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Office of the Press Secretary

For Immediate Release January 14, 1997
                           PRESS BRIEFING BY
                     OMB DIRECTOR FRANK RAINES AND 

The Briefing Room

12:10 P.M. EST

MR. HAAS: Good afternoon, everybody. Welcome to the briefing. As you all know, we normally do not discuss pieces of the President's budget before the President actually releases it. But in this particular case, as Mr. McCurry said earlier today, with the Inaugural coming up and a lot of focus on the District, we thought that there was good reason to do this.

I also want to emphasize something else that came up earlier today, and that was that this briefing is about the District of Columbia, and even though we have the President's budget director and the Secretary of the Treasury, they're not here to discuss other aspects of the President's budget. So, obviously, it's a free country and ask away, but they're going to avoid all those questions, so we shouldn't waste our time doing that.

You're going to hear an overview on the President's plan for the District from OMB Director Raines, who, as many of you know, heads up the President's task force on the District of Columbia. You are then going to hear from Secretary of the Treasury Rubin, who has been very actively involved in all of our efforts, going back a couple of years, and he will put our efforts in a larger context in terms of what this administration is trying to accomplish. Obviously, after that we'd be delighted to take your questions.

MR. RAINES: Hello and welcome to all of you. Let me begin with one overall comment. The President's plan is a product of hours, weeks and months of hard work, starting with the President himself. This is without a doubt the boldest plan for the District that any President has ever proposed. And we're proud to stand behind it and we're enthused by the idea of working with Congress, the city and other interested parties to make it a reality.

The President's plan has two basic goals: We want to revitalize the city as the Nation's Capital, and we want to improve the prospects for home rule to succeed. It's now very plain to everyone that the federal government's relationship with the District is fundamentally flawed. The local, county and state responsibilities that we gave this city in 1974 have proven to be beyond the city's resources to deal with them. As well, local officials have not performed as well as they must in managing the city.

We view this plan as a plan of tough love. We want to help the District, but we will insist that the District take specific steps to help itself. The plan reflects the President's overall goals for the nation. He wants to increase opportunity in the District, he wants to demand responsibility from the District, and he wants to build the District into a strong community that we all can be proud of.

This plan has been put together in the context of the President's overall balanced budget plan that he will be submitting to Congress in the beginning of February. The plan has four major components. First, we will relieve the District government of major financial and managerial responsibilities including certain pension plans in parts of the criminal justice system. These are beyond the financial capacity of the city. And we will also resolve -- help resolve the city's cash flow shortfall that stems from its accumulated deficit. We'll invest considerable resources to improve the city's criminal justice system and its capital infrastructure. We will strengthen the District's economic base. And we'll draw on the federal government's technical expertise to help make the city government more effective in such areas as income tax collection, education, training, housing, transportation and health care delivery.

Over five years, this plan will invest $3.9 billion of federal budget resources in the Nation's Capital. Among other things, the plan provides $885 million for new capital spending on prison renovation and construction; $891 million to operate prison facilities; $681 million to operate the court system; and $125 million in 1998 to begin rebuilding the city's transportation infrastructure. We will provide $117 million to improve the District's tax collection and $917 million to increase the federal share of D.C.'s Medicaid payments. We will also have a program of incentives and grants for economic development in the District.

In exchange, the plan will end the yearly federal appropriation and other payments to the District, saving $3.5 billion over five years. The net federal cost of the plan comes to $339 million over five years.

Now, the plan proposes to implement the takeover of the pension plans for law enforcement officers, firefighters, teachers and judges. Upon the transfer to the federal government these plans will be closed. The existing pension assets will be used to pay beneficiaries. And starting in 2007, the federal government would begin to make contributions to pay over an extended period of time the $4.3 billion of unfunded pension liability that the city has, a liability that was transferred to the District by the federal government in 1979. The District would be required to establish new plans for these employees.

Over five years, this plan will save the District about $770 million. Federal costs will be somewhat less than the District budget savings, in part because pension assets will be used to pay the pension payments between 1998 and 2007.

The proposed federal spending is all dependent on the District government taking certain actions to improve its performance, and these will be outlined in a memorandum of understanding to be reached between the federal government, the District government and the financial authority.

