THE D.C. Commission on the Arts and Humanities is facing its toughest test. Eight weeks ago, the city's corporation counsel, followed by the u>s> attorney; began investigating possible misuse of $16,00: in commission funds by its executive director, Mildred Bautista.

When the probe began, the arts community in Washington was shocked. Then it was learned that Bautista, a $45,000-a-year appointee who also served as the mayor's cultural adviser, had left another job in Michigan 12 years ago after officials there discovered she had falsified a re'sume'.

Bautista resigned her post here, saying: "I have done wrong. I have misused public funds and betrayed the public trust. I feel regret and sadness about my sins, particularly to the many people, friends and associates who have placed their faith in me."

In the arts community, the scandal has called into question the future effectiveness of the commission, and revived memories of accusations of poor management in the years before the huge growth that has taken place under the Barry Administration.

Some very respected names served on pre-Barry commissions, such as Patrick Hayes, founder of the Washington Performing Arts Society, and J. Carter Brown, the director of the National Gallery. But the agency was viewed as quietly active and not as a political force, and it was strapped by a small budget. In fiscal 1979 the budget was $167,100 and its application to the National Endowment for the Arts was initially turned down. Now it has a million-dollar budget and a staff that has grown from seven to 11.

The mayor "has lived up to his promises and given dynamic leadership. The mayor and the commission have given visibility, identification and morale to the art community," says Hayes. His organization, he says, has never received funding from the commission.

In the pre-Barry days, the city did not match federal funding, and local grants were awarded without a panel process. After a reorganization of its procedures, the commission decided to give larger grants to fewer groups in three categories: $5,000, $10,000 and $15,000 to operating organizations; $1,000 to institutions with well-known track records, and $2,500 to individual artists. The commission tried to prevent favoritism by only funding an applicant for three out of five years.

When the Barry transition team surveyed the arts, it found that "the artists didn't feel the commission was responsive to them. They complained about lack of access, disagreement with goals, lack of money," says Philip Ogilvie, who directed the cultural part of the transition office.

Mayor Marion Barry, who pledged a vigorous arts program in his first campaign in 1978, thinks the situation has turned around.

"The art community feels someone cares, not just the institutions but the neighborhood people," says Barry, whose support extends beyond funding to using his offices as art galleries.

More than 70 percent of the commission's budget goes to grants and programs. Only 7.5 percent of the budget, according to chairman Peggy Cooper Cafritz, went to administrative costs in fiscal 1983, and the remainder to personnel.

In fiscal 1983 the commission gave $450,000 to 100 grantees, representing nine artistic disciplines; 295 applied for the grants. For fiscal '84 they received another 295 applications and awarded 89 grants. The National Endowment gave the commission $310,750 in fiscal year 1983 and this year budgeted the commission for $335,600.

Nationally, the District ranks ninth among states on legislative appropriation for the arts; in 1980 it was 11th. In spending per capita, the District spent 54.3 cents on the arts in fiscal 1980; now it's $1.45.

Even with its increased budget, the commission still has problems pleasing everyone.

"We still have a long way to go. The hostility that was evident when we came on board has abated. The institutions are much more inclined to listen to us now," says Cafritz. "We are still very young. We still need the municipal nurturing of the mayor. We are the only city in the country that virtually gives no support to the major institutions, and the money we give the small institutions is so meager we can only keep them from sinking, not help them grow and flourish."

Hugo Medrano, producing director of the GALA Hispanic Bilingual Theater, believes the commission is still politicized and does not reach beyond its own cadre of recipients. "I think the commission should be much more open to artists instead of being tied to whom they give money." GALA, the oldest Hispanic theater in the city, has received funding from the commission, as well as the special citation of The Mayor's Art Award.

Bart Whiteman, director of the Source Theatre, agrees, complaining about the pattern of funding. "The Arena, The Folger and The Rep Inc. get the money," he says. Source, he says, has received $8,000 over the last five years. He cites the promises to turn the Lansburgh Building into a cultural center as a well-meaning but unfulfilled idea, and says, "The crying need is for them to work in another direction."

A few, like George Frain, a supporter of the defunct Washington Civic Opera, believe the commission abused its mandate by supporting the Washington Opera Society, instead of free programs like the Civic Opera.

And Melvin Deal, founder and director of the African Heritage Dancers and Drummers, admires the commission's progress but feels its broader purpose is being missed. "The arts commission can influence business and international relations, and that helps investment," he says.

Still others say privately the commission pays too much attention to the minority artist.

Many of the commissioners agree that "meeting the needs" is an ongoing frustration. To answer some of that criticism, several programs have been inaugurated or expanded. Among them:

Special Constituencies, which last year set aside $50,000 for programs for the elderly, the mentally and physically disabled and the incarcerated; Summer Programs, which last year gave $67,000 for programs in public spaces that emphasized the hiring of youth; Artists in Education, a $60,000 program for residencies in public schools; Geographic Development, which targeted $30,000 for Wards 5, 7 and 8, areas generally ignored by art institutions; and the National Symphony Youth Apprenticeship Program, where musicians take private lessons with symphony members, attend rehearsals, perform and work with the members. The commission continued an old venture, Arts D.C., a joint program with the Greater Washington Central Labor Council, which the commission gave $17,500 for job training. This program, said vice chairman Theodis Gay, "has a high record of job placement, averaging 80-85 percent. The people go on to be arts administrators at the Smithsonain Institution, for example, or dancers with dance companies."

The commission also helped support the Pen-Faulkner Awards programs, held in Washington for the first time, and sponsored the first Larry Neal Writers Conference, named after the late poet and playwright who was executive director of the commission from September 1976 to May 1979.

Some programs haven't succeeded, such as a Friends of the Arts fund-raising group, which the commission decided was competing with local groups. In January 1983, the NEA approved an application from the commission for funds, but noted that the commission lacked program review, evaluation and implementation.

"The panel felt the information contained in the plan was vague and weak," said Anthony Turney, a deputy chairman of the Endowment.

The mayor doesn't foresee any negative fallout from the investigation and the Bautista resignation.

"The investigation will not have an impact on my feelings or the institution's programs. We have not built the commission around one person," said Barry. "I don't think it will tarnish the art movement. Whatever happens, Millie Bautista has been a force."