during this period are $1,025 billion, while current revenue sources are expected to yield $763 billion.*

Of the alternative methods of closing this gap, sale of securities seems the least attractive, especially to smaller communities. Small cities not only must compete for funds against private borrowers (corporations and consumers) but also against larger, better rated municipalities. In order to attract investors, therefore, less populous cities, many of which are not rated by Moody's or Standard & Poor's, usually must offer their bonds at substantially higher rates of interest.

Under our profit system, a variation in corporate bond yields can be defended. However, it seems inequitable to the taxpayer of Coldwater, Ohio, to burden him with relatively higher interest costs merely because he happens to reside in a small community.

C. LACK OF CORRELATION BETWEEN TAX BASE AND FINANCIAL NEEDS

In 1962 over 90,000 local governmental units existed in the United States. This proliferation of tax jurisdictions has distorted the correlation between revenue-producing capabilities and revenue needs.

For example, the inheritance taxes collected each year by one wealthy Ohio suburb have enabled that community to enjoy the lowest property tax rate in the State. Another small town is blessed with the presence of a huge industrial plant whose property taxes proved more than enough funds to meet this city's needs.

By the same token, many other political subdivisions lack the high-yield base which factories or high-priced residences provide. The needs of the citizens residing in these areas, however, do not differ materially from those who live in high-tax-base communities. Each of us wants a good education for our children; reasonable protection of our person and property; paved streets; adequate sanitation and recreation facilities. Regrettably those whose_residences are in tax-poor districts are penalized in two ways. First, the quality of governmental services which they receive is substandard. They have poorer schools, ineffective police and fire protection, inadequate sanitation and recreation facilities. Second, in order to receive even this minimal level of service, they must bear a proportionately higher tax rate on their real property. This, in turn, crates a regressive tax structure.

III. RECOMMENDATIONS

What, if anything, can the Federal Government do to mitigate these municipal bond-financing problems?

The first constitutional and statutory legal restrictions-does not come within the purview of Federal authorities. Hopefully, State officials will undertake (and are gradually doing so) the elimination or reduction of the archaic limitations which needlessly handicap local finance directors in their bond-disposal efforts.

As a nation, however, we are concerned about the need for a more equitable tax structure, equality of educational opportunities,

• Ibid.

James A. Maxwell, "Financing State and Local Governments." The Brookings Institution, 1965.

and adequate protection for all of our citizens. Thus, it is in the national interest, it seems to me, to produce an alternative revenue source which would reduce the dependence of American cities upon bond financing.

The major objective of national policy in the area of local government should not be further Federal assumption, or partial assumption, of certain responsibilities presently ascribed to our communities. Rather, the goals should be to strengthen local governments so that they are capable of assuming the increased responsibilities which the public expects of them. One means of fulfilling this objective is through some type of Federal tax-sharing program.

A Federal tax-sharing plan would offer three positive advantages to our Nation's cities.

First, it would reduce the dependence upon bond financing. Local taxpayers, in smaller communities, especially, will be relatively less burdened with costs stemming from the payment of premium interest

rates.

Second, a portion of the total Federal tax rebate could be distributed on a need basis. This would provide material assistance to those who, because they reside in low tax yield communities, receive poor quality services.

Third, revenue sharing could effectively broaden local tax bases by providing an incentive to political subdivisions to establish and support certain services on an area wide basis.

Ultimate adoption of a Federal tax-sharing program, in my opinion, would strengthen both State and local governments so that they are better equipped to face the challenges of our time.

Mr. Chairman, I am pleased to be joined this morning by three distinguished representatives of the city of Dayton who are well versed in the intricacies of bond financing. I am certain the Dayton mayor, Dave Hall, city manager, Graham Watt, and finance director, Winton Parent in their testimony will make a significant contribution to your study.

Chairman PATMAN. Thank you very much, Congressman Whalen. We will be glad to hear now from Dave Hall, the mayor of Dayton, Ohio. You may proceed, sir, in your own way.

STATEMENT OF DAVE HALL, MAYOR OF DAYTON, OHIO; ACCOMPANIED BY GRAHAM WATT, CITY MANAGER, AND WINTON PARENT, FINANCE DIRECTOR

Mayor HALL. Gentlemen, my name is Dave Hall and I am mayor of the city of Dayton, Ohio. Dayton operates under the commissionmanager form of government as established by its charter since 1913.

We have been invited by the National League of Cities to appear before your committee to testify on the effect of bond ratings and bonding capabilities of Dayton. So that you may know our city better, let me note a few basic characteristics.

