Nation’s Capital Wrestles With Budgetary Crisis : Finances: Republicans in Congress threaten a federal takeover after Washington officials announce a $335-million shortfall.

Faced with a major fiscal crisis in the nation’s capital, congressional Republicans gave Washington Mayor Marion Barry a virtual ultimatum Wednesday: Make massive spending cuts and devise a plan to save the city from bankruptcy or face a federal takeover that could spell the end of the district’s 20-year experiment with home rule.

“We’re moving in the direction” of a federal takeover, said Rep. James T. Walsh (R-N.Y.), chairman of the House subcommittee that appropriates funding for the district. His comments came after Barry announced that the city owes $335 million in debts it cannot pay and faces a deficit of at least twice that much in the coming fiscal year.

Conceding that the city is awash in red ink, Barry, speaking after a Capitol Hill meeting with lawmakers, said he would announce some specific steps to deal with the financial crisis today, with a more detailed plan to follow after further consultations with federal officials. Some austerity measures under consideration include massive municipal layoffs, a reduction of the school year by more than a week and major cuts in Medicaid benefits to the poor.

“They want recommendations from me,” Barry said. “I get the impression they’re not going to take any action unless I don’t act, and I intend to act.” He added that reductions in the district’s 45,000-member municipal work force are inevitable.

Barry blamed most of the fiscal crisis on his predecessor, Sharon Pratt Kelly, who defeated Barry four years ago but could not stop his political comeback last November, after he served six months in jail for cocaine possession.

Kelly’s “lack of focus,” together with an accumulation of overdue bills, mostly as a result of unpaid Medicaid debts, left the city with a $335-million shortfall last year, even after a $250-million loan from Wall Street, Barry said.

Added to this year’s projected deficit, the district’s total shortfall of about $700 million represents a staggering 22% of its operating budget.

The problem remained partly hidden, Barry said, because the Kelly Administration gave him erroneous budget figures after his election. The true picture of the city’s shattered finances emerged only after outside audits were completed last month, he said.

For GOP lawmakers long unhappy with the state of the city’s finances, the new numbers were what one House aide described as “the next to the last straw” in an often contentious relationship with both Barry and Kelly.

Noting that Congress is ultimately responsible for the nation’s capital, Walsh said lawmakers would give Barry another month to come up with a plan to balance the city’s budget. After that, there would be “nothing to prevent us from moving to take control” of the district’s finances, he said.

Home rule, granted to the district by Congress in 1974, is “contingent on D.C. presenting a balanced budget” and can “always be superseded by another law,” Walsh said. He and other GOP lawmakers also complained that the district has been slow in giving the General Accounting Office information to determine the true extent of the crisis and has not yet carried out $140 million in cuts that Congress mandated last year.

Barry said he appealed to the lawmakers for understanding in dealing with the fiscal crisis.