Straight talk from the D.C. Auditor

Want to know when there's some new Auditude?

D.C. and the Financial Rules of the Road, Part II

A fractured financial framework

Published February 8, 2024

The Office of the D.C. Auditor recently reported that the District failed to follow accounting rules in describing the D.C. Housing Authority in the FY2022 Annual Comprehensive Financial Report (ACFR).

The ACFR—produced by an independent CPA firm using financial information from the Office of the Chief Financial Officer—is the single most important financial document the District publishes. It serves as a basis for bond issuances, and reflects the financial decisions elected officials have made.

That finding prompts the question:  what other financial rules are being ignored and who is paying attention?

In the early 1990s the District’s elected and appointed officials ran roughshod over the norms of city finance—they took funds from the water authority to cover other costs and actually created a “fifth quarter” of tax revenues, pretend money they then spent. They failed to budget for expenses the District was required to pay, such as retiree health benefits, and they “saved” money by not paying bills. We narrowly veered away from insolvency.

In the wake of that financial crisis Congress the District set up elements of an oversight framework to preclude that kind of mischief in the future. The framework included giving the Office of the Inspector General the role in managing the annual financial audit. Congress created the large, powerful and independent Office of the Chief Financial Officer (OCFO), now counting over a thousand FTEs and budget of more than $200 million.

Overspending reigns

In its early years the CFO created a “financial review process” (FRP) that requires every agency to report mid-year overspending and produce a written gap-closing plan to bring spending back into line with budget as we noted in 2020. But the CFO does not effectively enforce the FRP process today.

The agency rewrote its own rules for FRP oversight in 2022 in launching D.C.’s new financial system, the District Integrated Financial System, which went live October 1, 2022. The revised FRP rules continue to state that any agency with a spending pressure that could lead to overspending at year’s end must submit a “gap-closing plan that details how to prevent any projected spending pressure in order to avoid a potential deficit resulting in violations to the Anti-Deficiency act of 2002.”

The July 31, 2023, FRP from the Metropolitan Police Department reported a projected deficit in excess of $100 million based on current spending. The detailed gap-closing plan proposed by the department, signed off on by the Chief and subsequently accepted by the OCFO, states “supplemental funding needed to close this spending pressure.”

That was the entire plan.

Executive branch agencies overspend their budgets each year and the overspending stands until after the end of the fiscal year, when appropriations are shifted around to cover overspending that has already occurred. Thriftier agencies lose budgeted funds that are not spent. And MPD’s plan was put into effect! The FY23 ACFR released last week notes that MPD had $127 million added to the budget originally approved by the Council.

Mid-year overspending is required to be flagged for another piece of the financial oversight framework, the Board of Review of Anti-Deficiency Violations (BRADV). With the sole exception of one Council appointee and a representative of the Inspector General, BRADV is made up of the same players who overspend and facilitate the overspending: representatives of the Mayor and the CFO. It is a Wilson Building mystery whether the BRADV ever actually meets.

You need how much to do what?

In Council testimony last week, the D.C. Open Government Coalition (DCOGC) eviscerated another part of the OCFO oversight framework, the Fiscal Impact Statement (FIS). Looking at a single example of a FIS for an omnibus police reform bill enacted in 2022, the DCOGC testimony detailed how the OCFO’s internal controls were ignored to produce cost estimates for new Freedom of Information Act requirements: the FIS did not include the basis for the estimate and the OCFO had no evidence of any research—both required by OCFO policy—apart from redacted emails from MPD and the Office of Police Complaints.

Instead, the OCFO relied unquestioningly on these redacted emails which contained the agencies’ claims that disclosing police discipline records would require 11 new employees and an additional $5 million over four years. The DCOGC testimony recommends Council conduct a thorough review of the CFO’s FIS process and if warranted consider “other approaches to cost analysis.”

Last week’s Auditude said the erroneous treatment of DCHA in the ACFR was the tip of the iceberg. These fractures in the framework may signal other dangers ahead.

Leave a Reply

Your email address will not be published. Required fields are marked *