WASHINGTON -- President Clinton's plan to drastically restructure HUD could be the first step toward cuts in federal funding for housing and community development programs, and has the potential to disrupt the housing bond market, lobbyists said Friday.

Those sources also said the president's proposal to expand the use of Individual Retirement Accounts could harm demand for tax-exempt bonds, and plans to cut federal taxes could also lead to lower state and local revenues.

Their comments came after Clinton's Oval Office speech Thursday night in which he proposed tax cuts for the middle class and said he would pay for those cuts by radically restructuring HUD and possibly selling off five federal electric power agencies.

In his speech, Clinton confirmed that he had scrapped an earlier plan for eliminating HUD, choosing instead to propose restructuring the agency by transforming the Federal Housing Administration into a private corporation, and merging dozens of housing programs into a few big block grants.

"My plan will ... shrink 60 programs into four at the Department of Housing and Urban Development," Clinton said.

Clinton's plans include creating two or three large block grants containing programs like the Community Development Block Grant program, HOME, and the Section 8 rent subsidy program. The funds would be administered by state and local governments, but the governments would still have to adhere to a set of federal guidelines to make sure the money was being used properly.

Housing industry officials said they were concerned that consolidating 60 programs into four would be a first step toward reducing federal funding for housing and community development, something that congressional Republicans have indicated they want to do.

Clinton "is already doing the Republicans' work for them by getting all the hostages in four rooms," said John T. McEvoy, the executive director of the National Council of State Housing Agencies. From there it would be an easy next step to propose lower levels of funding, he said.

Micah S. Green, the executive vice president of the Public Securities Association, said the White House and Congress need to keep in mind the potential effect on the housing bond market of any plans to change HUD programs.

"There needs to be sensitivity to the fact that there is a vast marketplace of securities that are backed by the full faith and credit of federal guarantees under HUD programs, and that sensitivity is necessary to ensure the marketplace is fully cognizant and knowledgeable as to what changes might occur," Green said.

Clinton was less specific about his plans for the Department of Energy, but he indicated that he is still likely to propose selling off the Bonneville, Alaska, Southeastern, Southwestern, and Western Power administrations.

"We can sell off entire operations the government no longer needs to run," Clinton said.

The president's statement showed that the idea of selling the five power administrations "is still very much a live proposal," said Madalyn Cafruny, a spokeswoman for the American Public Power Association, which opposes the sale.

Selling the agencies could result in increased tax-exempt bond issuance if public power utilities purchased them. According to one estimate, selling the five could save the federal government $12 billion over five years.

But the power association has warned that the sales could result in increased electric power rates and fire-sale prices, which would defeat the purpose of getting rid of the agencies.

The proposals for cutting back HUD and the Department of Energy are designed to raise enough revenue to offset the losses expected from Clinton's proposals for tax breaks, the president said in his speech.

Among the tax proposals are a $500 income tax credit that families making up to $75,000 a year could receive for each child under the age of 13. Another Clinton proposal would permit middle-income families to deduct up to $10,000 a year for college tuition or other post-secondary education expenses.

Clinton is also proposing a kind of "super" IRA in which middle-income taxpayers could make tax-free deposits and withdrawals. The withdrawals could be for education, medical expenses, the purchase of a first home, or the care of an elderly parent.

Clinton's IRA follows similar proposals by various members of Congress that have been sharply criticized by the municipal bond industry.

Bond proponents have said they are concerned such enhanced savings accounts would draw individual investors from tax-exempt bonds by creating a sort of "super" treasury investment that would carry a higher rate than municipals and have the added value of being exempt from federal taxes.

Clinton's IRA plan and other savings proposals like it "are likely to lead to higher borrowing costs for all cities and towns," said Frank Shafroth, the director of policy and federal relations for the National League of Cities.

Shafroth also pointed out that Clinton's proposals for new federal income tax deductions and credits would reduce tax revenues for any state or local government that patterns its tax system on the federal government's.

Subscribe Now

Access to authoritative analysis and perspective and our data-driven report series.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.