We believe that this plan will benefit the city, the region and the nation. It benefits District residents by reducing their government's financial burdens, improving the delivery of city services and investing in the criminal justice system, economic development and transportation.

It benefits the region because the city's economic recovery, the financial support given to the police, fire, teachers, and judges pension funds, the rebuilding of the District's prison system and the improvement of a key component of the regional transportation system.

And it benefits the nation because it begins to create a Capitol City that we all can be proud of and improves the transportation system and ensures the safety of its residents and visitors.

SECRETARY RUBIN: Thank you, Frank. Four points: One, the administration started when Alice Rivlin was still here as head of the Washington, D.C. task force, and that led to the creation of the Financial Control Board as well as activities by various of the agencies with the city. The Financial Control Board will continue to help the city function in a constructive way.

Number two, as Frank may have mentioned, we will have to find a mechanism for funding out the $400 million to $500 million accumulated deficit that the District has. As you know, Treasury has been lending money to the District on a yearly basis, funded by the annual payment. The annual payments will no longer exist. So we will find a mechanism for providing intermediate-term funding to fund out the accumulated deficit.

Number three, as Frank mentioned, there will be an economic development corporation. And what we will do, given the focus that we have had on capital access and creating economic activities in urban areas, is to draw on the best thinking that we've had over the last four years and then recommend provisions and measures that are best suited to the circumstances of Washington, D.C.

And, number four, that activity that we've been engaged in -- capital access and creating economic activity in the inner cities, particularly, although in urban America generally -- has been a very important part of the focus of this administration. And what we're doing and announcing today with respect to Washington is one more manifestation of that focus and that concern.

Q Doesn't this mean that home rule has failed?

MR. RAINES: What this means is that the home rule arrangement that was created in 1979 has proven not to be a successful arrangement. And what we are doing is readjusting that arrangement to give it a greater chance to succeed. Many aspects of home rule have been very successful. Some aspects, particularly in the financial side, have been less successful.

Q What's been successful?

MR. RAINES: The city went from a circumstance where it was a federal agency, where there was virtually no democracy in the city, and there's a thriving democracy in this city, where city residents are participating in the governing of their own day-to-day lives. The concern that we all have is that the burdens that they face are beyond the resources that they have to deal with them. We believe that this will give some breathing room for democracy to flower in the city.

Q Director Raines, what are some of the specific tough-love measures you all are going to expect from the District?

MR. RAINES: Well, the first part of the tough love is on the exchange of the federal payment for the specific actions that we will be taking. Second, for each of the actions there will be requirements required of the city. With the pensions, we will be closing off the pension plan. They'll have to adopt a new pension plan and pick up all accruing liability thereafter. And they will be mandated that that fund be funded from day one going forward.

With regard to the criminal justice system and the prisons, we will not take custody of prisoners who were not sentenced according to federal sentencing guidelines. That will require changes in the laws of the District of Columbia so that they are sentenced according to those guidelines.

We also are going to be requiring that the city balance its budget a year early. Under the current legislation, they have until 1999 to come to a balanced budget. We will be requiring that they have a balanced budget by fiscal year 1998.

Q Director Raines, on the prison specifically the plan says that Lorton will be repaired and expanded. Every political person -- Republican, Democrat or whatever -- in Virginia has opposed the continuation of Lorton and wants it closed. There's legislation to close it within five years. How are you going to sell this to the Virginia members of Congress?

MR. RAINES: The particulars of the reconstruction of the District pension -- prison system are going to have to be worked out with the entire region. The new facilities are going to be required -- virtually all new facilities are going to be required, and we are going to be working with them on how to implement that. It's our preference --

It's our preference to continue the prisons in their current location -- at least some -- occupying at least some of the land that is there. But our bottom line is that we have to have new facilities that will meet the standards of the Federal Bureau of Prisons.

Q If I could just follow up -- if you do not keep Lorton, would you then expect any new facilities would be built in the District of Columbia itself, or is that open?

MR. RAINES: That would be an open question. We would prefer that the facilities be within reasonable distance of the District of Columbia. But as you know, in most states the state prisons are very often hundreds of miles away from the largest city.

Q Director Raines, what is in the plan to help stabilize the loss of residents and loss of businesses that's been eroding the District's tax base? Does this plan go far enough to stabilize the city's finances and to stop the bleeding that's made a difficult problem worse?

