greater demands for government services, and a decline in the real value of the dollar. At the same time taxes imposed on District residents were increased substantially in response to needs. Local tax revenues have been rising steadily while the Federal payment authorization has remained at the $50 million level established in 1964. (Exhibit J-1.) Based upon current estimates for fiscal 1967, local tax revenues have increased 30 percent since 1964. If the Federal payment authorization had been related to growth in local tax revenues as now proposed, it too would have risen 30 percent instead of remaining at the fixed amount of $50 million. What is needed is a systematic and equitable method of determining annually the relative amounts to be provided by District taxpayers and the Federal Government. The situation as it has existed for the past ten years and as it is projected for the near future is shown on Exhibit I now on the easel. EXHIBIT I JUNE 23, 1966. Supplementary report and recommendations on Federal payment and borrowing proposals for the District of Columbia, based on a percentage of local tax revenues (Includes changes made in Senate approved amendments to H.R. 11487, May 16, 1966) The Commissioners appreciate the opportunity to express their strong support of the alternate suggested by the then Deputy Director of the Bureau of the Budget on February 28, 1966, to the formula method previously recommended by the President for determining the Federal payment authorization for the District of Columbia. The Commissioners believe the suggested alternate has much merit and recommend establishing the level of the Federal payment authorization at 25 percent of District local tax revenues and the general fund portion of motor vehicle registration revenue. This alternative proposal would equate the Federal share of the cost of operating the Nation's Capital that will be paid by all Americans, including those who live in the District, to the amount that would be provided by the District from local taxes. A corollary change in the general fund borrowing authority is also suggested. FEDERAL PAYMENT The Congress and the President have consistently recognized the unique responsibility of the Federal Government for the District of Columbia as the Federal city and the Congress has regularly provided payments to help defray the costs of operating the District. The question of how large the payments should be, however, and therefore what constitutes a fair and equitable Federal share of the cost of running the District of Columbia has been the subject of extensive study and discussion since 1790 when the decision was made to establish the capital city in this location. This proposal envisions a steady growth in the authorized amount of the payment in proportion to revenues as illustrated by the estimated data for the next six years: 1 Includes increases approved by Senate on May 16, 1966 in amendments to H.R. 11487. Varying amounts of Federal support were provided to the District of Columbia over the years. During the first 89 years of the capital city's existence, the Federal Government appropriated an average of approximately 40 percent of the cost of local government though the amounts were not explicitly determined on any consistent basis. Beginning in 1879, the level of Federal participation was set at a flat 50 percent of total expenditures, an arrangement which was maintained for 42 years. Between 1921 and 1924 the Federal share was set at 40 percent of District expenditures. Since then, Congress has enacted lump sum authorizations which have varied over the years. On five occasions since World War II, Congress has increased the lump sum federal payment authorization raising it from a wartime level of $6 million to $50 million. In each case, within a few years, the level established became inadequate as the needs of the District grew in response to changes in the District's population, greater demands for government service, and a decline in the real value of the dollar. During this same period, taxes imposed on District residents also were increased substantially in response to needs. While increases in the federal payment authorization have been made by Congress from time to time, its growth has been irregular and has had no consistent relationship to annual needs. Instead, what is needed is an equitable and systematic method of determining annually the relative amounts to be provided by District taxpayers and the Federal Government. A federal payment authorization based on a percentage of local tax revenue would provide a constantly up-dated measure of what Congress and the President feel is an equitable sum to supplement District revenues. This would enable the District to compute the federal payment authorization at the time of its earliest budgetary planning and would make it possible for the District to assess its probable total resources from local sources and the Federal Government so that priorities could be established among competing needs. Only in this way can the District evaluate and present its recommendations to the Congress regarding the level at which our programs should go forward in a reasonable and orderly fashion. It should be pointed out that this proposal does not involve any kind of an automatic payment of federal funds for District purposes. Congress would still retain complete control over appropriations for the District. The District will not be able to spend a dime of either local revenues or the federal payment authorization that is not explicitly appropriated by Congress. The District budget would continue to be reviewed and justified each year before the Appropriations Committees of the House and Senate. Under this proposal the Congress can be assured that the federal payment authorization will increase only as revenues from local taxes increase. Except for the setting of the property rates which has been delegated to the Commissioners, any changes in local taxes must be enacted by Congress. Throughout much of the history of the District of Columbia, the federal payment was based upon a percentage of