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 no concern in making a determination as to whether to approve statehood. However, although the District now performs at its own expense almost all 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 of Justice. With support costs, the new state would have to undertake an 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 transportation, as well 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 District operated and financed institutions. Nevertheless, over 1600 District prisoners are in Federal institutions and halfway houses. The District reimburses the Federal Government nearly $25 million per year for these correctional 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. funds? Would there be costs associated with the transfer of agency 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 above which are not very little 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 facilities 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 cents. Being a full citizen of a state should be an inalienable right of all Americans, without question. Thank you for the opportunity of testifying this morning. |