The executive director of four Maine agencies including the Maine Municipal Bond Bank said the specter of proposed radical changes in the way tax-exempt bonds are regulated have him concerned about the future of bond-issuing authorities.

Robert O. Lenna said in an interview yesterday that the problems surrounding the municipal bond industry have little to do with an overreliance on negotiated sales or the independence of authorities.

Rather, he said, if political contributions were outlawed for anyone interested in selling or underwriting municipal debt, the recent clouds of controversy surrounding the industry could be lifted.

"There is a problem out there and it's giving all of us in the industry a black eye," Lenna said. "During this time when states and other issuers are forced to be increasingly creative in their financings, new regulations could stifle smaller issuers and force them out of business."

Speaking at The Bond Buyer's Northeast Public Finance Conference last week, Lenna said that if authorities are expected to survive, they must be allowed to take financing risks and possibly fail. He said that if a smaller authority, like one of the four he supervises, were to get bogged down in increased paperwork or government intervention, it would lose the ability to take advantage of a quickly changing market.

Lenna serves as executive director for the Maine Municipal Bond Bank, the Maine Court Facilities Authority, the Maine Public Utilities Finance Bank, and the Maine Health and Higher Educational Facilities Authority.

While it is fashionable for municipal watchdogs to say that negotiated sales should be abolished and all debt should be sold competitively, Lenna said, this would end refundings, the use of derivatives, and any other complex transactions that authorities have us" to save localities large amounts of money.

"It has been the bread-and-butter of well-run agencies to take full advantage of all the different methods of financing existing," Lenna said. "I don't have to go through the same bureaucracy as if I were regulated by the state."

But recent events have propelled the municipal finance industry off the business pages and onto the front pages of many normally uninterested publications.

Scandals surrounding borrowing practices in Massachusetts, New Jersey. Louisiana, New York, and Kentucky have prompted congress under the leadership of Rep. Edward Markey, D-Mass. to establish a special committee to review the industry.

My guess is that we will overcompensate and overregulate and take away some of our flexibility, which will create some new problems." said Philip N. Shapiro, chief financial officer of the Massachusetts Water Resources Authority. "It will take some time to get back our equilibrium. "

Specific recommendations from Markey's committee will be issued soon. However, Lenna warned, if small authorities are required to issue quarterly reports to states, "It would cost [them] over $ 100,000 in unnecessary costs."

Shapiro said. "Public sector finance has always been risk averse compared to corporate finance because public finance officials are not paid to take risks."

"Lots of issuers would definitely be locked out of the market," said Joseph D. Blair, former head of the Massachusetts Industrial Finance Agency and now the head of the firm J.D. Blair & Co., a Boston-based financial advisory firm. "Campaign contributions are a problem, but the bright sunlight of full disclosure could take care of the problem. "

Blair also said it would probably be an abrogation of a person's constitutional rights to be forbidden from making campaign contributions.

"Intelligent people can always find a way around the rules." he said. "Both firms and politicians should be responsible for releasing all contributions made and accepted. But removing the ability to accept contributions could lead to governance solely by the rich. "

One of the most vocal critics of the way business is done by Massachusetts and by some of its authorities has been state Inspector General Robert A. Cerasoli who has said the municipal industry could use some closer review.

"Authorities are not overregulated," Cerasoli said yesterday. "In general, they are in much better financial shape and have a stronger credit rating than the states they service."

Cerasoli said it is a concern of his office that the congressional committee is looking at the problems of the industry too broadly.

"In Florida it's simple. You either make political contributions or your firm can't underwrite municipal bonds," Cerasoli said. "But these problems span all across the spectrum of governance and affect every procurement and service in the state. "

Cerasoli said his office would not recommend an end to negotiated financings. However, he did say that most authorities in Massachusetts should sell more bond issues competitively.

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