The District government stands to lose at least $4 million, and probably much more, because Congress has belatedly rejected the method of borrowing used two years ago to finance land acquisition for the city's new Convention Center.
In effect, Congress has instructed the city to return to the U.S. Treasury $21.4 million borrowed at an interest rate of 9.25 percent, obliging the city to reborrow it at rates certain to be much higher, possibly as high as 13 percent.
Under the financing arrangement, the city borrowed the money from the U.S. Treasyry on a 30-year note. But Congress now apparently believes the repayment term violates an agreement by which the money was to be borrowed for a short term and repaid quickly through collection of special taxes on local hotels and businesses. As a result, Congress has ordered the faster payback.
The directive to replay the loan surprised and upset District officials, not just because of the cost, but especially since they believe the transaction in question was entirely legal and because nobody in Congress or at the Treasury Department has supplied a full explanation. They also view it as unnecessary congressional meddling in city affairs.
"I'm not sure what this directive means," said budget director Gladys Mack. "I think it results from some confusion around here." She said the loan arrangement "fulfilled the requirements of the law, and our accountants seem to think it's okay, too."
Mack said she will seek meetings with members of the House and Senate D.C. Appropriations subcommittees and their staffs to ask for reconsideration. But with Congress near adjournment and memberships of the comittees and their staffs changing next month, there is little time for that.
The Convention Center, a $98.7-million investment in the future of downtown Washington, is under construction at 9th and H streets NW and is scheduled to open in the summer of 1982.
Opponents of the project are still fighting a rear-guard action in the courts that has hampered efforts to hire a general manager and book conventions, but the latest congressional action apparently will not affect the center's actual operations. The issue is how the city raised the $21.4 million that was used to acquire the 9.7-acre site.
A "joint explanatory statement" issued by the House-Senate conference committee that worked out the final version of the District budget for the current fiscal year says that "the conferees are aware that the city has negotiated a 30-year capital improvement loan from the United States Treasury which was used to finance land acquisition" for the center.
Since it was "the intent of Congress" that the loan be repaid "as soon as possible to avoid any additional burden on the local taxpayers," the report said, "the conferees direct" that the loan be paid off in five years instead of 30.
But Mack and other officials said that the abbreviated repayment schedule would oblige the city to make a first installment of $12 million this fiscal year, using capital funds already earmarked for other projects.
As a result, that money would have to be reborrowed. Even at the most favorable possible interest rate, a rate only available until Dec. 31, the additional cost to the city would be $4 million, they said.
To raise $4 million in a single year through residential property taxes would require an increase in the tax rate of about eight cents per $100 of assessed valuation, or $56 on a house now assessed at $70,000. However, extra revenues almost certainly would be raised through extension of the temporary business and hotel taxes.
The congressional action has its roots in a bookkeeping mechanism established by the city government to account for the financing of the Convention Center.
When Congress approved the project after a long wrangle, the city wanted to proceed as rapidly as possible with acquisition of the site bcause costs were rising almost daily.
The special taxes on hotel rooms and businesses that had been levied to raise the site-acquisition money had not yet yielded enough money, so the city used money borrowed from the U.S. Treasury in a 30-year note -- the same method it uses for all capital borrowing.
Subsequently, the City Council established a Convention Center Enterprise Fund, managed by the Center's board of directors, to hold and disburse construction money and later operating revenues.
To maintain an accurate "audi trail," the Enterprise Fund was listed as having borrowed the $21.4 million from the city's capital projects fund -- a loan to be repaid by the end of next year out of the special taxes, which are yielding revenues of about $6 million a year.
Congress, however, apparently has determined that the $21.4 million loan is tantamount to a direct long-term loan from the Treasury to the Convention Center for site acquisition. That violates an understanding that the site would be bought with short-term money so the special taxes could be repealed as soon as possible.
Therefore, Congress directed that the loan be repaid by the city in five years. The city can make the payments because it is being reimbursed by the Convention Center fund, but it wants to use that money, borrowed at favorable rates two years ago, for currently authorized capital projects, instead of turning it in and securing a new more expensive loan.
The issue of the convention center loan did not arise during the long process of congressional review of the District's budget for the 1981 fiscal year, but it appeared suddenly in the conferees' report.
"We got a call about it from Treasury," a congressional staff member said. "They said that if they had known what was heppening, they would never have negotiated a 30-year repayment for this loan."
But Kenneth Schmalzbach, legal counsel in Treasury's Bureau of Government Financial Operations, said Treasury did not specifically ask for the directive that was issued.
"We got letters from the city referring to their agreement with the [Senate] committee," he said, "so we asked the committee what they had agreed with the District. That's all we did."
Edward Singletary, chairman of the Convention Center Board of Directors, said he did not know what prompted Congress to take the action it did. He said he was unfamiliar with the loan transaction because the board was appointed l-l/2 years after the loan was made and is concerned with operating the center, not with past arrangements about its financing.