WASHINGTON - The indictment of Rep. Dan Rostenkowski and the impending hiatus in his chairmanship of the House Ways and Means Committee may harm the efforts of municipal bond supporters to persuade Congress to ease curbs on tax-exempt bonds, municipal lobbyists said yesterday.

Their comments came after the Illinois Democrat, who has chaired the Ways and Means Committee for more than a decade, was charged in a 17-count indictment that includes allegations of conspiracy to violate federal laws, embezzlement of government property, mail fraud, and obstruction of justice.

Taken together, Rostenkowski allegedly misappropriated about three-quarters of a million dollars in tax-payer funds, according to the indictment.

When the House returns next week from its Memorial Day recess, the Democratic leadership is expected to temporarily strip Rostenkowski of his chairmanship, as House rules require, until his case is decided. Unless the rules on succession are waived, Rep. Sam Gibbons, D-Fla., the second most senior Democrat on the panel, will become acting chairman.

Rostenkowski's fall from power, even if only temporary, is a blow to the municipal bond community for two reasons, lobbyists said.

For one, the powerful Ways and Means chairman has become a supporter of tax-exempt finance in recent years. He would have been a powerful ally next year when the bond community pushes for enactment of broad bond legislation proposed by Rep. William J. Coyne, D-Pa., a panel member and Rostenkowski supporter.

His assistance also would be crucial to the success of major infrastructure financing legislation that President Clinton may propose next year that bond proponents have predicted will include proposals to ease the curbs on tax-exempt bonds.

"I think Chairman Rostenkowski has become over the last several years much more supportive of municipal bonds. The importance of that cannot be overstated," said Micah S. Green the executive vice president of the Public Securities Association. "His level of knowledge and support of what bonds can mean to the politics of a tax bill will certainly be missed during this time when he's out."

A second problem for the municipal bond community centers around the 74-year-old Gibbons. Although he has voiced no objections to public-purpose bonds over the years, Gibbons has maintained a steady opposition to private-activity bonds.

"We've never looked to Gibbons as a supporter of our programs," said John C. Murphy, the executive director of the Association of Local Housing Finance Agencies. "It remains to be seen whether or not he might become that in his new role."

Another lobbyist was more blunt in his assessment. "If he's replaced by Sam Gibbons, the loss of Rostenkowski is potentially a very damaging blow to the municipal bond community," said the lobbyist, who asked not to be identified. "You would have to say Gibbons is more hostile to the needs" of state and local governments.

The gloom with which lobbyists viewed the impending departure of Rostenkowski from the chairman's seat would have seemed unthinkable back in 1986 when Rostenkowski, in presiding over passage of the Tax Reform Act, supported the most sweeping curbs on tax-exempt bonds ever.

Evidence that Rostenkowski's view toward municipal finance had softened appeared in 1991 when he introduced a broad tax simplification bill that included an array of major tax-exempt bond provisions.

For example, Rostenkowski proposed increasing to $10 million the $5 million small-issuer exemption from the arbitrage rebate requirement, and repealing the so-called 5% unrelated-use rule.

Last year, Rostenkowski was credited with being the driving force behind passage of legislation that made permanent the tax exemptions for mortgage revenue bonds and small-issue industrial development bonds. At the time, lobbyist said Rostenkowski had come to believe that mortgage bonds and small-issue IDBs could help cities, including his own, Chicago.

"I think our relationship with Rostenkowski is much better," said Catherine L. Spain, the director of the Government Finance Officers Association's federal liaison center. "I think the introduction of simplification was a prime example of the more favored treatment of tax-exempt bonds" by Rostenkowski.

Spain credited lobbying work done by city and county officials in Illinois, who made Rostenkowski see their need to use tax-exempt finance for public purposes.

"He was responsive once people brought these issues to him," Spain said. "He finally started hearing some of the good things about tax-exempt bonds, aside from only the bad things, from people that he trusted."

Rostenkowski's indictment came after more than a week of negotiations between his lawyers and the prosecutors, who tried and failed to reach a plea agreement. The agreement reportedly would have required Rostenkowski to serve jail time and resign his seat in Congress.

Instead, Rostenkowski chose to stay and fight.

"I strongly believe that I am not guilty of these charges and will fight to regain my reputation in court," he said in a statement over the weekened. "That is a far more attractive option than pleading guilty to crimes that I did not commit."

In outlining the charges against Rostenkowski, U.S. Attorney Eric Holder said the congressman "engaged in a pattern of corrupt activity for more than 20 years," from 1971 to 1993. Rostenkowski was first elected to Congress in 1958 and is in his 18th term representing Illinois' 5th district.

The investigation against Rostenkowski began two years ago with allegations that he laundered campaign money through the House Post Office, concealing it through large purchases of stamps. One of the counts deals with the Post Office scandal, charging that Rostenkowski misappropriated about $50,000 of public funds through stamp purchases.

But the allegations extend well beyond the Post Office scandal. For example, the embezzlement charge alleges that Rostenkowski carried 14 "ghost" employees on his congressional payroll from time to time who either did no work or only performed personal services for him, according to Holder. Over the years, Rostenkowski paid those people a total of $500,000, Holder said.

The obstruction of justice charge involves one of the alleged ghost employees, who was subpoenaed to testify before the grand jury looking into Rostenkowski's finances, but who allegedly was told by Rostenkowski not to offer the jury any information about his dealings with the congressman.

In his statement, Rostenkowski acknowledged that he would have to step down from the chairmanship, but vowed to stay involved with the Ways and means Committee.

"[I] will continue to serve as an active member of Congress. I know my committee colleagues can handle today's challenging agenda, regardless of who is in the chair, and I expect to help," he said.

Rostenkowski's pledge to keep working with the committee, if he continues to wield influence among his colleagues, could blunt any efforts by Gibbons to turn the committee in another direction on such issues as tax-exempt finance, lobbyists said.

The indictment comes at a particularly difficult time for the committee, which has been struggling to draft a health care reform bill. Although Rostenkowski's leadership has been considered essential to enactment of a bill, House Democratic leaders and Hillary Rodham Clinton said last week that they expected the push for a health care measure to continue without interruption.

For the municipal market, the health care reform initiative is significant because the Public Securities Association and a group of 501(c)(3) issuers are urging Congress to pass a trio of bond proposals that would increase health care advance refundings, ease limits on bank deductibility, and eliminate a cap on outstanding bonds of individual health care institutions.

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