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MUNICIPAL SECURITIES FULL DISCLOSURE ACT OF
THURSDAY, FEBRUARY 26, 1976
U. S. SENATE COMMITTEE ON BANKING, HOUSING AND URBAN AFFAIRS,
SUBCOMMITTEE ON SECURITIES,
Washington, D.C. The subcommittee met at 10 a.m., pursuant to call, in room 5302, Dirksen Senate Office Building, Senator Harrison A. Williams, Jr., chairman of the subcommittee, presiding.
Senator WILLIAMS. We will come to order. The Securities Subcommittee will return to consideration of the two bills that are before us dealing with municipal securities full disclosure.
First this morning we have the Honorable Richard Carver, Mayor of Peoria, Illinois, for the National League of Cities and the U.S. Conference of Mayors; and the Honorable Jim Flaherty, Chairman of the Allegheny County Board of Commissioners for the National Association of Counties.
STATEMENT OF RICHARD CARVER, MAYOR, PEORIA, ILL., REPRE
SENTING THE NATIONAL LEAGUE OF CITIES AND THE U.S. CONFERENCE OF MAYORS
Mr. CARVER. Mr. Chairman, I'm Richard Carver, the mayor of Peoria, Ill. I've got a written statement that I will not attempt to read in its entirety this morning, but I will request that it be made à part of the record in this particular hearing.
Mr. CARVER. What I will try to do is try to emphasize some of what we personally believe to be the very important points relative to this matter.
As the chairman of the National League of Cities Committee on Effective Government, we have a policy committee that has jurisdiction over this particular issue. Our committee has not dealt with it but it's still my opinion and the opinion of those that I have talked to and I believe the opinion of the National League of Cities and the U.S. Conference of Mayors that we are opposed to this kind of control or suggestion of control over the municipal securities that are issued by local units of government in this nation.
We believe that the history of the issuance of municipal securities over the past 43 years supports this particular position. We feel that the record of this type of security, the record of its safety, the record that we have been able to generate the type of capital that's been needed by State and local units of government and further the record of losses that have been actually had by those who have invested in this type of security demonstrates that we have in fact had an excellent type of program existent to date. I think it's important to make added note, because it's my
belief and I think the belief of many, that this particular type of legislation has been brought forward because of the situation concerning New York. We do think that was a unique type of circumstance.
The National League of Cities Board of Directors did establish a policy statement concerning assistance to the city of New York. I'd like to read that just for a moment to illustrate the type of position that we have taken in matters of this sort and I think underscore the fact that we believe as cities that this was a fairly unique type of circumstance.
The policy statement read that the Congress and the administration should be prepared to assist a municipality to obtain either credit during a financial emergency only if it is apparent that the municipality and State government have exhausted all constitutional, legal and fiscal remedies available under their respective authorities. Assistance measures which may be appropriate in a financial emergency should not be made a permanent feature of Federal policy with regard to municipal bond financing.
I personally believe that the National League of Cities Board at that time were trying to emphasize that they did not want a Federal involvement in the tax exempt municipal bond market and I personally believe that they were stating that they felt that it was inappropriate both in terms of the record as well as the future costs in this particular market. There are 39,000 local units of government that could be adversely affected by the type of legislation that would add to their bond selling additional cost that in my opinion would not be necessary.
There simply have not been recurrent abuses int his particular area, Mr. Chairman, as you yourself pointed out, and we would like to state that New York City has been not typical and it has been very unusual. We believe that municipal bonds as a class are an extremely safe investment and we believe as you have stated that the Penn Central and W. T. Grant bankruptcies seldom occur in the public sector. We think that State and local governments provide an ultimate safety for the securities through the exercise of the general tax authorities and we also believe that the normal political processes associated with the issuance of State and local government debt ensure close public scrutiny through hearings, elections and referendums.
We also would like to make note of the fact that there already exists antifraud provisions in the Securities Act and that certainly if misrepresentations have taken place that this already provides a mechanism that will take care of those kind of abuses. It's my belief that the cost of this type of regulation at a time when the fiscal problems of the cities are at their greatest, added cost of selling municipal bonds would be a very unfortunate occurrence. Many people in the fall of last year believed that the security market, the municipal security market, would be very adversely affected by the New York City crisis and yet at that particular time the bond index stood at 27.67 and today it's gone down 72 basis points to 6.95, and I might add that the city of Peoria just recently had a sale of municipal securities below 6 percent which is not unusual in our State. So we obviously do not agree that the impact of the problem of New York City have in fact upset the market to the extent that cities like ours and I would like to sugest the vast majority of the cities in the United States have found themselves unable to sell at what we would classify bonds at a reasonable rate.
I think it's important to point out that from 1935 to 1974 approximately $5 million of municipal debt has gone in default. This represents 42 percent of the outstanding municipal debt at the end of 1974. This figure is even further reduced when we take a look at it in terms of what has actually been lost by the investor, which amounts to approximately $10 million, 1/1,000 of the outstanding municipal debt at the end of 1965.
We don't choose to pay higher interest rates, Mr. Chairman, and we are vitally concerned about the individuals who purchase the securities that we have to sell and we do think that there are needs for having more uniform methods of reporting and I'm sure it will be suggested this morning that there are mechanisms available for such to take place.
In Illinois we are in the process right now of developing uniform accounting procedures for all of the units of local government. I happen to be a member of the State of Illinois Comptroller's Committee on municipal audit, and I can personally tell you that those of us in local government and those in State government not only recognize that where a problem exists something ought to be done, but are taking affirmative actions to see that it occurs and I'd like to personally believe that we should be given that opportunity prior to any Federal intrusion in this area, and I would like to personally believe that the Federal relationship should allow and also should mandate that such should occur. It's my personal feeling
Senator WILLIAMS. Say that again, please.
