While the District government has struggled each year to curtail spending on such critical services as police and fire protection, public education and social programs, an obscure but significant part of the budget--repayment of the debt on construction projects--has been increasing dramatically.
Next year, under Mayor Marion Barry's proposed budget, the city will pay more to service this debt than it will pay for the police department.
Traditionally, the repayment of the debt on new city buildings and other construction projects has sailed through the annual budget process without much scrutiny.
But now, as Barry and the City Council labor over the budget for the 1984 fiscal year, they are becoming more concerned about the growing bite that debt service is taking--up by about 50 percent in the last four years.
Washington is not alone in experiencing a sharp rise in construction debt repayments. "Gross debt service payments have increased quite dramatically in most large cities," said George Peterson, director of public financing for the Urban Institute.
Peterson said the growth in debt service was largely due to the rise in interest rates. He said local governments across the country are now being forced to pay more attention to the significant impact debt service is having on their already tight budgets.
"Debt service is an operating account just like the ones for running the schools, paying the police or picking up the trash," says D.C. City Council member Betty Ann Kane (D-At large).
Kane, a longtime critic of the Barry administration's management of the construction debt, has argued that the mayor has repeatedly borrowed more for construction than is actually needed. She said the result is that the city commits itself to paying more in interest than it should have to pay, meaning that less money is available for social service programs and other more pressing needs.
Since 1980, the amount spent on repaying the city's construction debt has ballooned from $116.7 million to a projected cost of $175.5 million in the coming fiscal year (part of the repayment comes from water and sewer revenues, which are estimated to be about $20 million in fiscal 1984.)
"There's no question it is one of the fastest growing" parts of the D.C. budget, said Gladys W. Mack, the city's former budget director and now a top aide to Barry. Mack said the Barry administration is "sensitive" to the growing size of the debt service budget and has not borrowed more than is needed.
The District finances new construction projects, which range from new water lines to new police stations to the recently opened $98.7 million convention center, with loans from the U.S. Treasury.
The Treasury loans are not included in the District's annual operating budget. But the debt service repayments on the loans are in the budget and, with the exception of water and sewer, come from the same pool of tightly squeezed tax revenues that the city uses for its other operating expenses.
Mack said high interest hits the District harder than other jurisdictions because the rate on the Treasury loans is higher than the one for municipal bonds, the standard method used by local governments to finance new construction. The District has the authority to sell municipal bonds, but its continuing financial problems have prevented it from doing so and thus the city has been unable to take advantage of the lower rates.
However, city officials have announced that they intend to try to sell bonds for the first time in the coming fiscal year.
Another reason for the size of the District's debt service, Mack said, is that the city, after years of neglect in the days before home rule, embarked on a crash construction program in the late 1960s and early 1970s that included among other things building a new jail, courthouse, main library and library branches, as well as more than $200 million for schools and new water and sewer plants.
Since 1968, the District has borrowed $1.6 billion from the Treasury for construction projects.
Although nearly all of the city's construction boom was carried out before Barry became mayor in 1979, Mack said, repayment of the 30-year Treasury loans used to finance that work makes up a major chunk of the District's continuing debt service costs.
Peterson said a major reason local governments have not given adequate attention to debt service is that new projects are approved separately from the operating budget. As a result, he said, the financial implications on future years' budgets often are not immediately recognized.
Under its agreement with the Treasury, the District government can wait up to two years before it actually begins repaying construction loans, although the interest starts accumulating the day the money is borrowed.
For example, last year Barry asked and received approval from the City Council to borrow $145 million in construction loans from the Treasury. But funds for repaying those loans were not included in the 1982 or 1983 budgets.
In Barry's proposed budget for fiscal 1984, which is now before the council, the mayor is asking for an $18 million increase in debt service, primarily because the city will have to make its first payments on the $145 million borrowed in 1982.
When Barry went to the council last June to get approval to borrow the $145 million--the full amount the city was authorized to borrow last year and the largest ever borrowed by his administration--the mayor acknowledged that the city had no intention of spending all the money at once. However, Barry, who was in the midst of a reelection campaign, estimated that the city would spend $95 million on construction during the three months left in the 1982 fiscal year, which was scheduled to end Sept. 30.
In his written request to the council, Barry said the District planned to invest the unused share of Treasury funds in short-term securities and turn a profit on the loan money before actually spending it. The plan assumed that interest rates would continue to rise, and that the city would be able to reinvest the unused loan money at rates higher than Treasury was charging.
It was a practice that had previously worked here and in other cities across the country, according to city officials and the Urban Institute's Peterson. Peterson said the reinvestments were aimed in part at offseting the increased costs caused by the high interest rates.
But last year, the strategy backfired. Interest rates unexpectedly dropped almost immediately. The city borrowed the $145 million from Treasury at 14 1/4 percent in late June. By September, it was reinvesting the unspent funds at rates that fell to 9 1/2 percent. By January, the rate had dropped to 9 percent.
Kane, who was the only council member to vote against the mayor's plan, said the city should borrow only enough to pay its immediate construction bills, especially since it is forced to pay the higher Treasury rates for the 30-year life of the loans. She said she also felt that Barry's projections--spending $95 million of the $145 million in three months--were unrealistic.
By Sept. 30, the city had spent $60 million, not the $95 million estimated by Barry, which Kane noted left $85 million to be reinvested at the lower than expected interest rates. As of Jan. 30, the city had $39 million out of the $145 million left unspent, according to William Y. Kao, the city's director of cash management.
Kao and his boss, Deputy Mayor for Finance Alphonse G. Hill, have said in recent interviews and in testimony before the council that the city was the victim of an uncertain economy. They said the opinion they got from economic experts last spring was that interest rates would continue to climb.
"We do the best we can in projecting, but did anybody know that the rate would go down as rapidly as it did," Hill said in an interview.
Hill noted that despite the loss on the construction borrowings the city earned $14.1 million on all its investments last year.
Another reason the city borrowed the full $145 million, Kao said, is because if the city had not done so, the money would no longer be available under new restrictions imposed by the Reagan administration.