oversight

District of Columbia: Revenues Compared With Those of Selected Cities

Published by the Government Accountability Office on 1997-06-26.

Below is a raw (and likely hideous) rendition of the original report. (PDF)

7        United States
J   A0   General Accounting
         Washington,
                               Office
                       D.C. 20548

         Genera3 Government      Division


         B-277191

         June 26, 1997

         The Honorable Sam Brownback
         Chairman, Subcommittee on Oversight of Government
           Management, Restructuring, and the District of Columbia
         Committee on Governmental Affairs
         United States Senate

         The Honorable Lauch Faircloth
         Chairman, Subcommittee on District            of Columbia
         Committee on Appropriations
         United States Senate

         The Honorable Tom Davis
         Chairman, Subcommittee on the District of Columbia
         Committee on Government Reform and Oversight
         House of Representatives

         The Honorable Charles Taylor
         Chairman, Subcommittee on District            of Columbia
         Committee on Appropriations
         House of Representatives

         Subject:     District   of Columbia:     Revenues Compared With Those of Selected
                      Cities

         In response to your request, this letter updates information presented in our
         1995 GAO letter that compared revenues of the District of Columbia with those
         of selected other cities.’ Specifically, in this letter we (1) compare the
         District’s revenues, on a per capita basis, with the per capita revenues of eight
         selected cities,” using alternative assumptions regarding the allocation of state-
         level revenue to cities; and (2) identify some potential reasons why
         expenditures per capita may differ across cities.




         ‘District   of Columbia:       Exnenditures   & Revenues (GAO/OCE-95-2R,          Aug. 1,
         1995).

         ‘Baltimore, Boston, Honolulu, Indianapolis,         Jacksonville,   New York,
         Philadelphia, and San Francisco.
                                                         GAO/GGD-97-135B     District   of Columbia   Revenues
B-277191

The District of Columbia is responsible for functions that are typically divided among
state, county, city, school district, and other local units of government. Consequently,
comparisons of the District’s revenues per capita to those of other cities, without
adjusting for the revenues of other levels of government, are not meaningful. To partially
mitigate the comparability problems, we compared the District to other large cities with
combined city/county governments and allocated school district and state revenues to the
cities. Nevertheless, our comparisons should be viewed as rough at best. In addition, our
results should not be used to judge whether the District’s revenues are sufficient to meet
its expenditure needs. A much broader analysis, which was beyond the scope of your
request, would be needed to address the question of revenue sufficiency.

SCOPE AND METHODOLOGY

To avoid problems in allocating county revenues between cities and other jurisdictions
that might be contained within a county, we limited our comparison to cities that have
combined city/county governments.    We obtained the financial, population, and school
enrollment data needed for our analysis from the Bureau of the Census for fiscal year
 1993-94. These data were the latest available, and they were readily available only for
cities with populations that exceeded 500,000 in 1990. Only eight cities with combined
city/county governments met this size criterion. We did not independently verify the
accuracy of the census data.

For the eight cities, we adjusted for large intergovernmental   revenue flows to avoid
double counting. Except in the case of Honolulu, we relied on Census coding to ensure
that the school districts included in our analysis comprehensively covered students
attending public schools within the counties that we compared and did not cover students
attending schools outside those counties.     For Honolulu, we had to estimate the city’s
share of the revenues of the state’s single school district on the basis of its share of total
student population.    We did not try to adjust for differences in fiscal years across
jurisdictions, because the Census data did not provide any basis on which we could make
 such an adjustment.

To make the total revenues of the selected cities more comparable to the District’s total
revenue, we allocated state-level revenues to those cities. We were able to determine the
amount of state-level revenue that was provided to each city in the form of direct
transfers. However, we had no empirical basis for allocating shares of the nontransferred
revenues to each city.3 We made our comparisons using two alternative assumptions
regarding the allocation of that revenue. Our first assumption was that each city received
a share of nontransferred state revenues that was proportionate to that city’s share of
total state population.  Our alternative assumption was that each city received a share of



 “Nontransferred revenue is that portion of a state’s total revenue that has not been
 distributed to specific localities in the form of intergovernmental transfers.

 2                                         GAO/GGD-97-135R    District   of Columbia   Revenues
B-27719 1

the nontransferred revenue that was proportionate       to its share of total state personal
income. Because we do not know what states actually spent in each of the eight cities,
our allocation assumptions may result in an under- or overstatement of the amount of
revenue that cities would have to raise themselves if they were assigned state-level
responsibilities.  For all of the cities except the District of Columbia, the amount of
revenues that we had to allocate on the basis of assumptions was large compared to
those cities’ other revenues (see table 2). We did not try to allocate revenue used by the
federal government to provide services, such as national parks or police service, in some
cities.

Our computations do not incorporate the revenue of special districts, such as regional
transportation districts or local housing districts, because the Census Bureau has not
published revenue data for these districts since fiscal year 1991-92. Census also has not
published recent revenue data for small independent townships contained within the
boundaries of the counties that are largely consolidated with Boston, Indianapolis, and
Jacksonville.   The 1991-92 revenue data for the independent townships and large special
districts associated with the District and the eight cities in our study are presented in
enclosure I. We discuss the effect of excluding these revenues when we present our
results.

