Putsch On The Potomac

Can an ex-Fed governor whip Washington into fiscal shape?

Even for a city that has come to symbolize political chaos, Washington, D.C., had an extraordinary Aug. 5. President Bill Clinton signed a law transferring most local governing authority from Washington's elected mayor and city council to an appointed "control board" headed by former Federal Reserve Board Governor Andrew F. Brimmer.

But when the board tried to meet hours later at a local church, angry demonstrators surrounded Brimmer and his four volunteer board members, shouting: "Free D.C.!" A shoving match with a police SWAT team ensued before the altar--with the diminutive Brimmer standing stoically amid the melee. Then, the board reluctantly set to work naming new city agency administrators.

"SHAMEFUL ACT." Brimmer had better keep his jaw jutted. At the meeting, he promised voters he would move "decisively and swiftly" to fix the city. But there is no guarantee that a board composed of a 70-year-old economist, a college professor, a real estate executive, a retiree, and a museum curator can turn around the nation's 20th-largest city. With a high school dropout rate of 40% and its police cruisers riding on bald tires, D.C. is a monument to urban decay.

Complicating Brimmer's job is the continuing political turmoil in the nation's capital. No sooner had the District's congressional representative, Delegate Eleanor Holmes Norton, brokered a deal in Congress to provide the District with a four-year, $1 billion aid package than she reversed herself and denounced the power turnover that was part of the deal as "a shameful act" and "a grave mistake." Mayor Marion Barry Jr. denounced the federal bailout package as "a rape" of the city's limited home rule charter. The city council followed suit.

The control board was created two years ago to review D.C. government budget decisions. Until recently, Brimmer, who declined to speak to BUSINESS WEEK, largely confined his role to oversight of the bloated 30,000-employee municipal payroll. But as the board takes charge of running much of the city, it's likely to attract far more attention--and controversy. "Now, Brimmer has to express a vision for the city that will help refocus a bureaucracy that's more interested in its own privileges than in serving citizens," says Jamin Raskin, an American University law school dean and District historian.

So far, the control board has been unable to stop the fiscal hemorrhaging. This year's budget shortfall isn't likely to be much better than last year's $75 million deficit. Meanwhile, the city's population continues to fall and tax revenues are weak. Worse, the city is barred by federal law from taxing suburban commuters or real estate owned by the federal government, nonprofits, or foreign governments.

The new federal financial package will allow the District to borrow $300 million from the U.S. Treasury. The federal government also will assume the District's unfunded pension liability of $4.9 billion and increase its share of Medicaid payments to city residents. It will also pay to have the city's prison system shuttered and the prisoners moved to federal and private facilities.

TAX CREDITS. To stem the flight of the middle class, the IRS will provide $5,000 federal tax credits for first-time home buyers and an exemption from capital-gains taxes for investors in businesses in impoverished D.C. areas. "Even with all that, though, the incentives may still not be big enough to get people to stay," warns Parry Young, a Standard & Poor's director who tracks Washington's finances.

Brimmer's next challenge is finding a manager for the day-to-day operations of the city government. If he can find someone with enough political savvy, he could stay in the background doing what he does best. Otherwise, he will have to get used to shoving matches and irate protesters.

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