the total appropriation. For several reasons we believe relating the federal payment to local revenues is more appropriate. In the first place, it would tend to avoid any criticism that the District might seek to spend more money in an effort to increase the federal payment. Secondly, this method provides the District an incentive to keep local taxes at a realistic level since the authorized federal payment would be tied directly to local tax effort in a ratio of 1 to 4. We believe revenue from local taxes paid by residents, businesses, and visitors in the District of Columbia is an appropriate measure of the local tax effort to which the federal payment authorization would be related. Motor vehicle registration revenues which are credited to the general fund have been included in this base because these charges are imposed in lieu of personal property taxes on automobiles. Accordingly, we recommend that the following tax revenues be included in the tax revenue base for the purpose of determining the federal payment authorization: Income and franchise taxes Sales and gross receipts taxes Inheritance and estate taxes Deed recordation tax General fund portion of motor vehicle registration revenue The federal payment authorization would be set at 25 percent of estimated revenues from the above sources as approved by the Bureau of the Budget for the year under consideration. If the federal payment appropriated should exceed 25 percent of the revenue actually collected in that year, any excess federal payment would be refunded by the District to the U.S. Treasury. This base in our opinion would be equitable and fair to both the District and the Federal Government. In selecting a percentage relationship between the federal payment authorization and local tax revenues, consideration was given to past Congressional action, and to what appear to the Commissioners and the President to be a fair and equitable amount. The federal payment authorization has been increased by Congress five times since 1947. Though not explicitly computed as a percent of local taxes, the authorized federal payment at the time of each increase represented the following percentages of local tax revenues at that time: As these figures show, three of these authorization increases represented between 23 and 25 percent of local tax revenues. Thus it would appear that a level approximating 25 percent represents the federal share Congress considered appropriate on a majority of these occasions. These past decisions to increase the federal payment authorization however were made largely on the basis of an analysis of pending local needs without directly relating the increases to the level of local tax effort. The federal payment formula recommended by the President which related the authorization to federal property holdings and federal employment in the District would also provide federal payment authorizations that represent approximately 25 percent of local tax revenues. For example, of the total land area of the District of Columbia, over 40 percent is owned by the Federal Government. Federal employment in the District represents approximately 40 percent of the total employment. Thus based upon the historical relationship between the shares of the cost of running the District Government borne by the Federal Government and the District and the extent of Federal activity and control in the District, we believe 25 percent of local tax revenue provides a sound and conservative basis on which to determine the federal payment authorization each year. Local tax revenues have been rising steadily while the federal payment authorization has remained at the $50 million level established in 1964. Based upon current estimates for fiscal 1967, local tax revenues have increased 30 percent since 1964. If the federal payment authorization had been related to growth in local tax revenues as now proposed, it too would have risen 30 percent instead of remaining at the fixed amount of $50 million. BORROWING AUTHORITY Along with the proposed alternative method of determining the federal payment authorization, the Commissioners also recommend a new method for determining the maximum amount the District is authorized to borrow from the U.S. Treasury for general fund capital projects. This alternative would make use of the same general fund tax revenue base proposed for the federal payment authorization. Instead of an overall debt ceiling which traditionally has been tied to assessed values of property, this proposal would limit the annual amount of general fund revenue which can be committed to debt retirement. We believe the amount of revenue the District should be authorized to use for long term debt retirement annually should be limited to 6 percent of estimated annual general fund revenues from local taxes and the Federal payment for the year involved. This in turn would limit the overall outstanding debt which the District could incur, the actual amount of debt varying in accordance with prevailing U.S. Treasury interest rates on long term bonds. On the basis of 30-year, 41⁄2 percent loans, the following outstanding debt could be supported conservatively under this form of debt limit legislation: [Millions of dollars] Note: Adjusted to include changes approved by Senate on May 16, 1966, in amendments to H.R. 11487. As in the case of the alternative federal payment proposal described above, which relates the federal payment authorization to a percentage of general fund local tax revenues, such an approach would simplify the determination of general fund debt ceilings. It would also eliminate the controversial features of the borrowing formula incorporated in the amendment to H.R. 11487 which used the assessed value of all real and personal property in the District, including that owned and used by the Federal Government, as the measure of the District's debtcarrying capacity. This alternative is a natural corollary to the proposed change in the method of fixing the annual federal payment authorization. Annual revenues from all local sources constitute a more reliable and realistic measure of