WASHINGTON -- The city's muddy streets have turned into potholes.

With 1,157 miles of roads, it is inevitable that some streets in the District of Columbia should be in disrepair. But with money tight, they may stay that way for awhile.

"The district has had for several years, and expects to have for at least the next two years, an extremely straitened financial situation" that may require some infrastructure needs to go unmet, said Ellen M. O'Connor, the city's deputy mayor for finance.

During the Civil War, the city was a safe haven despite the incompetence of the Army of the Potomac, which for most of the conflict was outfough by General Robert E. Lee's Army of Northern Virginia. A ring of forts surrounded the city, allowing President Abraham Lincoln to oversee completion of the Capitol, which by 1863 was domed and capped with the statue "Freedom."

But with the city that survived the war now besieged by financial woes, officials are turning to the capital of their former foe for reinforcements.

"In Richmond, they excel at budgeting, and that's something we want to do here," Ms. O'Connor said. Accordingly, she said, "we have armed ourselves with a new budget director" and chosen Linda Cheatham, who previously oversaw finances for what is today Virginia's capital.

"What we hope to accomplish is to put our money where we see our priorities," Ms. o'Connor said.

Once touted as "recession-proof," the district was hit by a sharp dropoff in revenue growth in the late 1980s that has had officials scrambling ever since. The slowdown could not have come at a worse time, as the city's infrastructure, police, and human service needs quickly outpaced the government's ability to fund them.

Similar Ills, Key Differences

On the surface, the district's problems are similar to those being faced by localities nationwide. But there are important distinctions. For example, the district government must oversee not only a city's traditional duties but also functions typically handled by states and counties, noted Michael Johnston, a vice president at Moody's Investors Service.

Moreover, the city's ability to find more money is limited. Its tax rates already are among the highest in the nation, compensation for the fact that a full 55% of the land within the district's borders is not taxable because it is held by the federal or foreign governments.

Mayor Sharon Pratt Kelly took office in January faced with a projected budget gap of $316 million. About all she had going for her was a mandate for change, given her the previous November by voters who had tired of the scandal-plagued administration of Marion Barry jr., Ms. Kelly's predecessor.

The Kelly administration quickly found $216 million of budget cuts, and then asked Congress to come up with the $100 million necessary to fill the rest of the gap. Mayor Kelly also told Congress the city would need an additional $200 million in the 1992 fiscal year.

Had the previous mayor made such a request, he would have been hooted off Capitol Hill. "There's no question about it. No one was interested in helping the previous administration," said Rep. Thomas J. Bliley Jr., R-Va., the ranking Republican on the House District of Columbia Committee, in an interview earlier this year.

John Wilson, chairman of the Council of the District of Columbia, the city's legislative arm, thought that even now Congress would not go along. But Rep. Bliley said Ms. Kelly had impressed lawmakers with her resolve.

The result: Congress gave the city an emergency appropriation of $100 million, approved a fiscal 1992 appropriations package that included the extra $200 million Mayor Kelly wanted, and devised a formula that would allow the city even more federal money in the future.

The Kelly administration next took aim at the city's accumulated general fund deficit of $332 million, proplosing to issue 12-year bonds that, once paid off, would erase the deficit. Congress approved the plan, and the city floated the bonds in September.

Mayor Kelly's quick action pleaded rating agency analysts. Calling her successes with Congress "positive signs," Parry Young, a senior vice president with Standard & Poor's Corp., said that if the city can "get a better grip" on other problems, its "credit quality can improve."

The city's bonds are rated Baa by Moody's and A-minus by both Standard & Poor's and Fitch Investors Service.

But while analysts expressed some optimism, they said the city's war is not over.

Mr. young said analysts are watching the city's finances closely. "We don't think it is a foregone conclusion that all of the district's problems with balancing its budget are resolved," he said. Moreover, the city is saddled with a high level of debt and a sizable unfunded pension liability that is growing daily.

Ms. O'Connor acknowledge the difficulties, but said the city is attacking its problems on all fronts.

* To help balance the budget, the district is reviewing all nontax revenues. "We're not approaching our budget balancing exclusively as a spending cut opportunity," she said. "We want to see if we can increase federal reimbursements. We want to ensure that every fee, fare, and fine is collected."

* To address the unfunded pension liability, which currently stands at about $5 billion, city officials are developing a comprehensive plan.

"It is such a substantial problem that no one group can solve it," Ms. O'Connor said, hinting the city will ask the federal government for help.

* And finally, to help ease the district's debt crucnh, officials are exploring alternatives to GO issuance.

Ms. O'Connor said the city has about $800 million to $900 million of funding needs annually, but can finance only $275 million to $300 million each year. She said possibilities include creation of a debt-issuing authority for the local transit authority, in whose name the city currently issues GOs, and a stadium authority to fund needed infrastructure improvements for a proposed new football stadium.

While finance officials try to improve the district's standing in the credit markets, others are trying to change the city's reputation as a one-horse town of monuments and government.

Mayor Kelly wants to sell the city as a cultural and entertainment capital, too, but could be fighting an uphill battle. Even Gen. William Tecumseh Sherman, who tore through the heart of the Confederacy without a supply line, was in 1868 struggling to leave Washington behind.

In a letter to President Andrew Johnson, Gen. Sherman said he wanted to go to St. Louis, because "my family was well provided for there in house, facilities, schools, living, and agreeable society," whereas Washington " is the political capital of the country, and focus of intrigue, gossip, and slander."

A bigger problem facing the city is its reputation for violence, with homicides rising steadily. But the hospital emergency scenes, like the city's political reputation, also are not new. "Future years will never know the seething hell and the black infernal background of countless minor scenes and interiors . . . of the Secession War," wrote poet Walt Whitman, who served as a hospital volunteer in Washington during the war. "It was not a quadrille in a ballroom."

A tremendous amount of work has to be done. "The district has a significant opportunity of build from a new place for a positive future," Mr. Johnston noted. But Mr. Young cautioned that the long-term solutions the district must implement in education, health, and infrastructure "may take decades to get done."

For now, analysts appear willing to give the district time, offering a reassuring "All quiet on the Potomac," with no expected change in the city's bond rating for the foreseeable future.

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