WASHINGTON -- The Clinton administration expects to rely in part on tax-exempt bonds to help finance. the environmental cleanup required by the North American Free Trade Agreement, but it has no plans to ease any tax law restrictions to facilitate issuance.

U.S. Trade Representative Mickey Kantor told Congres's earlier this month that $8 billion will be needed to finance cleanup projects along the U.S.-Mexico border. Of the total, $2 billion will come from "resources currently available for the border states," including state revolving loan funds "and tax-exempt bond issues," Kantor told the House Ways and Means Committee on Sept. 14.

Kantor offered no specifics on how bonds might be used. But a Treasury official said the administration envisions state and local governments issuing bonds for the border cleanup using the authority they already have under current law.

The administration has no plans to ask Congress to ease a single tax law bond curb or to create a new category of tax-exempt bond, the Treasury official said.

And there will probably be "nothing new" proposed in the bond area, the official said. "This is all somewhat fluid because we're still talking to Mexico and we're going to have to talk with the Congress, but the concept at the moment [includes] no new authority for municipal tax-frees."

But some current law restrictions, particularly the volume cap on private activity bonds, probably would curtail the extent to which bonds could be used for the cleanup activities, said Micah S. Green, the executive vice president of the Public Securities Association.

"While it's encouraging that the administration is again looking to the bond community to help finance these identified public needs, the effect that the volume cap would have on the ability of states to use bonds of this nature could frustrate the administration's intentions," Green said.

The cleanup proposal, part of a so-called side agreement to the overall trade pact, was negotiated between the Clinton administration and the Mexican government earlier this year. The agreement is designed to spur the two governments to correct "serious wastewater and water pollution problems along the border," Kantor said in his testimony.

Congress is expected to spend the next several weeks debating the trade agreement, with a vote expected before the end of the year. The U.S., Canada and Mexico have set a deadline for ratification by the three countries of Jan. 1, 1994.

The trade pact has sparked controversy in Congress, with both major political parties split on the issue. For example, while House Speaker Thomas S. Foley, D-Wash., has pledged support for the agreement, House Majority Leader Richard Gephardt, D-Mo.,. has announced he will actively oppose it.

The other $6 billion in funds for border cleanup would come from a number of sources, Kantor said. The World Bank and the Inter-American Development Bank are expected to provide $2 billion of that amount, he said in his testimony.

The other $4 billion would come from an agency created jointly by the U.S. and Mexico, the Border Environment Financing Facility. The two countries would contribute seed money that would "be able to leverage participation from the private sector to finance pressing water quality projects that directly benefit the United States," Kantor said.

Lobbyists said that one major tax law question that could arise involves the use of bond proceeds on the other side of the border.

If the administration's intention is for the bonds to finance cleanup facilities in Mexico, lobbyists said that could present problems for tax lawmakers, who in the past have raised concerns about local governments issuing bonds for projects in other jurisdictions in the U.S.

Bonds for the environmental projects would presumably be issued by one or more of the four southern border states -- Arizona, California, New Mexico, and Texas -- or cities within those states that are near the border. But officials in two of those states questioned the wisdom of using tax-exempt financing for the cleanup.

Gov. Ann Richards of Texas "has long said the federal government is going to have to commit several hundred million dollars to address border environmental problems," said her spokesman, Chuck McDonald. "It's not the state's responsibility. It's the responsibility of the U.S. government. It's an international border."

A spokesman for Gov. Pete Wilson of California said the governor is not familiar with any Washington suggestions that would tie Nafta to state debt issuances. But the governor would examine closely any federal government decisions pertaining to border bond sales. said the spokesman, J.P. Tremblay.

"When you've got a state wracked by a recession for the past 2 1/2 years, there would be concerns about hoisting any more debt onto the state and forcing taxpayers to foot that bill," Tremblay said. "The state has enough of a fiscal problem to deal with to meet existing debt costs. Further mandates from the federal government are nothing we would like to see."

California lawmakers historically have been reluctant to grant general obligation bond authority to address situations of a regional nature. GO bonds usually are used to address long-term statewide capital needs.

For example, a bill introduced early this year by Assemblyman Steve Peace, D-Chula Vista, to authorize $150 million of GO bonds for wastewater and toxic waste clean-up along the border stalled in an Assembly committee. The bill might be taken up again in January, when the legislature returns for the second half of its two-year session.

Another Peace-sponsored bill to create a California-Mexico Environmental Authority is also on hold in another Assembly committee.

Politicians in California, meanwhile, are split on whether Congress should ratify the North American Free Trade Agreement. Wilson has endorsed the treaty while state Treasurer Kathleen Brown -- a former supporter -- changed her position earlier this month and is now against it.

A Brown spokeswoman said the treasurer had not seen details of the Clinton administration's recommendation on tax-exempt bonds. But Brown, in a letter to Clinton earlier this month, said she felt the environmental agreement is not tough enough and lacks adequate enforcement provisions.

"We are straining under the costs of Washington's decisions on immigration, base closure and defense conversion, but we are still waiting for the aid that was supposed to help us deal with those decisions," Brown wrote.

In her letter, Brown asked Clinton to make sure the federal government compensates the state for the cost of implementing Nafta.

Assemblyman Richard Polanco, D-Los Angeles, chairman of the state Assembly Select Committee on California-Mexico Affairs, is concerned that Nafta does not adequately address the border immigration issue, said Valerie Martinez, principal consultant to the committee. She said long-term debt financing to pay for stepped-up border inspections might "stop people from breaking our immigration laws."

In New Mexico, state treasurer David King said he agrees with the Clinton administration that bond financing, supplemented by federal grants, should be used, either through state governments, or through an authority such as the Border Trade Alliance.

King said that his office was working on "several projects" right now in the area of sewage treatment and said he's hoping to get started on all programs "fairly soon." He added that regardless of whether Nafta passes, billions of dollars in bonds will have to be issued to pay for environmental cleanup, industrial pollution safeguards, and health-related facilities on the U.S.-Mexico border.

"We can't be too proud on our side of the border. We've got colonias and industrial waste," King said of the small, unincorporated shanty towns that dot the border on the U.S. side in which the lack of water, sewer and other such basic services add up to environmental and health hazards.

"You're talking several billion dollars before you get through; in health, water and sewer alone," King said.

"We're going to have to do it anyway. But we'd have a much better chance of approving it through the free trade pact," King said.

King said that the entire New Mexican congressional delegation and state elected officials support Nafta. The border is New Mexico's second-largest population center and is growing faster than any region in the state.

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