ALPHABETICAL LIST OF WITNESSES Page Bailar, Benjamin F., Senior Assistant Postmaster General, Postal Service._ 259 84 257 84 Fortune, Peter, economist, Federal Reserve Bank of Boston__ Harkins, Peter B., executive director, Maryland Municipal League__ 283 170 84 84 191 84 84 Sellers, Wallace O., Merrill Lynch, Pierce, Fenner & Smith, Inc.. 84 84 Smeal, Frank P., executive vice president and treasurer, Morgan Guaranty 180 Snyder, Edward P., Director, Office of Debt Analysis, Department of the 1 Volcker, Paul A., Under Secretary for Monetary Affairs, Department of the Treasury. 1 ADDITIONAL STATEMENTS AND DATA Agriculture Department, letters from J. Phil Campbell, Under Secretary, on S. 1015 and S. 1699_ American Bankers Association, letter from Allen B. Stults, president__ Chiles, Lawton, U.S. Senator from the State of Florida, statement in support of S. 1699__. 68, 69 167 Comptroller General of the United States, letter regarding S. 1699-- Federal Reserve Board, letter from Arthur F. Burns, Chairman, Board of 186 Fortune, Peter, economist, Federal Reserve Bank of Boston, reprint of paper 203 Health, Education, and Welfare Department, letter from Elliott L. 72 Housing and Urban Development Department, letter from George 77 Interior Department, letter from John W. Larson, Assistant Secretary for 73 Joint Economic Committee, reprint of exerpts from hearings titled "Public 239 Magnuson, Warren G., U.S. Senator from the State of Washington: Morgan Guaranty Trust Co. of New York, statement of Frank E. Smeal, executive vice president__. 180 Page Municipal Finance Officers Association: Report of Special Study Committee on Federal Credit Assistance-- 135 .134 Municipal Finance Study group, statement of Edward F. Renshaw, 294 National Association of Counties, letter and policy statement received from Larry E. Naake, legislative representative_ 299 National Governors' Conference, letter and statement from Charles A. Byrley, office of Federal-State relations.. National League of Cities and National Conference of Mayors, statement of Peter B. Harkins, executive director, Maryland Municipal League. 283, 288 National League of Insured Savings, statement of Edwin G. Alexander, chairman, Committee on Federal Legislation_ 187 165 National Legislative Conference, intergovernmental relations committee, policy positions and final report_ 303 Nation's Cities, reprint of article from... 128 Office of Management and Budget, letter from Frank C. Carlucci, Associate 77 Securities Industry Association: Recent developments in marketing small and medium sized municipal Statement of William E. Simon, partner of Salomon Brothers, New Suggested amendment to the Federal Financing Bank Act.. Senate Public Works Committee: Letter from Senator Randolph. Reprint of report on S. 1015 State of Connecticut, letters from Robert I. Berdon, state treasurer. Letter from William F. Hellmuth, Jr., Deputy Assistant Secretary, to 122 84, 100 117 79 80 293 17 Letters from Samuel R. Pierce, Jr., General Counsel, on S. 1015 and Statement of Paul A. Volcker, Under Secretary for Monetary Affairs.__ Letter from Postmaster General E. T. Klassen, with views on S. 3001__ Statement of Senior Assistant Postmaster General Benjamin F. Urban Institute, statement of Harvey Galper, economist, senior research 1 75 275 257, 263 277 TABLES Benefits and costs of taxable bond option over three year period. Comparison of interest rates on municipal bonds of AAA and BAA ratings_ Estimates of average marginal tax rates of individuals who switch from 121 253 237 10 Federal costs arising from subsidy of guaranteed taxable municipal bonds__ FRB-BOS model estimates of welfare benefits of taxable bond option with 33 percent and 40 percent subsidy rates 255 232 Holdings of municipal securities by significant investor groups at end of 252 Impact of taxable bond option over 3 years following adoption under 33 percent and 40 percent subsidy rates, 1968 initial conditions___ Marginal tax rates for individuals who switch from tax exempts to taxable bonds with various subsidy rates 229 237 Net interest cost of municipal bonds sold in December 1967. 254 256 Page Prospective demand for municipal securities by investors classified by income tax bracket_. 254 Recent demand for tax exempt municipal securities, percent distribution by investor group. Ratio of new issue municipal to corporate bond yields. Share of taxable state-local bonds in total gross issues of state-local bonds Yields of U.S. Government insured merchant marine bonds compared to CHARTS Analysis of budget benefits of State-local governments due to taxable bond option.... 233 Analysis of welfare benefits of State-local governments due to taxable bond option... 