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Mr. FAUNTROY. I thank you, Attorney Watson. Your testimony in its entirety will be entered into the record at this point, without objection.

I do want to commend you for very scholarly work and testimony on this subject. You have brought to the committee several very re vealing points which I think will aid us as we continue to probe the issues surrounding statehood.

Let me just tender several questions to you. First in your testimony you skillfully disclosed the difference between the Federal payment and the division of expenses in the congressional appropriations acts for the District. At another point you noted that the annual Federal payment to the District does not have a constitutional, compact, or a contractual basis.

What I am interested in knowing is whether the income generated by the District under the division of expenses obligates the Congress to appropriate at least that amount. In other words, is there a constitutional, contractual, or other legal basis which would forbid the Congress from appropriating less than the full amount of funds actually raised by the District?

Mr. WATSON. Unfortunately, I think the Congress probably could, at the present time, appropriate and limit the District from spending everything which it raises. The difference that would happen, though, because of the system, is that money would stay the property of the District. At the present time it would reduce the accumulated deficits, but assuming there had been no deficit, that money would stay in the general fund of the District of Columbia, which is outside the treasury, and would be available for expenditure at later times.

Because what we have is the worst of all possible worlds. The Congress can put a maximum on, but it doesn't say that money will be raised. And if we raise more than that maximum, we can't spend it currently.

Mr. FAUNTROY. You heard the question I raised with Dr. Brimmer. Is it fair to say that the District as a State may well be able to impose a commuter tax on nonresident income in addition to continuing to have a fair and equitable basis for receipt of an annual Federal payment?

Mr. WATSON. I believe we could, as a State, impose that, should we, as any State, choose to impose it.

Mr. FAUNTROY. You referenced in your testimony Dr. Ebel's study for the Advisory Commission on Intergovernmental Relations which is concerned with Federal payments made to other States.

In your view, is there ample precedent to legally support a Federal payment to the District of Columbia as a State? In other words, are there any legal impediments that you see that would stand in the way of a Federal payment to the State of New Columbia?

Mr. WATSON. If there are impediments, we are going to have to get a huge amount of money back from the States that have already received it. Because we are regularly contributing to States. Various smaller contributions are made, for instance, to cities where the Tennessee Valley Authority is, to cities where various Atomic Energy Commission plants were located. There is absolute ly in my mind no question that a payment can be made and certainly morally should be made to the District for having this location.

Mr. FAUNTROY. I must admit, I was struck by your revelation that there are some Federal programs which provide funds only to counties or municipalities, and that as a single government-level State, the District may not fully qualify for those funds.

Do you think we should attempt to cure that possibility through some provision in the D.C. statehood legislation that we are shaping?

Mr. WATSON. I don't think we should have the difference in our statehood. I think it can be handled in two ways.

Mr. FAUNTROY. OK.

Mr. WATSON. The first way is there would be nothing that would prevent the District from having within itself local government, even being the same size. In fact, I note there that at various times Philadelphia and Los Angeles have been both county governments and city governments, separate governments on the same territory.

The second area is, I would expect that our voting congressional delegation would see to it that the legislation written in the future would make clear that if there was a unitary government, it could qualify for the various forms.

Mr. FAUNTROY. A very good point.

It might interest you to know that the U.S. Department of Education just recently promulgated regulations which expressly exclude the District of Columbia from benefiting from a Federal education grant program, because when the Congress passed the act we referred only to the States as beneficiaries. And while we are now working to reverse those regulations, it is a problem that we experience from time to time. Every once in a while a Member or staff on the Hill will write the States and forget to say, "and the District of Columbia and territories.

So while most grant programs are allocated to the States, is it fair to say that we will be better off as a State for purposes of Federal grant programs?

Mr. WATSON. Well, I think we would be substantially the same as we are now. There are some programs I think that we don't fall into, or fall in somewhat different percentages. But on the whole, we would be certainly no worse off and probably slightly better off. It probably would not make a very great difference.