We also reviewed a variety of studies of the District of Columbia’s finances, some of
which make comparisons to other state or local jurisdictions, to identify potential reasons
why expenditures per capita may differ across cities.

We did our work in Washington, D.C., between May and June 1997 in accordance with
generally accepted government auditing standards. We did not audit the reliability of the
data collection systems that produced the information we used. We provided a draft of
this letter to the District of Columbia Financial Responsibility and Management
Assistance Authority and to the Chief Financial Officer (CFO) of the District of Columbia.
On June 23, 1997, officials from each of those offices provided written comments on this
letter that are reprinted in enclosures II and III and discussed at the end of this letter.

RESULTS

In our analysis, the District of Columbia had the highest total revenue per capita among
the cities we reviewed, under both of the nontransferred revenue allocation assumptions
we made (see table 1).




                                         GAOIGGD-97-135R    District   of Columbia   Revenues
B-277191

Table 1: Total Revenue per Capita Under Two Alternative          Assumptions


                                                      Total revenue if
                                Total revenue if       nontransferred
                                 nontransferred      state revenue was
                               state revenue was      allocated on the
                                allocated on the     basis of personal
          City/County         basis of population          income
 District       of Columbia                 $8,286                $8,286
 New York                                    7,673                    7,851
 San Francisco                               5,982                    6,740
     Honolulu                                5,965                    6,218
     Boston                                  5,455                    5,764
     Philadelphia                            4,804                    4,643
     Baltimore                               4,649                    4,358
     Indianapolis                            4,086                    4,360
     Jacksonville                            3,417                    3,357

Source: GAO computations based on the Census Bureau’s Government                    Finances Series:
1993-1994, and Countv and Citv Data Book: 1994.


Other assumptions could produce a different result. For example, in commenting on a
draft of this letter, the Office of the Chief Financial Officer of the District of Columbia
offered an analysis using a different assumption.4 Under their assumption, all
nontransferred state revenue was allocated to cities in proportion to their share of the
state’s poverty population (see enc. III). Under this assumption, the District ranked
second, behind New York City. While the ranking of the cities did not change
significantly from one assumption to the next, the amount of total revenue per capita for
some of the cities differed significantly under the alternative assumptions. These results
illustrate the sensitivity of the comparisons to the assumptions used.

Comparisons of city total revenues per capita do not address the question of whether the
revenue available to each city was sufficient to meet its expenditure needs and should not
be used alone to assess whether these revenues are too high or too low. Our review of


 ‘We did not verify the analysis provided      by the CFO’s Office.

 4                                             GAO/GGD-97-135R   District     of Columbia   Revenues
B-277191

studies of the District of Columbia’s finances revealed that expenditures per capita may
vary across cities owing to differences in (1) the types of services provided, (2) the share
of each city’s population that receives particular services, (3) the quality of service
provided to each recipient, (4) the costs of labor and other service inputs, and (5) the
efficiency of service provision.


COMPARISON OF DISTRICT REVENUES WITH THOSE
OF EIGHT OTHER COMBINED CITY/COUNTY GOVERNMENTS

For the purposes of this comparison, total revenues for the District of Columbia are
defined as all general revenues5 that it collects itself, plus the transfer that it receives
from the federal government.      For the eight selected cities, we have defined total
revenues to be the sum of (1) general revenues that the cities collect themselves; (2)
revenues that independent school systems use to educate students residing in those
cities;” (3) revenues that the cities receive in the form of direct transfers from the federal,
state, and other local governments; and (4) a portion of their states’ revenues that are not
transferred to specific local governments.

We were able to determine the first three components of total revenue for each city from
available data. However, we could not determine exactly how much of the
nontransferred state revenues should be allocated to each city. The Census data on state
revenues and expenditures that we used were constructed from accounting records that
generally did not indicate which specific localities benefit from state resources that are
not dispensed as intergovernmental  transfers.

Lacking an empirical basis for allocating nontransferred    state revenue, we chose to make
our comparisons using two alternative assumptions regarding the allocation of that
revenue. Our first assumption was that each city received a share of nontransferred state
revenues that was proportionate   to that city’s share of total state population. Our
alternative assumption was that each city received a share of the nontransferred revenue
that was proportionate to its share of total state personal income.

Our estimates are sensitive to the assumptions that we made and, therefore, are not
precise. For all of the cities except the District of Columbia, the amount of revenue that



“General revenues do not include revenues from local government-owned liquor stores;
receipts from sales of government-operated   water supply, electric power, gas supply, and
public transit systems; and employee contributions to public employee retirement
insurance systems.

?.n the case of dependent   school systems, funds collected   for education are included in
the city’s own revenues.

