Today the House District Committee is scheduled to hold a second hearing on HR 1807, the bill to authorize the District government to sell bonds to finance part of its accumulated deficit. The hearing will be held exactly one year from the day Mayor Marion Barry outlined the District's financial problems to the District Council and 10 months since he presented, in a televised speech, his financial plan to solve the problems. The District's plan for additional short-term borrowing from the Treasury and continuing efforts to balance the 1981 budget only serve to highlight the need for a permanent solution rather than constant juggling. adequate time has now been spent in exploring the problems and understanding the proposed solutions. Now it is time to act -- before the financial community loses faith in the will of Congress and the District government to act.
The District's immediate financial problem is fairly easily understood. It has three interrelated parts. First, over the last decade the District government, under federal control as well as under limited home rule, has simply obligated itself to spend more than it has raised in revenue. Somehow, money must be raised in the future to pay for this past accumulated deficit. Second, this need for money is made urgent by the rapidly deteriorating working capital position of the District. While some of the deficit can be repaid over time, at least $184 million represents liabilities for which cash should immediately be on hand. Third, the District government has paid between $20 and $50 million in unnecessary interest on Treasury loans since 1975 because it has been unable to finance its capital improvement program through the sale of tax-exempt municipal bonds. The excess cost of these loans over their 30-year life will be at least $200 to $300 million and increases with each new loan. (The large range in the estimates of extra interest costs is due to alternative interest rate assumptions.)
The financial situation has been complicated by recent Reagan administration proposals to cut off District access to short-term loans and capital loans from the Treasury. Although these proposals are in some respects ill conceived, they do underline the need for immediate action by the District government.
District officials have agreed to a straightforward plan for dealing with the three interrelated financial problems. They propose to sell $184 million in tax-exempt bonds to provide necessary cash and plan to finance the remainder of the accumulated deficit by setting aside $10 million each year until it is totally eliminated. Clearing up the cash-sensitive portion of the deficit and balancing the annual budget will permit entry into the bond market for capital purposes and save the District $60 to $90 million over the 30-year life for each $100 million in capital borrowing.
The benefits of this approach are substantial. The most pressing part of the deficit is immediately financed, and its repayment is legally mandated through the annual payment of principal and interest. The District will receive $184 million in cash to finance prior obligations. Taking care of those obligations will permit the District to manage its affairs in a more businesslike fashion and should eliminate the need for short-term borrowing for cash flow purposes. Also, the District will be able to take the next big step to financial independence by issuing its own capital bonds at a tremendous savings to taxpayers -- all of this without requiring one penny of federal funds or federal guarantees.
There have been suggestions that the District could achieve the same result without incurring the interest costs inherent in issuing bonds to finance the deficit. One approach calls for setting aside $20 to $30 million per year from the budget in a special fund that after years would generate $184 million. This approach, however, is too flawed to be an acceptable alternative to the District plan.
The alternative makes assumptions that are quite likely to be viewed skeptically by the financial markets. It assumes that the D.C. council and Congress will vote for substantial surpluses (up to three times the level in the District plan) for seven years while services and employee wages are constrained. It assumes that the Treasury will continue to make short-term advances to the District or that another guaranteed short-term lender could be found who did not insist on an investment grade credit rating. Finally, it assumes the District would be able to successfully continue its cash management acrobatics. This alternative also sacrifices the substantial savings available to the District from issuing tax-exempt bonds for capital purposes, at until a substantial portion of the cash surpluses had been amassed.
More fundamentally, this alternative approach is predicted on two faulty premises. First, the alternative is not cheaper for the District. Second, the alternative gives too much weight to the stigma of issuing deficit funding bonds. The statements by the two credit rating agencies at the House committee hearing indicated there is ample precendent for issuing bonds to finance a deficit. The fact of the accumulated deficit is the problem; the financial markets would prefer definitive action to cure the deficit rather than a seven-year delay.
Even if this and other alternative approached were equally effective, with equal financial benefits, great weight ought to be given to the fact that elected District officials have united behind their plan. After all, Congress is not being asked to endorse or finance the District plan. It need only authorize the District to take action on its own.
The first hearing of the House District Committee created a strong record of support for the feasibility of the District plan. It would be in the interest of all concerned if the second hearing led to speedy passage in both houses of Congress.