Mr. CARVER. I happen to think, Mr. Chairman, that the cities and States ought to be given the opportunity to solve this particular problem on their own and I happen to personally believe that the Federal relationship, the concept of the relationship that I personally believe in in terms of the Federal Government with the States and the cities, should allow this opportunity, and I happen to personally believe in Illinois we are proving that such is the case.
Senator WILLIAMS. I thought you used the word “mandate” in there.
Mr. CARVER. No sir; I did not, and if I did I will withdraw the statement.
Senator WILLIAMS. Did anybody else hear that?
Mr. CARVER. If I did, Mr. Chairman, I was only using it for emphasis in terms of suggesting that this opportunity for solving the problem at the local level ought to be allowed to occur, and I think all of us recognize that there are some difficulties that have occurred but that they are quite few, quite small, and the impact has been almost miniscule and rather than go much further with this I think I'd like to close by stating that if given the opportunity I'm sure the State of Illinois and the city of Peoria, and for that matter all the cities of this Nation, will be moving ahead with their own programs in the area of standard accounting and that the type of market that has existed for municipal bonds is dramatically different than that that's always existed for private securities. The mere fact that we need bond opinion by bond counsel in itself is unique and the type of requirements there are those that have been freely and not mandated by law, but simply mandated by practice, recognizing that there is a need in this particular area, and I would suggest that in the other aspects of the sale of municipal bonds that will occur as well.
Thank you very much.
Senator WILLIAMS. Thank you very much, Mayor. I think we will turn to Mr. Flaherty, but first let me just understand your representative position here. I have you listed for the National League of Cities and the U.S. Conference of Mayors. It is helpful to us to know how an association like the league or the U.S. Conference comes to any position. Now we read in the paper, of course, of other mayors, and there are mayors that recognize that the crisis has highlighted the need for this approach to a new basic understanding by investors of what they are investing in and that is municipals.
When was the last meeting on this of the U.S. conference or the League of Cities?
Mr. CARVER. Well, Mr. Chairman, in my opening comments I pointed out that the policy committee of the National League of Cities, which I chair, has not met on this particular issue. So, as a result, to try to tell you that anything more than an attempt to evaluate the other positions of the League has taken together with discussions with the significant number of mayors has taken place. In fact it has not. I'm also an advisory board member of the U.S. Conference of Mayors and in that capaicty we have discussed certainly issues that revolve around the problems of New York City, the problem New York City had in the sale of its bonds and municipal securities, the problem that New York City may have had that would impact on the sale of municipal securities in other cities and communities throughout this country and in those discussions the very reason why I read the policy statement was to emphasize the fact that the cities of this country have in fact adopted a policy that they do not want intrusion into the municipal bond market.
Senator WILLIAMS. When was this now? Are you talking about the League or the Conference right now?
Mr. CARVER. I'm sorry, Mr. Chairman. What was it?
Senator Williams. First, you said the league had not met on this issue and the U.S. conference had informally discussed this.
Mr. CARVER. Mr. Chairman, don't misunderstand me. I'm talking about the particular bill that's under discussion this morning, and I'm talking about that issue in a more specific sense. In the general sense, in Houston, the National League of Cities adopted a policy
that states the Federal Government should not submit the local government authority in its bond issuance procedures to the jurisdiction of the private security regulatory bodies, and that was adopted in Houston by the National League of Cities in its total convention.
Senator WILLIAMS. What page?
Senator WILLIAMS. What does that mean, "should not submit?” The Federal Government should not submit the local government authority in its bond issuance procedures to the jurisdiction of the private security regulatory bodies, what does that mean?
Mr. CARVER. I think more specifically, it's talking about the SEC, and if you will note in the sentence just in advance of that, it states that our position on the Tower amendment in the National League of Cities is it's strongly opposed to the regulation of State and local government issues by the SEC and then it goes on to embellish that by relating the policy statement that has been adopted by the National League of Cities in its convention.
Senator WILLIAMS. When was that meeting?
Mr. CARVER. The meeting was approximately a year ago, Mr. Chairman.
Senator WILLIAMS. I see, long before S. 2969 was fashioned into legislation and introduced. Really, this legislation, S. 2969, is more than an invitation to the States to do the job. It clearly says that when the States do, as North Carolina has done, and we have heard this through almost every witness, gear up to provide to investors just the rudiments of understanding what lies behind an issue, then any Federal guidelines would be unnecessary. You say in Illinois there is something germinating. What is it? Has the State legislature done anything with this?
Mr. CARVER. The State constitution, Mr. Chairman, adopted approximately 3 years ago mandated that there be uniform accounting procedures and reporting procedures for all units of local government.
Senator WILLIAMS. Now who is Mr. Carver. The State comptroller is charged with that responsibility.
Senator WILLIAMS. And could we have a copy of what he says are uniform standards! That would be helpful.
Mr. CARVER. I will see that such a thing is made available, Mr. Chairman, to the committee.
Senator' WILLIAMS. In other words, all municipals are now operating under uniform accounting standards?
Mr. CARVER. At this time they are not, Mr. Chairman, but that is mandated and that will have to occur.
Senator WILLIAMS. And that is all that we are asking. That is ultimately what we are asking for.
Mr. CARVER. Well, Mr. Chairman, in reading the bill, it suggests that the commission
Senator WILLIAMS. Before we come to that in the bill, if a municipality does not conform to the accounting standards, does that