5                                         GAOIGGD-97-135R     District   of Columbia   Revenues
B-277191

we had to allocate on the basis of assumptions was large relative to those cities’ other
revenues. The importance of those allocations can be seen in table 2, which shows the
revenues per capita of the District of Columbia and the eight cities by source of revenue.
In most cases, the amount of nontransferred state revenue that we had to allocate
exceeded the amount of revenue that cities raised themselves; in all cases, except for San
F’rancisco, it exceeded the direct transfers that the cities received from other levels of
government.

The sensitivity of city revenue estimates to assumptions about allocating nontransferred
state revenue is also shown in comments on this letter we received from the Office of the
Chief Financial Officer of the District of Columbia.     The CFO’s Office produced city
revenue estimates based on the assumption that all nontransferred state revenues are
allocated to cities in proportion to their share of their state’s poverty population. These
estimates are included in enclosure III to this letter. Under the assumptions used by the
CFO’s office, the District ranks second, behind New York City, in total revenues per
capita, and the gap between the District and most other cities in our comparison is
smaller than under our two assumptions.

The exclusion of special district and independent township revenues also reduces the
precision of our estimates. For example, if we included all of the 1991-92 revenue of the
townships and those special districts that were completely contained within the
boundaries of each city/county, total revenue per capita would have been higher in all of
the cities, except the District of Columbia and Honolulu.7 However, the addition of these
revenues would have had a negligible impact on the rankings shown in table 2 (Boston
would have moved ahead of Honolulu under the second assumption).




 7The 1991-92 additional revenue per capita for each city would have been $1 for New
 York, $122 for San Francisco, $502 for Boston, $279 for Philadelphia, $235 for Baltimore,
 $476 for Indianapolis, and $147 for Jacksonville.

 6                                        GAO/GGD-97-135R   District   of Columbia   Revenues
B-277191


MULTIPLE FACTORS AFFECT
REVENUE NEEDS

The amount of revenue per capita that a city needs depends on both the demand for
public services in the city and the efficiency with which the city delivers those services.
Our analysis did not address the question of whether the revenue available to each city
was sufficient to meet its expenditure needs. The following factors have been cited in
previous studies’ as causes of variations in per capita expenditures across jurisdictions:

 -       Tvnes of Services Provided. Cities differ in terms of the types of service they provide.
         For example, Honolulu does not have to provide snow removal services. Some cities
         may have privatized functions, such as trash removal and bus service.

 - Share of Ponulation Receiving Services. The costs of some services, such as Medicaid,
   Aid to Families with Dependent Children (AFDC), and foster care, depend on the
   number of beneficiaries receiving the service. The larger the share of a city’s
   population receiving these services, the higher the costs per capita will be.

 -- Qualitv      of Service. City governments differ in the quality of service they provide to
         each service recipient. For example, there are variations across cities in the coverage
         provided to Medicaid recipients, in teacher-to-pupil ratios, and in the timeliness and
         quality of street repairs.

 -       Costs of Service Innuts. Cities in which the cost of living is higher than average may
         have to pay higher salaries to attract qualified workers, pay more for construction or
         public housin,, 0 or provide higher benefit levels to public assistance recipients to
         provide a minimum standard of living.

     -   Efficiencv of Service Provision- Inefficiencies resulting from surplus or unqualified
         employees, unproductive work processes, or higher salaries than necessary to attract
         qualified workers may result in higher costs of providing services in some cities.




 ‘District of Columbia Financial Responsibility and Management Assistance Authority,
 Toward a More Eauitable Relationshin:    Structuring the District of Columbia’s State
 Functions (April 15, 1997). Phillip M. Dearborn and Carol S. Meyers, The Necessitv and
 Costs of District of Columbia Services, prepared for the District of Columbia Financial
 Responsibility and Management Assistance Authority, Greater Washington Research
 Center (Washington, D.C.: Jan. 1997). Carol O’Cleireacain, The Orphaned Capital:
 Adonting the Right Revenues for the District of Columbia (Washington, D.C.: Brookings
 Institution Press, 1996).

 8                                              GAO/GGD-97-135R    District   of Columbia   Revenues
B-277191

AGENCY COMMENTS        AND OUR EVALUATION

We received written comments on a draft of this letter from the Executive Director of the
District of Columbia Financial Responsibility and Management Assistance Author?@ (the
Authority) and the Deputy Chief Financial Officer (CFO) of the District of Columbia.
(See encs. II and III.) We also met with the Chief of the District’s Office of Economic
and Tax Policy and staff on June 23, 1997, to discuss additional details concerning the
Deputy CFO’s comments. Overall, both organizations expressed the opinion that our
analysis was incomplete or flawed and expressed concerns that the results would be
misinterpreted  or were not comparable for the cities we studied. Their specific concerns
and our responses are discussed below.

A principal concern of both the Authority and the CFO’s Office was the limited scope of
our analysis, in that we were asked to provide information on revenues alone. Both
offices noted that questions about whether revenues are sufficient to meet expenditure
needs in any jurisdiction cannot be addressed without additional information about other
matters such as specific requirements for and costs of services, efficiency indicators, and
other cost drivers for each of the selected cities. In addition, the CFO’s Office
specifically cited additional characteristics such as poverty rates, the proportion of a
metropolitan area’s population that lives within the city’s boundaries, and rates of change
in cities’ populations as factors that influence revenue needs. They both recommended
that we broaden the scope of our analysis to include such additional information to
provide an appropriate perspective for the data reported.