Mr. FAUNTROY. You mentioned our municipal bond processing mode today, and although you did not specifically address this issue in your testimony, I wonder if you would have any thoughts on whether the District's bond ratings might improve as a State?

Mr. WATSON. Well, I think they probably would, because one thing that I think concerns investors is anything that is out of the ordinary. When they have to look at a footnote and say these bonds are different because the State legislature cannot bind to provide appropriation, that makes investors feel uneasy. I think if we state hood, it would clearly benefit our bonds because then we would have a State legislature which could commit that State government for repayment and no one would have to raise the question of what happens at midnight tonight if the continuing resolution hasn't been signed.

So, from that point of view, I think Wall Street would look at us as a more stable government, cutting ourselves off from the unstable Congress, than having our present relationship.

Mr. FAUNTROY. Thank you.

Let me just mention one other matter that you touched on and which is of concern to me. The prisoners housed in Federal penal institutions from the District, are they any different from prisoners in Federal penal institutions from other States? I am curious to know why you believe this is a transition cost that the State of New Columbia may have to assume, particularly given the fact that the District already reimburses the Federal Government for those correctional services that it provides us.

Mr. WATSON. The difference is in the technical difference, as to how our convicted persons are committed to penal institutions. Everyone, even in our superior court, our local court, is committed to the custody of the U.S. Attorney General. In theory, at least, the U.S. Attorney General can then assign District prisoners anywhere.

This is somewhat different than States. States do, in some numbers, or smaller percentages, have for one reason or another convicts in Federal institutions. It makes for a different sort of relationship in that the prisoner has to be by a specific agreement with the Federal Government as opposed to merely staying within the custody of the Attorney General. So I think we would probably see a smaller percentage of District prisoners in Federal institutions, which would mean we would have to undertake some of those capital costs which we have not in the past done.

Again, though, I think this is an obligation that we have to assume as we assume the right rights of statehood as well.

Mr. FAUNTROY. Finally, Attorney Watson, the three questions I have asked: What would happen if we were denied the ability to impose a commuter tax, what would happen if we were denied the Federal payment, and what would happen if we were denied both?

Mr. WATSON. We right now are denied the ability to impose a nonresident income tax. With that restriction, we would certainly be no worse off than we are now. It would be wrong, but I don't think it affects our viability as a State because we are viable right now.

Similarly, with the Federal payment, it would be a serious imposition; it would be inequitable because it would be requiring the residents of the District of Columbia to be bearing the cost of National Government disproportionately. However, would it bankrupt the jurisdiction if the Federal payment were cut off? That, I have to say, is no. I believe we have a solid enough economic base that were we to lose 20 percent of our revenue, part of it would be made up in an increased burden on ourselves, which as I say we were meeting the responsibilities that the rest of the Nation should be meeting, and part of it would be in a reduction in services. But it is something that would not be a fatal blow to the State.

Mr. FAUNTROY. Thank you so much, Attorney Watson, for your contribution to this hearing. If in the committee report that goes to the Members preparatory to voting on this measure you see language not unlike that which you have included in your testimony, it will be because I will give you credit for it after the Congress passes it. I won't have an opportunity to reference in many instances the wisdom that you have attributed, but it will certainly contribute much to our effort to move this matter.

Mr. WATSON. I appreciate that. Thank you.

Mr. FAUNTROY. Our next witness is Dr. Lucy J. Reuben. Dr. Reuben is presently the vice president of Financial Research Associates, Inc., and also associate professor of finance at George Mason University. She received her bachelors degree at Overland College and her masters and doctorate degrees at the University of Michigan.

