base. Accordingly, at various times District officials have asked the Congress for additional funds and other measures to enhance revenues. In a preliminary September 2002 report, GAO concluded that the District had not provided sufficient data and analysis to discern whether, or to what extent, it is facing a structural imbalance. At that time, GAO also agreed to perform a more comprehensive analysis and was asked to (1) determine whether, or to what extent, the District faces a structural imbalance between its revenue capacity and its public service responsibilities, (2) identify any significant constraints on the District's revenue capacity, (3) discuss factors beyond the control of District officials that influence the District's spending in key program areas as well as factors within its control, such as management problems, and (4) report on the District's deferred infrastructure projects and outstanding debt service and related expenses that might be affected by a structural imbalance. The District concurred with our key findings.

What GAO Found

GAO used a multifaceted approach to measure structural imbalance that GAO defines as a fiscal system's inability to fund an average level of public services with revenues that it could raise with an average level of taxation, plus the federal aid it receives. This approach compared the District's circumstances to a benchmark based on the average spending and tax policies of the 50 state fiscal systems (each state and its local governments). However, the benchmark is adjusted by taking into account circumstances that are beyond the control of state and local government officials (e.g., number of school-age children and value of tax bases). GAO supplemented this analysis with reviews of the District's key programs to provide insights on factors influencing spending, and reviewed deferred infrastructure and outstanding debt. The cost of delivering an average level of services per capita in the District far exceeds that of the average state fiscal system due to factors such as high poverty, crime, and a high cost of living. The District's per capita total revenue capacity is higher than all state fiscal systems but not to the same extent that its costs are higher. In addition, its revenue capacity would be larger without constraints on its taxing authority, such as its inability to tax federal property or the income of nonresidents. The District faces a substantial structural deficit in that the cost of providing an average level of public services exceeds the amount of revenue it could raise by applying average tax rates. Data limitations and uncertainties surrounding key assumptions in our analysis made it difficult to determine the exact size of the District's structural deficit, though it likely exceeds $470 million annually. Consequently, even though the District's tax burden is among the highest in the nation, the resulting revenues plus federal grants are only sufficient to fund an average level of public services, if those services were delivered with average efficiency. The District's significant management problems in key programs waste resources and make it difficult to provide even an average level of services. Examples include inadequate financial management, billing systems, and internal controls, resulting in tens of millions of dollars being wasted, and hindering its ability to receive federal funding. Addressing management problems would not offset the District's underlying structural imbalance because this imbalance is determined by factors beyond the District's direct control. However, addressing these management problems would help offset its current budget gap or increase service levels. The District continues to defer major infrastructure projects and capital investment because of its structural imbalance and its high debt level. These two factors make it difficult for the District to raise taxes, cut services, or assume additional debt. Although difficult, District officials could address a budget gap by taking actions such as cutting spending, raising taxes, and improving management efficiencies. In contrast, a structural imbalance is largely beyond District officials' direct control. If this imbalance is to be addressed, in the near term, it may be necessary to change federal policies to expand the District's tax base or to provide additional financial support. However, given the existence of structural imbalances in other jurisdictions and the District's significant management problems, federal policymakers face difficult choices regarding what changes, if any, they should make in their financial relationship with the District.