Fiscal Watchdog: D.C.’s Independent CFO Yields (Uncomfortable) Benefits

A professional, independent municipal CFO can be a strong protector of taxpayer interest. At the same time, they can also be a source of sand in the gears of government.
by | June 15, 2010
 

In early April 2010, D.C. Schools Chancellor Michelle Rhee reached a tentative agreement with the Washington Teachers Union on a new contract. The groundbreaking $140 million contract was slated to grant raises in excess of 20 percent over five years, while also giving Rhee greater flexibility to remove underperforming teachers and reward high achievers.

After more than two years of bitter negotiations, it appeared that agreement was imminent. That's when the District's Chief Financial Officer, Dr. Natwar M. Gandhi stepped in to announce that he would not allow the contract to go forward.

The proposed contract, he noted, would rely on $21 million in private money from four foundations to help fund the pay increases. In his role as independent CFO for the District, Gandhi reviews all labor agreements, and in this case Dr. Gandhi found the private money problematic because the foundations could withdraw their financial support for various reasons, including any "material change" in school system leadership.

Basically, if the city found itself, for whatever reason, without Michelle Rhee, it could also find itself with a $21 million budget hole. Thus, Gandhi demanded a contract funded exclusively by public funds available without condition.

In his role as fiscal watchdog, Gandhi was doing his job -- but creating a massive headache for Rhee trying to do hers. In the subsequent weeks, Rhee significantly restructured her entire budget to ensure that the contract could be funded with "available"funds, and in mid-May Gandhi allowed the contract to move forward -- but only after what the Washington Post described as "nearly five weeks of interagency finger pointing and confusion." The groundbreaking contract was approved by teachers in June.

A professional, independent municipal CFO can be a strong protector of taxpayer interest. At the same time, they can also be a source of sand in the gears of government.

The District's CFO is a distinct position in American government. Once appointed by the mayor, the District's CFO can be removed from their five-year term only for cause -- a very high barrier that largely insulates the CFO from political pressure.

The District's uniquely powerful CFO came into being following an extended period of chronic overspending and excessive -- often aggressive -- bureaucratization. Before 1995, D.C had provided one of America's more egregious examples of undisciplined municipal overspending, often creating budget holes that could only be filled by Congress.

In 1995 Congress provided relief to District residents by creating the powerful Financial Responsibility and Management Assistance Authority -- a presidentially-appointed "financial control board" assisted by an independent chief financial officer to provide the needed fiscal discipline. They had the power to say "No."

The first chief financial officer, Anthony Williams, attacked the city's financial mismanagement with a vengeance. His accomplishments were appreciated by city residents, who later elected Williams mayor. In 2000, Williams in turn appointed Gandhi CFO.

The combination of D.C.'s financial control board and the independent CFO has delivered needed changes. According to the District of Columbia Financial Responsibility and Management Assistance Act of 1995, the District is required to have a balanced budget, the certification of which is the CFO's distinct responsibility. This has a simple but powerful effect: Funds must be there for any proposed spending -- and revenue and spending must be square.

The mayor and City Council must get CFO certification that all spending proposals are backed by available money. All spending proposals are run through the gauntlet of "accountant-think," which is a different species altogether from "politician-think." The cause of fiscal accountability has been greatly strengthened by the CFO's influence over executive and legislative branch spending actions.

This strong CFO position of course does not come without potential drawbacks. What if the CFO were less professional, or operated according to his or her own political or bureaucratic agenda? CFO&'s are still human, and in many cases, spending approvals hinge on revenue projections, which involve assumptions about which reasonable people can differ. For example, how much certainty should Gandhi have required in deciding whether Rhee's foundation grants should be considered reliable revenue?

Despite some possible downside, taxpayer and charter reform groups should consider a version of the District's independent CFO office as an antidote to fiscal and bureaucratic mismanagement. Across the nation, we are experiencing a governmental overspending problem on a level resembling D.C.'s municipal government pre-1995. Establishing a strong CFO, whether independent or not, who is professionally qualified and who must certify availability of funds will produce many beneficial structural changes.

Such changes won't come easy. As Gandhi noted when I spoke with him, "As a practical matter, it's very unlikely that executives or legislators in other cities and states would willingly cede power to allow the CFO to become an independent authority." In addition, special interest groups who benefit from public spending would oppose establishing any office that plays the role of fiscal watchdog.

Gandhi's role in the D.C. teacher's contract sheds a bright light on the little-studied office of municipal CFO. The story highlights the hugely important advantage of having, as Gandhi puts it, revenue estimates that are "accepted as objective analysis and, to date, have been above politics." If only all state and local governments could be so lucky.

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