MR. RAINES: We believe this plan gives the city a very major opportunity to be able to get its house in order and to begin to stem the flow of people leaving. There's no guarantee in this plan that that will occur. The most important things, I think, that we are offering in that regard have to do with the relief that they will be getting in their budget from the swap that we are undertaking. Second, the technical assistance that we're going to be giving to the city to try to improve service delivery in the city, from schools all the way to tax collection, which should have a major impact on residents of the city as they believe that the city is performing again. The third one that I'd mention is what the Secretary of the Treasury mentioned, the economic development incentives that we hope will begin to increase economic activity in the city, increase employment in the city, and make it a place that employers want to do business.

Q You are not proposing any capital investment on schools, as I understand it, but quite a lot on prisons. Some folks are going to find that interesting in view of the fact that schools have not been performing so well. What are you going to do about schools other than improve administration? What does this plan envision?

MR. RAINES: If you look at this plan, you will see that we are very careful to identify areas in which the federal government has expertise that we can bring to bear to the issue. In dealing with the prisons, we have a long history of being involved in the criminal justice system in the city. For example, the prosecutor for all crimes in the city is the U.S. Attorney. That's a very unique arrangement in this city that's different from any other place. So the reason we focused on the criminal justice system is that there is a national and federal interest in the operation of the criminal justice system. We have an expertise through the Bureau of Prisons.

We are not in the business of running school systems. What we will provide to the District is the very strong support of the Department of Education giving them the greatest flexibility to -- with the use of federal funds and working directly with General Becton and the School Board and the Advisory Board to help them with their plan to improve the schools. But that's something the local government is going to have to do.

Q Director Raines, President Clinton came out for statehood in 1992. He testified for it. Does this plan mean that he is no longer for statehood and he is just for the city being a prosperous, economically secure city, a city forever, that's it?

MR. RAINES: No, this plan doesn't deal with several things. It does not deal with the issue of governance of the city. There are several processes going on in the city that are looking at questions of charter revision and other changes such as that. There's nothing in this plan about that. We don't address that. There's no change in the position regarding that. And so we haven't tried to deal with --

Q -- a change in his governance position --

Q What is the position?

Q -- that he is still for D.C. statehood?

MR. RAINES: I have not talked to the President lately about any -- about that issue. I do not know of any change in his position on governance.

Q -- commuter tax which is not addressed in this at all and the taxing of an organization that you worked for, Fannie Mae, which would bring in $300 million. Why are those two issues not addressed in this plan? (Laughter.)

MR. RAINES: That's right. I'm recused from Fannie Mae. Let me say this very directly. We have in this plan a national capital infrastructure fund that we're providing seed capital for. We are also going to be seeking other sources of financing for that fund because we believe that the region and we believe that all entities in the city benefit from the transportation infrastructure. We'll be encouraging many people who have been talking about payments in lieu of taxes to, in fact, examine making payments in lieu of taxes to this fund as a way of their meeting their responsibilities to the local community.

We believe that this is an approach that can bring the interest of the region as well as organizations that have otherwise been tax exempt -- universities, hospitals and others -- together around a common goal where they can see the benefit that they will be receiving at the same time the District will be seeing the benefit.

Q Including -- is that part of the organizations that would be contributing?

MR. RAINES: We believe that any organization that is not paying taxes to the city would be prime candidates to make contributions toward this fund.

Q They qualify? They qualify?

Q Frank, there's no --

SECRETARY RUBIN: Can I just add one thing? I think you'll find Mike McCurry said this morning, the President still favors statehood.

Q Frank, there's no tax -- to follow up on David's question, there's no tax cut in this plan and you mention the economic stimulus package, which seems somewhat nebulous at this point. What can you say to reassure people that the base -- the economic base of the city will be sufficient to stop people from leaving and to get people to come back, which Mrs. Norton advocated in her tax cut?

SECRETARY RUBIN: I think a good -- and Frank said it very well before -- I think a good part of what this is about is having a viable economic base in the city. Obviously, you need to restore confidence and the program that has been developed, by virtue of the federal performance of these various functions and putting that on a firm grounding, then leave to the city that which it can manage, in our judgement, at least, should contribute to confidence on the part of private sector.

