WASHINGTON -- President Bush's proposal for tax-exempt bonds in enterprise zones could be a significant help to cities rebuilding after recent riots, but the plan has some serious flaws that may keep it from being widely used, municipal lobbyists said yesterday.
Those sources said the limit on loans made from bond proceeds -- $250,000 per business -- needs to be increased, and the bonds should not be subject to the private-activity bond volume cap limit, as the President has proposed.
"The good news is the administration is at least committed to some kind of expansion of tax-exempt bonds," said Milton Wells, the director of federal relations for the National Association of State Treasurers. "The bad news is it may not be everything we'd like to see. But at least it's a start."
A Treasury official, meanwhile, cleared up some of the confusion that had arisen over what type of bond the President was endorsing for enterprise zones.
One administration official who disclosed the plan to the Senate Finance Committee on Wednesday appeared to be describing tax-exempt commercial industrial development bonds. Another referred to the creation of a new class of tax-exempt bond.
The Treasury official explained yesterday that the President does intend to propose a new category of exempt-facility bond that would finance loans of up to $250,000 per business in qualified enterprise zones.
The loans could finance tangible property, such as a building or land, but not things like "goodwill" -- the value placed on intangible assets -- in the acquisition of a business, the official said. The bonds would be subject to the private-activity bond volume cap, under which each state may authorize $50 per capita or $150 million in bond authority, which ever is greater.
Micah S. Green, the executive vice president of the Public Securities Association, was one of several lobbyists who had mixed reactions to the plan.
"From the positive side it shows consistency with our now age-old argument that bonds are part of the solution to public problems," Mr. Green said. But "simply creating a new exempt facility without creating a new volume cap simply means you'll be robbing Peter to pay Paul. Simply defining the allowable use without providing some capacity to meet those growing needs only addresses half the issue."
The National League of Cities "is pleased there is a recognition" by the administration of the need for the federal government to find ways to finance urban redevelopment, said Frank Shafroth, the league's director of policy and federal relations.
But he added, "I think you've got a problem" if the bonds are subject to the volume cap, which for many states is too restrictive. "Our view is you're going to have to create a separate ~surcap'" and target the additional bond authority to distressed urban areas, Mr. Shafroth said.
Several lobbyists also noted that the $250,000 per business loan limit would make it difficult for an issuer to sell a bond unless it was used for a pool. They also said the limit was too low to be of much use for all but the smallest startup businesses.
But David Jones, a lobbyist for the League of California Cities, said the $250,000 limit "is not troubling," because that is exactly the type of company they are trying to target. "We want to create a whole cadre of small business owners," Mr. Jones said.
"When you're talking about enterprise zones, you're not talking about making loans to an existing manufacturing facility that wants to add on a new wing. You're talking about very small businesses" who need seed money to begin paying rent and start building up inventory, he said.
Some lobbyists said there was also a third obstacle to making the proposal work: the lack of any provision for federally insuring the loans.
"The big problem is going to be credit enhancement," said Nathan Brostrom, the executive secretary of the California Industrial Development Financing Advisory Commission. "You're not going to find a bank willing to [back] these small businesses without some kind of insurance."
Mr. Shafroth agreed, saying that for the plan to be sufficient to meet the needs of Los Angeles and other cities, it would have to "deal with bank credit and insurance availability.