the ability of a government to support long term debt especially in the case of jurisdictions like the District of Columbia where property taxes are only one of a number of tax resources. In the District, property taxes constitute only about one-third of the local general fund tax base. The growth of nonproperty tax sources and the emergence of a number of other problems in connection with the use of assessed values, have caused the Advisory Commission on Intergovernmental Relations and others to recommend that consideration be given to the use of annual revenues rather than assessed values as a measure of debt ceilings. Use of annual revenues also has the advantage of eliminating the prob lems caused by changes in the assessment level which makes these values subject to manipulation. Such a change in the method of setting debt limits has been made in several other American jurisdictions. Puerto Rico, for example, adopted a constitu tional amendment in 1961 which limited the maximum annual debt service of its Commonwealth Government to 15 percent of the average of the last two years' annual revenues. Connecticut also changed its statutory debt limits for local governments in 1963 and now uses multiples of average tax receipts of these governments as the basis for determining their debt ceilings. Two other states which use annual tax revenues for debt limitations are Tennessee and Mississippi. In Tennessee additional bonds may be authorized by the legislature only if tax revenues collected during the preceding year were at least one and one half times the debt service on all outstanding bonds. Mississippi provides that bonded debt may not exceed one and one half times the highest annual tax receipts of the past four years. Limiting the annual debt service of the District for general fund purposes to 6 percent of general fund revenues from local taxes and the federal payment would permit the District at the current U.S. Treasury interest rate of 42 percent on 30year bonds to incur an outstanding indebtedness which is slightly less than the estimated revenues from local taxes and the federal payment for the corresponding years as the borrowing authorization estimates shown above indicate. In comparison with prevailing local government borrowing practices generally in the United States this is a conservative amount of indebtedness in relation to local revenues. A comparison of the outstanding indebtedness for general governmental purposes with revenues in the 21 largest cities in the United States in fiscal 1964, which is shown in the attached table, indicates that the ratio of revenue to debt in these cities ranged from a low of slightly less than 1:1 to a high of 1:4 with a median level of indebtedness that was twice the revenues for the same year. The objective of all debt limitation provisions is to limit the amount of debt a government may incur to an amount which it can safely repay and to restrict the authority of imprudent administrations. Most governments are unable to finance all their requirements on a current basis and use long term borrowing to finance capital outlay projects of lasting benefit whose cost is heavy relative to the current financial resources of the community. Between 1952 and 1960, 63 percent of all local government capital outlay work was financed with loans. In many respects the use of long term loans to finance projects which will serve residents of the community for many years in the future is more equitable than current payment since it places some of the financial burden of these projects on the future users of the facilities. Paying for such capital improvements entirely out of current revenues actually constitutes payment in advance in these cases. The proposed change in the District's borrowing authority would relieve Congress of the need to periodically adjust the lump sum authorization that inevitably becomes inadequate in a relatively short time since this type of authorization does not reflect repayments or changes in the District's capacity to finance long term debt. A flexible borrowing authorization is essential to putting financial planning for long range public works programs on a sound basis in the District. The availability of early estimates of the level of borrowing authorization would permit the District to plan the timing of substantial capital outlay expenditures by providing a more accurate estimate of the city's ability to finance such projects. An increase in the general fund borrowing authorization that is reasonably related to the ability of the District to support long term debt and will enable the District to finance essential school construction, library, health, welfare, and recreational facilities is urgently needed at this time to allow the District to make more rapid inroads on capital requirements. The present six year capital works plan of the District calls for the use of the rest of the District's present general fund loan authorization of $175 million, exclusive of the rapid transit loan of $50 million, by 1968. These essential public works will have to be abandoned unless some provision for additional loan funds is made. This proposed borrowing authorization provides a prudent yet flexible debt limit. The amount to debt actually incurred will continue to be appropriated each year by the Congress. These proposals for the annual federal payment and general fund borrowing authorizations together with the increases in District tax revenues which have been recommended by the Commissioners and the President represent an urgently needed long range solution to the District's most critical financial problems. They will in our judgment provide a fair and flexible measure of the amount of Federal support that should be provided the District for essential services and facilities and a constructive approach to long term debt management. We respectfully request your earliest consideration of these measures so that the District may move ahead to meet its goals and fulfill its increasing responsibilities. These proposals have been prepared on the basis of and conform with the 65-205-66 |