Call 1994 the Year of Lowered Expectations.

Back when 1993 began and President Clinton took office, hopes loomed sky high among municipal bond proponents that changes to the tax code were just around the corner.

Clinton, the former governor of Arkansas, was going to propose a host of provisions to ease curbs on tax-exempt bonds - or so they thought. And they believed Congress, eager to follow the President and shore up the economy, would quickly enact his proposals.

But Clinton was preoccupied with other issues. And Congress was too worried about holding down the deficit to propose anything. So this year disappointed advocates of municipal bonds are scaling back their hopes for what Washington will produce to help the market.

Some lobbyists, in fact, say they have given up on the Clinton Administration and expect exactly nothing out of the White House in 1994.

In the tax-exempt bond area, "There doesn't seem to be anyone over in the Clinton Administration willing to sit down and do anything, and I am shocked," said a securities industry lobbyist who asked not to be identified. "I think state and local officials in general are pretty upset and very disappointed."

Others, however, are willing to give Clinton the benefit of the doubt.

"I think they're serious about doing something," said a municipal lobbyist who also requested anonymity. "The issue is not whether but when."

Bonds are almost certain to be included in any infrastructure plan Clinton eventually puts forward, though such a plan is not likely to surface until 1995 or later. "Because of severe budget constraints," the municipal lobbyist said, "a central element is inevitably going to have to be tax-exempt financing. There is no other way to pay for it, period."

Moreover, no one should forget that the Clinton Administration strongly supported and won permanent extensions for tax exemptions on mortgage revenue bonds and small-issue industrial development bonds, said a lobbyist for a large city. The two proposals, in fact, were enacted in August. "So, I think they have tried," the lobbyist said.

But even Clinton's defenders admit that both the administration and Congress will probably concentrate on issues other than bonds in 1994. Nearly everything, in fact, will have to take a back seat to the number-one item on lawmakers' agenda next year: health care reform.

The Health Care Gorilla

Congress and the White House "do have their hands full, and they're going to have to scrape for every dime's worth of revenue that they can [find] for health care," said John T. McEvoy, the executive director of the National Council of State Housing Agencies. "So I think it's not an auspicious time for an ambitious tax program by anybody."

A tax bill with bond provisions "is always a possibility, but I think there needs to be a lot of grassroots work, outreach, and work on the administration," by bond proponents before one will surface, said Catherine L. Spain, the director of the Government Finance Officers Association's federal liaison center.

There is some degree of hope among lobbyists - though not much - that the health care bill itself could act as a catalyst in the bond area.

"I think if they do a major health care bill that there will be a significant tax bill that goes with it and the opportunity to change some things," said Amy K. Dunbar, the director of governmental affairs for the National Association of Bond Lawyers. "If they aren't able to achieve sweeping health care reform this year and go the incremental route, then I think it will be harder to get a large tax bill."

If a health care bill doesn't become the vehicle for a tax bill, what's left? There is one other possibility. A tax simplification measure passed by the House Ways and Means Committee in November already contains three minor provisions to ease tax-exempt bond curbs. But, bond proponents said, there is a chance it could be broadened to include more substantial changes in the tax-exempt area.

No matter what the vehicle, one other obstacle looms large: lack of revenues to pay for bond proposals. For years, the tax committees have kept themselves on a tight budget, approving proposals that lose money for the federal government only when there have been offsetting proposals that raise revenue.

"Money's just going to be tight out there, and I think Clinton's going to find out that, if he keeps proposing all these new programs, there's not going be any taste at all next year for any major tax increase," said the securities industry lobbyist.

Normally, politicians shy away from raising taxes, but they will be even more leery than usual in 1994, an election year.

Tax increases, even ones used to pay for needed new programs "are harder to defend in a re-election campaign," said Micah S. Green, the executive vice-president of the Public Securities Association. "That makes a separate tax bill potentially problematic."

One housing lobbyist was more pessimistic, saying that the chances for a tax bill with bond provisions in 1994 are "little or none. Health reform will dominate the debate." The Clinton Administration "is making great efforts to otherwise avoid taxes, and bonds are not on the radar screen," added the lobbyist, who asked not to be identified.

For all the pessimism, one or two bright spots on the legislative horizon may bode well for bonds in 1995 and beyond. First, Rep. William J. Coyne, D-Pa., has emerged as a key supporter of tax-exempt bonds on the Ways and Means panel.

On Nov. 22, Coyne introduced a wide-ranging bill to ease tax-exempt bond curbs that includes provisions that would provide a new way for issuers to avoid the arbitrage rebate requirement and would create a new type of bond to aid distressed communities.

With the introduction of Coyne's bill, the lobbying ability of state and local governments will improve "dramatically. It's something on the table, it's something out there, something for us to rally around," said Milton Wells, the director of federal relations for the National Association of State Treasurers.

"It's important to have a specific vehicle that people can [use to] motivate their grassroots people by saying, ~support the Coyne bill,'" Dunbar said.

With the Coyne bill "you have a shorthand mechanism through which to transmit the message from the constituents to Congress that there is strong support for bond changes," Dunbar said.

Also helpful was the enactment in August of the bill granting permanent extensions to the mortgage bond and IDB exemptions.

In previous years, Congress had several times extended the two exemptions for temporary periods. The annual fight to renew the exemptions consumed substantial resources and lobbying hours that now can be devoted to other issues in the bond area, several bond proponents said.

"It was very important to get those [two exemptions] taken care of," Spain said. "There's only so much you could put on the congressional plate" at one time.

Lawmakers' Bond Fatigue

Many members of Congress who supported mortgage bonds and IDBs "have been [general] bond supporters too, but just have not been able to take leadership roles because they knew the tremendous amount of work that was going to go into" trying to make the mortgage bond and IDB exemptions permanent, Spain said.

But the enactment of permanent extensions has a negative side effect too, some sources said. Many members of Congress believe that, in having granted permanency to mortgage bonds and IDBs, there are no more big issues they need to tackle in the bond area.

"A number of members tell me, when I ask them now to support bond provisions, ~We took care of that. We gave you that already. Solved that, been there, done that,'" Wells said.

The issues that remain, though important, are not as easily explainable as the extensions. They include the arbitrage rebate requirement and bank deductibility. Mortgage bonds and IDBs "were easily comprehensible issues. They were housing; they were economic development. All of the bond issues now are tough." Wells said.

If 1994 promises no important changes to help bonds, neither will it be a year when Congress tries to place additional curbs on municipal finance, lobbyists said. And in the current era of budget-cutting, coming out of any tax-writing process unscathed is a victory, they said.

Bond proponents who complain of not getting enough out of Congress forget that it wasn't too long ago when the bond community was content to be left alone by Congress.

"I still don't take lightly at all that in the deficit reduction package of 1993, which was aimed at wealthy, there were no proposals to cut back municipal bonds," Green said. "I take that as a commitment right there to defend the tax exemption."

"What I see next year is no real strong backlash against public finance," even though members of Congress will be looking for revenue sources to pay for health reform, the securities lobbyist who requested anonymity said.

That is because on the tax committees, "I think there's broad enough support [for bonds] and I think the Ways and Means members who have been willing to support public finance are very effective members," he said.

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