WASHINGTON -- As budget director of Massachusetts during the final two years of Gov. Michael S. Dukakis's cash-strapped administration in 1989 and 1990, Ellen M. O'Connor helped slash the size of state government while improving relations between the legislative and executive branches.

Now Ms. O'Connor, recently tapped by Mayor Sharon Pratt Dixon on to be the District of Columbia's deputy mayor for finance, finds herself faced with a government that could run up a $200 million deficit in the next fiscal year if it does not receive a supplemental appropriation from Congress.

Some may believe she is jumping from the proverbial frying pan into the fire, but Ms. O'Connor appears to relish the challenge.

"Actually, I think it's more like I'm going from the fire into the frying pan," she said yesterday. "There are opportunities, flexibility, choices, and time here, which was not true in Massachusetts."

Ms. O'Connor said she recognizes that the district faces a host of difficulties, ranging from revenue shortfalls to a seriously underfunded pension program. But she said city officials have a range of options to meet the problems, including spending cuts and new revenues, such as the utility excise tax approved Tuesday by the Council of the District of Columbia.

The Levy will bring in an estimated $8.3 million in fiscal 1991, which ends Sept. 30, but the total could vary depending on energy use. Mayor Dixon proposed the tax as part of a strategy to make up revenue declines of $26 million in April.

Robert Pohlman, who is stepping down after three years as the city's deputy mayor for finance, attributed the April shortfall to lower-than-expected 1990 tax receipts. "We're seeing the effects of the 1990 recession," he said yesterday. He said officials hope to recover much of the remainder of the shortfall through an aggressive effort to collect delinquent taxes.

According to Ms. O'Connor, city officials have a unique window of opportunity to set the district on a more even fiscal keel.

"We have a very popular mayor, and the environment is supportive of change," she said. "I think it's true that the city is going in a direction that if nothing is done, there could be serious problems. But I think there are a couple of years of opportunity to get things done."

Though Ms. O'Connor sees ample time to chart a new course for the city, she said she has yet to develop a set of priorities. "I don't know if I trust my judgment yet," she said. She added that she has studied a number of reports, including that of the Commission on Budget and Financial Priorities of the District of Columbia, and has met with "lots of people," but "nothing has achieved number one status yet."

The commission, established by former Mayor Marion Barry Jr., was headed by Alice M. Rivlin and is more commonly known as the Rivlin Commission. Ms. Rivlin is a former director of the Congressional Budget Office and is now a senior fellow at the Brookings Institution. Mayor Dixon has embraced a number of the Rivlin Commission report's recommendations and urged Ms. O'Connor to study the report carefully.

Ms. O'Connor said one thing is clear: The city must stick to the basics, spending no more than it takes in. But though that philosophy is relatively simple to articulate, it can be difficult to carry out due to difficulties in forecasting revenues during an economic downturn.

She said one thing that may help is to aim at surpluses when budgeting, rather than a perfectly balanced budget that could become unhinged due to higher-than-expected social services spending or lower-than-expected revenues.

"You can leave a cushion for bad news," she said.

Ms. O'Connor also said that as bad as the city's unfunded pension liability is, her initial feeling is that district officials should first get the rest of its financial house in order before tackling the problem.

"I'm not trying to be an ignoramus about the need to do something," Ms. O'Connor said. "We need to get controls in place. But there are a whole lot of other things competing" for a financial commitment. For example, the Rivlin report calls on the city to increase infrastructure spending by $185 million annually.

"My feeling right now is that before we make a commitment, we have to see what our multiyear financial picture is and get the components of spending that are growing faster than revenues under control," she said.

Dixon administration officials have indicated that Ms. O'Connor will have to be confirmed by the district council. But an aide to the council said the matter is still up in the air and that they are uncertain whether confirmation is necessary. In any event, they have not yet received formal notification from Mayor Dixon.

"The only announcement we got was in the newspaper," the aide said.

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