Washington -- House Majority Leader Richard Gephardt has been working with bond dealers on a proposal to establish a federal infrastructure bank that would issue taxable bonds to provide grants to states and localities, a New York City official said yesterday.

Carol O'Cleireacain, the city's commissioner of finanace, said she has been collaborating on the idea with the Missouri Democrat and Felix Rohatyn of Lazard Freres & Co. She described how such an infrastructure bank might work at a meeting of the Infrastructure Investment Commission here yesterday.

The bank would be designed to provide a stable, growing source of federal funding for state and local infrastructure projects, particularly those not financed through existing grant programs and the tax-exempt bond market, she said.

To be eligible for the bank's funding, state and local governments would have to provide a 15% to 30 % matching grant, according to O'Cleireacain. But the bank would have the authority to waive local matching shares during a recession to provide countercyclical stimulus, she said.

The bank would augment federal seed funding from Congress by issuing a new federally guaranteed, taxable security. It would be designed to attract investment by pension funds and other institutions that do not currently invest in tax-exempt infrastructure bonds.

The federal seed money would come either through user fees or a dedicated gas or energy tax, and the tax would be devoted to backing the new federal securities. With such backing, the bonds could be expected to trade at 20 to 25 basis points above Treasury securities, she said.

To attract pension funds, the federal guarantee and other packaging would be "very important," O'Cleireacain said. She suggested calling the securities "national infrastructure bonds" so they could be marketed as a socially conscious investment among pension portfolio managers.

O'Cleireacain said she acts as a trustee of four New York City pension funds. She estimated that some pension fund managers would invest as much as 50% of their portfolios in such bonds.

It would "not be unrealistics," she said, to expect 5% to 10% of an estimated $2.5 trillion of pension funds to invest in such a new infrastructure instrument, thus creating a market that would rival the tax-exempt market.

Daniel V. Flanagan Jr., chairman of the commission, took issue at the meeting with O'Cleireacain's position that a federal guarantee would be needed to attract pension funds. He said the funds would be satisfied if the securities were structured simply to minimize or eliminate the risks inherent in infrastructure financings, such as the construction period risk.

Flanagan said that other members of Congress besides Gephardt would support such an infrastructure bank, and might be willing to raise or devote between 2 cents and 3 cents of the federal gasoline tax to it each year.

"It's not out of the question that this could happen next year," he said.

Each penny the gas tax is raised generates about $1 billioin in revenues.

But some meeting participants said the proposal could run into trouble next year if the newly elected Congress and President put top priority on cutting the inflated federal deficit.

"Most people are agreed this is the way to go, but every time you sit down with the people on Capitol Hill, you keep running into problems with the budget," O'Cleireacain said. She suggested the budgetary problem could be avoided by creating a federal capital budget, which puts such infrastructure funds off-budget.

But Francis X. Lilly, president of Bear, Stearns Fiduciary Services and a member of the infrastructure commission, said capital budgeting probably would be viewed as a gimmick. "Changing the rules is always a good way to get the deficit down," he joked.

Another speaker at the meeting, Robert L. Mitchell, a former chairman of the Michigan Task Force on Public Investment, said the bank proposal might meet some resistance from the states if it relies on a higher federal gas tax.

"That could make it harder to raise gas revenues at the state level" and thus create a double bind for states that are trying to step up their own infrastructure spending, he said.

But O'Cleireacain said the proposal should not supplant state infrastructure spending or their tax-exempt borrowing.

"Theoretically, state and local governments could borrow more cheaply" and finance the projects themselves, she said. "The problem is, that isn't happening. That's why this panel was created -- because it just isn't being done.

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