In making these observations, both offices were concerned that, despite our caution that
our results should not be used to judge whether the District’s revenues are sufficient to
meet its expenditure needs, readers would attempt to make that judgment. As our
cautionary statements throughout this letter indicate, we too have been concerned that
readers may attempt to draw conclusions regarding revenue sufficiency from our results.
We were asked to compare per capita revenues across selected cities within a short time
frame that did not permit us to analyze expenditure comparisons or revenue sufficiency.
However, we had recognized from the outset that the factors such as those indicated by
the Authority and the CFO’s Office may influence revenue needs and, for that reason, we
had included a section in our draft letter that discusses the multiple factors that affect
revenue needs.

Both the Authority and the CFO’s Office questioned whether the assumptions we used to
allocate nontransferred state revenues-proportional  to the distribution of population or
personal income-were the assumptions that should have been used. The Authority
suggested that any discussion of allocated state revenues should be based on the state
revenues and associated costs of state programs and services provided to the cities. The
CFO’s Office produced a table (see enc. III) showing estimates of total revenue per capita



                                         GAO/GGD-97-135R   District   of Columbia   Revenues
B-277191

for each city if all nontransferred state revenues that were allocated using a different
assumption, namely the “percent of total state poverty located in the city.”

We agree that the results of an analysis such as the one we did will vary depending on
the assumptions that are made. One of the reasons why we chose from the outset to use
two different assumptions in our analysis was to illustrate this very point, and we
emphasized this point throughout our letter. More specifically, we used the distribution
of population and personal income as alternative assumptions (1) to make the point that
different assumptions affect the revenue estimates for each city, (2) because we were
asked to update our prior analysis, and (3) because we lmew that data on those
distributions were readily available in the short time frame we had for this analysis.
There is no widely accepted empirically-based set of assumptions for this kind of analysis.
Moreover, we do not agree, however, that the poverty distribution offered by the CFO’s
Office is necessarily a better choice as a basis for allocating nontransferred   revenues.
 Based on an analysis of state spending for fiscal year 1991/92, we estimate that state
 revenues devoted to social services and income maintenance spending-revenues         that the
 CFO’s Office suggest are allocated to cities based on the distribution of poverty-account
 for, on average, about 42 percent of the nontransferred revenues of the eight states in our
 analysis.g Thus other factors are likely to affect the distribution of the majority of
 nontransferred revenues.

The Authority also recommended that we explain how federal transfers to states to fund
programs such as Medicaid and AF’DC are reflected in our analysis, so that readers would
be better able to judge the appropriateness of our comparisons. As stated in our letter,
we adjusted for intergovernmental    revenue flows. Specifically, all federal transfers to the
state are included in the state revenues, both transferred and nontransferred,    that we
allocate to the cities. State funding for Medicaid (including federal funds channeled
through the states) is included in the nontransferred portion of state revenue. The
division of state funding for AFDC (including federal funds channeled through the states)
between the direct transfer and nontransferred portions of state revenue in the data we
used varies across the states.

The CFO’s Office said that the data we used are not consistent across cities and,
therefore, should not be used in raw form to compare cities. For example, they said that
reported revenues for California and Pennsylvania include tuition paid to state universities
while reported revenue for New York does not. In their oral comments, representatives
from the CFO’s office offered another example of the lack of comparability   of the data by




 ‘This figure is the total nontransferred spending on social services and income
 maintenance for the eight states as a percent of the total nontransferred spending of the
 eight states.

 10                                        GAO/GGD-97-135R    District   of Columbia   Revenues
B-27719 1

observing that the Census data do not include special assessments as taxes.          They noted
that the District does not levy special assessments but other cities do.

While we did not independently verify the accuracy of the Census data, we did explore
the specific issues raised by the CFO’s Office with Census officials to determine whether
these observations were evidence of a lack of comparability in the data we used. On the
basis of that review, we do not believe these observations are supported. The Census
 Bureau, using the comprehensive annual financial reports and other financial statements
supplied by cities and states, has developed a detailed system for categorizing state and
local government revenues and applies this categorization consistently across all
jurisdictions.  Specifically, we were told that Census data do contain tuition paid to state
universities in all states, including New York. Also, while the Census does not classify
special assessments as taxes, it does include them in the miscellaneous revenue category,
and thus they are reflected properly in our estimates. However, to clarify these matters
in the letter, we have added more details to identify how certain revenue items are
treated in the Census data and in our analysis.

In a similar vein, the Authority was concerned that our results were not comparable
because the school districts we included in our analysis may not overlap with the
boundaries of the city/county governments, thus implying that for some cities we may
have included revenue for students attending public schools outside the city/counties we
studied or excluded revenue that should have been included. This did not occur in our
analysis. Except in the case of Honolulu, we relied on Census coding to ensure that the
school districts included in our analysis comprehensively covered students attending
public schools within the counties that we compared and did not cover students attending
schools outside those counties. For Honolulu, we had to estimate the city’s share of the
revenues of the state’s single school district, which we did on the basis of its share of
total student population.   We have revised the letter to clarify our methodology for
allocating school district revenues.


