Already uncertain over the impact the Gramm-Rudman-Hollings law will have on their ability to provide services, area government officials were jolted by another potential fiscal bombshell last week: proposed federal legislation that would tax the interest paid on municipal bonds, the chief funding mechanism for new schools, roads and numerous other public improvements.
Triggering the officials' worry is a proposal by Sen. Bob Packwood (R-Ore.), chairman of the Senate Finance Committee, to subject interest payments on municipal bonds to the minimum income tax. The measure would be phased in over five years, starting next year.
Under Packwood's plan, which is to be taken up when the committee reconvenes tomorrow, the legislation would be made retroactive to include all tax-exempt income earned this year from previously issued or new bonds. The interest is now tax-exempt, a feature that has made the purchase of municipal bonds highly attractive to investors throughout the country.
Washington area officials fear that the tax, together with other proposed changes that would reduce the appeal of municipal bonds, could endanger planned capital improvement projects, force layoffs and dramatically increase the cost of operating local governments. Without the tax break, they say, governments would have to offer higher interest rates to make the bonds attractive to investors.
The impact of some of the proposed changes already has been felt in Montgomery County, where officials recently slashed $25 million from the $75 million bond issue they plan to float this spring. Deleted from the bond plan is money the county planned to use to buy land.
The land still will be bought, but with general revenues. That means a higher cost to the county and possible tax increases during the next couple of years.
In Montgomery County, bonds are to be the funding source for several major projects, including $39.5 million this year alone for building new schools and renovating others, $2 million for improvements in Wheaton's central business district, $2.5 million for the planned Mid-County Highway, and $1 million for realigning and resurfacing Good Hope Road.
An estimated $7 million was to be appropriated for development of a center for advanced research and biotechnology and $600,000 for construction of an emergency police and fire communications center.
"Montgomery County and every other municipality will have a much more difficult time selling their bonds," predicted J. Edward Rowley, the county's deputy director of finance. "It's of great concern to the people expecting new schools and new roads, and those two areas are the guts of our capital improvements program."
Similar warnings were sounded by Richard W. Bradley, deputy director of finance in Prince George's County, which Wednesday unveiled an ambitious $117 million capital improvements program that includes 29 major road projects. He said the proposed tax would increase the county's debt service and "pose a threat to our capital improvements projects."
According to analysts at the Public Securities Association, a New York-based securities industry trade association, Packwood's proposal would cost Prince George's about three-fourths of a percentage point in interest, which translates into $27 million in added cost over 10 years. The estimate was based on market activity Friday.
Using the same estimate of an added three-fourths of a percentage point of interest, the analysts said that the added costs of the Packwood plan to all governments in Virginia, which issued a total of $2.5 billion in tax-exempt bonds last year, would have been $284.2 million over the life of those bonds.
Fairfax County, which is in the midst of a development boom, has won approval for, but has yet to sell, $267 million worth of bonds.
Nearly $135 million is for road improvements, including the proposed Springfield Bypass, which carries an estimated price tag of $89 million, and $12 million for road construction near the Vienna Metrorail station. About $47 million is to fund school projects, including the construction of several new elementary schools and the new Braddock Park High School.
"Down the road, it could mean that some of those projects would be delayed," said Ilene M. Blake, Fairfax's budget director.
More likely, the county would dip into its general revenue fund for money to carry out projects jeopardized by the bonding revisions.
An estimated $27 million in commercial revitalization and several million dollars more for public housing improvements are among the bond-financed projects in the District that are threatened by the recommended changes.
"Bonds are our fundamental source for capital improvements," said William Kao, assistant treasurer in the District, which plans to issue about $170 million in bonds this year alone for improvements in public buildings, roads, sewers and other projects. "If the tax exemption is removed, it will make financing much more expensive."
A spokesman at the Government Finance Officers Association, a national organization of finance officials, said the proposed legislation could seriously hamper state and local governments.
"Borrowing and making capital expenses will be more expensive" for them, said John E. Petersen, a director at the association. "They will be faced with reducing capital spending, raising taxes or cutting down on other expenditures."
The municipal bond market was clouded by uncertainty even before Packwood's proposal because of H.B. 3838, legislation adopted by the House and awaiting action in the Senate, which would limit the amounts and types of bonds that could be sold and the way the proceeds could be used.
But Packwood's proposal last week further alarmed investors and has already prompted state and local officials to reassess their bond plans. New York City officials, citing "chaotic market conditions," postponed the planned sale of a $450 million bond issue.
Closer to home, officials planned no such dramatic actions, but they were clearly worried about their building and renovation plans.
"There would be a real question about what the market would be for bonds" if the tax is added, said Anna Lee Berman, management and finance director in Arlington. "We can't afford to lose our ability to go into the tax-exempt market."
Arlington voters will decide on a $27.9 million bond issue this fall that would will fund a $96 million capital improvements program spanning six years and covering such projects as street repaving and a $10 million police station.
Alexandria just sold $22 million worth of bonds and does not plan to float more until mid-1987, giving it some breathing space while Congress debates the various proposals.
"It shouldn't affect us right now. We've completed our bond sale and received our money from the underwriters," said William A. Cole, deputy director of Alexandria's office of management and budget. He added, however, that "if our issue were on the street now, we probably could not sell it."
Peterson, of the finance officers association, said Congress was being "harsh and unfair" in placing such projects in jeopardy. He said the assault on municipal bonds, combined with the large domestic spending cuts adopted by Congress, are "putting state and local governments in a tremendous vise."
"The feds are picking the pockets" of those governments, Peterson said. "They're dumping more and more responsibilities on them and taking away their resources at the same time."