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directly or indirectly, state and local issuers through the Security Exchange Commission. While we understand that the intent of S. 2969 is to minimize the role of the SEC and to avoid “the formalities, administrative delays and costs of full registration,” the language of the legislation does not support the stated. intent. For example:
Section 13A (a) (1) states that annual reports must be prepared in accordance with such rules and regulations as the SEC may prescribe."
Section 13A (a) (2) subparagraph J states that issuers shall be audited by an independent public or certified accountant in “such a manner as the Commission may prescribe."
Section 13A (b) (1) requires an issuer selling securities exceeding $5,000,000 to prepare a distribution statement "in accordance with such rules and regulations as the Commission may prescribe.”
Section 134 (d) grants the Commission authority to change the minimum dollar amount that determines which issuers must comply with the reporting and disclosure standards.
Section 13 A (f) (3) gives the Commission authority to contract for the establishment of a central repository to receive and maintain all reports. All such reports would be required to be filed in "accordance with such rules and regulations as the Commission finds are necessary or appropriate in the public interest."
I submit to the Committee that the discretionary authority granted to the SEC under S. 2969 is tantamount to registration with the Commission. The nation's cities cannot support such an approash.
I would like to return for a moment to the remarks which accompanied the introduction of S. 2969. In those remarks the original reasons for public issuers being exempt from the Securities Acts of 1933 and 1934 were discussed. The statement identified three such reasons.
1. The rare instance of misrepresentation by municipalities.
2. The costs of SEC regulation that would be imposed upon state and local government.
3. Sophistication by the investment community that permitted them to protect their own interests.
During the past 40 years, a great deal of change has occurred in the municipal bond market. However, we believe that the three basic reasons for exempting public issuers in 1933-1934 are valid today. To those who support SEC regulatory authority being extended to state and local government, we must ask the following questions. If recurring misrepresentation of financial information has occurred, why has the SEC failed to prosecute the offenders under the anti-fraud provision of the original Securities Act? Are cities so affluent today that the cost of regulation by the SEC is no longer a troublesome issue? Have the underwriters of municipal bonds lost their ability to discriminate between a good and poor investment risk?
In addition, we must respectfully take issue with the Chairman's statement that the historical concern that SEC regulation would increase costs to state and local government has been superseded by a potentially more serious concern-"the erosion of investor confidence." I can assure this Committee that the imposition of federal regulations and their associated costs are just as objectionable today as they were 40 years ago.
In analyzing the merits of the proposed legislation, the cost factors to cities must not be overlooked. Over the years, the federal government, by executive, legislative and judicial action, has mandated numerous requirements and responsibilities for local government without providing the necessary financial resources to meet these added responsibilities. These requirements have often had a negative and severe impact upon local budgets. It is clear that the trend is toward more frequent and costly government regulations. The impact of this increased federal involvement in local budgets must be clearly understood if the current urban financial situation is to be well managed.
Fiscal responsibility requires that the full costs of governmental programs and regulations be publicly known. It is seldom that a federal agency concerns itself with the cost effects of its decisions on state and local budgets. I see little evidence that the SEC, which contains no local government representation and is primarily oriented towards the corporate security industry, would prove more sensitive to cost-impact than other federal agencies. Analyzing the cost of federal reporting and disclosure standards must therefore rest with the Congress. Before proceeding, this Committee must attempt to ascertain the costs to state and local government that the various legislative alternatives would impose. Only then can the alleged benefits of federal involvement in municipal bond financing be accurately assessed.
Given the conditions in the municipal bond market during 1975, a great deal of concern has been expressed regarding investor confidence. This issue appears to be at the core of the debate surrounding the adequacy of current reporting and disclosure practices. All of us must be concerned about the sudden rise in interest rates in the municipal bond market which occurred during the past year. In October, the 20 Bonds Index of medium grade securities reached a record-high of 7.67 percent. Clearly, the New York City crisis and its “ripple effect" was one reason for these unprecedented rates. But our analysis leads us to the conclusion that other factors were also involved ; factors such as the withdrawal of commercial banks from the market, the "crowding" in the market caused by sharp increases in pollution control bonds, and the general rise in interest rates associated with the nation's fiscal and monetary policies.
II lack of investor confidence continues to be a critical issue in the bond market, then we should expect a continuation of record interest rates. However, since October 2, the 20 Bonds Index has declined by 72 basis points, with the February 11 figure standing at 6.95 percent. The current rates reveal that, with some exceptions, municipalities have had little trouble in issuing their securities at significantly lower interest rates. Today, investor fear of default appears to be minimal. Confidence has returned to the market-a confidence that has dominated the municipal bond market for the past 30 years. The statistics speak for themselves. From 1945-1974 approximately $500 million in municipal debt has gone into default. This represents only 0.42 percent of outstanding municipal debt at the end of 1974. This figure is even further reduced when the permanent loss to the investor is measured. It is estimated that from 1945-1965 that less than $10 million or 1/10,000 of outstanding municipal debt at the end of 1965 was permanently defaulted.