Copies of this letter are being sent to the Ranking Minority Members of your Committees,
the Mayor and the Chief Financial Officer of the District of Columbia, the Chairman of
the District of Columbia Financial Responsibility and Management Assistance Authority,
and other interested parties. We will also make copies available to others upon request.
Please contact me at (202) 512-9110, or James Wozny at (202) 512-9084, if you or your




James R. White
Associate Director, Tax Policy
  and Administration  Issues


11                                       GAO/GGD-97-135R    District   of Columbia   Revenues
ENCLOSURE              I                                                                              ENCLOSURE           I
            REVENUES       OF INDEPENDENT      TOWNSHIPS     AND LARGE SPECIAL DISTRICTS.                  1991-92


                                                                                         1991-92
                                                                                        Revenues
                                                                                        (dollars in          Revenue
         City/County            Independent   Township or Special District               millions)a         per capitab
i                                                                                                      c
    C
    (

    r

    t
    E




                                                                                                                              ,
    San Francisco




                                                                                                                              7




                                                                                                                              3

                                                                                                                              1


                                                                                                                              1



                                                                                                                              1


    12                                                 GAO/GGD-97-135R       District     of Columbia        Revenues
ENCLOSURE I                                                                                       ENCLOSURE              I

                     Special Service District of Philadelphia                                     6                  4

                     Pennsylvania    Convention      Center Authority                          11.3                  7

                     Philadelphia   Parking Authority                                         72.9                  48

                     Delaware River Port Authority                                           117.0

  Indianapolis       Indianapolis   Housing Authority                                           9.1                 11
                     Indiana Municipal Power Agency                                          146.7

                     Indianapolis   Utilities District                                       270.4                 331
                     Indianapolis-Marion     County Public Library District                    18.1
                     Indianapolis-Marion     County Building Authority                         13.3

                     Lawrence Township High School                                                1

                     Independent     smaller cities and towns                                  77.4

  Jacksonville       Beaches Public Hospital District                                          11.3
                     Independent    smaller cities and towns                                   91.8

%pecial districts with total general revenue in 1991-92 of less than $1 million are not included.

bRevenues per capita are given when special district service areas are coterminous           or within a county.
Census county population estimates are used to compute per capita amounts.

Source: Bureau of the Census, Census of Governments, “Finances of Special Districts,” 1992 and special
electronic Census of Government files “GIIND.DAT” and “FIN92lND.DAT.”




13                                                       GAO/GGD-97-135R      District   of Columbia   Revenues
ENCLOSUREII                                                                              ENCLOSURE II

          COMMENTS FROM THE DISTRICT OF COLUMBIA FINANCIAL
         RESPONSIBILJTY AND MANAGEMENT ASSISTANCE AUTHORITY

                                     District of Columbia Financial Responsibility
                                         and Management Assistance Authority
                                                   Washington, D.C

                                                        June 23,1997

                  Mr. James R. White
                  Associate Director, Tax Policy
                  and Administrative Issues
                  United States General Accounting Office
                  Washington, D.C. 20548

                  Dear h4r. White:

                         Thank you for the opportunity to provide comments on the draft proposed
                  correspondence entitled, “District of Columbia: Revenues Comnared With Those of
                  Selected Cities.”       -

                           The D.C. Finsnciai Responsibility and Management Assistance Authority
                  (“Authority”) affirms the admonition noted in the proposed correspondence, that the
                  results should not be used to reach conclusions regarding whether the sufticiency of the
                  District’s revenues to meet the District’s expenditures. This conciusion cannot be
                  reached without a detailed anaiysis of the relative costs of the specific services snd actual
                  costs of the services that each of the selected govemments provides and a comparison of
                  those costs to the actual revenue base.

                          Unfortunately, despite warnings to the contrary, the reader may attempt to draw a
                  conclusion regarding the suEciency of District revenues based on the estimation of per
                  capita revenue for. each government. To assist the reader in drawing an accumte
                  conclusion, the Authority recommends that the analysis be broadened to include an
                  examination of the tax rates, costs of labor, income rates, population, and other indicators
                  of the revenue base of the sekcted cities. Since the District performs municipal, county,
                  and state functions, the analysis in the proposed conclusion should include a detailed
                  discussion of the revenues generated by states that are directly attributable to the selected
                  governments. ‘Ibis discussion wilI present a clear picture of the revenue base of each of
                  the selected governments.

                         The Authority is also concerned that the assumptions used to compute the per
                  capita revenue for each government may prevent a valid comparison.              It is our
                  understanding that to mitigate comparabiIity          problems, school-district and state
                  revenues were allocated to each city using two altemative approaches, population and
                  personal income. We believe that these approaches do not provide a true estimate of the
                  actual state revenue generated by the governments and these approaches do not
                  adequately describe the actual revenue allocable to the sekcted governments.

