FROM THE OFFICE OF PUBLIC AFFAIRS

Mr. Chairman,Members of the Committee, thank you for the invitation to discussthe President’s Plan to revitalize our Nation’sCapital. I will briefly summarize the President’s plan andthen focus on one of its key elements -- how the President’splan will help spur economic development in the District ofColumbia. After I conclude my remarks, I would be happy to answerany questions that you may have.

OVERVIEW

As you know toowell, our Nation’s Capital faces not only structuralfinancial problems, but serious obstacles to providing the mostbasic services to its residents. The President has presented aplan to assume a number of responsibilities normally performed bystates, in order to put our capital city on firmer financialground and its prospects for success.

The plan is a firststep, not a panacea. The District’s government and FinancialAuthority will have to continue to do the hard work necessary tocreate a City where streets are safe, where children enjoy thequality education they deserve, where every resident has thechance to earn a decent living -- and where the City’sgovernment spends within its means.

Through the plan,the Federal government will assume over $4 billion of D.C.’scosts over the next five years, and will invest well over $1billion in the District for economic development, transportation,criminal justice improvements, and tax collection. The plan wouldalso end the annual $660 million Federal payment.

The plan is not a"bailout." All Federal assistance will be conditionedon the District taking specific steps to improve its budget andmanagement. The plan will require the District to submit a

balanced budget for1998 and for each year thereafter, to continue to comply with therequirements of the Financial Responsibility and ManagementAssistance Act, and to take a number of specific reform steps ineach area of the President’s plan. Last week, the Council ofthe District of Columbia and the Mayor took an important firststep in signing a Memorandum of Understanding with the Office ofManagement and Budget committing the District government tofulfill these requirements, including a requirement to implementtimely and efficient zoning, permitting, and licensing processesby the end of FY 1998.

ELEMENTS OF THEPRESIDENT’S PLAN

The President’splan would help the District through four main elements:

First, under theplan, the federal government will take on major financial andmanagerial responsibilities that are beyond the financialcapacity of the District and that are normally assumed by states.The Federal share of the District’s Medicaid costs willincrease. The Federal government will assume responsibility forthe vast majority of the District’s existing pensionliabilities. The Federal government will take on responsibilityfor housing D.C. felons, offender supervision and services,prison construction, and funding (but not administering) DistrictCourts. The U.S. Treasury will structure loans to assist the Cityin appropriately addressing its accumulated deficit.

Second, the Federalgovernment will invest in improving the City’stransportation infrastructure. It will take responsibility forthe funding and oversight of certain National Highway System(NHS) capital projects -- including roads, bridges, and transit-- and NHS operations and maintenance projects in consultationwith the District. A National Capital Infrastructure Fund (NCIF)for road, bridge, and transit projects will be established inFY1998 and continue through the end of FY 2003.

Third, the Federalgovernment will provide technical expertise to help the citygovernment become more effective in such areas as income taxcollection, education and training, housing, transportation, andhealth care delivery.

Fourth, the planwill spur economic development in the Nation’s Capitalthrough new federal tax incentives and a new Economic DevelopmentCorporation -- or EDC. The remainder of my testimony will focuson this economic development component. But let me underscorethat spurring economic investment and opportunity in the Districtis not limited to the economic development portion of the plan.All of the plan’s elements, taken as a whole, will providethe District with a climate conducive to economic growth -- ifthey are combined with the continued efforts of Districtresidents, the District government and Financial Authority torealize the fiscal sustainability, high quality services, goodschools and safe streets upon which growth depends.

ECONOMIC DEVELOPMENTPLAN OVERVIEW

Drawing on the bestpractices of states and local communities throughout the countryand extensive discussions with the District’s business andcommunity leaders, the Administration has proposed several newtools for the District of Columbia to grow its economy andprovide opportunities for its citizens by promotingprivate-sector investment and jobs. These tools include anEconomic Development Corporation (EDC) which is designed tofacilitate business expansion, and widely available taxprovisions to ensure that the District’s residents as wellas its businesses have opportunities to participate in thisexpansion.

Economic DevelopmentCorporation

Central to thePresident’s plan for the District’s economicrevitalization will be a new District of Columbia EconomicDevelopment Corporation, or EDC, whose mission, governance,powers and resources reflect both "best practices"nationally and the unique circumstances of the District. Incities and states throughout the nation business expansion isoften facilitated by groupings of private and public economicdevelopment entities whose responsibilities range from themanagement of large-scale redevelopment projects to encouragingentrepreneurship in low-income communities. Successful economicdevelopment efforts, whether in places like Cleveland, Ohio orTupelo, Mississippi, depend on the efforts of many entitiesworking cooperatively to perform the tasks essential to promotetheir City’s economic future.