The facts clearly show that the investor in municipal securities runs very little risk of losing his or her investment. Are we not potentially getting ourselves into a position of overkill as a result of the reaction to the New York situation which, Mr. Chairman, you yourself have described as being atypical?
Members of this Committee surely realize that no city official freely chooses to pay higher interest rates. If providing more detailed financial information is a prerequisite to continued investor confidence, I can assure you that the necessary information will be forthcoming. The National League of Cities and U.S. Conference of Mayors fully support the current drive within the bond market to insure complete and accurate financial disclosure. We are extremely pleased with the initiatives taken by the Municipal Finance Officers' Association in developing their Financial Disclosure Guidelines. Later this morning you will have the opportunity to discuss this initiative with them. We believe that these voluntary guidelines should be given the opportunity to work before federal intervention is seriously contemplated by the federal government. The responsibility is now upon us to provide complete and accurate financial data. I firmly believe that the higher standards of financial disclosure being demanded by the investment community will be voluntarily met.
Senator WILLIAMS. Mr. Flaherty.
STATEMENT OF JIM FLAHERTY, CHAIRMAN, ALLEGHENY COUNTY
BOARD OF COMMISSIONERS FOR THE NATIONAL ASSOCIATION OF COUNTIES; ACCOMPANIED BY ALICEANN FRITSCHLER
Mr. FLAHERTY. I'm Jim Flaherty, Chairman of the Board of County Commissioners of Allegheny County, and I thank you for the invitation to be here today representing the National Association of Counties (Naco) to discuss the proposals before your subcommittee regarding disclosure requirements for issuers of municipal securities. I am accompanied by Aliceann Fritschler, the deputy director for Federal Affairs for the National Association of Counties.
I serve as chairman for tax policy on the Naco taxation and finance steering committee, which will be meeting at the end of March to consider our position regarding the specific legislation before your subcommittee. Today I want to discuss with you some general principles regarding disclosure by State, county, and city issuers. Also, I would like to share with you the results of a recent bond sale by Allegheny County which I think the subcommittee will find particularly interesting. We believe that by disclosing additional information the county was able to attract more bidders and save approximately $2 million.
As you may know, there are 3,101 counties in the United States but Allegheny County is the ninth largest serving 1.6 million people, one-third of whom live in the city of Pittsburgh. I, myself, have been in office less than 60 days.
After I was in office only 3 weeks, I was faced with the prospect of opening bids for county general obligation bonds with only one firm interested in bidding. I was advised at that time that the customary sparse four-page bond prospectus—which we provided as exhibit No. 1—for $27 million worth of bonds was insufficient. Based on that original prospectus, which disclosed very little financial information about Allegheny County, the different bidders had individually requested additional data by telephone for 2 weeks prior to the intended bid opening. After consultation with bond counsel and review of recent Municipal Finance Officers Association disclosure guidelines, the Allegheny County Commissioners decided to delay the opening of bids for 2 weeks in order to resolve the lack of information situation.
Up to this time the previous Board of Commissioners had depended solely on maintaining a high bond rating with the bond rating firms and did very little to improve financial disclosure. The county comptroller and members of my staff went to New York City and met with representatives and municipal bond analysts from 10 major municipal bond bidders. Upon their return, the county developed a “full disclosure" prospectus for official statement which was expanded from the 4-page statement to 24 pages of information which has been provided to you as exhibit No. 2, and which is based on the published disclosure guidelines of the MFOA which was done on a voluntary basis.
I am happy to relate to you that as a result of these efforts, Allegheny County received four bids from four independent municipal bond syndicates at an interest rate more favorable than a previous interest rate received by Allegheny County 4 years before. We have calculated that by delaying the opening bids for 2 weeks along with preparing a full disclosure statement, my county saves approximately $2 million over the 30-year life of the bonds offered. This anecdote is intended to demonstrate before this subcommittee that local governments can respond effectively to the requirements of full disclosure and remain financially solvent.
We realize that the proposals being made regarding fuller disclosure are a direct result of the financial problems of New York City. Although the problems of New York City have had an impact on some cities and counties' abilities to borrow funds at a reasonable rate, not all governments have been affected or found it more difficult to borrow. In fact, some issuers have found it easier to borrow because their credit ratings were excellent.
The National Association of Counties strongly supported Federal assistance for New York City on an emergency basis because our members felt that the city's problems were so severe and unique that a Federal guarantee was needed for taxable bonds issued by that city.
