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Chairman Fauntroy, members of the Subcommittee, my name is Matthew S.

Watson. I am the former Auditor of the District of Columbia. I appreciate the

opportunity to testify here today with regard to a number of financial and legal aspects of statehood for the District of Columbia. I appear at the request of the

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Will the state be treated differently than the current government for purposes

of Federal grants and loans, i.e., revenue sharing, highway funds, H.U.D.

programs, etc.?

How will taxing authority be


commuter, sales, residential and

commercial property, federal property, use, value-added, etc.?

What are the expected transition costs of statehood?

Are there costs associated with the transfer of agency funds ?

We sometimes have the tendency here in the District to think of ourselves as having greater differences from other parts of the country than is actually the


Rather than being unique, often, our position in the District vis a vis the

Federal Governinent is merely a concentration of similar problems also existing in

the other 50 states.

By establishing the District as

a state, the District would have the same

rights, and prohibitions, as any of the other 50 states of the union.

The answers

to the questions raised as to the fiscal relationship of the newly created state to

the Federal Government would not be different from those relating to any other


Many of the issues are neither new nor novel. Indeed, the Supreme Court

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responsibility to states for the burdens of Federal activities within the nation's

1 infancy, barely 30 years after the ratification of the Constitution. There is no

reason to believe that arrangements developed over two centuries in the other 50

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not just as viable here in the nation's capital. These considerations

include the new state's eligibility for a continuing annual Federal payment, and

categorical and block Federal grants, as well as the new state's taxing authority

and sovereign responsibilities.


Before considering the effect of statehood on continued compensation to the

District for the Federal presence here through the annual Federal payment, it is

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understand the Congressional involvement in the District budget

framework and the current nature of the Federal payment.

In particular, it is



determine how closely the

current budget system resembles


.conventional state budgeting system and the legal status of the Federal payment

under the current Home Rule government.

Whether the current payment has a

Constitutional basis, compact or contractual basis, or is merely gratuitous may

determine whether the District will be in any less advantageous a position with

statehood than in its current "Federal protectorate" status.


Although under the Home Rule system, the Congress of the United States

must affirmatively adopt all District appropriations, the Congress does not act in


same capacity with regard to

District appropriations as it does with the

appropriation of Federal funds. The requirement for the District's budget legislation to go through Congress unrcasonably delays and burdens the budget process and, with all deference this committee, is inappropriate for the

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A typical Federal appropriation act appropriates sums "out of any money in

the [United States) Treasury not otherwise appropriated." From the point of view

of a Federal agency receiving such an appropriation, it is a cashiers' check allowing

expenditure of the appropriated funds.

A Federal agency has little concern as to the U.S. Treasury's cash raising ability. Appropriations to

a Federal agency are

monies available to be spent.

When the very same Congress which makes the Federal appropriations passes

District appropriation acts, the Congress makes


very slight, but extremely

important change from the wording of typical Federal appropriation acts.


appropriations do not guarantee the availability of funds for actual expenditure as

is the case for Federal agency appropriations. The Congressional appropriation acts

for the District are divided into two basic parts.

The "Federal payment[:]" and

the "Division of Expenses." The Federal payments are "contributions" to the District

treasury, but do not approve District government expenditures.

The expenditures

approved by Congress

for the District of Columbia

are appropriated in the

Congressional acts

in the "Division of Expenses." The Federal payments


appropriated in typical Federal appropriation language "out of any money in the

[U.S.) Treasury." But the expenditures approved by the Congress for of the District

Government in the Division of Expenditures are not appropriated out of the United



States Treasury, in typical Federal appropriation acts, but rather appropriated, "out of the general fund of the District of Columbia".? That change


of just seven words in the introductory clause takes the District's budget out from

the Federal expenditure system and leaves the District on its own.

Needless to say, the "general fund of the District of Columbia" does not

have the cash or credit resources of the United States Treasury or the U. S.

Treasury's ability to incur deficits. The General Fund of the District of Columbia

2. see, e.g.

H.R. 3067 (FY 1986 Appropriation Act, P.L. 99-190)

is equivalent to

any state treasury.

The District, like any state,

cannot print

money, and checks for expenditures from this fund will bounce if there have not

been sufficient deposits to the fund to cover the payments, regardless of whether

expenditures have been appropriated on paper.

While for a Federal agency, the

Congressional budget establishes the same dollar amount for both the maximum and

effective spending level for approved programs, the Congressional appropriation for

the District sets only the maximum spending level which the District is allowed to

spend from its

own funds.

The appropriation act passed by Congress for the

District does not guarantee that funds will be available to actually make the

expenditures. The current District appropriation is essentially only a "hunting license," requiring the District Government to caise the funds necessary to actually

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Thus, although the current District budget is enacted by the Congress, with

a Congressionally mandated upper limit, it is equivalent to the budget adopted by

any state legislature. In any of the other 50 states, the legislat

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of a budget, just like the Congress' appropriation in the District, does not create

the funds to be spent. The actual cash must be raised by the state or by Council

legislation to allow any expenditure to be made, regardless of the appropriation.

Thus, the District currently, with regard to the amounts appropriated by Congress,

is no different than it would be with its own legislatively appropriated budget after

becoming a state.

In fact, as will be discussed below, the local sources of revenue

after statehood would be expanded, as opposed to contracted, easing the burden of

raising the cash to support the expenditures.

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