Secondly, in the Development Corp., you will find a robust package of tax incentives and other measures to create economic activity.

Q Have you shown this to the congressional leadership, and what's their reaction? What are the chances of this actually clearing Congress?

MR. RAINES: Over the last several months, I've had a number of discussions with congressional leadership regarding the District of Columbia, and I think that we share the view that some fundamental changes have to be made to put the city on a sound basis. And I look forward to widespread support in Congress for the President's proposal.

Q How many jobs would be lost from the District government?

Q -- Congress leader -- Senator Faircloth has already called your plan a nonstarter because it increases the deficit. And he calls it a great rip-off, not a great swap. How do you react to that?

MR. RAINES: Well, I haven't had a chance to talk to the Senator yet. I think he will be -- obtain some reassurance that this is, in fact, paid for within the President's balanced budget plan. So I think one of the things that we're going to need to do, as we have to do on all of these issues, particularly on the District, is get out and explain the plan to people. And I think you will find over time as they understand the details of the plan, they will see that we've in fact touched each of the bases that you mentioned.

Q Does it freeze any of the taxes or reduce capital gains? In other words, what does this plan contain that would cause business to invest here?

SECRETARY RUBIN: The answer to your question is that we are in the process of putting together a set of proposals with respect to tax incentives. And as I said at the beginning, what we'll do is draw on the work that we've done more generally with respect to inner cities and urban America in general and choose the tax incentives that seemed to us best suited to D.C. circumstances. We have not yet finished that work. And, obviously, when we are ready, we will consult with local businesses and others who we think will have a good insight as to what will work best in D.C.

Q Under this plan, how many jobs will be cut from the District government?

MR. RAINES: There will be a number of jobs that will be moved from the District government into the federal government. The largest group of that is going to be the -- at the prison. But the District has to reduce its own employment levels simply to balance its budget. So that --

Q But D.C. employees won't be guaranteed the federal jobs in the prison system, for example, right?

MR. RAINES: D.C. employees will have the opportunity to apply for the jobs in the federal system and during a period of time in the transition we'll be offering training opportunities to ensure that as many as possible will have the opportunity to take those jobs within the system. But the District -- I just want to emphasize, the District has a lot of work it has to do even with this plan. They have a lot of work they have to do to balance their budget and to balance their budget a year early. There's nothing in this plan that will take that pressure off of the city and the pressure to get to balance and stay balanced. So no one should believe that there's something here that's a magic wand that's going to make all of the problems go away. We have renegotiated the deal. But the deal is a tough-love deal. It requires much of the city, just as we are offering them an opportunity.

Q Is the City Council aboard on this plan?

MR. RAINES: I think you'll have to ask them, but we --I have had the opportunity to consult with the Council on it, and we've incorporated a number of their thoughts in the plan.

Q How can you be sure the city --

Q Many of the responsibilities you take over have escalating costs in the out-years. That's one of the benefits for the District of this. What do the American people gain from all of this? It seems like you're taking on a fairly substantial financial responsibility and the country as a whole doesn't get much back.

MR. RAINES: Let me give you two answers to that. First of all, the very articulate answer that the President and the Speaker of the House have given, and that is that all of us in the nation have an interest in the well-being of the Nation's Capital. We all have an interest in ensuring that the Nation's Capital works and is a city that we can all be proud of. That's a national interest.

The second I would mention to you is that all of the functions of the District government were given to the District government by the federal government. The District government was essentially an agency of the federal government when home rule began. So that the fact that we are taking back problems that we handed to them isn't that the local government somehow is foisting them upon us, we are simply reshuffling the deck in a way that we think is more fair.

People believe the District government could deal with more than it can. We all have come to the conclusion that has been unsuccessful. We don't think we should go forward with an unsuccessful situation, so we're changing the situation to one that we believe has a greater prospect of success.

Q How can you be sure the city will live up to its end of the bargain here? You talk about a memorandum of understanding, but how does that work? How can we expect the city to be better able to do what it's supposed to do than it has been in the past?

MR. RAINES: Well, one of the things I think -- two things I think I would point your attention to -- one is that the financial authority, which has very broad powers over the city's operations, will remain in effect. We will be backing its efforts to ensure that the city makes the improvements that are necessary, and it will stay in effect until all of those improvements have, in fact, been made.

