The turmoil in Los Angeles touched off by the Rodney King verdict was a wake up call to government leaders. On May 12, top congressional Democrats and President Bush declared they would work together to develop a bill for increased federal assistance to cities.

President Bush has said he wants an urban aid package to include earlier proposals he made for welfare reform, youth job training, and enterprise zones, as well as some expanded housing programs and social services.

The Democrats, while agreeing with the President on enterprise zones, also have ideas of their own. They want more money for public works projects and for disaster assistance. They also want to extend tax breaks expiring June 30, including the tax exemptions for mortgage revenue bonds and small-issue industrial development bonds.

Some Washington insiders say the tax code prevents tax-exempt bonds from playing a bigger role in countering urban problems. For example, banks have little incentive to buy bonds issued to rebuild urban areas because of the bank deductibility curb enacted in 1986. Banks can deduct 80% of the cost of carrying tax-exempt bonds, but only if they are purchased from issuers who expect to sell no more than $10 million of governmental bonds annually.

Frank Shafroth, director of the office of policy and federal relations for the National League of Cities, has been involved in trying to come up with ideas for an urban aid bill. He talked recently with staff reporter Joan Pryde about the prospects for the measure and how the various proposals are shaping up.

Q: What do you think of President Bush's proposed urban aid package?

A: I think it's not new. It would mean the majority of cities would actually take a cut in assistance, and it's moving the pea around under the shells instead of really responding and providing new resources. It is a less important and urgent initiative for the administration than the Russian bailout package, both in terms of time and deadlines, and in terms of commitment lines, and in terms of commitment of resources. So I don't think it's a real response.

Q: Do you have the same view of what the Democratic congressional leaders have proposed?

A: Well, they're at least discussing some additional resources. There's not a lot of agreement amongst themselves as to what those resources are or where to find them. There has not been much more effort by the leadership to consult with people at the street level. But I feel there's a greater concern and a greater willingness to make a commitment, and that's an important start.

Q: If you had the opportunity to write your own proposal, what would you do?

A: First, I'd have a short-term proposal, which would include four items. First, I'd get some money out for summer youth employment programs immediately. Second, I'd extend the expiring provisions and include some of the provisions that were in the vetoed tax bill to reduce the cost of financing public improvements.

Third, I'd stop playing politics with [pending anti-crime legislation] and pass it, and I'd fund it, and I'd fund it in a way that for the first time since Richard Nixon declared war on drugs in 1972 we got money directly to the front lines.

Fourth, I would reauthorize and accelerate funding for the nation's expiring housing and community development laws and public infrastructure programs. And I'd make sure all those [things] were done within 60 days.

Q: What kind of long-term solutions would you propose?

A: I'd do three things. First, I would double federal public infrastructure investment and do that in a way that coordinates with state and local governments... There has to be a massive public works program to rebuild the country and to make sure that process is under way before the year 2000.

Second, I think the program ought to be coupled with a massive education and training program. It's pretty clear in a number of cities we're spending more money on prisons and police than we are on providing job opportunities for kids, and that's got to change.

Third, you've got to enact a major long-term comprehensive economic conversion plan so that we can switch what today is $290 billion in defense spending to a peacetime economy that includes jobs for those thrown out of work by the major defense cuts that the U.S. will be making in the next several years.

Q: What do you think the chances are that Congress and the White House will come to an agreement on urban aid legislation and pass it this year?

A: I think the chances are, for a meaningful program, maybe 50-50. You have the White House determined not to raise taxes and not to change the budget agreement, which spells one result: absolutely no new resources or new investment or new effort. And the congressional leadership appears to [realize] it's going to require a new way to approach these issues and some resources, or you're not going to make a difference. That's a fundamental divide, and I don't see any signs yet that they're moving toward agreement.

Q: Is there a particular window of opportunity in terms of the timing of this bill?

A: The conventional thinking is they have until the July 4 congressional recess to move on a package. That's probably not wholly true, but it's pretty clear that some of the steam is going out. You look at the newspaper headlines, and Los Angeles is already fading from view. Murphy Brown has replaced Los Angeles. So there's a short time frame unless there are further incidents this summer which keep this issue on the front of the public's minds.

You may have a possibility to do a bill in the fall because there's a better-than-even chance that the debt ceiling will expire before the new Congress convenes, in which case there will be must-do pieces of legislation that the Congress and the President will have to act on before the elections.

Q: What kind of a place, if any, could tax-exempt bonds have in an urban aid package?

A: Clearly, you can do extenders. But I think there are some other ways one could be extraordinarily creative. One of the serious problems the country faced after the riots in Watts in 1965 was the disintermediation or disinvestment by banks and insurance companies, making it almost impossible for development -- particularly commercial development -- to take place in those areas.

It seems to me one could look at the bank deductibility provision. For banks that have superior community reinvestment ratings from federal regulatory agencies, give them the benefit of full deductibility. Extend it to cities that issue any kind of bonds, whether they're traditional governmental or nongovernmental bonds, if they are going to be focused exclusively on areas of severe distress. In that way you would have an incentive for banks to make credits available in those areas.

Q: What about commercial industrial development bonds, which were eliminated in 1986? Could they be used for urban redevelopment?

A: Very few manufacturing facilities were destroyed in the recent riots in Los Angeles. It was mostly commercial establishments. Perhaps it's time to rethink things, and say that small-issue IDBs ought to be available for certain commercial purposes and to leverage more investment.

We also need to leverage capital investment in all distressed areas, not just a few zones of a few cities. Therefore I believe we ought to consider a "surcap," or a surplus percentage of each state's nongovernmental volume cap to be targeted exclusively to distressed areas. .

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