Senator PROXMIRE. Why would you have lesser saving on the part of government?

Mr. GALPER. Because government saving can be defined in terms of their tax revenues minus their current expenditures. If their current revenues go up, there would be an increase in government saving. There would be some offsetting factor on private saving. In any event, I don't think the saving impacts in terms of national aggregates of such a plan as this is likely to be large. I think what is involved, for the most part

Senator PROXMIRE. I am not so disturbed it might not be large, I would agree with that, we estimate it is around a billion dollars, which isn't large when you consider savings of $50 billion a year which is about 8 percent of the personal income, something like that.

But you say there may not be any saving at all. It would be workout to washout.

Mr. GALPER. I think it might even be negative.

Senator PROXMIRE. Would you say the problem of cyclical instability in the municipal bond market tends to increase the costs of municipal outlays?

Mr. GALPER. It is hard to say on average. You have higher interest rates in some periods and lower ones in other periods. I think the great disadvantage of the cyclical instability is not so much the increased cost, but the increased difficulty in financial planning.

Senator PROXMIRE. When you move resources into and out of an industry, doesn't that add to cost?

Mr. GALPER. I think that that is right. From that point of view, I think that is correct. That is, you have an uncertain set of supply conditions for the facilities which these State and local governments try to erect. From that point of view, they are likely to have higher

costs.

Senator PROXMIRE. So, this would be another benefit?

Mr. GALPER. I would think so.

Senator PROXMIRE. Do you think this bill requires more study?
Mr. GALPER. No; I would be ready to support this bill.

Senator PROXMIRE. You think it does not?

Mr. GALPER. I don't think it requires more study.

Senator PROXMIRE. Thank you very, very much. You are most helpful. Your fine work has been referred to by previous witnesses. I am sure you must have appreciated that.

Our last witness is Mr. Peter Harkins. Mr. Harkins is executive director of the Maryland Municipal League and he represents the National League of Cities and the National Conference of Mayors. We are honored to have you here, Mr. Harkins. I apologize for the late hour. I know you are hungry and I am, and I have a luncheon to go to. I have had a chance to look at your statement. The entire statement will be printed in full in the record. You handle it in any way you wish (see p. 288).

STATEMENT OF PETER B. HARKINS, EXECUTIVE DIRECTOR, MARYLAND MUNICIPAL LEAGUE, REPRESENTING NATIONAL LEAGUE OF CITIES AND NATIONAL CONFERENCE OF MAYORS

Mr. HARKINS. In one way I am glad that I am last on the list, because I was preceded by three very expert witnesses, and the institu

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tions that they represent contributed substantially in terms of knowledge and their studies to the decisions and the policies that I will relate to you today.

I am Peter B. Harkins, the executive director of the Maryland Municipal League, and as you indicated, I am testifying on behalf of the National League of Cities and the U.S. Conference of Mayors.

These two organizations represent the municipalities of America who, along with the State and other local government units, have a vital stake in the four bills that you are considering today. The marketability of our municipal bonds and the future of most of our capital financing projects will be directly affected by the decisions that this committee will make.

For this reason, we are hopeful that any action you take will enhance the intergovernmental fiscal system's ability to provide additional credit to municipalities, and I might also note at a cost that will be bearable by the taxpayers.

Because the municipal bond market provides cities with the resources for the major portion of their capital financing our two organizations have undertaken a continuing and long-term study of the municipal bond market, its problems and its needs for improvement where we find them necessary.

Our general findings over the course of these studies indicate that the present municipal bond market must be broadened in order to provide both adequate capital for future State and local government needs, but moreover at a cost that will remain well within the bearable limits of governmental finance and the limits that the taxpayers are demanding from their elected officials.

We have reached this conclusion after a rather thorough analysis. I think perhaps that the policy decision that their conclusions lead to will in many ways surprise Members of Congress and others, particularly in light of the more traditional position that we have taken on legislation in the past.

S. 3215, which is the principal bill before your committee this morning, would in fact broaden the market for municipal securities in what we feel is a most positive way. The bill provides that the Federal Treasury would subsidize interest payments on municipal bonds which are sold as taxable securities.

