systems for the District by the development and implementation of numerous system improvements as noted in the Report.

I am encouraged by our movement toward full financial integrity as represented by both the progress being made in our comprehensive financial systems development and by the tangible result of an unqualified opinion on the District's first independently audited balance sheet. This movement has not come without significant difficulties, but it is the commitment of the District to meet this challenge forthrightly.

This financial report provides valuable information to the citizens of the District, the Council, and the U.S. Congress. I would like to take this opportunity to express my appreciation for the efforts of the District's Office of Financial Management and other District agencies that provided invaluable assistance in continuing to improve upon the District's financial reporting.

I am pleased to transmit the 1979 Annual Financial Report for the District of Columbia. This is the first time that the balance sheet has been examined by independent certified public accountants, and we have received an unqualified opinion.

The Report for the fiscal year ended September 30, 1979, includes such entities as the District Unemployment Compensation Trust, Stadium/ Armory Complex, Redevelopment Land Agency and National Capital Housing Authority, which have been excluded in previous reports. This reflects a continuation of the enhancement in financial reporting and disclosure by the District Government.

The Report contains consolidated financial statements (pages 2 to 3,
and 5 to 6), consolidating financial statements (Exhibits I to III--
pages 23 to 26), summary of major accounting principles (pages 7 to 9),
and notes to the financial statements (pages 10 to 22). The following
are important to an understanding of the Report.

63-088 0 - 4

The consolidated financial statements are presented
to give a more complete and understandable view of
the entire District as a single financial entity.
This represents a considerable improvement over
statements typically issued by municipal governments.
At the present time, few public entities present their
financial statements on a consolidated basis in
accordance with the principles applied herein.

It should be noted that, in view of this last consideration above, any comparison between the financial statements of the District presented herein and those of other public entities must be undertaken with care, recognizing that substantial adjustments may be necessary to achieve comparability.

Results of Fiscal Year 1979 Operations

Consolidated Basis

As noted above and in the accompanying notes, the consolidated financial statements represent a full consolidation of District financial operations, the use of the accrual basis of accounting throughout, and the recognition of accrued pension expense. On this basis, the Consolidated Statement of Costs of Services and Revenues (page 3) indicates that the District incurred a substantial deficit in fiscal year 1979 of $285.9 million. The corresponding deficit for fiscal year 1978 was $192.7 million. As shown in the Consolidated Balance Sheet (page 2), the accumulated deficit at the end of fiscal year 1979 was $1,045.0 million.

The annual and accumulated deficits noted above are chiefly attributable to the recognition of accrued non-cash pension expenses by the District. This practice was begun in fiscal year 1976 (and reported in the annual financial reports for that and subsequent periods) to account for approximately $2.0 billion of unfunded prior service costs that had accrued, but were not recognized in the financial statements of the District, prior to the granting of limited Home Rule in 1975.

Public Law 96-122, known as the District of Columbia Retirement Reform Act, enacted November 17, 1979, resulted from a realization of a direct Federal responsibility for a portion of unfunded pension costs for prior services. The Act provides for Federal payments to our pension trust funds of $52 million a year, totalling $1.3 billion over a 25-year period (fiscal years 1980 through 2004). The District's liability for unfunded pension costs for prior services has been reduced by $649 million, reflecting the present value of these future payments. However, the District will still continue to accrue substantial non-cash pension expenses annually under the financing arrangement in the Reform Act. Note 6 to the financial statements (page 15) explains the calculation of the cost to the District of funding the police, fire, teachers and judges pension system.

For the first time, this year the District's investment in assets for its many buildings and other fixed assets have been comprehensively identified and included in the financial statements. This includes the District's share in the Metro rail and bus system. During fiscal year 1979, the District contributed $47.6 million to the Washington Metropolitan Area Transit Authority. Of this amount, $41.0 million represents the District's share of operating deficits and $6.6 million was related to capital contributions. Note 5 to the financial statements (page 13) explains the District's participation in Metro.

During fiscal year 1979, Federal loans for capital outlays amounted to $100 million, with interest rates from 8.88 % to 9.25 %. Total Federal loans outstanding at September 30, 1979, were $1,374 million. A summary of the Federal loan principal and interest repayments due in the future is shown in Note 9 (page 19).

Budget Basis

The annual budget of the District is developed in accordance with procedures established by the U.S. Congress over the years, and on a basis that reflects continued Federal control of District financial operations. The annual budget consists of operating and capital budget authority which is financed by local taxes and other local revenue, along with the Federal Payment, Federal Revenue Sharing, and Federal loans for capital outlays. This budget authority is referred to as the "appropriated" budget. It is important to note that a result of Federal budget procedures is that roughly a third of total annual financial operations--primarily grant finances-is not formally enacted into law as budget authority.

In the annual budget process, a "financial plan" is formulated, in the context of which the appropriated operating budget undergoes City Council and Congressional review and approval. Briefly, the financial plan considers, on a cash basis of accounting, opening balances available to finance the budget and the cash impact of budgeted revenues and expenditures. Balancing of the budget is accomplished on this cash basis. The fiscal year 1979 appropriated operating budget financial plan resulted in uncommitted authorization of $5.9 million. The comparable amount for the fiscal year 1978 appropriated operating budget financial plan was $40.1 million.

Accounting System Improvements

The effort toward development and implementation of a financial management system for the District has moved forward under the direction of the Temporary Commission on Financial Oversight of the District of Columbia. The Commission, which was established by Public Law 94-399, is comprised of three members of the U.S. House of Representatives, three members of the U.S. Senate, the Mayor, and the Chairman of the Council of the District of Columbia. The Commission is chaired by Senator Thomas Eagleton.

During 1978, the Commission approved a conceptual design for a new central accounting system--the Financial Management System (FMS) --and 15 agency feeder systems. The FMS general design was completed on October 1, 1978, detailed design and implementation planning was completed during 1979, and the system began first year operations on October 1, 1979. FMS had some start-up problems during the initial three months, but now promises to soon be operating as expected. We will, of course, continue to monitor FMS closely during the coming months. One adverse effect of FMS implementation difficulties in the first quarter of fiscal year 1980 was a lag in billing for grant reimbursements, due to an initial lack of timely cost information generated by the system. This resulted in a temporarily tight liquidity situation which will resolve itself as this system capability comes up to speed.

Contracts were awarded to develop and install agency feeder systems for water and sewer billing, hospital billing, cash management, traffic tickets, and supply management.

O The water and sewer billing system began partial operations
July 1, 1979, and is scheduled to be fully operational
by April 1, 1980.

The hospital billing system became fully operational
September 1, 1978, and was utilized during fiscal year
1979 in billing about $50 million for patient services.

The cash management system is scheduled to be fully
operational by March 1, 1980.

The financial management portion of the traffic ticket
system became fully operational in November 1979.

The supply management system has been deferred. The
design phase, however, was completed during fiscal
year 1979.

The general design for an integrated payroll/personnel
system is scheduled for completion April 1, 1980, with
partial implementation scheduled for early 1981.

I wish to express my appreciation to all those who contributed to the preparation of the 1979 Annual Financial Report. Because of the progress in the past year, which has led to this first independent audit of the District's balance sheet, I believe the information included will provide an improved understanding of our financial position and results of operations.

Sincerely,

Con Wallen

Colin F.S. Walters

Assistant City Administrator