Dr. Reuben currently sits as a member of the Metropolitan Washington Planning and Housing Association's board of directors and is a former visiting professor with the Federal Reserve System's Board of Governors. Dr. Reuben has authored many indepth studies in the area of economic development which have appeared in a wide range of prestigious publications. Her achievements are many and we again could spend all day citing them. I will decline that and just simply say how delighted we are to have you. We have enjoyed very much reading your testimony and look forward to your presenting it at this time. STATEMENT OF LUCY J. REUBEN, VICE PRESIDENT, FINANCIAL

RESEARCH ASSOCIATES, INC., AND ASSOCIATE PROFESSOR OF FINANCE, GEORGE MASON UNIVERSITY

Dr. REUBEN. Thank you, Mr. Chairman. I appreciate that very kind and honorable introduction.

I appear before you at the request of the D.C. Statehood Commission and the D.C. Statehood Compact Commission to testify on the subject of certain financial and economic implications of statehood for the District of Columbia. My testimony will focus upon the specific financial issues as follows, as with the other witnesses here:

What effect, if any, will statehood have on the Federal payment, and how will the new State be treated in comparison with the present treatment of the District for purposes of Federal grants, Ioans, taxing authority, and any expected transition costs of state hood. I have previously submitted an analysis and a study on these issues in depth and will give you a summary here of that study.

Mr. FAUNTROY. Without objection, the entire study will be included in the record at this point.

Dr. REUBEN. Thank you.
[The study may be found in the appendix on P. 694.]

Dr. REUBEN. In summary, my analysis led to the conclusion that, a priori, statehood for the District of Columbia should occasion no significant incremental cost. While there will continue to be a significant role for the Federal payment, even if the District of Co lumbia is granted statehood, the size of the Federal payment should not have to grow as fast if the proposed State of New Columbia is granted the full fiscal and taxing authority of other States.

There will continue to exist exceptional rationale for the Federal payments. Moreover, there will continue to be a need for an annual payment based on the responsibilities and expenses of the State of New Columbia in the associated activities of the Federal Govern

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ment. Additionally, there needs to be more predictability in the amount of any such payments.

My analysis concluded there is no economic or financial reason that the proposed State of New Columbia should be treated any differently from the current government for purposes of Federal grants and loans. Indeed, the residents of the State of New Columbia would be denied the full range of economic resources available to residents of other cities and States if the new government were denied access to any programs for which this urban area is presently eligible.

With respect to the taxing authorities of the proposed State, from an economic perspective it is very important that the full range of taxing authority be applied. The current government does not have the power to tax nonresident income. This means that the residents of the District of Columbia bear a disproportionate share of the cost for an income-generating infrastructure-that is, the streets, sanitation facilities, police protection, et cetera-but are denied a commensurate proportion of the benefits of that infrastructure. Finally, the transition costs of statehood are one time in nature and should not be significant within the total fiscal framework.

Due to the unique congruents in the city and State, most of the mechanisms of statehood are already here in place. The only significant additional aspect of the overall administrative

and regulatory structure would be an anticipated judicial system. But, in general, the government of the District of Columbia already successfully assumes several of the functions of municipalities and States.

Now let me focus on the Federal payment. Currently, the District of Columbia receives from Congress an annual lump-sum appropriation known as the “Federal payment." The primary objective of the Federal payment is to defray certain expenses of the District government associated with the activities of the Federal Government. The Federal payment also compensates for fiscal constraints placed by Congress. To the extent that activities of the Federal Government continue to place otherwise uncompensated demands or limitations upon the State of New Columbia, there will continue to be economic and financial justifications for an annual Federal payment.

Now, conceptually, the Federal payment began when the District of Columbia was established as the Nation's Capital in 1800. This payment was, of course, designed to mitigate many of the otherwise unfunded expenses of the District in its unique role as the Capital City.

In particular, there are three perspectives of the rationale of the Federal payment. The State surrogate currently exists as one rationale, the Federal interest as another rationale, and the cost of the Federal presence is a third rationale. Each of these different perspectives acknowledges in some way the economic burdens that are inherent in the unparalleled status of the District of Columbia.

As far as the State surrogate rationale, the justification of the Federal payment on the basis of the State surrogate rationale recognizes that the District of Columbia is the only city which suffers from the lack of economic support from a State. Other major cities can benefit from the more diverse economic resource base of States

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