Most importantly, of course, it gives the issuing government the ability to make the decision as to whether or not it will in fact go to the taxable or the tax-exempt market.

The interest subsidy is at the rate of 3313 percent of the total taxable interest rate. The advantages that we find in this proposal are threefold, and we consider them rather substantial.

First, the bill would open up a new market for the bonds of cities to which we do not now have access. No longer would the financial institutions having vast amounts of resources, such as retirement funds I might note especially State and local retirement funds-and other tax-exempt organizations, life insurance companies and so forth, be discouraged from investing in municipal securities.

With the additional Federal interest payment, municipal obligations might well be competitive with other investment opportunities providing similar rates of return for this class of investors. As a result, not only is a new market opened, for cities to sell their bonds in, but, assuming a number of cities elect to utilize the interest payments, the

mounting pressures on the tax-exempt municipal market itself will be relieved.

Second, the city—and I mentioned this earlier-under S. 3215 retains the right to make the decision whether to issue a taxable or taxexempt bond. For the Nation's cities, this feature is key to this proposal. We would vigorously oppose any measure which would mandate the issuance of taxable bonds. Cities must maintain the option of issuing either taxable or tax-exempt bonds if any degree of fiscal independence is to be retained locally.

I think that very point along, Mr. Chairman, has underlined the position that we have taken in the past on legislation and has provided the framework for looking at these securities in addition to the other factors that Mr. Galper just suggested. And that is indeed why we are interested in maintaining what we feel is at least the same degree of fiscal independence that we enjoy by utilization of the tax exempt market, which is completely free of any inter-governmental influence. Third, this program avoids many of the pitfalls and problems that we find inherent in other proposals, such as the various environmental banks which are discussed later in the statement.

As to the proposal itself, we have some suggestions which we feel might improve it. Let me also state at this time that not all of our members have had an opportunity to completely review the proposal, and consequently, we, of course, would like to have the opportunity to offer additional recommendations in the future.

First, we believe as the other witnesses have stated, that the subsidy rate of 3313 percent is not adequate. After our initial review of this proposal, we have concluded that the interest payments should be set at a level of at least 40 percent. We do not feel that the 333-percent rate would be adequate to induce or attract enough cities to utilize the Federal interest payment program.

We believe that a higher rate would also help relieve the congestion in the market. A 3313-percent rate, by not attracting enough users, would not.

Mr. Morris, I think, stated in his testimony, of course, that a 40percent rate would indeed syphon off a higher proportion of new issues into the taxable market under normal circumstances. For the remaining issuers, who for policy-and I underscore that term policy— or fiscal reasons seek capital in the traditional or conventional market, we would anticipate easier going, including lower interest rates, as pressure or demand for credit abates.

This again is assuming that we have a 40-percent rate and that we would have the additional inducement that 40 percent rate offers. Second, we believe that all State and local government obligations should be eligible for the interest payments under this program. S. 3215, specifies that industrial revenue bonds are excluded, and by the bill's reference to section 103 (c) (2) of the Internal Revenue Code, means by that certain types of antipollution, mass transit, and other so-called legal, if you will-in quotation marks-industrial development bonds are excluded.

I would hope that your intention would not be to go quite as broadly as the bill is now worded in that area, although we would certainly

agree that the conventional type of industrial development bond probably ought to be excluded.

Senator PROXMIRE. Could I interrupt you at this point?

As I say, I have read your statement carefully, and I will be happy to study it further. The whole statement will go into the record. Let me interrupt you at this point and ask you some questions. Mr. HARKINS. Fine. I think you have sensed from what I have said so far that we support your proposal.

Senator PROXMIRE. Yes; I have read it.

Mr. HARKINS. I think anything else in this statement certainly could go into the record.

Senator PROXMIRE. First, it has been suggested that subsidy payments provided under S. 3215, be made discretionary on the part of the Treasury rather than mandatory. What would be your view of the legislation if this change were made?

Mr. HARKINS. I think it would be a negative one.
Senator PROXMIRE. You would be against that?
Mr. HARKINS. I would be against it.

