WASHINGTON -- It was a shot across the bow of the municipal bond market.

The warning, which could spell trouble for the market on two fronts, came last week when Rep. Pete Stark, D-Calif., told a hearing that an ill-fated House plan to ease the $150 million cap on the amount of bonds that 501(c)(3) health care organizations, other than hospitals, may have outstanding at one time "is a step down the wrong course."

Stark's comment is a clear sign that the broader proposal approved by the Senate Finance Committee that would eliminate the $150 million cap on all nonhospital 501(c)(3) bonds, including colleges, may be in jeopardy if House and Senate conferees eventually meet to hammer out a final health care reform bill.

But it also may be a precursor to trouble next year, when many in the municipal market hope that President Clinton will propose a major infrastructure financing bill that could include proposals to ease some of the curbs on private-activity bonds.

What should be particularly troubling to the municipal market was the tone of Stark's comments, which reflect the attitude that he and many other House Ways and Means Committee members had about private-activity bonds and bond underwriters in the late 1970s and early 1980s.

Many projects financed by private-activity bonds in general, and health care bonds in particular, "are promoted by bond houses and not by strong financial needs," Stark told a hearing held by the Ways and Means' sub-committees on select revenue measures and on oversight.

Stark, a longtime foe of private-activity bonds who heads the committee's health subcommittee, said that overcapacity in hospitals and the run-up in health care costs can be partly attributed to bond-financed health care projects that were not needed but "were stimulated by overzealous bond salesmen."

Although the Treasury did not oppose the House bond plan, which was not included in the health care bill adopted by Ways and Means, an aide provided an unexpected blast from the past at the hearing by repeating the Treasury's 30-year-old refrain that tax-exempt bonds are "an inefficient means of providing a subsidy when compared to more direct programs such as grants and direct loans."

Many municipal market participants have been under the impression that the old anti-bond attitudes in Congress and at the Treasury have been changing, especially since the excesses and abuses in the market were eliminated by the bond curbs that were imposed in the mid-1980s.

They also have been hoping that the tight federal budget and the need for increased spending on infrastructure would prompt Congress and the Treasury to agree to ease some of the curbs on private-activity bonds for projects that serve a public purpose but have a large amount of private involvement.

But the comments of Stark and the Treasury indicate that the old prejudices about municipal bonds still appear to be alive and must be turned around quickly if the market is to have a chance of convincing Congress to ease any of the bond curbs in the near future.

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