THE ADMINISTRATION'S proposal to cut off the District's access to interest-free loans from the Treasury is a good idea that comes at a very bad time. With the city facing a potentially severe cash-flow problem this summer because of a large deficit, its ability to get short-term, interest-free loans from the Treasury was one last reason for optimism about its chances of finishing this fiscal year without a financial collapse. By borrowing from the Treasury, the city had a readily available way to avoid default on bills as well as to prevent payless paydays for its workers. Without the Treasury as a safeguard against temporary shortages of money, the city is likely to find itself in desperate fiscal condition this year.
Despite the bad timing, the idea of cutting the city's attachment to the federal government's coattails is long overdue. It is the logical extension of home rule and adds justification to the city's drive to get Congress completely out of the business of reviewing, with the right to approve or reject, the local government's budget. The city budget, paid for with local tax dollars, should be crafted and approved by local officials. Even considering that the federal payment is about 20 percent of the local budget -- paid to the city for the federal government's use of local services and for occupying tax-free land -- the federal government should not have the final say over how the city is run. The Reagan administration's proposal would add weight to that argument, although the administration's interest in the matter appears to have less to do with home rule than with saving money for the federal government by reducing the amount the Treasury lends annually. Even so, the administration's goals are in line with the city's thinking and ordinarily would be unconditionally welcomed.
But as the Reagan proposal is designed, the city would continue to have access to the Treasury for short-term loans until the end of the 1982 fiscal year on Oct. 1, 1982. Between now and then it is likely that the city can untangle its financial problems and eliminate the need for a safety net of cost-free loans. But the Office of Management and Budget has proposed that the District be charged the prevailing interest rates on money borrowed from the Treasury before it actually stops the city from using the Treasury as a lender. If the OMB proposal is accepted by Congress anytime soon, the city could be immediately left without the interest-free loans. That could happen in the next few months, if not weeks, if Congress passes the OMB proposal in tandem with a city request for permission to go to the bond market to finance part of its acumulated deficit.
Instead of having the city abruptly cut off from interest-free loans, Congress should amend the OMB proposal and allow the city to continue taking loans at no cost from the Treasury until October 1982. That would give the city time to prepare to handle its finances without Treasury loans, and it would also give it some needed help in getting out of its current financial problems. The federal government, which played a role in creating the city's deficit, owes the city at least that much help.