Third, the subsidized taxable bond creates no institution, with its own staff, procedures, and objectives. The federal banks do. There is no question that a subsidized taxable bond is less expensive from this standpoint and easier to operate and more efficient per dollar of assistance given to state and local borrowers. Economy of scale must be weighed against their loss of control. Fourth, to the extent the bank is controlled by the Treasury; the timing of its security issues would also undoubtedly come under Treasury influence. This could mean that the timing of state and local borrowing would be governed, not by market conditions or state and local needs, but by the fiscal needs of the U.S. Treasury. For example, during a period of tight money when the federal government is also a heavy borrower, the Treasury might very well restrain the bank from issuing securities in order to hold down the rate on direct Treasury obligations. This in turn would result in fewer loans to state and local governments for public facilities. Under the subsidized bond approach, the decision to borrow would be left strictly up to each local community. The Task Force also found that taxable bonds will open up the existing municipal bond market so that those municipalities with no credit rating or a low credit rating can have a better opportunity to secure capital financing at a lower interest cost. While this is a partial solution to the problem of cities that have no or low credit ratings, it is perhaps not the final answer. The Task Force intends to study and research this matter further and propose new National Municipal policy, if necessary, aimed at curing the problem. FEDERAL BANKS WOULD HELP FINANCE PUBLIC WORKS Many bills have been introduced in the 92nd Congress which would establish federal banks to aid in the financing of public works projects by state and local governments. Here is a brief description of the major proposals now pending on Capitol Hill : National Domestic Development Bank (S. 1958): The bank would provide an alternative source of credit to state and local governments for the purpose of financing public and quasi-public facilities of all types. Lending rates would be comparable to that of municipal bonds. Loans would also be available to businesses for economic development in designated areas. The bank would provide state and local government technical assistance in the planning of projects, coordination of other funding sources, and the integration of current federal programs with the overall development plans of the community. Finally, the bank would help protect the environment by guaranteeing that funded projects do not adversely affect it. Consolidated Farm and Rural Development Act (S. 2223): This act would expand the authority of the U.S. Department of Agriculture to provide credit for public and private borrowers unable to obtain credit from commercial sources at reasonable rates, to carry out rural development purposes. The Farmers House Administration's lending authority would be expanded to include all communities with a population of less than 35,000. Three agencies would be created and placed under a Federal Rural Development Board. First, 10 Regional Credit Banks would be created to finance rural development projects through cooperating financial institutions. These banks would issue their own taxable debt to cover their loans. A second agency would make or guarantee loans to cities or states for any rural development project through the regional banks. The third agency would subsidize interest payments for any rural borrower paying more than a comparable urban borrower. Rural Development Bank (S. 742) The bank could make or guarantee loans or provide other financing to public and private entities to establish, expand, or preserve any industrial or commercial facility or a supporting public or prvate development in a rural area if other public or private financing could not be obtained on reasonable terms. The Environmental Financing Authority (S. 1015): The authority would have a five-member board and would be authorized to purchase municipal obligations issued to finance liquid waste treatment public works projects. The authority, working with the Environmental Protection Agency, would: (1) certify that the issuer was unable to secure sufficient credit on reasonable terms to finance his actual needs; (2) approve the project under the Federal Water Pollution Act; and (3) agree to guarantee payment of interest and obligations. To raise the capital to purchase municipal bonds, the Authority could issue its own obligations. Coastal Zone Management (S. 638 and S. 582): The Secretary of Commerce would be authorized to enter into agreements with coastal states to guarantee bonds for the purpose of land acquisition, land and water development, and restoration projects. National Development Bank (S. 580 and H.R. 3550): The Bank may make or guarantee loans or purchase obligations to provide funds: (1) To purchase real property and to furnish working capital for new or existing businesses and industries in depressed urban or rural areas provided the borrowers meet certain conditions; (2) To finance capital expenditure for public works and community facilities provided they make a direct and substantial benefit to such depressed areas; and (3) May make or guarantee loans to public or private entities to provide dwellings under the Insured and Guaranteed Low and Moderate Housing Income Loan Programs of the federal agencies. Direct loans to state and local governments, other public agencies, and private entities may be made at a effective interest rate at 6 per cent or the federal reserve discount rate, whichever is lower. National Environmental Bank (S. 1699): The National Environmental Bank would be authorized to issue U.S. Environmental Savings Bonds and to establish an Environmental Trust Fund. The bank would also have a capital stock of $500 million to be subscribed by the Treasury. Outstanding obligations could not exceed 20 times the paid-in capital stock. The bank could make or guarantee loans to local public bodies to finance environmental programs (air, water, solid waste, noise, and other programs). Interest rates could not exceed 3 per cent. The CHAIRMAN. Now, we have Mr. Daniel B. Goldberg, Municipal Finance Officers Association of New York. Mr. Goldberg, we are glad to have you. We have your prepared statement. It will be printed in full in the record. You may present it as you see fit. STATEMENT OF DANIEL B. GOLDBERG, COUNSEL, MUNICIPAL FINANCE OFFICERS ASSOCIATION, NEW YORK Mr. GOLDBERG. Thank you, Mr. Chairman. May I then just hit the high spots of this orally? The CHAIRMAN. Yes, present it as you wish. It will be printed in its entirety in the record (see p. 155). Mr. GOLDBERG. The Municipal Finance Officers Association, or MFOA, is composed of the directors of finance, the treasurers and other fiscal officers of local governments of this Nation. They are in the frontline of marketing the obligations of these governments and in selecting the marketing processes and attempt to minimize the cost of borrowing. No other group is more intimately involved in the subject matter of the present hearings. Now, this March the MFOA executive board approved a special study committee report on Broadening