The market for municipal securities which are tax exempt, has, at least in recent years, been primarily confined to commercial banks which acquire about two-thirds of the municipal securities issued. Since, during periods of tight credit, Federal Reserve credit policy focuses upon commercial bank reserves causing these banks to curtail their purchases of municipal securities, such securities are particularly affected by cyclical changes in the market. The bill is intended, in part, to eliminate these constraints upon the municipal securities market by encouraging the use of instruments that will be attractive to a broader range of investors. The sponsors of the measure assert that the bill will not only improve and stabilize the market for municipal securities but also will result in a net tax return to the Treasury that will more than offset the subsidy. This, it is asserted, will occur because the average current tax bracket of municipal bondholders is estimated at 42 percent while the subsidy will only be 33 percent. The overall objectives of S. 3215 are laudable and a stable municipal bond market is a worthwhile goal. However, we think there are a number of important questions which should be considered before the Congress acts on a bill of this magnitude. Among these are the following: Is it clear that the interest subsidy provided in the bill will in fact be sufficient to make the contemplated new taxable obligations in the established tax exempt market? What are the problems of steps that might be taken, such as adding a Federal guarantee, to assure competitiveness? -Is the projection that the Treasury will receive greater tax receipts than it will pay out in subsidies accurate? If the measure succeeds in attracting new investors "in lower income brackets" will the assumptions supporting the estimate remain sound? Further, if there is no "profit" to Treasury, what cost should the Federal Government be willing to pay for improving the stability and efficiency of the municipal securities market? If there is a cost, to what extent would that argue for greater selectivity in the projects assisted? -To what extent could the bill, if successful, operate to encourage the continuation of marginal, inefficient, overlapping special units of government? -To what extent may the effectiveness of the bill in helping solve State and local credit problems be limited because of the economy's accelerating need for long term capital over the next decade? In the face of accelerating demands, will the price of money on the taxable market often not discourage State and local borrowing notwithstanding the access to that market which the bill is designed to provide? -What impact is the bill likely to have upon our success in meeting other necessary capital requirements, such as those for housing? Are there limits to the degree to which the Federal Government can undertake to shelter varying and competing interests in the private capital market and, if so, does the new Federal intervention involved in the bill approach or pass those limits? Because of the need for further consideration of questions such as these, we do not, at this time, recommend enactment of the bill. The Office of Management and Budget has advised that there is no objection to the presentation of this report from the standpoint of the Administration's program. Sincerely, GEORGE ROMNEY. Senator PACKWOOD. We will meet again on Wednesday morning at 10 o'clock. (Whereupon, at 11:10 a.m., the hearing was adjourned, to reconvene on Wednesday, May 17, 1972, at 10 a.m.) FEDERAL FINANCING AUTHORITY WEDNESDAY, MAY 17, 1972 UNITED STATES SENATE, COMMITTEE ON BANKING, HOUSING AND URBAN AFFAIRS, Washington, D.C. The committee met at 10:07, pursuant to call, in room 5302, New Senate Office Building, Senator John Sparkman (chairman) presiding. Present: Senators Sparkman and Brock. The CHAIRMAN. Let the committee come to order, please. I expect other Senators in, but the Senate is in session; I don't know how soon we may have to leave to vote. We are meeting today, continuing the hearings that were started on Monday to receive testimony on the following bills: S. 1015, to establish an Environmental Financing Authority to assist in the financing of waste treatment facilities; S. 1699, to establish a National Environmental Bank; S. 3001, to establish a Federal Financing Bank; and S. 3215, to expand the market for municipal securities. We have received a letter from Chairman Randolph of the Senate Public Works Committee, enclosing a copy of that committee's report on S. 1015. We will include the letter and the report in the record at this point. (The letter and the report are as follows:) Hon. JOHN SPARKMAN, UNITED STATES SENATE, COMMITTEE ON PUBLIC WORKS, Washington, D.C., May 17, 1972. Chairman, Committee on Banking, Housing and Urban Affairs, U.S. Senate, Washington, D.C. DEAR MR. CHAIRMAN: Thank you for your letter of May 10, 1972, regarding hearings scheduled by the Committee on Banking, Housing and Urban Affairs on S. 1015, a bill to establish an Environmental Financing Authority. As you know, the Senate Committee on Public Works reported S. 1015 for rereferral to your committee. Enclosed is the report filed by our committee at that time. Although the members of the Committee on Public Works will not be able