233 FEDERAL FINANCING AUTHORITY MONDAY, MAY 15, 1972 U.S. SENATE, COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS, Washington, D.C. The committee met at 10 a.m., pursuant to call, in room 5302, New Senate Office Building, Senator Bob Packwood presiding. Senator PACKWOOD. The committee will come to order. Mr. Under Secretary, if you wish to start, we are on our way. STATEMENT OF PAUL A. VOLCKER, UNDER SECRETARY FOR MONETARY AFFAIRS, DEPARTMENT OF THE TREASURY, ACCOMPANIED BY EDWARD P. SNYDER, DIRECTOR, OFFICE OF DEBT ANALYSIS Mr. VOLCKER. The committee has asked for testimony on four bills this morning, Mr. Chairman. Therefore, I have a lengthy statement. I can proceed by reading it or however you would prefer. Senator PACKWOOD. I would prefer that you read it. I have not had a chance to read it. That way I can go with you as you are doing it. Mr. VOLCKER. Good. I am pleased to be here today to express the views of the administration on S. 1015, the Environmental Financing Act; S. 1699, the National Environmental Financing Act; S. 3001, the Federal Financing Bank Act; and S. 3215, the Municipal Capital Market Expansion Act. The administration strongly endorses S. 1015, the Environmental Financing Act. The bill would establish an Environmental Financing Authority known as EFA, which would make a significant contribution to our program for a better environment by facilitating the efforts of State and local governments to construct waste treatment facilities. EFA would purchase municipal waste treatment bonds which could not otherwise be sold on reasonable terms. To finance these purchases EFA would issue its own taxable securities in the market. EFA could not purchase any obligations unless the Administrator of the Environmental Protection Agency, one, has certified that the borrower is unable to obtain on reasonable terms sufficient credit to finance its actual needs, two, has approved the project as eligible for a waste treatment construction grant under the Federal Water Pollution Control Act, and three, has agreed to guarantee timely payment of principal and interest on the obligations. EFA was first proposed by the President and submitted to the Congress by the Secretary of the Treasury in February 1970. Hearings on the EFA proposal were held by the Senate Public Works Committee in 1970, and additional hearings were held in 1971 by both the Senate and House Public Works Committee. The House included the administration's EFA proposal as section 12 of the Federal Water Pollution Control Act Amendments of 1972 (H.R. 11896), which passed the House on March 29, 1972. We understand that EFA is now being considerea by the conferees on the overall Water Pollution Control Act Amendments, and we strongly urge that this committee recommend that the conferees adopt the EFA provisions passed by the House. The Senate-passed version of the Federal Water Pollution Control Act Amendments of 1972 does not include EFA, although in November 1971 the Senate Public Works Committee reported EFA favorably without amendment. EFA was referred in the Senate to both the Public Works and Banking Committees, and the Public Works Committee stated in its report that it recognizes that the financial expertise of the Banking Committee makes it appropriate for this committee to consider the advisability of the provisions in section 5 (b) of S. 1015, which requires the Administrator of the Environmental Protection Agency to certify that a public body applying for an EFA loan is unable to obtain on reasonable terms, sufficient credit to finance its actual needs. We understand that concern has been expressed that section 5 (b) is too broad, that some public bodies might be certified as eligible for an EFA loan even though they could borrow on their own in the market on "reasonable terms," that EFA would become a large bureaucracy, that it would undermine the tax-exempt bond market, and that it would be a threat to State and local independence. I would like to assure this committee of the clear intent of the administration, as indicated in S. 1015, that the purpose of EFA is simply to assure that no municipality in this country is denied the opportunity to sell its waste treatment construction bonds on reasonable terms. Without EFA, those communities that are unable to borrow the funds necessary to meet their share of construction costs will also be unable to comply with Federal water quality standards, and to qualify for the Federal grant program under which the Congress has authorized grants for 30 to 55 percent of the construction costs of liquid waste treatment facilities. EFA is designed to take care of this one specific problem-to remove an impediment to successful implementation of the water pollution control program already enacted by the Congress. EFA would not be authorized to do anything else. EFA could not become involved in a single municipal project that the Federal Government is not already involved in through the underlying grant program. No municipality would be required to borrow from EFA in order to get the Federal grant. Thus, EFA would in no way be a threat to State and local independence, and it certainly would not undermine the tax-exempt bond market. The demand for EFA loans would depend upon the interest rate at which EFA lends, and section 5 (d) of S. 1015 requires the Secretary |