can provide a powerful stimulus to new construction is further suggested by our Federal housing programs. OUR HOUSING PROGRAMS In fiscal 1973 the Federal government plans to make available to families with low and moderate incomes 608 thousand units of new housing through subsidies without Federal capital investment. The category, "subsidy without federal capital investment," includes programs under which the Federal government subsidizes a dwelling unit for which the basic capital financing is provided by private investors at market rates of interest. The programs in this category include lowrent public housing, rent supplements, rental housing assistance, and home-ownership assistance. There is a sense in which these programs may have been too successful, however. In the first quarter of 1972 new housing starts plus shipments of mobile homes, on a seasonally adjusted annualized basis, exceed three million units per year. This is equivalent to almost two new homes for every man, woman and child added to the U.S. population and not many children can afford to buy even a used home. Over production of rental units is already a serious problem in many parts of the United States.14 It should also be pointed out that the number of new households is only expected to increase at between 1.1 and 1.3 million units per year between now and 1975. With vacancy rates rising to very high levels in many areas it is not unreasonable to suppose that residential construction could decline by as much as one-third between now and 1975.15 That, of course, could have a deleterious feed back effect upon our entire economy if new policies are not devised to redirect a portion of the resources which are now employed in residential building to other worthwhile construction. In the last decade and a half there have been 6 years in which the total expenditure for new construction of all types (in current dollars) increased by 3.2 per cent or less. The average increase in real GNP during those six years (1957, 1958, 1960, 1961, 1967, and 1970) was an unsatisfactory 1.1 per cent. In each of these years residential construction was in the doldrums and the increase in state-local construction insufficient to provide a dynamic increase in total spending. While the Federal government could sponsor a variety of programs to shift resources which are now employed in residential building to the public sector, there are dangers and inequities in a piece-meal approach to public facility expansion. A particularized approach to new construction needs could quickly lead to serious distortions, like too many hospital beds,16 and would not be fair to those communities that have already made substantial progress at, say, cleaning up their own environment but may lack other facilities which do not have as much Congressional appeal. A 50 per cent direct interest subsidy for all kinds of public facilities that are financed with taxable municipal bonds would, in my judgment, be a far more equitable and effective way to stimulate a revival of state-local construction activity and help to insure that 1973 and 1974 will not be years of disappointing growth in economic activity. Aside from the possibility that a 50-percent subsidy would be largely "selffinancing" in the sense that it would cost the U.S. Treasury little in the way of additional outlays that would not be offset by increased taxes there is an even more impelling reason for endeavoring to shift the focus of national stabilization policy from greater deficits at the Federal level to greater borrowing by states and local governments. On a dollar-per-dollar basis new construction financed by an increase in state-local debt is probably far more effective in increasing income and employment than an increase in the Federal debt. Most of the increase in the U.S. debt in the past two years has been for current operations or for welfare expenditures which transfer purchasing power from 14 "An Apartment Glut Hits Some Cities," Business Week, Apr. 15, 1972, p. 88. 15 Edward F. Renshaw, "The Demand for Housing in the Mid-1970's" Land Economics, August 1971, pp. 249-255; reprinted in Housing 1970-1971, edited by George Sternlieb for the AMS Press, 1972. 16 Too many hospital beds can be particularly costly since doctors and hospital administrators can, to some extent, increase the number of patients to fill the available beds. See Max Shain and Milton J. Roemer, "Hospital Costs Relate to the Supply of Beds," Modern Hospital, April 1959, pp. 71-73. one group to another without increasing national wealth. New construction financed by an increase in state-local debt boosts total production immediately, provides roughly the same amount of additional income to stimulate private spending and consumption and can also be expected to provide useful services to the public in general for many years in the future. Hon. JOHN SPARKMAN, NATIONAL ASSOCIATION OF COUNTIES, Chairman, Committee on Banking, Housing and Urban Affairs, DEAR MR. CHAIRMAN: We would like, with your consent, to take this opportunity to submit a statement for your Committee records on proposed legislation being considered by your Committee to assist state and local governments in their capital financing needs. We certainly appreciate the concern shown by your Committee in holding hearings on these measures and the apparent desire of the Banking, Housing and Urban Affairs Committee to assist the states, counties, and municipalities in meeting their growing capital financing needs. We all, I think, are concerned that the market for tax-exempt bonds may not be broad enough to take care of the increased requirements that are anticipated in the future for a variety of state and local government construction needs. There are a number of different approaches that have been suggested to solve the apparent problem. This is certainly indicated by the multitude of bills which have been introduced in the 92nd Congress to establish "banks" which would assist state and local governments either on a specific grant-in-aid program approach or for more general purposes. After much soul searching and investigation, the National Association of Counties has determined that the proposals which would establish federal banks, either of specific or general nature, are not in the best interests of the local governments or the future of the municipal bond market. We do agree that the municipal bond market should be expanded, but that any legislation which would have an impact on this market should adhere to the following criteria: 1. Any credit assistance program should be automatically applicable to all legitimate state and local borrowing. 2. Such assistance should not be subject to elaborate administrative procedures. 