DALLAS -- When it comes to spending under its volume cap, Texas is getting this advice from the state's bond industry: Don't fix what isn't broken.

But, some industry figures say, a little fine-tuning would not hurt. They have suggested tinkering with some technical rules -- such as time limits -- to allow small issuers to better use their share of the $852.9 million of bonding under the private-activity volume cap.

"Their main message was that they had no problem with the current system," said Tom Pollard, executive director of the Texas Bond Review Board. "There's no preconceived notion here that there needs to be an overhaul of some kind."

The review board is studying the current allocation system at the direction of Texas lawmakers, who voted last month to put distribution of the limited cap under the agency's control beginning Jan. 1, 1992. At a public hearing last week, none of the 10 witnesses recommended a major change in the formula used to allocate the volume cap into four broad categories -- even though overall demand for allocations is twice the supply.

"In the view of our law firm, the system is not brokern," said Jerry Turner, a bond lawyer at Vinson & Elkins in Austin. "We think the system during the last couple of years has operated fairly and efficiently."

He said even though one of the categories of bonds under the volume cap formula has demand three times the available allocation, the system works. Mr. Turner added, "We're not wasting the allocation."

But he and other bond lawyers told the review board that minor regulations often are the source of big problems for some issuers.

Paul Martin, a bond lawyer at McGinnis, Lochridge & Kilgore in San Antonio, related how a client, the San Antonio Housing Finance Corp., last year submitted more than 20 project applications. He said the agency received several allocations for separate projects, but was forced to comply with what is commonly known as the 60-day rule or forfeit its share of volume cap.

The rule is set by Texas statute and requires that issuers complete a sale of tax-exempt bonds under the volume cap within 60 days. However, there is an automatic 15-day extension, which effectively gives issuers 75 days to use the allocation.

"It's very difficult to make it all come together within an arbitrary time," Mr. Martin said.

The rule is designed to ensure that none of the allocation be wasted. If an issuer forfeits its share of the volume cap, the money is reallocated to others under a lottery system.

Mr. Martin also proposed that rules concerning multifamily housing bond issuers be modified so they could seek a multiple-project allocation. For instance, rather than seeking three different allocations for smaller projects, he advocated a rule change that would allow issuers to make a more efficient single issue for all the projects.

Mr. Turner raised a similar concern. One rule requires issuers to pay their allocation fee and deliver final closing documents within five days of completing a transaction. Under the statute, those who do not comply will have their allocation canceled.

While no issuer has ever been stripped of its allocation under the rule, he points out that the regulation is dangerous since bonds would already have been sold if such a drastic step became necessary.

"It seems to me to be a little draconian," Mr. Turner said. "I don't favor any surprise on the market."

So far, no one has publicly objected to having the review board handle the allocation process while it also oversees issuance by state agencies that use private-activity bonds. Some have privately raised concerns that the duties may conflict.

The state currently awards private-activity bond allocations through a two-year-old process that divides applicants into four broad categories: single-family housing, small-issuer projects, state-voted issues, and a general classification that includes multifamily housing, student loan agencies, and pollution-control projects.

"We would urge them to leave the lottery system intact," said John Fainter, a bond lawyer at McCall, Parkhurst & Horton in Austin. "There should not be anything subjective in deciding" how the cap is allocated.

Lawmakers last revised the allocation system in 1987 when they eliminated a first-come, first-serve system in which issuers competed for allocation by simply lining up on the sidewalk outside the Texas Department of Commerce, which then administered the program.

Critics said that system was disruptive and unfair. Now, lawmakers are concerned about maximizing the volume cap, especially for state issuers.

When the legislature last revised the system, state-voted bonds accounted for 25% of the volume cap, compared with the current 15%. Since 1987, the population-based allocation has slipped below $1 billion, leaving the state with a smaller share of a smaller cap.

Mr. Pollard said the review board will complete the study later this month and, if needed, request changes from legislators who open a special budget-writing session today.

"We just want to look at whether there is a problem with the mechanics of the system," Mr. Pollard said. "We also want to make sure it is an equitable distribution of that scarce resource."

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