The seeds of the current controversy over the way the District government manages its cash were sown in April 1984 by Alvin C. Frost, an obscure senior cash management analyst who decided on his own to write and circulate a report harshly critical of his superiors and coworkers.
Frost, a soft-spoken, self-assured Harvard Business School graduate, wrote that the city's cash management team frequently violated the D.C. Depository Act in making short-term investments and had no written policies.
He charged that the staff was poorly trained and "ill suited" for their jobs, and he warned that the office was not adequately monitoring the issuance of large checks by D.C. agencies.
"The daily operations of the D.C. Cash Management Office is nowhere near the level of excellence that should be expected," Frost concluded in his 16-page report, which was blasphemy within an administration that prided itself in having straightened out the District's long-tangled finances.
The report drew protests and criticism from his superiors. Some said they believed that Frost, who had been hired as an accountant and later promoted to handling day-to-day investments, had no business volunteering his opinions on personnel.
"It made me question Mr. Frost's overall judgment of disseminating a document like that prior to its being seen by the parties who had responsibility for those areas that he was critiquing," Assistant Treasurer Fred Williams, Frost's immediate supervisor, said recently.
In December, when Frost objected to the District's plan to invest with Bevill, Bresler & Schulman Inc., a New Jersey-based securities firm, Williams ignored his warnings. Williams filed away a Dec. 14 memorandum written by Frost to outline the problems in dealing with BB&S Inc. Deputy Mayor for Finance Alphonse G. Hill, who made the final decision to go with the firm, says he never was shown the memorandum.
Today, Mayor Marion Barry's administraton is on the defensive, struggling to justify its decision to invest nearly $100 million of city funds with BB&S Inc. before the firm went bankrupt last month and became the target of a federal fraud investigation.
The District government did not lose any principle or interest in four months of investing with BB&S -- a point stressed by Barry and other top officials -- because of a D.C. requirement that the firm back up each transaction with collateral.
However, City Council member John A. Wilson (D-Ward 2) and council chairman David A. Clarke, who jointly held a hearing into the BB&S matter May 6, were troubled that Frost's warnings apparently went unheeded and that the city appeared to have done a shoddy review of the firm's finances.
The political controversy escalated a week ago following a report in The Washington Post that Williams had submitted a backdated memorandum to the council to justify the District's decision to invest with BB&S Inc.
Wilson and Clarke, who say they were angered that the administration tried to deceive the council, have scheduled a second hearing for Friday "to examine the accuracy of the testimony and other documentary evidence" previously submitted. This time, administration officials will be asked to give sworn testimony.
An aide to Wilson said that Frost's April 1984 report, which got scant attention during the first hearing, may receive a full airing when the hearing resumes. "It's safe to say that anything concerning the cash management policies can be brought up," the aide said.
Barry contends that the affair has been "blown out of proportion." But he told reporters Thursday that he would not rule out disciplining or firing Williams. He also conceded, under questioning by reporters, that he had no way of knowing whether Williams was telling the truth when he said the document that he drafted April 11 is a transcription of notes Williams made Dec. 7 when he and other officials decided to invest with BB&S Inc.
"I'm not sure," Barry said. "I wasn't in his office Dec. 7. I didn't see any notes. I only asked for the notes after this became a controversy and he brought them over to me. In this government, I assume the best rather than the worst."
Barry said that his administration has gone a long way in straightening out the city's financial problems and boasted that since he took office the District government has invested more than $14 billion in local revenues without incident.
"Our aggressive and successful cash management policies generated $16.6 million to finance District services in fiscal 1984 -- more than legalized gambling, the cigarette tax or the hotel occupancy and financial institutions tax combined," Barry said in a recent letter to Wilson.
A week ago, the District marketed $170 million in general obligation bonds and obtained a favorable interest rate of 9.83 percent, according to Barry. "The street financial investors must have some confidence in this government," he said.
Several financial analysts who keep close watch on the District agreed late last week that the BB&S incident has done little to shake confidence in the city's financial management -- primarily because the city escaped losses while other municipalities did not.
"I think the fact that, whatever financial exposure they had, they did recover -- that's what was important to us," said George W. Leung, vice president for municipal bonds with Moody's Investors Service, one of the foremost finance rating services.
However, Leung said that he will follow the controversy over Williams's backdated memorandum, which he said raises a "broader issue" of the integrity of the financial statements issued by the District.
Another municipal financial expert, who asked not to be identified, said the District did the right thing by insisting that BB&S Inc. post collateral but "risked embarrassment" by dealing with a firm with a questionable financial base and then erred by backdating a memorandum to justify their actions.
"These guys pride themselves on their management ability," the analyst said. "The memo was to show they really did think about it. It was a mistake to backdate it . . . . They were trying to retroactively deal with a public relations problem, which probably isn't possible."
Hill, the deputy mayor for finance, has served as the administration point man throughout the controvery. He handpicked BB&S Inc. from among several investment firms hungrily seeking the District's business after he personally visited BB&S Inc.'s headquarters in Livingston, N.J., late last year.
Hill has shown irritation at being second-guessed by council members about his decision to select BB&S Inc. and has vigorously denied allegations by Frost that Frost was pressured to begin investing with BB&S Inc. last year before the firm had been officially approved.
During his testimony before the council May 6, Hill snapped at Wilson, the chairman of the Finance and Revenue Committee, during a heated exchange about the wisdom of the decision to go with BB&S Inc. Hill insisted that a firm's financial statement was secondary to whether it was willing to post collateral on a transaction.
"I take the position, Mr. Chairman, we get collateral," Hill said. "Our position is secured. I don't care if you don't have a dime, Mr. Chairman. That's not the position we take in companies."
Barry also acknowledged at his news conference that a running feud between Williams and Frost may have exacerbated the situation. D.C. officials and financial analysts familiar with the cash management office say that Frost and Williams have very different styles that frequently produced tension.
"Alvin Frost is a little eccentric, smart and very possessive in guarding his turf ," said one observer. "He's a true believer in the correctness of his position . Fred is a bureaucrat."
Frost's critics say that he has made mistakes himself. For instance, Frost recommended in his April 1984 report that the District consider doing business again with ESM Government Securities after having dropped the firm because of several bad experiences. Frost's superiors decided against further dealings with ESM, and the firm subsequently went bankrupt.
Frost, a product of the D.C. public school system, holds degrees in management from the Lowell Technological Institute and Harvard Business School. Though much of his career has been spent as an analyst for private firms and the D.C. government, Frost considers himself as an activist and reformer.
He was president of the Afro American Society at Lowell and helped bring a suit against the school, charging racial discrimination in its hiring and admissions practices.
Since joining the D.C. government in 1982, Frost has frequently raised objections internally to the way the cash management office has been operated. He contends that after he circulated his report last year, Williams and other superiors threatened him with reprisals. He filed a formal grievance with Hill May 30, 1984.
Frost said last week that he is not bothered by Barry and Hill's criticisms of him for speaking out. He said he intends to continue raising questions about the performance of the city's financial offices -- possibly as a candidate for a D.C. office next year.
"I'm just doing my job," Frost said. "It's not something I look forward to or sought.