One of the beauties of this proposal (and its simplicity) is that it has a mandatory feature. It assures the users of the program that if they make the decision, the vital decision, to switch to the taxable market that there will be no further questioning on the part of any other governmental agency in terms of this decision.

Senator PROXMIRE. So, No. 1, you would be against changing the present provisions, whether it is 40 or 50 or 33, to the voluntary, but if it were changed to giving the Secretary of the Treasury the volition to set it at whatever level he wanted, would you oppose the legislation? Mr. HARKINS. I think it would have a very serious impact on the acceptability of the legislation; yes.

Senator PROXMIRE. You would probably be opposed?

Mr. HARKINS. I think we would have to oppose it under those circumstances.

Senator PROXMIRE. You indicate in your statement that S. 3215, with your recommended changes is supported by the Conference of Mayors and by a task force of the National League of Cities.

I don't want to put you on the spot, but I am going to put you on the spot anyway: Could you estimate the likelihood that the taxable bond alternative will be endorsed by the National League of Cities at their next meeting?

Mr. HARKINS. I can from the standpoint of serving on the National League of Cities board of directors and on the revenue and finance committee which has been studying these proposals.

The revenue and finance committee has already endorsed, generally, a proposal which is similar to S. 3215. I think their endorsement will almost be perfunctory.

I also feel the board of directors has now come to understand this proposal sufficiently well enough that when they meet to take final action in September, they will endorse it.

Senator PROXMIRE. Would you favor a recommendation to the Federal financing bank legislation, S. 3001, which would make it volun

tary on the part of the Federal credit programs to finance issues with the Federal financing bank?

Mr. HARKINS. I think I would.

One of the objections we have had to FFD was the ability of that bank to control credit, Senator, to control the flow of credit. This is a point that is objectionable to us. It represents one more possible impediment that can be introduced into the smooth flow of local projects. I can think of an example right now in my own State of Maryland. The city of College Park has been deeply involved in urban renewal now for a number of years, and to use a popular curent term, their proposals have been "continuously recycled" by HUD through the demand for more studies and so forth.

The city has already invested a significant amount of its own time and money, and I do envision that one day HUD and the city are going to get together and they are going to be able to move ahead.

Now, if the city were to then be in the position that they were going to the market for urban renewal capital beyond what they have already obtained and FFD were in the picture and held them up even further, not only would there be a psychological impact, in many instances this type of delay could seriously jeopardize the successful conclusion of the project.

Senator PROXMIRE. That is a good example.

Mr. HARKINS. I think you have interpreted our remarks on FFD accurately in suggesting that we would have to agree with the voluntary approach as opposed to the present approach in the bill.

Senator PROXMIRE. Would you favor an amendment to section 7 of S. 3001, to place a statutory limit on the length of time the Secretary of the Treasury could postpone agency borrowing?

Mr. HARKINS. I guess much of that would be dependent-it would seem to be inconsistent with what I have just said: That there be any kind of

Senator PROXMIRE. Not a bit. It is not voluntary, so there would be a limit, it seemed to me it would fit right into your example of College Park.

Mr. HARKINS. I suspect the answer would have to be dependent on the kind of limitation that you are suggesting here.

Senator PROXMIRE. Well, on the length of time, in other words, the Secretary could postpone borrowing. One psychological difficulty is, is it going to stay in there for weeks or for months, and if there is a limit on the length of time he could postpone it, then you wouldn't object to that; would you-maybe 30 days, whatever it is?

I don't know what would be reasonable.

Mr. HARKINS. In terms of the way you have just described it, the answer would be yes.

Senator PROXMIRE. As I read the legislation, the Secretary of the Treasury could even direct FHA or VA to reduce the volume of FHA or VA mortgages being guaranteed or insured.

First, do you agree with this interpretation, and, if so, do you think it is proper for the Secretary of the Treasury to have this authority? Mr. HARKINS. I think your interpretation is accurate. I am not certain, though, about the policy, whether I agree with the policy conclusion that the Secretary of the Treasury should have this.

In one sense, it is probably from his point of view a good type of