Debbie Boone sang and Mickey Mouse frolicked through the crowds, while Sen. Edward M. Kennedy (D-Mass.) praised the courage of the more than 700 deaf, blind and mentally retarded children who attended a national, "Very Special Arts Festival," for handicapped children here last year.

For the festival's sponsor, however, the Washington-based National Committee, Arts for the Handicapped, the glittery, star-studded celebration turned out to be a financial disaster that still threatens the group's survival.

Today, the committee, a private, nonprofit organization established in 1974 to increase public school art programs for handicapped children, is about $185,000 in debt. Most of that amount stems from the festival, which was supposed to cost only $60,000 but actually cost more than four times that amount, according to committee directors.

Expenditures for the festival included more than $100,000 for hotel costs, $3,375 to pay 15 chauffeurs $8.50 an hour, and more than $16,000 for the opening ceremonies at the elegant Organization of American States Building here, including $6,500 for tee shirts, $3,000 for programs and $1,844 for balloons and buttons, according to a committee report.

The festival's unexpectedly large deficit is but one example of how the primarily publicly-financed committee, whose directors include Jean Smith, the senator's sister, and other prominent philanthropists and educators, operated for more than three years in what its directors concede was the absence of proper financial controls.

In the past four years, the committee has received nearly $5 million in federal funds as part of a multimillion-dollar federal effort to provide equal rights to more than 20 million handicapped Americans, an increasingly vocal minority that has demanded an equal opportunity to share in government programs.

Committee members say the organization has provided teacher training throughout the country, given grants for demonstration centers, done research on curriculae for the handicapped, and last year helped sponsor a number of "Very Special Arts Festivals" in which more than 260,000 handicapped youths took part.

Committee officials cannot say, however, how many new arts programs for the handicapped have been established in public schools -- the major goal cited in the organization's literature.

"We know what we do, but it's hard to assess what's been done all over, nationally," said Bette Valenti, the committee's full-time executive director.

But several national observers of programs for the handicapped interviewed questioned the effectiveness of the committee, whose $1.5 million appropriation from Congress last year accounted for more than 40 percent of the grant money Congress allocated to the Arts and Humanities office of the Department of Education.

"If I were writing an article on the national committee, I would entitle it: 'What is it? What is their mission?" said one high-ranking government official who regularly deals with the handicapped and asked not to be named. The official, who receives the committee's material, said: "It's bright, well-done, beautiful colors and beautiful pictures, very slick, well-regarded stuff. But I read all of it, and I still don't know what they do. I couldn't understand it."

The Department of Education sent a team to examine the committee's finances for 12 days last January.

"We found a lot of evidence of really poor management," said Edward Sontag, a department of education official.

"It is difficult to tell how [federal] program funds were used . . . In some cases we can only speculate [on] how [the committee] used [its] funds because those records are inaccurate, incomplete and inconsistent," said an internal report circulated in the Education Department after the visit.

The department subsequently classified the committee a "high-risk" grant receipient. One expense that caught the eye of department officials was the committee practice of paying full-time emplolyees $35 a month to help defray parking expenses. That practice has been discontinued.

Wesley Apker, the committee's former treasurer, said he discovered after the national festival that the organization had been in debt even before the festival took place. Asked where the money had gone, Apker replied: "I wish I could tell you. It's very tough, based on the records we have, to answer that question."

Defending the committee she co-founded, Smith acknowledged that it has suffered from inadequate financial controls. But she said the board of directors has hired the nationally-known accounting firm of Price Waterhouse & Co. to straighten out the committee's books, and new, stricter management policies have been put into effect. She said that the debt from the national festival is being paid off with private contributions, not with government funds.

The committee's "grew tremendously fast and we weren't prepared for it," Smith said in a telephone interview from her home in New York. "As soon as we became aware that things were not in place, the board acted to set it right . . . Now we have a very good situation."

The committee was established by Smith and others following a conference on arts for handicapped children held at the Kennedy Center in 1974. Its board members include Smith, whose husband Stephen served as Kennedy's 1980 presidential campaign manager; Phyllis Wyeth, vice chairman and the wife wealthy painter Jamie Wyeth, the son of famous painter Andrew Wyeth; and Ernest Boyer, the former U.S. Commissioner of education, a new director who was selected after the festival.

Substantial federal funding for the committee began in 1976, and Congress has increased the amounts steadily from $250,000 in 1976 to $1.5 million last year -- a 500 percent boost over four years.

A Washington Post study of the committee's records found that most of the tax dollars it distributes to other groups on behalf of the federal government have been used to sponsor state and local "Very Special Arts Festivals" similar to the one held here.