                         We note that the question of allocable state expenditures is not included in the
                  proposed correspondence. Any discussion of allocated state revenues should be based on




                         OneThomasCircic,N.W. . Stitc900 . Waskgto~D.CZC005 . (202)5@KMJ
14                                       GAO/GGD-97-135R            District   of Columbia      Revenues
ENCLOSUREII                                                                         ENCLOSURE iI


              state generated revenues and the associated costs of state programs and services provided
              in the selected governments.

                        Another possible problem is the use of school district revenues. Schooi district
              boundaries may not over lap with the boundaries of the selected governments and skew
              the results.

                       Additionally, more analysis is necessary to explain the impact of Medicaid and
              AFDC on calculating the direct transfers from the state and the federal government. The
              revenue from these two federal aid programs flows to states not counties or cities. The
              federal contribution di&rs by state. Therefore, it must be explained how these revenues
              are reflected as transfers, in order to determine the appropriateness of comparisons with
              units of government that do not receive this type of federal assistance.

                       Finally, the discussion of possible drivers of expenditures does not expiain the
              reasons for the District’s relative high per capita revenue rate. We would recommend
              that the analysis include an examination of the specific costs of municipal, county, and
              state services in each of the selected governments and compare the results to the
              District’s costs. Without discussing specific costs and adjusting for workloads, efficiency
              indicators, the presence of special districts and other specific cost drivers, the analysis
              cannot lead to an irrSormed policy discussion of the sufficiency of revenues and the
              revenue base that is necessary to support the optimal expenditure level.

                     Again, we appreciate the opportunity to share our views on the proposed
              correspondence. If you have questions, please do not hesitate to contact my office.


                                                    Sincerely,




                                                  WEjrecutive
                                                    obn W. Hill, Jr
                                                              Director




15                                 GAO/GGD-97-135R           District    of Columbia    Revenues
ENCLOSURE III                                                                                                        ENCLOSURE III

                    COMMENTS FROM THE OFFICE OF THE CJ3IEF
                FINANCIAL OFFICER OF THE DISTRICT OF COLUMBIA


                                             GOVERNMENT                OF THE DISTRICT                   OF COLUMBLA
                                                    Office           of the Chief Financial              Of%icer
                                                                              ***
                Natwar   M. Gandhi
                Deputy   Chief Financial      Officer                                                                              Tax and Revenue




                 June 23,1997




                 Mr. James R. White
                 Associate Director, Tax Policy and Administration issues
                 U.S. General Accounting OffLze
                 Washington, DC 20548

                 Dear Mr White:

                 On behalf of Anthony Williams, I am responding to your letter dated June 13,1997, requesting comments
                 on your draft report entitled “District of Columbia: Revenues Compared with Those of Selected Cities.”

                 As you know, the District of Columbia is engaged in the urgent task of bringing the District’s revenues and
                 expenses into long-term balance. CIearly, we must take a hard look at any areaswhere District costs are
                 out of line. However, we have serious disagreement with this report, which uses faulty data and
                 methodology that exaggeratethe differences in revenue between the District of Columbia and eight other
                 cities. Substantial revisions should be made before the report is released.

                 The following are our concerns:

                 1.       The report fails to recognize a primary function of state taxation-to generate revenue from
                          better-off individuals (significantly concentrated in suburbs) and m-allocate funds according
                          to need to worse-off individuals (significantly concentrated in inner-cities).
                          This failure shows up in several places in the report:

                          .         Where state revenue is allocated either per capita or based on share of income, rather
                                    than based on a measurement of %eedn for each service supported by state
                                    expenditure. For example, by allocating Medicaid expenditures according to city
                                    population or income, the report assumesthat poverty is distributed in the same pattern as
                                    either population (but there are urban concentrations of the poor) or as income (which may
                                    well be m         related to poverty). Poveay concentrations in the nine cities range from
                                    8.9% (Honolulu) to 26.7% (Philadelphia) in 1993.

                          e         Where, by selecting only cities that have city/county governments, the report implies
                                    that the cities all have the same relative mix of urban and suburban populations.
                                    However, Jacksonville’s county includes 74% of the entire metropolitan area (and a

                                           441 4th Street,   N.W.,   Suite 4005,    Washington,   D.C     2&01   202/727-6083


 16                                                          GAO/GGD-97-135R                  District      of Colnmbia         Revenues
ENCLOSURE   III                                                                                                  ENCLOSURE           III


            Mr. James R. White
            Page 2
            June 23,1997

                                 significant part of the middle-dass population in the suburban ring) while the District only
                                 contains 14% of its metropolitan area population. When more population has private
                                 means,as in Jacksonville, there is less reason for higher per capita revenue distributions.

            2.         The data used in the report are not consistent across cities aad, therefore, should not he used
                       in raw form to compare cities. For example, reported revenues for California and Pennsylvania
                        include tuition paid to state universities, reported revenue for New York does not.

