State treasurers haven't given up yet on President Clinton. Although he disappointed them by failing to include provisions easing tax-exempt bond curbs in his economic package, they still believe he understands their problems with tax law impediments to issuing and buying municipal debt.
The members of the National Association of State Treasurers had been optimistic after a March meeting with Clinton, when they urged him to include bond provisions in the tax package he was putting together. But although the President was sympathetic to their concerns, that sympathy did not translate into concrete proposals.
The treasurers were unhappy about that outcome, but they are undeterred, said Lucille Maurer, the president of the treasurers' group.
"We were disappointed," Maurer said. "We had wanted [the bond provisions] and felt it would be good for the county if ... those items had been in the package."
However, she attributed their absence to political considerations of the moment, not to any lack of support for bonds from the President. "I think he's well aware and understanding of" state and local concerns, Maurer said.
Though Clinton wanted to help state and local governments, the federal deficit tied his hands, said Milton Wells, the director of federal relations for the treasurers' group. And, he said, "The budget arithmetic hasn't changed."
When Clinton began his term, "there was certainly a false sense of euphoria," because he was a former governor of Arkansas and had displayed a high degree of knowledge about tax-exempt financing while in the statehouse and during the campaign, Wells said.
"Because we had someone who understood what our problems are, [we thought] this would somehow magically translate into a legislative success story," Wells said, adding that he and other bond proponents should have realized that "the budget numbers weren't going to be any different the day after his election than the day before his election. "
But is there any hard evidence, beyond what Clinton has told the treasurers, that he does want to ease bond curbs?
Maurer says that answer is yes, and points to the recently reissued arbitrage regulations to prove her point.
"The stringent parts, the unworkable parts have been ameliorated" in the new version that was issued last month, Maurer said.
Those regulations were improved in large part, she said, because the attitude toward tax-exempt bonds in the White House now is much different from that in 1986. At that time Congress and the Reagan administration were assembling the Tax Reform Act, which placed the tightest curbs to date on tax-exempt bond issuance and demand.
There was "an attitude on the part of Treasury and on the part of the congressional staff that states and local governments were a special interest, and that what we were asking for was against the interest of the federal government, " Maurer said.
More Signs of New Attitude
"And now I sense there is more understanding, though [legislatively] it hasn't been carried out yet to any degree." she said. "The top people in the administration have a better understanding of the role of states and local governments in the capital markets."
Another bit of evidence that Clinton at least has bonds on his radar screen was provided recently by Leslie Samuels, the Treasury's assistant secretary for tax policy.
On June 22, Samuels told the House Ways and Means Committee's subcommittee on select revenue measures that Clinton is still considering making proposals to ease tax-exempt bond curbs sometime in the future.
Samuels said the administration is reviewing the nation's infrastructure needs, including the extent to which tax-exempt bonds should be used to finance them.
"On completion of this review, it is possible that the administration may offer proposals to amend the tax-exempt bond provisions of the code to facilitate infrastructure financing," Samuels said, though he did not say when the review would be completed.
Over the past several years, the treasurers'group has become more active in lobbying Washington on issues relating to tax-exempt bonds. This year, in particular, the treasurers pushed to get their message out, Maurer said.
"We've been very active in carrying our concerns about the importance of tax-exempt financing to the economic recovery to the White House," Maurer said. "Our whole operation in Washington has not just been to keep ourselves informed, but to carry our concerns and our message to the Congress and the administration."
Earlier this year, the treasurers' group and 28 other organizations representing state and local governments sent Clinton a memo that listed the five most important changes the President could propose for bonds.
The first change involves private-use restrictions. The coalition wants Clinton to propose easing the so-called 10% private-use test, which stipulates that no more than 10% of the proceeds of a tax-exempt public purpose bond may benefit private business. The coalition advocates increasing that level to the pre-1986 level of 25%.
Along the same lines, the coalition supports a proposal by Beryl Anthony, the former Arkansas congressman, to create a new category of tax-exempt bond in addition to public-purpose and private-activity bonds.
The new category, "public-activity" bonds, would be treated under the tax law as a public-purpose bond. It would cover bonds for environmental projects such as hazardous waste removal and sewage treatment, which serve a public purpose but which by their nature require a high degree of private involvement. The level of private involvement in projects financed with these environmental bonds prevents the debt from being classified as public-purpose bonds under current law.
As for the second area, arbitrage, the coalition wants the President to repeal the rebate requirement for governmental bonds enacted in 1986. Issuers have argued for years that complying with the requirement is complicated and burdensome. Measures designed to ease the administrative burden, such as the 1989 arbitrage rebate relief law, have not lived up to expectations, they argue.
The third area involves the 1986 tax law provision that permits banks to deduct 80% of the cost of purchasing and carrying tax-exempt bonds, but only if they are purchased from an issuer that expects to sell no more than $10 million of bonds a year. According to the coalition, that relatively low figure has excluded many issuers.
The coalition asserts the provision "certainly kept municipal yields higher than they otherwise would have been" over the last several years. "When issuers sell their bonds, they receive fewer bids because of the loss of the bank interest deduction, and banks making direct loans to issuers require higher interest rates to offset the loss of the deduction."
By the end of 1992, banks held just $97.6 billion in municipal debt, compared to $231 billion in 1985, the coalition stated in its memo to Clinton.
Over the last few years, issuers have pushed Congress to grant an increase in the $10 million small-issuer limit, to $25 million. But the coalition is advocating a complete rollback to pre-1986 law, in which the 80% deduction could be taken on the debt of any issuer.
The fourth area in which the coalition wants to see change is in the private-activity bond volume cap. Under the volume cap law, states are allowed each year to issue the greater of $50 per capita or $150 million in private-activity bond authority.
According to the coalition, many states find issuer demand outpacing supply and "are forced to postpone or cancel critical investment projects involving private-activity bonds because tax-exempt financing could not be secured."
The coalition said two solutions would be the creation of the public-activity bond, which would be exempt from the cap, and an inflation index for the cap.
The fifth area where the treasurers want change involves the tax exemptions for mortgage revenue bonds and industrial development bonds, which expired June 30, 1992. The coalition wants the tax breaks made permanent.
Clinton did propose permanent extensions for the two exemptions, and House tax legislation included those proposals. The Senate, however, proposed extending them through June 30, 1994. Late last week, tax bill conferees were leaning toward permanent extensions, but a final decision had not been made.
Whatever the outcome of these proposals, treasurers and other advocates of change for bonds need to guard against becoming discouraged, Wells said.
"I don't think Clinton is any less gung ho on our issues" than previously thought, Wells said. "I don't think it's any less likely in the long run to get helpful legislation. "
What bond supporters in the administration and Congress need to do now, he said, is solve the problem of how to pay for those changes.