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grant exceptions, the Congress can also grant such exemptions even if the District

government chooses not to grant the exemption.

The District would, however, upon statehood, lose

one benefit which it

presently enjoys, not in terms of its own taxing authority, but in the District's

exemption from taxation.

Since the District's current bonds are issued pursuant to

the authority of Congress to legislate for the District, the interest paid on District

bonds is currently exempt from taxation by the other 50 states.

After statehood,

the District's obligations would have no greater status than those of other state

obligations and would be taxable by other states.

The effect on the saleability of

District bonds would, I believe, be minimal.

It is clear that the District will not lose any authority to levy taxes upon

statehood.

It will, however, gain the ability to

tax certain income and real

property from which it is now prohibited from utilizing. It should also be noted

that, as

a unitary government, the District has and will continue to have with

statehood all of the taxing authority normally divided amoung state, county and

municipal governments.

The District may or may not decide to levy such taxes,

just as the various state legislatures chose from their own

circumstances and

competitive positions what taxes to levy. As I have stated, it is possible that the

Congress would chose to terminate the Federal payment whether or not statehood

is achieved. The Congressional decision on this matter would certainly be relevent

to the fiscal needs of the new state.

But either way there should be no question

of viability of the new state, since the current Federal payment represents only

approximately 20% of total resources.

What are the expected transition costs of statehood?

Transition costs, of themselves, are likely to be minimal, and should be of

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activities which would be required to perform as a state, several programs which

the state would be required to take over from the Federal Government would have

cost implications which are not merely transition costs, but which would continue

indefinitely.

Three of these Federally performed functions are involved in the criminal

justice system.

Currently the District Government does not have authority to

criminally prosecute other than traffic and petty misdemeanor offenses. The local

criminal prosecution function is conducted by the United States Attorney for the

District of Columbia. Upon admission to statehood, the new state would have full

criminal prosecution authority and responsibility. The new state would not take

over the entire function of the United State Attorney's office. That office would

still exist, as it does in all other states, to prosecute Federal offenses and to

represent the United States civilly, but in a considerably smaller form. That part

of the U.S. Attorney's office which prosecutes local

cases in Superior Court

currently has approximately 110 lawyers who are paid by the Federal Department

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expenditure of approximately $10 million per year to perform these functions. The

District should properly bear this cost, together with the authority to choose the

chief prosecutor.

Similarly, the United States Marshall also performs various functions in

support

of the Superior Court, including courthouse security and prisoner

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as service of process and execution of eviction orders.

These functions, currently financed by the Federal Government, would become the

responsibility of the new state, with cost implications of several million dollars per

year.

Although all sentenced District prisoners are technically charged to the care and custody of the U.S. Attorney General, most actually serve their sentences in

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services. Upon, the District's, achieving statehood, it is likely that this privilege

would stop.

It is difficult to determine whether it would be

more

or less

expensive for the District to provide these services on its own.

The District government has also benefited over the years from its ability to

participate in Federal employee benefit programs.

Currently, District employees

are eligible to participate in Federal health benefit plans. In addition, permanent

employees, other than police, firefighters, teachers and judges, are covered by the

Civil Service Retirement System. State governments do not have the right to

participate in these Federal programs.

In fact, regardless of statehood, the Office

of Management and Budget has recently informed the District that it will not be

permitted to enroll new employees in the programs after October 1, 1987. It is

likely that the District will be able to obtain group health coverage which is

reasonably competitive to current costs.

The potential retirement costs are much more threatening.

With regard to the Civil Service Retirement System, the

District is treated as

a Federal agency.

The employee contributes 7% of wages,

which is matched by the District. The District's contribution is now approximately

$50 million per year. Although the Civil Service actuaries estimate that the cost

above the employee contribution is at least double the agency share, the District,

like any Federal agency, has no further obligation other than the initial 7% which

it contributes. When District employees retire, any deficiencies in the funding are made up by the Federal Government. Statehood could cause even existing District

employees to be dropped from the Federal retirement system.

Even without having

to cover all District employees in a new retirement system, it is likely that the

benefits will have to be considerably reduced to be affordable to the District. If

all District employees were to be dropped from the Federal system, the District

might face increased annual

costs of $50 to $100 million

to

match

current

benefits. Even under the existing Home Rule government, the District will begin

covering new employees in its own retirement system starting in FY 1988. The

OMB requirement of only covering new

employees, however, will make the

transition gradual. Statehood might trigger a much quicker change with attendant

significant increases in costs.

Would there be costs associated with the transfer of agency

funds?

The costs associated with the transfer of agency funds should be minimal.

The District is already independent of the Federal Government for its budgeting,

accounting and cash management.

With the exception of those activities discussed

• 24

above which are

not

now financed with District, there would be

very little

difference in the financial system after admission to statehood.

CONCLUSION

It is my opinion that the financial effects of statehood are less than one

might expect.

There is no reason to believe that there would be any significant

change in the Federal payment to the District. Nor would the payment be any less

secure

and reliable with statehood than without.

I cannot

conclude that the

Congress would fail to meet its reasonable obligations to the District. In addition,

the absence of the Congress in the budget approval process would make that

process more efficient,

The most substantial impacts would be assuming those responsibilities which

the Federal Government not financing

local prosecution and courtroom security,

the unavailability of overflow prison facüities and health and retirement benefits.

Assuming the worst case, these costs could be range between $100 and $150 million

per year. Although that is a sizable absolute amount, it is only approximately 5%

of the Districts total expenditures. That percentage is certainly within the range

of changes which could be accommodated, particularly since

some

additional

revenues will be available with the advent of statehood.

In any event, the value of full citizenship cannot be measured in dollars and

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Thank you for the opportunity of testifying this morning.

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