the Municipal Bond Market, which expressly evaluates the kinds of programs which the bills before you would enact. I would like, Mr. Chairman, with permission, to include this brief report in full in the record. If so, I can get more copies down to the committee shortly. The CHAIRMAN. Very well, sir. (The complete text of the document follows:) BROADENING THE MUNICIPAL BOND MARKET A Report of the MFOA Special Study Committee on Federal Credit Assistance Preface During the past decade, financial problems of state and local governments have escalated in complexity and intensity. This is particularly evident for capital improvement financing. More than $145 billion state and local bond's were outstanding at the close of 1970 and nearly $25 billion were marketed in 1971. Capital financing requirements will continue at or above current record breaking levels, with possibly more disrupting effects on the capital market than in the past. Strains placed on the capital market, as presently structured, point to the need to broaden the market for state and local bonds. The Environment for Study pur Many bills are now pending in Congress to establish programs to lend money to municipal governments by purchasing their bonds. Some programs would be limited to loans for particular high priority poses. Some are unrestricted as to purpose of the authorized loans. All are limited as to the available capital to be loaned and would be administered by Federal officials. Almost all of the bills provide that the loans are to be made at interest rates equivalent to what would prevail if the bonds were sold as tax exempt, but each pro gram would set the actual rate to be paid. These programs were proposed to raise money by the public sale of taxable bonds, the addition of a Federal guarantee to the municipal bonds purchased and permission for their resale as taxable bonds. In each case it is proposed that Congress appropriate the nual losses to be incurred lending to local governments at tax exempt interest rates and buying from the public at higher taxable rates. an by Officials of the U. S. Treasury, and others, support this approach in particular cases by claiming: (1) local governments are beginning to "scrape the bottom of the barrel" of capital available in the tax exempt market at reasonable rates and therefore need access, indirectly, to the taxable market; (2) tax exemption is becoming less "efficient," i.e., local governments are getting less and less for the exemption and the per condra investors are demanding, and getting, tax exempt interest rates which are a growing percentage of what the equivalent tax rate would be; (3) it would cost the Treasury nothing to make up the interest lost because it would recover the apparent losses out of the tax on interest paid on taxable bonds sold to raise the money to buy the municipal bonds. Although these claims by officials of Treasury and others are difficult to prove by facts and statistics, the MFOA Liaison Committee, meeting in New York during the Annual Conference of the Association, suggested a review of these programs and general problems involving the present tax exempt market. A special committee made up of members of the MFOA Committee on Local Government Fiscal Policy and Liaison Committee in consultation with members and staff of the Investment Bankers Association of America, was appointed to make the study. The Special Committee met in Hartford, Connecticut, on August 12, 1971. In reviewing the many Federal proposals, members of the Committee found there were major defects in each, the most important being the increased danger of Federal control and loss of basic local determination and decision making authority. As a result of its study, the Special Committee recommended the following program which it hopes will correct deficiencies in the present local government debt system by expansion of the traditional bond market and provide local government officials with the preferable alternative to that market should the need for such flexibility arise. Expansion of the Traditional Following are suggestions made by the Special Committee to expand the present tax exempt bond market so as to meet the future needs of local government and to assure that it continues as the primary market. A. Pass-through of tax exemption by mutual funds. While underwriters have developed a highly efficient mechanism for selling municipal bonds to commercial banks and other large institutional investors, individual investors in high and middle tax brackets with A regular mutual fund would have several advantages over the previously established "unit trusts" which are now used to market municipal securities to small investors. (1) Underwriting risk would be avoided; monies could simply be collected from investors and then invested on the most advantageous terms. (2) The principal from maturing bond issues could be automatically reinvested in new issues by the mutual fund's management. Since the fund would not be required to go out of business as its assets matured, the initial sales charge would only need to be paid once. (3) Automatic reinvestment of maturing principal plus the right to issue new shares of the same fund means that the size of the fund could be increased time and become more, instead of less economical to manage. over New shares in an old fund, moreover, could be promoted on the basis of past performance. This is important because there is reason to believe that a mutual fund could be managed So as to achieve a higher yield than a unit trust. The securities in a unit trust must be held until maturity or until the trust is dissolved; they cannot be replaced with longer lived and less seasoned securities with higher yields. Inability to replace means that the shares in a unit trust will gradually become more liquid and less suitable for long-term investors. The securities in a mutual fund, on the other hand, could be rolled over from time to time to take advantage of market "seasoning" and an upward sloping yield to maturity curve. This should enable the fund's management to both increase the cumulative return on the fund and preserve its investment characteristics. Recognizing that there is a need to provide a more convenient and efficient mechanism, for marketing municipal bonds to individual investors, the Municipal Finance officers Association, at its 65th Annual Conference, went on record as favoring changes in our tax laws which would permit mutual funds to invest in tax exempt bonds and have the interest on such investments flow through to security holders without taxation of dividends received. B. U.S. Government Trust Funds Various trust funds which are administered by the Federal Government now hold approximately 100 billion dollars of United States government securities. The benefits to be paid from these funds are, in most instances, quite independent of the earnings on the assets in the trust.2 By permitting some of these funds to invest a portion of their portfolio in municipals of fairly long maturity, Congress could reduce the amount of appropriations that will eventually be necessary to provide payments to trust beneficiaries in the future that have already been agreed upon. Since tax-free yields on longterm municipals are higher than the yields on special issues of U.S. |