In-depth assessmentsof the economic development efforts of the District of Columbiawere undertaken by Treasury and OMB, as well as by private sectororganizations such as the DC Agenda Project. These assessmentscame to the same conclusion: A key missing link in theCapital’s ability to advance economically is private-sectordriven economic development corporation to bring the citytogether behind an economic development strategy and to push thatstrategy to completion.

The EDC wouldprovide a focal point for development. The EDC’s missionwould be to bring together the private sector, civic leaders andgovernment to develop, market, and promote an economicdevelopment strategy for the District, facilitate longer-term andregional approaches to economic growth, help develop majorprojects to revitalize our Capital, and link the District,including its economically distressed areas, to local andregional growth opportunities.

The EDC created bythe plan will provide the District with the type oforganizational structure that other state and local governmentshave used effectively to stimulate economic growth in theircommunities. Development corporations, by bringing together theprivate sector, government, and civic leaders, can often overcomebarriers to development that no single private sector firm couldovercome on its own. For example, while a large retail businessmay be economically viable in a neighborhood if customers aredrawn to the area by the presence of numerous other retailers, noone firm may be willing to make the first decision to locatethere, in the absence of decisions by enough other firms. Bybringing numerous interested parties together, developmentcorporations can help overcome such market failures.

This package offederal tax incentives and the new Economic DevelopmentCorporation are designed to respond to the unique economicsituation of the District of Columbia, while drawing onsuccessful models around the country. Many states, includingVirginia and Maryland, provide an array of financing options,targeted tax incentives, loans, training, and other services toretain and attract businesses. The EDC was modeled on bestpractices from economic development corporations elsewhere in thenation, including the Baltimore Development Corporation, theBoston Redevelopment Authority, the Erie County IndustrialDevelopment Agency, the Kansas City Economic DevelopmentAuthority, and the Philadelphia Industrial DevelopmentCorporation.

What these entitieshave in common is an ability to draw together the disparateinterests in a community, lower barriers to development, and spurgrowth. They are governed by boards that can focus on long-termeconomic development strategy, and that represent the broaderbusiness and civic community. They use a variety of tools,including revolving loan funds, private activity bonds, eminentdomain, and targeted tax incentives to catalyze economic growth.Finally, the experience of other development organizationssuggests that in fulfilling the EDC’s challenging missions,the EDC must work carefully to build experience and capacity overtime.

EDC Mission.Building on work done by a number of private sector Districtgroups, the EDC will develop an economic development plan, helpimplement large-scale development projects, support efforts tocreate jobs and business opportunities in the District, andconnect District development to regional growth. We expect thatthe EDC will have five core missions:

Strategic Planning -- provide technical support and a forum for hard-nosed thinking about the District’s longer-term economic opportunities and options;

Project Development -- participate with developers and investors in the planning and management of large-scale development projects that present significant economic growth opportunities for the city;

Business Promotion -- market the District and its region as potential sites for business investment, tourism, and other approaches to promote economic growth;

Link Distressed Communities -- facilitate linkages with D.C. residents, community based organizations and other entities, such as employment intermediaries and micro-loan programs, that can connect the residents of the District’s economically distressed communities to economic opportunities available within the city and in the region, and;

Regional Action -- work with economic development organizations in surrounding suburban jurisdictions to implement win-win regional efforts, so that the entire region’s economy benefits from cooperative regional economic development strategies.

EDC Structure. Underthe proposal, the District of Columbia EDC will be governed by anine member Board of Directors. The President will appoint fiveof the Board members in consultation with Congress, of which fourwill be selected from private sector businesses, and one will beselected from community based organizations. The Mayor, with theapproval of the City Council, will appoint an additional member.There will be three voting, ex officio members, one each selectedby the President, the Mayor, and the City Council respectively.The EDC will be run by a Chief Executive Officer and served by aprofessional staff.

FederalCapitalization and Tax Incentives. As described more fully below,the EDC will be given the authority to spur development withfederal tax credits for loans and investments in D.C. businesses,and to issue project revenue bonds, including new tax-exemptprivate activity bonds. Under the plan, Congress would capitalizethe EDC with an investment of $50 million in FY 1998. The EDCwould use these funds for planning, project development,investments, operating costs, and other statutory purposes. Ofthis amount, $20 million would be made available on a competitivebasis to non-profit entities in the District for job creation.The EDC would also be required to conduct an independentevaluation of the efficacy of the tax incentives provided underthis proposal, to ensure the effective use of federal taxdollars.

