WASHINGTON -- The tax-exempt borrowing provisions in President Bill Clinton's proposed health-care reform package are ticking time bombs could blow up in the faces of 50 states and the U.S. Treasury.

The provisions -- unknown to the Treasury's bond experts until they were revealed last week in two stories by staff reporter Patrice Hill -- include a measure that ultimately could force states to use billions of dollars of tax-exempt bonds to bail out insolvent healthcare providers in a rescue effort that could rival the magnitude of the savings and loan bailout of the 1980s.

Even if that worst-case scenario does not materialize. another provision that calls for state agencies or nonprofit organizations to use tax-exempt securities to provide needed cash flow for some 200 regional health-care alliances could still lead to a surge in municipal volume.

Both provisions are not only likely to drive up state and local borrowing costs for all other purposes. but they could reduce federal revenues as wealthy investors, hit by higher income tax rates, sop up the added supply of municipal debt.

The threat to states of financing a massive health-care bailout arises from a provision in the Clinton. plan saying that states must set up guarantee funds to protect against the possible insolvency of the pooled health plans.

Under the plan, state guarantee funds would have the authority to issue long-term, tax-exempt bonds to finance the bailout of any insolvent health plans.

White House and top Treasury officials have ignored several requests for explanations of the proposed provisions and their possible ramifications for states and the municipal market.

But one ramification is becoming increasingly clear.

Not only would the Clinton plan shift much of the responsibility for the control and operation of the proposed health-care plan to the states, but the guarantee plan would also shift the financial risk to the states and possibly to the municipal market.

Just as the Treasury was left on the hook to finance the savings and loan debacle, the health-care plan would appear to leave the states responsible for bailing out any health-care providers that go bankrupt under the new system.

Whether intended by the drafters of Clinton's plan or not, the guarantee plan appears to be a clever attempt to make sure that the Treasury won't be put into a position where it will have to pay for any health-care bailout.

Unfortunately, the plan could leave the states and the municipal market stuck with a massive financial liability.

Clinton's health-care plan faces a long and tortuous road before it is enacted by Congress, and participants in the municipal market must start asking tough questions about its borrowing provisions.

Many market participants have pushed over the years for new uses of bonds to expand supply. But they must make sure that any new issuance triggered by the proposed borrowing provisions doesn't cost the market more than it gains.

Subscribe Now

Access to authoritative analysis and perspective and our data-driven report series.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.