3. Access of state and local governments to the existing tax-exempt market should not be impaired. As is apparent, then, the National Association of Counties does not support three of the four proposals before your Committee which would establish a National Environmental Bank (S. 1699), a Federal Financing Bank (S. 3001), and an Environmental Financing Authority (S. 1015). Essentially, we oppose these approaches because they could diminish local autonomy and home rule; distort local spending decisions; establish further federal bureaucracies that might cause delays in local capital improvements; and proliferate federal "banks" to parallel the existing categorical grant-in-aid system. One of the major goals that should be a part of any federal legislation should be to strengthen our counties and cities throughout the United States. Such strength will make them less dependent on the federal government and bureaucracy for both decision making and specific, narrow, categorical financial assistance. The establishment of federal banks, however, aborts that goal by placing the decisions about financing local capital improvements in a federal agency. This would occur because the establishment of a federal bank would jeopardize the existing municipal bond market. It would offer financing to counties and cities at the same rate they pay now or at a reduced rate. Local governments would most likely fund more and more of their local projects through the federal bank. In the short run this would probably be advantageous to local governments, but in the long run it could ruin the existing municipal bond market. At any rate local governments would become more and more dependent upon the federal bank. This would require, because of a limited number of dollars to lend, that federal banks would have to set priorities to determine which bond 78-443 0-72- -20 programs should be funded. Such decisions might be completely divorced from what in reality are local needs and priorities. On the other side of the coin, the establishment of federal banks on a categoryby-category basis would distort local spending decisions. As you are aware, many local governments now initiate local programs and construction projects merely on the basis of the accessibility to federal funding programs at any given point in time. This approach does not always reflect local priorities and needs-a county may build a library because there are federal funds available, when in fact they need a park for which there are no federal fund available. At the same time these federal banks are diminishing local autonomy and distorting local spending decisions, we would be establishing further federal bureaucracies causing delays and confusion for local governments. One has only to look at the existing federal grant-in-aid programs to see that there has been a history of growth in rules, regulations, requirements, guidelines, and other bureaucratic "red tape" which create roadblocks to carrying out services to local citizens. Finally, we fear very strongly that there will be a proliferation of specific and individual federal financing authorities for many of the existing grant-in-aid programs. We find this prospect to be terrifying. These then are our objections to those proposals which would establish federal financing banks. NACO does, however, support federal legislation which would broaden and strengthen the bond market for state and local governments. In developing our NACO policy on Capital Financing, our members went on record supporting federal legislation which would: 1. Compensate private or public pension funds if they purchase tax-exempt bonds from state and local governments. 2. Allow regulated open end mutual investments funds which invest their money in state and local government tax-exempt bonds to pass this federal taxexemption on to their shareholders. We believe that this would help tremendously in expanding both the alternatives and the market for local bonds. We do not have a policy which would support Senator Proxmire's proposal, the "Municipal Capital Market Expansion Act" (S. 3215). We will, however, be seriously considering this approach during our annual conference in late June of this year. However, Senator Proxmire's does certainly meet most of the criteria that we set forth in our policy statement. It appears to have many of the advantages that the private and public pension funds and the open end mutual investment fund approaches contain. And, it is certainly much more preferable to the federal bank approaches. We certainly appreciate this opportunity to present the views of county governments throughout the United States to your Committee. We will transmit any new policy positions to you as they become available. We would also be most pleased to work with you or your Committee staff in developing and detailing a workable program to assist state and local governments in meeting their growing capital needs. Respectively submitted. LARRY E. NAAKE, Legislative Representative. NACO POLICY ON CAPITAL FINANCE-AS APPROVED BY THE NACO Board of DIRECTORS The National Association of Counties emphasizes the need to retain and strengthen the tax-exempt bond market as a source for the capital needs of state and local governments. The Association also recognizes the need to broaden the bond market to meet the growing requirements for capital construction at the state and local level. We, therefore, recommend that Congress adhere to the following criteria when considering any legislation which would have an impact on the municipal bond market: 1. Any credit assistance program should be automatically applicable to all legitimate state and local borrowing. 2. Such assistance should not be subject to elaborate administrative procedures. 3. Access of state and local governments to the existing tax exempt market should not be impaired. We further recognize the need to expand the access of state and local governments to the bond market. We do not, however, believe that the various proposals to establish a national development bank (the so-called Urbank) are the proper vehicles for expanding the market. We do, on the other hand, support federal legislation which would: 1. Compensate private or public pension funds if they purchase tax exempt bonds from state and local governments. 2. Allow regulated open end mutual investment funds which invest their money in state and local government tax exempt bonds to pass this federal tax exemption on to their shareholders. Finally, the National Association of Counties supports measures which would improve the existing statutes relating to the issuance of tax exempt bonds by state and local government. |