EPA Finance Board Asks Administrator To Support Reforms Of '86 Bond Curbs

WASHINGTON - The head of the Environmental Protection Agency is considering whether to champion proposals in Congress to ease tax-exempt bond curbs as a way of freeing up more money to build environmental projects estimated at over $200 billion.

William Reilly, the administrator of the agency, took interest at the urging of a recent report from the agency's Environmental Financial Advisory Board, which recommended that he make environmental finance reform one of his top goals and recognize that it is a "major segment of unfinished business" for the agency.

The report urges Mr. Reilly to become an advocate for reform both within the administration - where he would face formidable possition from the Treasury Department and the Office of Management and Budget - and in Congress, where major bond reforms have been proposed each year but never acted upon.

The report has many detailed recommendations for easing bond curbs imposed by the Tax Reform Act of 1986, including a key proposal to reclassify private-activity bonds as governmental bonds if they are used to finance environmental facilities mandated by federal law. Bonds reclassified as such would escape state volume caps, the alternative minimum tax, and other restrictions.

Mr. Reilly, whose office has been reviewing the report for over a month, has not yet responded to that proposal or to its less far-reaching recommendations. Aides to the administrator were not available for comment yesterday.

One agency official said Mr. Reilly will not receive a personal briefing on the report, or come to any decision on how to use it, until he receives another report, which has been delayed, from the advisory board on large-scale environmental financing programs.

Some officials were optimistic that Mr. Reilly, once fully briefed, would pick up on the report's ideas. "It's my guess this is the kind of thing Reilly would approve of and want to encourage," said James Smith, executive director of the Council of Infrastructure Financing Authorities.

The bond recommendations might particularly appeal to cabinet officials within the Bush administration who are former securities industry executives, Mr. Smith said. He added that they might see the proposals as a savvy and inexpensive way of addressing the dilemma of financing the growing backlog of environmental projects.

"It's a very Republican approach to use the public finance market" and other economic incentives to solve environmental problems, he said.

But all sides conceded that if Mr. Reilly chooses to back the bond proposals, he will run up against major obstacles. One of OMB's two representatives on the board, Robert Fairweather, raised major objections to the report's bond recommendations when they were drafted this spring and called for substantial changes.

Apparently because the OMB was able to obtain only minor revisions in the report, Mr. Fairweather resigned from the 32-member board this summer. The final report does not list him as a board member.

"In hindsight, it probably was not a good idea to have an OMB representative on what is in essence an outside federal advisory committee," said Charles Grizzle, the former assistant administrator who organized the advisory board. Mr. Grizzle, now with the Washington consulting firm the Jefferson Group, left the agency shortly after presenting the report to the administrator mid-August.

"It put Rob in an untenable position, being on the budget side of OMB, since the report's outcome could have a revenue impact," he said. The report says its proposed bond reclassification proposal, alone, would cost about $941 million over five years.

Mr. Grizzle said he does not expect Mr. Reilly to personally become a high-profile advocate for bond reforms in Congress. Instead, he expects the administrator to designate a top aide to monitor environmental finance issues and to use the report to develop informed responses to bond legislation going through Congress.

"It's not the EPA's role to push the debate, but when tax and fiscal policy issues are discussed, it needs to make sure everyone understands the environmental issues," he said.

Mr. Gizzle added that getting the board's proposed bond reforms through Congress could be like "waiting for the second coming of the ice age," but he expects that eventually they will be taken seriously on Capital Hill.

Mr. Smith said that the agency could be an effective advoate in Congress, even if it does not officially defy the OMB, Treasury, and other detractors and adopt the report's bond recommendations.

"We should not underestimate" the success of even "low-key" advocacy by the agency, he said. "That's how things really get done in Washington."

At a minimum, the board's recommendations for bond reforms - coupled with a tacit endorsement by the administrator - should help to "dignify" the quest for those reforms by other proponents in Congress, he said.

The report's tax-exempt bond proposals are drawn from environmental infrastructure legislation proposed by Sen. Pete Domenici, R-N.M., as well as the recommendations of the Anthony Commission on Public Finance, which is chaired by Rep. Beryl Anthony, D-Ark. Both the senator and the congressman sit on the board, which is composed mostly of state environmental officials and bond professionals.

The report's reclassification proposal is by far the most expansive of its proposed bond reforms, but short of reclassifying environmental bonds, it says the bonds simply could be exempted from state volume caps or other individual bond restrictions to help reduce tax-exempt financing costs.

The report recognizes that these far-reaching bond proposals also would have costs, including the loss of tax revenues on bond interest for the Treasury. Because of this revenue loss, the report says, the EPA and other would-be proponents in Congress would have to find offsetting revenues to pay for the proposals.

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