DALLAS - Republican Kay Bailey Hutchison's weekend election to the U.S. Senate could mean more trouble for the Clinton administration budget and tax proposals, but will give the municipal bond industry a new ally on Capitol Hill.

Hutchison, 49, who has served as Texas' treasurer since 1990, could be sworn in as the state's first female senator as early as Monday after garnering two-thirds of the votes in Saturday's special election. She defeated Sen. Bob Krueger. who served on an interim basis after Lloyd Bentsen left the Senate to become Treasury secretary.

Gov. Ann Richards has already begun a search for Hutchison's successor.

Hutchison has made it clear during the campaign and in weekend remarks that she wants to fight new taxes and favors cuts in government programs to balance the fiscal 1994 federal budget. Her election gives Republicans a 44-member minority, but some of the Senate's 56 Democrats oppose parts of the President's economic plan. Hutchison was unavailable for comment yesterday.

I am not prepared to vote for tax increases," Hutchison told reporters on Sunday. "I think Congress needs to perform on cutting the budget before it looks at any other options."

Though she favors cuts, Hutchison has wasted little time in defending two major federal projects in Texas: the super conducting supercollider being built south of Dallas and the space station being developed by Houston-based NASA.

But some lobbyists warned Texas may suffer from Hutchison's victory when it comes to doling out federal aid to states. Now that Texas has two Republican senators, the Democrat-controlled Congress may be more likely to cut funding for the supercollider and the space station.

Hutchison also said she is eager to get to Washington so she can focus on hearings by a federal base closure commission in mid-June that will review whether the Dallas Naval Air Station, Kelly Air Force Base in San Antonio, and the Corpus Christi Naval Air Station should be closed. The closings are aimed at reducing defense spending.

In Washington, municipal lobbyists said Hutchison's election will mean that the tax-exempt bond market has a friend in the Senate who understands and supports the ability of state and local governments to finance their own needs.

"We find it very exciting that someone with such first-hand understanding of municipal bonds and the marketplace in general is now one of the 100 U.S. senators," said Micah S. Green, executive vice president of the Public Securities Association. "To us, it's very gratifying she's in that position."

Amy Dunbar, director of governmental affairs for the National Association of Bond Lawyers, agreed. "As a state treasurer, she clearly has a keen understanding of the relationship between federal tax law and state financing needs, and she will be a positive force for public finance in the Senate, " Dunbar said.

While Hutchison's committee assignments have yet to be determined, her aides say it is unlikely that she will become a member of the powerful Senate Finance Committee, once chaired by Bentsen.

Her husband, Dallas bond lawyer Ray Hutchison, said yesterday that his wife will support the same positions that earned her a spot on the Anthony Public Finance Commission. As state treasurer she has lobbied Congress to ease arbitrage rebate regulations and has directed the largest short-term borrowings in Texas history.

"I would imagine Kay will carry the same views into the Senate as she had on the Anthony commission," said Ray Hutchison of Hutchison, Boyle, Brooks & Fisher in Dallas.

Meanwhile, the search to fill Hutchison's treasury post has begun. Richards is reportedly reviewing more than a dozen Democratic candidates to head the treasury, which Richards ran before being elected governor three years ago.

Observers said yesterday the governor could name an interim treasurer who would be appointed on the condition that the person not seek the office in 1994 or she could name a candidate strong enough to win election next year.

One candidate that state officials believe is high on the governor's list is Regina Montoya, a Dallas lawyer who is assistant to President Clinton for intergovernmental relations. She has an extensive record with state and local government matters.

Other candidates include Paul Williams, a former deputy treasurer and chief of staff to Richards; former Harris County Treasurer Nikki Van Hightower, who lost to Hutchison in 1990; and Texas railroad commissioner Mary Scott Naber. Several other local officials, including Fort Worth Mayor Kay Granger, have been mentioned.

Some bond dealers have speculated that Marc Stanley, chairman of the Texas Public Finance Authority, the state's largest issuer, might seek the appointment. A longtime Democratic fund-raiser, Stanley last year told The Bond Buyer that he might be interested in running for the office in 1994, but he could not be reached for comment yesterday.

An investment banker who knows Stanley, a Dallas lawyer, said that he has recently opened a litigation firm, which he may not be willing to abandon to seek state office.

Hutchison's election comes as Senate tax lawmakers are trying to hammer out their version of Clinton's budget and tax package. Several lobbyists said her victory will force Senate lawmakers to scale back tax increases in Clinton's budget and tax package, and increase the spending cuts needed to reduce the deficit.

But they also said they did not view her win as a "wake-up call" to Democrats in Washington. The Clinton administration and Congressional leaders already were sensing discontent among voters, evidenced particularly in Clinton's plummeting approval rating.

"When one's approval rating is 36% and your candidate gets 33%, it doesn't sound like you're in much worse shape than you already were," John T. McEvoy, the executive director of the National Council of State Housing Agencies, said in reference to Krueger's lopsided defeat.

"I think there was a message, but don't think it was as loud and clear as the Republicans would like the Democrats to think," Dunbar said. Hutchison's election "may have underlined the message" that the Democrats already were receiving, she added.

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