In the current year's budget, for example, the committee has alloted $300,000 out of $660,000, or about 46 percent of the total grant money it funnels to other organizations, for the arts festival. Altogether, the committee has spent somewhere in the vicinity of $1 million on the art festivals, according to its financial reports.

Committee critics, who include present and former members of its board of directors, said the festivals reflect the emphasis that Smith, who is national chairman of the committee's festival program, and other board members place on flashier, publicity-oriented programs for the handicapped instead of more essential art education activities.

Former committee treasurer Apker, who also was executive director of the National Association of State Boards of Education, said he unsuccessfully tried to get the board to concentrate on "more substantive types of programs," instead of the festivals. According to Apker, the directors wanted to help the handicapped but, "Somebody who has been surrounded by money all their life . . .they look at things differently than I did. They were honestly working on a different agenda."

Smith said such claims are "ridiculous."

"It sounds like sour grapes to me," she said. "This (work for the handicapped) has been an interest of our family for a long time. This is not something that came out of the blue."

Rosemary Kennedy, one of the eight brothers and sisters of the late president John F. Kennedy, was born mentally retarded and through the years the family has been involved in efforts to improve the lot of persons with that and other disabilities.

Another Kennedy sister, Eunice Kennedy Shriver, is president of the "Special Olympics" sports program for the handicapped, a separate operation. Smith said the festivals, an idea that in part grew out of the concept for the "Special Olympics," are "supposed to be a culmination of art experiences for the child throughout the year. We felt that if we had arts festivals, teachers would have to give children art experiences."

Congressional funding to the committee has been in the form of noncompetitive grants that have enabled the committee to avoid having to compete with other organizations for the federal money. In contrast, Congress normally leaves it up to federal departments and agencies to select specific grant receipients through competitive bidding. Last year, for example, nearly 300 private and public agencies competed for 20 grants -- totalling $1.25 million -- awarded by the Education Department's Arts and Humanities office.

Rep. Silvio O. Conte (R-Mass.), one of the sponsors of the committee's funding in Congress, said in a recent interview that committee officials "sold us a hell of a bill of goods. I was tremendously impressed with (the program)."

Since 1976, the committee has received $3.25 million in direct congressional grants and nearly $1.6 million more in six grants from the Department of Education, according to the General Accounting Office, the investigative arm of Congress.

During that same period, the committee has received $300,000 in private donations, including nearly $50,000 from the Joseph P. Kennedy Jr. Foundation and $65,000 from the Alliance for Arts Education program at the Kennedy Center, the GAO said. The committee's request for an additional $1.5 million for the current fiscal year has been approved by the House of Representatives and is awaiting action in the Senate.

This year, the six-year-old committee has a $2.4 million budget, 17 full and part-time employes and soon will move into larger offices that rent for $70,000 a year at 1825 Connecticut Ave., NW, near the Washington Hilton Hotel. Committee officials said they will support part of the new rent by subleasing their current offices at 1701 K St., NW for $44,000-a-year.

The Department of Education's examination of the committee turned up evidence of possible improper expenditures, including questionable payments for entertainment and travel and awarding consulting contracts without competitive bidding.

One questionable expense cited by department officials was a $141.90 reimbursement of a committee employe for a dinner for five people. Federal regulations prohibit grant employes from spending federal funds for entertainment, or using grant funds for their own meals unless they are out of town on grant-related business. Committee records do not indicate where the dinner took place.

In another case cited by the department, the committee in 1979 awarded a $45,000 contract -- without getting competitive bids -- to a private New York consulting company to do an evaluation of the committee's operations, according to the department's report. Federal regulations require that such contracts be awarded through competitive bidding.

Dr. Ruth Mondschein, a $44,443-a-year special projects official at the education department, is a voting member of the committee's board and took an active role in helping organize the national festival here.

Mondschein acknowledged that the committee hired two of her daughters, Paula Mondschein, a professional opera singer, conducted at least one committee arts workshop in Texas, and another daughter, Joan Mondschein, a theatrical producer, received about $1,500 to help coordinate the opening ceremonies for the festival here.

Committee officials were unable to say how much Paula Mondschein was paid.

Mondschein said both women were well-qualified for the jobs, and that she played no role in the committee's decision to hire them.

In late September, the committee held its fourth annual meeting in Washington, culminating with a banquet for more than 200 people in the Atrium room on the top floor of the Kennedy Center. The main course was poached salmon with hollandaise sause, topped off with a dessert of pears in Cassis.

For the two-day meeting, which included workshops and other training sessions, the committee paid for hotel, travel, and some meal expenses for 100 committee coordinators who came here from around the country, according to committee executive director Valenti.

The total tab for the meeting came to about $60,000.

Unlike the national festival, however, this bill is expected to be paid on time -- but not with private contributions. It will be paid with federal grant funds.