            3.         Because dynamic elements are omitted, the methodology of the report overstates revenue per
                       capita in D.C. and understates revenue per capita in the other cities. Specifically, the
                       District’s population declined sharply by 6.4% between 1990 and 1994, while the populations of
                       Baltimore and Phiiadelphia declined less severeIy and the populations of the other cities increased.
                       Because it takes time for governments at all levels to adjust expenditure patterns’, there is bias in
                       the reported results.

            My staff has respondedin as much detail as possible, given the one-week time frame for a response. As
            your time is also limited, we would be pleased to work closely with you in addressing the points raised in
            the enclosed “Comment”.

            Please include these written comments in the report so they become part of the record and other users will
            have the benefit of our perspective.

            Thank you for the opportunity to review this drafi report.




                                    ax and Revenue

            Enciosure:          Comment on GAO draft correspondence,
                                “Diict of Columbia: Revenues Compared with Those of Selected Cities”

            cc:        Anthony A. WiIliams




                            ‘For example, populationdecfie lastyearis likely to be measured thii year, taken into account   iu the
                  subsequent budget process (next year), and to affect the budget the year sfter next-




17                                                     GAO/GGD-97-135R                District    of Columbia         Revenues
ENCLOSURE   III                                                                                ENCLOSURE            III




                  REVIEW       AND COMMENT:      Draft Correspondence
                  “District   of Columbia: Revenues Compared with Those of Seiected Cities”

                  Office of the Chief Financial Ofleer, Deputy CFO for Tar and Revenue
                  June 20. 1997

                  The root difftcuky is that the “District of Columbia: Revenues Compared with Those of Selected
                  Cities” (hereafter the “draft”) just scratches the surface of an area that already is the subject of a
                  number of detaiIed studies. The draft, therefore, reflects very little from the lessons learned
                  about making fair and accurate comparisons between the District of Columbia and other cities. It
                  merely cites some of these studies in a footnote on p. 10 and lists without comment some of the
                  reasons the topic is complex. we          disclaimers.ost readdthe          draft are iikelv to sm
                                                    .     .        . .
                  the&&&&~,,&                                    Jhsa         m anv other comnarable citv. and thr;
                  ilaws i-the           table -.d ~0 unnoticed.

                  Specific issues with the draft are discussed below.

                  1Ahhough the discussion in the draft is stated in terms of revenues, it can just as well be viewed
                  in terms of expenditures, since there is a virtuai equality between revenues and expenditures in
                  cities. Unfortunately, there is no effort made to address in any serious way why the expenditures
                  that need to be tinanced vary among cities. Ahhough it is essential to improve efficiency and
                                                                                                              . .
                  reduce the cost of D.C. services, $
                                                                                . .
                                heaw w&lg.&&ted          to its urban.

                  2. As the draft rem-s,        a key methodological challenge of the analysis is how to allocate
                  state revenues (including federal grants-in-aid made avaiiabie to the states) that are not directly
                  paid to the city by the state. These indirectly aUocated revenues, which include most money for
                  welfare, corrections, and higher education, are very substantial. These revenues account for well
                  over half of all state revenues, and represent a substantial &action of the revenues calculated for
                  many of the cities.

                  For allocating these otherwise unaccounted for state revenues, the draft presents 2 altematives-
                  proportionate shares of population and of income. However, both of these measures have
                  substantial shortcomings because very large portions of the unallocated state spending are
                  positively con&ted with neither of these bases. Indeed, income may be negatively correlated.
                  The draft is especially flawed in faiImg to mention the traditionaI redisttibution role that state
                  governments play in many service areas-namely, distributing resources from better-off areas
                  (typically suburban areas), to cities or poorer rural areas where spending needs are high.

                  An example of the shortcoming can be found in the Maryland welfare programs. Maryland
                  spends from its tmaiIocated revenues more than 40% of its Medicaid and AFDC COSTSin
                  Baltimore. Yet the GAO methodology allocates only about 14 percent on a per capita basis and
                  even less on an income basis. Because these two programs constituted over $2.2 billion of




 18                                             GAO/GGD-97-135R            District   of Columbia      Revenues
ENCLOSURE III                                                                                 ENCLOSURE               III




                spending in 1995, the GAO understatement of Baltimore revenues is substantial. The differential
                between 14% and 40% of $2.2 billion is approximateiy $570 million, or more than $800 per
                person living in Baltimore.

                As mentioned above, the “right” way to allocate all of the state revenues (or expenditures) is a
                very complex task and we do not purport to have developed the complete answer in this short
                timename. However, with back-of-the-envelop estimates such as those contained in this report,
                and as a matter of professional integrity, every effort should be made to be sure that the ranges
                that are shown encompass the fitI1 range of plausible approaches. This is particularly true, given
                the strong possibility that those reading the report may draw important conclusions fkom it
                regarding the adequacy or lack thereof of D.C. revenues. I&&v. the ahocatton would be ma&
                based on e                work-w     for each &pe of state or federal exnendiue. e.9. the share of
                Jhc state’s uovertv DODUI~~~~Dfor welfarethe                              state, s um‘versitv-a
                                    her educati                      so forth.

