owned agencies, including the Federal Land Banks, Banks for Cooperatives, Federal Intermediate Credit Banks, Federal Home Loan Banks (including the Federal Home Loan Mortgage Corporation), and the Federal National Mortgage Association. These five agencies issue by far the larger share of all "agency offerings" at the present time. Yet they are excluded from the bill. In explaining why these agencies should be exempt from the bill, Secretary Connally stated that the Government-sponsored agencies which are entirely privately owned and issue obligations which are not directly guaranteed by the Government should stand on their own feet in the market. Is this a distinction without a difference? Certainly the fact that these credit conduit agencies have private equity capital does not lessen their impact on the market, or the need to coordinate their offerings with other federal agency offerings. The Postal Service, like the agencies mentioned, is authorized to sell its obligations without a Government guarantee. Moreover, of all the Federal agencies the Postal Service stands by itself as being the most like a private business enterprise. In any event, it is clear that in enacting the Postal Reorganization Act Congress wanted the Postal Service to stand on its own feet to the maximum extent possible. Making the Postal Service's borrowing authority subject to Treasury and Federal Financing Bank control would be inconsistent with this concept. Having discussed at some length the practical and policy arguments supporting the position of the Postal Service that it should not be included within the terms of the proposed legislation, let me now call the Committee's attention to the position of the Postal Service that as a matter of legal interpretation S. 3001 as presently drafted would not apply to the Postal Service. We believe our position is sound and if the bill is enacted in its present form we intend to regard it as being inapplicable to the Postal Service. The basis for this interpretation is set forth in our formal report on the bill and if the Committee so wishes the legal arguments can be further explained by Counsel accompanying me today. In view, however, of the understandable caution exercised by financial institutions in large-scale lending transactions, the practical effect of the enactment of legislation such as S. 3001 might be to complicate the exercise of our right to borrow from the private money markets the funds needed to finance postal reform unless it is made clear by legislative history that the bill is not applicable to the Postal Service. Accordingly, we request that a specific statement be inserted in the Committee's report indicating that the bill is not intended to be applicable to the Postal Service. This concludes my prepared statement. Thank you Mr. Chairman. to Folios Offset Insert Here (Readers and Revisers Carry All Information-Prominently) During the course of the hearings on various financing bills which took place before your Committee on Thursday, May 18, 1972, a witness who appeared before the Postal Service witnesses was asked his views as to the application to the Postal Service of section 16 of S. 3001, a bill to establish a Federal Financing Bank. In response to this question, the witness, Mr. Frank Smeal of the Morgan Guaranty Trust Company of New York, gave highly favorable testimony from the Postal Service's point of view, in that he stated that in his opinion the Postal Service ought not to be covered by the provisions of the Federal Financing Bank legislation. We would like to take this opportunity, however, to state the Postal Service's views on the point of the application of section 16 to the Postal Service since we did not deal with that specific question in the testimony we presented to the Committee. As explained in the Postmaster General's report on the bill dated May 8, 1972, it is our opinion that the entire bill as drafted including section 16 -- does not apply to the Postal Service. Even if the Committee should decide to amend the bill to make it generally applicable to the Postal Service, section 16 of the bill would nevertheless continue not to be applicable to the Postal Service, since section 16, by its own terms, applies only to agencies involved in loan guarantee programs. Section 16 of the bill provides as follows: No Federal agency shall enter into any commitments In our opinion, it is clear that section 16 of the bill is related to the budget program review of agencies involved in guaranteeing the 2. obligations of others. In an apparent reference to section 16 of the bill, the Treasury Department, in its letter of transmittal, stated that the proposed legislation "provides for submission of budget plans for loan guarantee programs and for limitation by the President if overall fiscal requirements and credit demands so warrant." Since the Postal Service operates no "loan guarantee programs", this provision could not apply to the Postal Service, even if S. 3001 were generally applicable to the Postal Service. We hope that the additional views expressed above will be of assistance to the Committee in its consideration of S. 3001. Honorable John J. Sparkman Sincerely, Roger P. Craig Roger P. Craig Deputy General Counsel Senator PROXMIRE. Our next witness is Mr. Harvey Galper, senior staff research economist, Urban Institute. STATEMENT OF HARVEY GALPER, ECONOMIST, SENIOR RESEARCH STAFF, URBAN INSTITUTE Mr. GALPER. My name is Harvey Galper. Senator PROXMIRE. I might say to you, we would appreciate it if you can abbreviate your statement. Mr. GALPER. I am an economist on the Senior Research Staff on the Urban Institute here in Washington and my testimony will be based on research I have undertaken at the institute. My testimony will be primarily directed toward S. 3215, although I will make some references to S. 1699, the National Environmental Financing Act, and S. 1015, the Environmental Financing Act as well. First, let me discuss briefly the problems as I see them in the municipal bond market. Then, I will show how I believe the subsidy plan of the Municipal Capital Market Expansion Act will operate to help solve these problems. I will conclude with some comments on the desirability of using such a market-oriented approach as opposed to the administrative procedures of the Environmental Financing Acts. Let me begin by delineating the issues which I see confronting the State and local bond market at the present time. There are two broad problem areas which I believe are deserving of legislative attention. The first relates to the ability of State and local governments to raise significant volumes of capital funds both in the short term as well as in the long run to finance their new construction, especially in light of the demands being placed on governments at all levels to improve what may be broadly termed the quality of life. The second problem area is concerned with the nature of the subsidy provided to State and local governments by virtue of the tax exemption of the interest income of municipal bonds. Let me consider the second point first. Tax exemption when viewed as a subsidy to State and local governments is both inefficient and inequitable. It is inefficient in that the benefits of tax exemption to State and local governments as measured by their reduction in interest costs is considerably less than the costs to the Federal Government in terms of lost tax revenues. In testimony before the Housing Subcommittee of the House Banking and Currency Committee, I estimated that the stock of municipals outstanding as of yearend 1970 involved a tax loss of approximately $3.3 billion to the U.S. Treasury. Of this, about $2.5 billion-or 75 percent-is passed on the State and local governments in the form of lower net interest costs while $800 million, or 25 percent, represents a tax loss which does not benefit the issuing governments. Thus, tax exemption is in part a subsidy to State and local governments and in part a subsidy to private individuals and institutions. As a means of assisting States and localities, therefore, tax emption is seen to be an inefficient subsidy since the Federal Government is not getting full value for the revenues it loses. And then there are the equity considerations. Since the value of holding tax-exempt securities rises with higher tax brackets and |