The District has recovered less than half the money it is owed in federal interest payments because of sloppy record-keeping and failure to follow proper guidelines to claim the money, according to the city inspector general's office.

In letters obtained by The Washington Post, Inspector General Charles C. Maddox recently informed Mayor Anthony A. Williams that the unpaid interest payments over the last four years totaled more than $6 million. But the U.S. Department of Treasury would agree to only a one-time reimbursement of half the interest owed because of the city's poor handling of grant money and interest requests.

The audit was conducted by Maddox's office and Chief Financial Officer Valerie Holt and covered annual reports for fiscal years 1995 through 1998--part of the time when Williams was the city's chief financial officer. It identified cash management problems within various city agencies.

"As a result, District agencies were using District funds to pay expenses rather than drawing on grant funds that had been allocated for the purpose of operating the programs," Maddox said in the letter.

Francis A. Smith, executive director of the D.C. financial control board, said the city has improved its finances in many areas, but drawing down on federal funds has continued to be a problem.

"Cash management is an issue," he said. "Part of that is drawing down on financial resources at the appropriate time. The difficulty right now is we're in better shape than we were, and now we can look at things like this and say, 'Isn't this terrible?' "

While the $3 million reimbursement was welcome news, D.C. Council member Kathy Patterson (D-Ward 3) said she would have liked to see the city recover all the money it was owed.

"It would be nice to get a dollar for a dollar instead of 50 cents on a dollar," she said. "If Treasury is acknowledging that they owe us $6 million, I'm not sure I understand why they're only paying 50 cents on a dollar."

A review by Maddox's office found the agencies had not set up procedures to get the funds transferred to the District in accordance with federal regulations. The District routinely did not meet its annual Dec. 31 deadline to submit its annual reports, and the federal government questioned the accuracy of the amounts the city reported.

The District also lost more than $22 million in 1998 because several agencies did not spend federal grants or used the money to pay expenses not covered by the grants.

Last year, the city hired Maximus, a Virginia-based firm that specializes in recovering money owed to governments from federal programs. Under federal rules, the grant money can be obtained only for services provided in the previous two years. Maximus did not play a role in recovering the $3 million in federal interest money.

The District also failed to comply with the law governing the transfer of funds between the federal government and the city, ensuring the money is available and sent to the states in a timely fashion while allowing governments to assess interest liability.

In a letter to Holt, Maddox said that before the audit, the District submitted reports to the Treasury Department claiming only an "interest neutral" status.

"That is, no claims were made for federal interest liabilities incurred," Maddox said.