to participate in your hearings, I would appreciate the inclusion of the text of the attached report in your hearing record. Thank you again for bringing these hearings to the attention of the Committee on Public Works. With kind personal regards, I am, Truly, JENNINGS RANDOLPH, Chairman. Mr. COOPER, from the Committee on Public Works, REPORT [To accompany S. 1015] The Committee on Public Works, to which was referred the bill (S. 1015), the Environmental Financing Act of 1971, having considered the same, reports favorably thereon without amendment for referral to the Committee on Banking, Housing, and Urban Affairs. COMMITTEE ACTION Senate bill 1015, the Environmental Financing Act of 1971, introduced by the senior Senator from Kentucky (Mr. Cooper) and others, was jointly referred to the Committee on Public Works and the Committee on Banking, Housing, and Urban Affairs. The Subcommittee on Air and Water Pollution received testimony on the proposed legislation in the second session of the 91st Congress, when the bill then bore the designation S. 3468. Additional testimony was taken on S. 1015 during hearings held earlier this year. (Parts 3 and 5 of the 1970 hearing record contain testimony and additional materials relating to S. 3468, and part 2 of the 1971 hearing record includes testimony on S. 1015.) PURPOSE The Environmental Financing Authority, or EFA, is intended to contribute to the general program for improving the quality of our waters by facilitating the efforts of State and local governments to construct waste treatment facilities. Environmental Financing Authority would purchase municipal waste treatment bonds which could not otherwise be sold on reasonable terms. To finance these purchases the Environmental Financing Authority would issue its own securities in the market. S. 1015 should assure that no municipality in this country is denied the opportunity to sell its bonds for the construction of waste treatment plants. SUMMARY In order to comply with water quality requirements pursuant to the Federal Water Pollution Control Act, as amended, a massive investment in public facilities for the treatment of municipal and other wastes is underway. Section 8 of existing law (33 U.S.C. 466) provides Federal grant assistance to municipalities and other public bodies for the construction of waste treatment facilities, in amounts ranging from 30 to 55 percent of total project cost, the actual share in each case depending upon the satisfaction of certain requirements set out in the statute. The non-Federal share of the project cost must be borne by the local and/or State governments involved. The local government share of the project cost is, in virtually all cases, raised through the sale of debentures. On November 2, 1971 the Senate approved, by a vote of 86 to 0, a bill, S. 2770, which, among others, would amend section 8 of the Federal Water Pollution Control Act. The amendment would provide up to 70 percent Federal-State financing with any remaining percentage of the total needed will be borne by the local jurisdiction. The total waste treatment program would be expanded so that more Federal funds would be available. In addition, more stringent water pollution controls will be applied to municipalities. Consequently, an Environmental Financing Authority could be an important element in the national effort to restore the quality to our Nation's waters. S. 1015 anticipates instances in which certain local governments will be "unable to obtain on reasonable terms sufficient credit to finance" their share of waste treatment facility construction cost. The bill would provide that where such conditions are found to exist the Environmental Financing Authority would purchase the obligation of such a public body. The Committee on Public Works has been unable to determine to its own satisfaction the extent to which the problem anticipated by S. 1015 will occur. But the committee does believe that it is an appropriate function for the Federal Government to serve, in effect, as a borrower of last resort if instances do arise where obligations for this purpose are, in fact, unsalable on reasonable terms. Therefore, even though the Committee on Public Works is uncertain as to how the EFA mechanism will be needed, the committee believes that it could be a useful tool if the circumstances anticipated by it do occur. What reservations the Committee on Public Works does have with respect to S. 1015 lie in section 5(b) of the bill, which provides that no purchase of obligations by the EFA would be made until three determinations had been made by the Administrator of the Environmental Protection Agency: (1) that the public body is unable to obtain on reasonable terms sufficient credit to finance its actual needs; (2) that the project in question is eligible for Federal grant assistance under the Federal Water Pollution Control Act; and (3) that the Environmental Protection Agency will guarantee timely payment of principal and interest on the obligations to be purchased by the EFA. The committee questions whether it is appropriate to vest in the administration of the EPA the discretionary authority to make often complex determinations about the credit of a given public body and the salability of its obligations. The committee, however, recognizes S. Rept. 92-424 |