Expedited Approvals.The EDC will also have a number of other important powers,including eminent domain, the ability to seek expedited review bythe District government of necessary permits, requests for landtransfers, and the like. As part of the MOU with the Federalgovernment, the District government has committed to achievereforms with respect to permitting, licensing, and zoning by theend of FY 1998 and to cooperate fully with the EDC.

New Federal TaxIncentives for Jobs and Growth

The President’splan provides for $250 million in federal tax incentives toencourage business investment in the District and to foster jobgrowth for District residents. A D.C. Capital Credit and newPrivate Activity Bonds will flow through the EDC to businesses. Anew D.C. Jobs Credit and Additional Small Business Expensing willbe available directly to D.C. businesses. Prudently used, thesetax incentives could leverage over $1 billion in private sectorinvestment in D.C. businesses. We are encouraged that SpeakerGingrich and Senate Majority Leader Lott have agreed to seek toinclude in balanced budget legislation the Administration’sproposals for tax incentives designed to spur economic growth inthe District of Columbia.

D.C. Capital Credit.The plan will authorize the EDC to allocate $95 million infederal tax credits for investors in, or lenders to, Districtbusinesses, for up to 25 percent of the amount invested orloaned. This incentive would be available for business investmentthroughout the District. Investors and lenders will compete forthe credits, which will reduce the costs of capital for economicdevelopment projects throughout the District. The EDC willevaluate the long-term potential for the investment or loan togenerate jobs for D.C. residents and to improve the D.C. taxbase. The EDC will be given the authority to allocate the taxcredits for loans and equity investments in much the same waythat state economic development agencies and state housingagencies allocate tax-exempt private activity bonds and the lowincome housing tax credit. As a recent GAO study of the lowincome housing tax credit demonstrates, allocation of a federaltax credit by a state agency allows the credit to be efficientlytargeted to meet local priorities within the broad federal policygoals established for the incentive.

Private ActivityBonds. The plan provides for the new EDC to issue a new categoryof tax-exempt private activity bonds to finance commercial andretail development projects in the District. Tax-exempt financingis traditionally used by state and local governments as a way totap the public bond market as a source of capital. The new bondcategories are tailored to the economic development needs of theDistrict. The proceeds of the economic development bonds must beused to finance projects located in census tracts with povertyrates of 15 percent or more. Some 45 percent of theDistrict’s population and 37 percent of its land area areincluded in such census tracts. Businesses that benefit from thislower cost borrowing must employ a workforce at least 35 percentof which is made up of District residents. The bonds would besubject to the annual $150 million cap on the issuance of privateactivity bonds for the District of Columbia, half of which isdirectly allocated to the EDC under this plan. Although the bondswould be issued by the EDC, repayment would be secured by therevenues from the private businesses funded.

D.C. Jobs TaxCredit. The Plan provides for a D.C. Jobs Tax Credit, a 40percent tax credit on the first $10,000 of eligible wages in thefirst year of employment, including employer-provided healthcare, child care, and educational assistance. The D.C. JobsCredit would be available to District businesses that hire D.C.residents earning up to $28,500 a year who live in areas with 15percent poverty or more, and other targeted D.C. residents. Overthe next five years, tens of thousands of workers could benefitfrom higher wages or new jobs because of the D.C. Jobs Credit.The Jobs Credit will help expand private sector employment ofD.C. residents, increase the tax base, reduce dependency onpublic assistance, and lower the costs of labor to D.C. firms.

Additional SmallBusiness Expensing. The Plan provides for greater tax deductionsto encourage the creation or expansion of small businesses ineconomically distressed neighborhoods, those with poverty ratesof 15 percent or more. Eligible small businesses will bepermitted to deduct (rather than capitalize over time) up to$20,000 in additional costs per year for certain equipment. Thisincentive will give a boost to small businesses, help revitalizeD.C.’s neighborhoods, and create jobs for D.C. residents.

CONCLUSION

Mr. Chairman, thatconcludes my description of the economic development component ofthe President’s revitalization plan for the District.

The President’splan is ambitious. It will benefit the City, the region, and theNation.

It benefits Districtresidents by reducing the D.C. government’s financialburdens, improving the delivery of City services, and investingin criminal justice, economic development, and transportation.

It benefits theregion by strengthening the District’s criminal justicesystem; by improving key components of the regionaltransportation infrastructure; and by fostering the City’seconomic recovery -- according to Professor Steve Fuller ofGeorge Mason University, for every dollar of additional economicactivity in the District, its suburbs pick up $1.50 in newgrowth.

It benefits theNation because it will help build a Capital city of which allAmericans can be proud.

Mr. Chairman, thatconcludes my testimony.