Second, in connection with the financing that we are offering the city, there will be very tough covenants in that financing to ensure that as long as that financing is outstanding the city is meeting its responsibilities.

Q And if they don't follow through, they lose the money or it's taken back or --

MR. RAINES: In the case of the financial authority -- the financial authority has the authority to order changes or to substitute new people if the old people won't do the job. In the case of the indenture, they'll have its own specific enforcement mechanisms inside of it.

Q -- for the District of Columbia in the long run, it seems that the pension costs, particularly, are higher on the back end. I mean, how would you assess the benefit to the city in the long run, in a 10-year, 15-year time horizon?

MR. RAINES: Well, I think the best way to think of it is if you think in the five-year time horizon it's worth, as I mentioned, I believe the total benefit to the city is $770 million. You can then add to that the unfunded pension liability as an approximation of 30 years' worth of benefit.

Q That $4.3 billion?


Q Mr. Rubin, is there any provision in your budget to set aside money to pay for this $4.3 billion that would then start coming due? Because you said your balanced budget plan, that runs through 2002, but this is a rather large payment to leave to future presidents, and I'm just curious.

SECRETARY RUBIN: In point of fact, it is in the plan in our long-range numbers. In point of fact, in the context of what will in 2007 be about a $2 trillion budget, the payments will be in the range of $400 million a year. So it's not something that is going to be a major factor in balancing the federal budget in the out-years.

Q Secretary Rubin, as long as we have you here --

SECRETARY RUBIN?: Sounds like a change of subject coming. (Laughter.)

Q Given Friday's jobs numbers, today's sales and inflation numbers, is the economy perhaps even stronger than the administration thought it was? And given that it is, the news is driving up the dollar around the world, is there such a thing as a dollar being too strong, given your --

SECRETARY RUBIN: You know, we talked before this about what somebody might raise and somebody said is it possible somebody would raise the dollar, and we said there's no way to connect the dollar with Washington, D.C. But you've succeeded. (Laughter.)

I think on your first question , the four years we've been here the numbers fluctuate from month to month, quarter to quarter. I think we're still on the track we've been on and it's a very good track, solid growth and low inflation. So I don't see any reason to change our view of things.

Q Back on D.C. --

Q Wait, wait.

SECRETARY RUBIN: And on the question of the dollar, I believe without question that a strong dollar is in our interest. That's our position. It continues to be our position for the reasons we've discussed before.

MR. HAAS: Excuse me. We'll take one more question on D.C. from Susan. People from OMB and elsewhere in the White House are available to come up and talk on background, but this will be the last one on the record.

Q How is it that statehood is still a reasonable -- is it a reasonable goal when the District could not handle a lot of these functions that are normally handled by states?

MR. RAINES: One of the major questions on the future governance of the city has to do with the competence of the city to manage its affairs. We believe that we will be providing the city the opportunity to manage its affairs in a more effective manner. And to the extent that managing its affairs in a more effective manner opens up governance possibilities, then that's a positive. But there's nothing in this plan that is tied to any particular governance structure of the city going forward. That's something that's going to have to be worked out by the local citizens in working with the Congress of the United States.

Q Could we follow up on that, because that's an important issue? You keep saying that the city itself is not viable in terms of supporting itself economically, but, in fact, every economist shows that a billion dollars in tax money flows to Maryland and Virginia -- $600 million to Maryland; $400 million to Virginia -- for which those two states do nothing to earn that money, but that money, if it were taxed at a lower rate in the city would make the city economically viable. Seventy percent of the jobs are taxed by Maryland and Virginia. They have a windfall of a billion dollars a year for which they do nothing, but this plan doesn't address that.

MR. RAINES: This plan, as I said before, does not address the governance question. It would be entirely appropriate in a discussion of the governance question to raise issues about at responsibilities that the District takes on and its sources of revenue. But this plan, quite intentionally, does not deal with the governance issues because I think everyone would agree that the District is not in a position today to be an active party in that discussion. It does not come to the table with the kind of demonstration of execution of its duties that would permit that discussion to happen.

So I think that no matter what your view is on the future of governance, unless the city and until the city can get its house in order, that discussion will not be successfully engaged.

END 12:37 P.M. EST