At first, Frances Ferguson found it hard to accept her assignment to the Hospital for Sick Children, the Washington area's only long-term care facility for severely deformed, profoundly retarded or terminally ill youngsters.

"Old as I was, I'd never seen children like this," the 69-year-old mother of eight said, recalling her first day at the institution--the redundant title of which is a pale description of the tragedies within. "I tell you the truth, I didn't want to come back," she said.

But in the five years since she became a foster grandparent there, Ferguson, who spends four hours every weekday in the hospital at 1731 Bunker Hill Road NE, has cuddled and comforted many children.

Hugging babies close to her bosom, singing wake-up songs, she is every child's white-haired "grandmumma." But for Ferguson, there is a special "grandchild"--Danny.

He has been mentally retarded since birth. At 8, Danny cannot walk or speak, and doctors say he will always need the kind of constant care he receives at the hospital. He came there at age 4, about the time Ferguson did.

Over the years she has fed and dressed him, bought him birthday presents and cheered him through pain with silly songs and dances. She visits him daily, rubbing his cheeks and hands, prodding him to hold his head up. The frail boy, propped up and strapped in an oversized padded stroller, his soft brown eyes framed by long curly lashes, saves his rare smiles for Ferguson.

The special bond that has grown between them will end today, however, because of a minor funding disagreement between the hospital and administrators of the Foster Grandparents program. Today is the last day at the Hospital for Sick Children for Ferguson and four other grandparents assigned there. They will be transferred to other facilities.

They are being forced to break ties to children who know and need them--and vice versa--by an increasingly familiar issue: Who will assume financial responsibility for social programs in the wake of budget cuts? At the Hospital for Sick Children, the dispute is over the cost of lunches for the foster grandparents.

Until recently, the United Planning Organization, the agency that sponsored the hospital's foster grandparents, reimbursed the facility up to $3,000 a year for their lunches, hospital spokesman David Corro said. Foster grandparents, who are paid $40 a week, receive the lunches and transportation as additional compensation.

The Metropolitan Washington Council of the AFL-CIO, which recently took over the program, said it has no funds for lunches. The facilities to which the foster grandparents are assigned must absorb that expense, council spokeswoman Judith Claytor said.

The hospital, a private institution for patients who are wards of the city or whose families cannot afford the high cost of long-term care, has its own budget woes. Corro said expenses for all the patients are paid by Medicaid, and the hospital must depend upon fund-raisers and private donations for its other costs.

"Money is money. We're just trying to stay afloat," Corro explained.

The labor council recognizes the foster grandparents' reluctance to leave the hospital. "I know they want to be there, but there is this weird problem," Claytor said.

For Ferguson and the other foster grandparents, however, the matter could be easily resolved. "I tell you the truth, I don't have to have lunch," Ferguson said, agreeing with the other four foster grandparents. "I love the children. I just love them."

Regular volunteers are scarce at the airy, white-brick complex in the heart of Northeast's Michigan Park community. It is home to 73 young victims of heredity, accidents and disease. About 80 others are brought there daily for therapy and instruction. The children--infants to teen-agers--are afflicted with a range of impairments, many of them blind or with crippled limbs.

Corro said many persons have difficulty, as Ferguson did initially, caring for severely disabled or ill children.

"A lot of people come in here and think they're going to do something wonderful," Corro said. "They're not really ready for what they're going to see. There are children here who are extremely, extremely bad off."

Hospital staffers said that is the reason Ferguson and the other foster grandparents--Robert Fowler, Fernella Glover, Margaret Scott and Richard Blowe--are so important. They are vital links in the lives of many of the children and often are their closest familial contact, staff members said.

"Having grandparents around definitely provides a homelike atmosphere," said Alicia Blassengale of the hospital's public relations department. "Kids need an attachment to someone not coming to them for medication, not coming to them for therapy. Just someone coming for touching."

Employes provide some affection, said Christiana Carter, a white-uniformed care aide, as she looked out over a hospital courtyard where the sun filtered through trees onto children strapped in wheelchairs, in strollers and on beds. "On days when we're really busy we really need the foster grandparents ," she said.

Every day Ferguson leaves the home she shares with her husband and 14-year-old grandson on Emerson Street NW and heads for the hospital where she spreads grandmotherly affection.

Passing through the halls, she has a greeting or question for everybody she meets. Her white hair, pulled back into a soft mound of curls, forms a glow around her almond-brown face. Tall and spry, a month away from 70, she is constantly on the move, daring the arthritis in her knees and ankles to give her any trouble.

"Where's Danny?" she often starts her day, missing the boy since his recent transfer from the unit where she is assigned to another wing of the hospital. Every day she makes a special stop to see him.

"I use to feed him, take him out, give him love the nurses can't give him," she recalled. After five years, she knows him well, checking off his likes and dislikes as a mother would. "He doesn't like meat; you know, they crumble it up."

She speaks slowly and thoughtfully as if distracted by pleasant memories. "He likes spinach . . . he likes dessert . . . but he loves the milk. He'd rather drink the milk than eat." Although Danny cannot speak, she also knows that he likes music "because I'll get up and start dancing and he'll just laugh."

On a recent visit, finding him asleep on a floor cushion, she bent down, caressing his face. The next day, he was awake, and Ferguson, playfully shaking his shoulders, asked, "Are they treating you right?"

"I don't know if he understands me or not," she said later. Danny apparently does understand enough to recognize familiar people. Care aide Carter said he cried one day last week when a staffer he did not know tried to feed him.

Whether or not Danny and other children who have formed special attachments to some of the foster grandparents will be aware of their departure, Ferguson said she knows her presence has made a difference in his life.

"He's changed since he's been here (in the new wing). . . . He just holds his head down all the time," she said.