                Accordingly, given the cleariy demonstrated redistributive role of state governments and of
                federal programs operated through the states, it would be entirely proper for the report to include
                at least one allocation formula based on need, such as the percent of the state’s poverty
                population that is located in the city. Based on information from the Bureau of the Census, the
                following table shows (1) the percentage of each city that is below the poverty line, and (2) the
                percentage of total state poverty that is located in that city.

                 City                             % of poverty in the city    % of total state poverty located in
                                                                              the city
                 District of Columbia .           20.5%                        100.0%
                 New York                       I-24.6%                      I 61.1%                                   I
                 San Francisco                    13.4%                        1.8%
                 Honoiuht                         8.9%                        68.2%
                 Boston                           19.0%                       17.9%
                 Philadelphia                     26.7%                       26.4%
                 Baltimore                        25.4%                       34.9%
                 Indianapolis                     15.1%                       18.1%
                 Jacksonville                     15.2%                        4.9%


                Applying the percentages of state poverty to the unallocated amounts of state revenue used in the
                dr& results in an estimate that raises per capita revenues in some cities and lowers them in

                                                                2




19                                            GAOIGGD-97-135R           District   of Columbia      Revenues
ENCLOSUREIlI                                                                                        ENCLOSUREITI


               others. As a result, the ranking of cities changes, with New York higher than the District, and
               several other states get much closer to the District. The listing of per capita revenues under tbis
               assumption for the cities in the report is as follows:




                City                                                 Total revenue per capita if nontransferred
                                                                     state revenue is allocated on the basis of the
                                                                     incidence of poverty*
                Disnict of Columbia                                  $8,286
                New York                                              8,841
                San Francisco                                         5,659
                Honolulu                                              5,642
                Boston                                                7,278
                Philadelphia                                          6,777
                Baltimore                                             7,652
                Indianapolis                                          4,560



               l Estimates make no adjustments for the dynamics of how population changes will tend to raise

               reported per capita revenue calculations in D.C. relative to other cities. D.C. population decliied
               6.4% from 1990 to 1994, only two other cities (Philadelphia and Baltimore) dehned at ail (but by
               a smaller percentage), and the others all increased.

                                                  ..                                 . .
               3. Bvsonfining~s                        over 500.000 whwe                        or no we        between
                                                                                           ..
                                                       es It a-t      true co-                    has been achieved. but


                       -Indianapoiis and Jacksonville consist of merged cities and counties that encompass 64%
               and 74% of their metropolitan populations. In contra& the district represents only 13% of its
                                                                             . .
               metropolitan population. yith m      of the better-off-             the suburban w    we would
               meet lower public expen&ures because-                have pljvate mws to provide for manv
               t3-axbL

                      -The proportion of city residents living in poverty varies considerably from city to city, as
               show in the first table above. Honolulu has only 8.9% of its population in poverty, while 26.7%

                                                                 3




20                                           GAO/GGD-97-135R              District   of Columbia         Revenues
 ENCLOSURE   III
                                                                                                    ENCLOSURE       III



                   of Philadelphia’s residents are in this category.

                           -Of the 9 cities that are compared, Census estimates show that only the District
                   experienced a sharp (6.4%) decline in population from 1990 to 1994. Only two others
                   (Philadelphia and Baltimore) experienced any decline at all, and these were smaller than D.C.‘s.
                   (4.0% and 4.5% respectively). The other 6 cities all grew, 3 of them (Boston, Jacksonville, and
                   Indianapolis) by more than 11%. Because all of the information in the report is shown on a per
                   capita basis, the relatively sharp decline in D.C. population is likely to bias the results by tending
                   to push per capita amounts relatively higher in the District. There is a long lead time in the
                   budget formulation and execution process, and it also takes time for service levels to adjust to
                   population changes. For example, if population declined in 1991, this likeiy was observed and
                   measured in 1992, taken into account in the subsequent budget process in 1993, and reflected in
                   the actual budget for 1994 or 1995, depending on when planning for the fiscal year takes place.


                   4. won                in the reuort is not swized               .- . therefore comoarisons should
                                                                         across aties.
                                                    6‘
                                       the data are cle&         ” Our experience, and that of others, has been that
                   despite the best intentions of. the Bureau of the Census, it is diEcult to place full confidence in
                   comparisons made with this data source. As au example, the census data counts college tuition
                   in state universities as revenue for California and Pemsylvania, but not for New York.

                    Further, the data in the report are confusing to follow. Are items such as special assekments,
                    utility funds, retirement funding, public housing, highway funding, taxes on utilities and liquor,
                    etc. given comparable treatment? In the time available, we were obviously not able to check into
                    this. However, other researchers have advised us not to use these data for comparisons among
                   jurisdictions.

                   5. For those using the report, it would be helpll if there were adequate tables in the appendices
                   so that users couid have a better idea about the nature of the background data, how the data are
                   researchedand “cleaned,” if necessary, and how the values in the tables are derived.




                                                                       4




(268804)

21                                          GAO/GGD-97-135R                District   of Columbia    Revenues
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