However, our recent experience in Allegheny County seems to show that the bond market has settled down and that by fully disclosing all pertinent information investors will be available for higher quality municipal issues. We believe it is important that the Congress not overreact to the New York City situation and impose a great many requirements and reports on all States, counties and cities—the majority of whom are still able to borrow funds at fair rates.
Although strict regulation and registration on a national basis is required of corporate issuers in the private sector, we do not believe that such regulation is required for State, county, and city issners. The specter of paperwork, redtape and its attendant costs which would be imposed on States, counties, and cities hy such registration is not appealing. The right of local self-determination is certainly a fundamental part of our American system. National Association of Counties American county platform states that national action should be reserved for residual participation where State and local governments are not fully adequate and for the continuing responsibilities that only the national government can undertake. I might point out to you that back in July the National Association of Counties had their annual meeting and passed as part of its basic statement of philosophy and policy the following statement:
Leave to private initiative all the functions that citizens can perform privately. Use the level of government closest to the community for all public functions it can handle. Utilize cooperative intergovernmental agreements where appropriate to attain economical performance and popular approval. Reserve national action for residual participation where State and local governments are not fully adequate and for the continuing responsibilities that only the national government can undertake.
Mr. FLAHERTY. We do not believe that there is a need for Federal regulation of State and local issuers at this time. We believe that counties, cities, and States should be free to develop their own operating policies in all programs not financed wholly or substantially by Federal or State funds, providing that these policies are set forth in writing.
The Steering Committee of which I'm a part met 2 weeks ago. In fact, it met on the day our county's bond issue results came in. So we have met recently on this matter and on this philosophy and what you are now being presented is a statement of the National Association of Counties and that Steering Committee. We intend to meet again in March to prepare a broader statement and to take a further position on all of the legislation. My function was to reveal to them the Allegheny County experience that full disclosure is beneficial, that it can be done voluntarily, that there isn't a need for the Federal Government to enter into another area. In fact, in our State, I actually think that we may be exempt from your regulation. We have a local debt limit act and under our local government debt limit act we have to receive State approval before we can borrow any money because there are certain requirements that we have to meet based on our tax position and our revenue position over the past 5 years on a formula basis. But I still think
5 that this is not an area in which there is a need for Federal intervention and I think that is supported by the position of the National Association of Counties.
[Complete statement follows:]
STATEMENT BY JIM FLAHERTY, CHAIRMAN OF THE BOARD OF COUNTY
COMMISSIONERS, OF ALLEGHENY COUNTY PENNSYLVANIA Mr. Chairman, I am Jim Flaherty, Chairman of the Board of County Commissioners of Allegheny County, Pennsylvania. I am pleased to be here today representing the National Association of Counties (NACO) to discuss the proposals before the Subcommittee regarding disclosure requirements for issuers of municipal securities. I am accompanied by Aliceann Fritschler, Deputy Director of Federal Affairs for the National Association of Counties.
I would like to thank the Chairman and Senator Tower for being willing to discuss their proposals with state, county and city officials who are so vitally affected by them.
I serve as Chairman for Tax Policy on the NACo Taxation and Finance Steering Committee, which will be meeting at the end of March to consider our position regarding the specific legislation before your subcommittee. Today I want to discuss with you some general principles regarding disclosure by state, county and city issuers. Also, I would like to share with you the results of a recent bond sale by Allegheny County which I think the Subcommittee will find particularly interesting. We believe that by disclosing additional information the County was able to attract more bidders and save approximately $2 million.
After only three weeks as Chairman of the Board of Commissioners of Allegheny County, I was faced with the prospect of opening bids for county general obligation bonds with only one firm interested in bidding. I was advised at that time that the customary sparce four-page prospectus (which we provided as Exhibit 1) for $27 million worth of bonds was insufficient. Based on that original prospectus, which disclosed very little financial information about Allegheny County, the different bidders had individually requested additional data by telephone for two weeks prior to the intended bid opening. After consultation with bond counsel and review of recent Municipal Finance Officers Association disclosure guidelines, the Allegheny County Commissioners decided to delay the opening of bids for two weeks in order to resolve the lack of information situation.
Up to this time the previous Board of Commissioners had depended solely on maintaining a high bond rating with the bond rating firms and did very little to improve financial disclosure. The County controller and members of my staff went to New York City and met with representatives and municipal bond analysts from ten major municipal bond bidders. Upon their return, the County developed a “full disclosure” prospectus for official statement which was expanded to 24 pages of information (provided as Exhibit 2) based on the published disclosure guidelines of the MFOA.
I am happy to relate to you that as a result of these efforts, Allegheny County received four bids from four independent municipal bond syndicates at