WASHINGTON - The District of Columbia's $200 million short-term note sale last week signifies financial distress and renewal of a borrowing pattern that a former city financial adviser warned against, a key federal lawmaker said yesterday.
"There is beginning to be once again a pattern of increased short-term borrowing over a long period of time. I wonder when it finally comes to a breaking point," Rep. Julian Dixon, D-Calif., the chairman of the House Appropriations Committee's District of Columbia subcommittee, said during a hearing held by the panel.
But city officials said later such borrowing represents sound cash management that is designed to bring receipts in sync with expenditures and is repaid out of current-year receipts.
This type of tax revenue anticipation note borrowing should not be confused with the $331 million of deficit funding bonds the district issued in 1991, in response to Wall Street concerns, to eliminate a deficit originally inherited from the federal government, said Mayor Sharon Pratt Kelly.
The district issued Trans every year from 1986 through 1991.
The intensity of questioning about the note sale expressed during the hearing surprised city officials because similar concern is not reflected in the credit markets, one official said after the hearing.
But Dixon sounded alarm over the sale, saying the district budget shows plans for borrowing an additional $250 million in fiscal 1995.
Dixon quoted a statement made to Congress in 1991 by Franklin Raines, formerly with district financial adviser Lazard Freres & Co. and now vice chairman of the Federal National Mortgage Association. Raines said that if the district returns to short-term borrowing, "that means there is another deficit" and Congress should oppose the borrowing.
"Short-term borrowing is not automatically a sign of an operating deficit," said Ellen O'Connor, deputy mayor for finance and chief financial officer for the district. There has been a lot of "water under the bridge" since that statement was made, O'Connor said. "We have had a recession," the federal government owes the city money, and there has been an increase in taxes owed but not paid, she said.
O'Connor acknowledged that the city promised Swiss Bank Corp., which provided a letter of credit for the recent note sale, that it would have a $63 million cash balance at the end of fiscal 1994.
At the hearing, which focused on the district's supplemental budget request for fiscal 1994, Dixon questioned whether revenue projections are realistic based on about $55 million in new or increased taxes recently approved by the city council and the mayor.
He also was skeptical about the link between the district's $5 billion unfunded pension liability and actual cash-flow problems. "I don't see a direct correlation between the unfunded liability and the failure of the district this year to pay its full pension" obligation, Dixon said, suggesting that the problems may stem from lack of financial discipline.
The district's decision to skip making payments to the pension fund this year "makes it very difficult for us to help," said Rep. James Walsh, R-N.Y., the ranking Republican on the panel.
At the hearing, O'Connor said the district will miss its July payment to the pension fund, bringing the total fiscal 1994 liability to $190 million. Of this, $113 million will be paid in October upon receipt of the proposed fiscal 1995 federal payment of $670 million this October.
The district will make four payments in fiscal 1995, one of which will make up the shortfall for fiscal 1994. Because four payments are traditionally made for each fiscal year, that will leave the city short one payment for fiscal 1995, O'Connor said.
Kelly said funding the pension program "would never be a cure-all." But "it;'s certainly exacerbating an already difficult situation by having to meet that obligation."
Structural reforms are needed to put the district on more equal footing with other cities that face similar problems, Kelly said. The district needs new authority to provide financial incentives as well as capture revenues to restore the city's eroding tax base, she said.
Kelly initiated a meeting Tuesday with President Clinton's economic advisers to discuss structural reforms like changes in taxing authority. Attendees included Alice Rivlin, deputy director of the Office of Management and Budget; Robert Rubin, head of the National Economic Council; Elgie Holstein and Gene Sperling, also of the council; and other administration and city officials.
Reform might involve providing a tax haven or credit that could be applied against federal income tax, Kelly said in an interview. She said she believes structural reform could occur by the end of the calendar year.
Recent requests by Dixon and Rep. Pete Stark, D-Calif., that the Congressional Budget Office and GAO review city finances has prompted speculation that Congress is seeking to gain more control over the district.
However, Walsh said at the hearing he does "not want to take additional responsibilities for the district ... I don't believe [Dixon] does either."
O'Connor said she has been briefed by the GAO and CBO on their findings. She and Kelly said in an interview that the findings corroborate what they already know about district finances.
Dixon said a major concern of his panel is that the district claims to balance its budget each year but ends up short.
"The budget that comes up [to Congress] does not accurately reflect the state of the financial condition of the district," Dixon said. The district submits balanced budgets; yet, "there have been times when the district has been almost out of money," he said.
Dixon was particularly intrigued that the congressional auditing agencies cannot find documentation for $24 million in accounts, receivables" dating back to 1981, representing payments owed by the federal government to various city accounts.
He questioned how the city's auditors, Coopers & Lybrand, could let those items carry over year to year when the payments apparently are not forthcoming. If this money does not come in, the city "is $24 million in the hole," he said.
O'Connor said $14 million of the outstanding receivables has been collectible. "I will take action as soon as I get out of here to make sure the documents [the congressional auditors] are looking for are provide," she said.
"If that's all they want to argue about" regarding specific items in the $3.5 billion budget, "that's not much of an issue," Kelly said in the interview. She said she had confidence in her auditors.
Dixon said the congressional auditors also were corncerned that the district's separate water and sewer fund, which recently made a contribution to the general fund of $28.6 million, will cause the water and sewer fund to have a negative cash balance in the near future.
O'Connor said the fund plans to pay out $20 million more in cash than it will receive in fiscal 1995, but this will come out of a savings account.