The population of the city of Dayton reported by the 1960 census was 262,332. The present population is estimated to be over 275,000. The Dayton standard metropolitan statistical area includes Montgomery, Miami, Green, and Preble Counties encompassing an area of 1,715 square miles and a population exceeding 874,000. Dayton has 800

industrial plants distributing over 1,000 products and is widely recognized for the impressive diversity of its industrial development. The retail sales volume in Dayton for 1966 was $539,606,000 and for the Dayton standard metropolitan statistical area, total retail sales volume amounted to $1,284,499,000. Dayton is recognized as a world leader in the production of many commodities such as refrigeration equipment, tools, business machines and computers-and as an international center in the precision industry. Wright-Patterson Air Force Base and the Defense Electronics Supply Center are two important Government installations located in our area with an employment of over 32,000, including 25,000 civilians, and an annual payroll of over $258 million. Dayton is engaged in five urban renewal projects, one of which comprises 750 acres and is one of the largest single urban renewal projects in the United States.

Pay-as-you-go funds, derived from a 1-percent municipal income tax and a real estate levy as provided by the city charter, are utilized to supplement bond funds for the financing of various projects in our capital improvement program. This program is projected for 5 years and encompasses major improvements such as parks and playgrounds, expressways, bridges, storm sewers, streets, and highways.

Dayton issues only general obligation bonds, both voted and unvoted, which are retired from property tax levies on a conservative 20-year repayment schedule. General obligation bonds also are issued for self-supporting utilities such as airport, water, and sewer facilities and, although the full faith and credit of the city is pledged, the bonds are actually retired from the revenues of each utility, thus relieving the burden on property taxpayers.

For many years Dayton has benefited from high ratings on its bond issues by the bond rating houses of Moody's Investors Service, Inc., and Standard & Poor's Corp. The rating of Dayton's bonds by Moody's was revised from BAA to A in December 1937. This rating remained in effect until November 1947 when it was improved to a rating of AA and then to the highest rating assigned by this firm of AAA in December 1953. This rating was reduced to AA for our bond sale of $5,050,000 March 13, 1963.

In connection with this 1963 sale, we requested advance ratings from both rating houses so that current ratings could be quoted in our bond prospectus to be mailed to various bond dealers, brokers, and investment firms. The lower rating first appeared in the Daily Bond Buyer of March 1, 1963, in its column, Calendar of Sealed Bid Openings. Although no notice was received from Moody's Investors Service, Inc., they later reviewed the new rating with Dayton officials. Moody's stated that "ratings are strictly an expression of opinion, and potentially there can be as many opinions regarding a specific bond issue as there are analysts who may have studied that issue." In response to our further request, we were told that there were no guidelines established to advise cities of specific actions to be taken to qualify for an improved rating. In effect, Dayton's rating was reduced as a matter of judgment and we could determine nothing about the basis for that judgment.

Dayton immediately conducted an investigation in an effort to determine the effect of this lower rating and we were informed that it probably would result in higher interest rates ranging from 5 to 10 basis

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points on bids for future bond issues. Assuming an increase of only 5 basis points, this would mean an increase in interest costs of $5,250 for each $1 million of bonds sold having equal annual maturities over a period of 20 years.

Standard & Poor's Corp. has rated all our bond issues AAA, the highest issued by this firm, since March 1961. Prior to that time they assigned a rating of AA to our bonds.

Although we usually have one bond sale each year, we have prepared the following tabulation of sales held immediately after changes in our bond ratings:

We do not profess to be expert in the matter of bond ratings nor the effect of those ratings in the municipal bond market. We believe judgment in this area can best be expressed by the dealers in municipal bonds. However, in preparing this statement for your committee, we have attempted to determine expert opinion about the effect of the change in our rating from AAA to AA, by canvassing some of the more important bidders for city of Dayton bonds, both in New York and in Dayton. In each case we were informed that the change had little or no effect upon their evaluation of city of Dayton bonds as they consider them to be prime rated. Their opinions are substantiated by the following tabulation of our bond sales during the past several years which shows the volume of syndicate bids received, peaking at 18 in 1965 for a relatively low effective interest rate of 3.03 percent:

Gentlemen, major cities throughout the United States are facing critical years ahead. As social problems develop, it becomes more difficult to secure public acceptance of essential tax increases and as interest rates rise your local officials will need all the help they can get. The strain on credit ratings and local debt capacity may be eased by the Federal Government assuming a greater share of the cost of programs that know no municipal boundaries-highway construction, air and water pollution control, public welfare, and airport construction are some of these areas. Such Federal aid programs should be financed

with advance grants-not reimbursements after the projects are paid for from local funds. This would eliminate the need for the city to lend its credit to finance the Federal share. Federal agencies should be authorized to withhold local income taxes from their employees as an aid to local governments and as a service to the government employees. And to a greater extent, perhaps, the Federal Government could guarantee payment of principal and interest on municipal bonds or establish an insurance fund against default as a means of increasing the attractiveness of municipal bonds and reducing the interest cost of local borrowing. Furthermore, the control of industrial aid financing may help to conserve available investor money for normal municipal borrowing, which would tend to hold down the interest cost of such debt.

To summarize, we agree with Standard & Poor's Corp., Dun & Bradstreet, and the dealers who bid on city of Dayton bonds that Dayton is a prime credit risk. We will continue our past practice of borrowing only what we need-when we need it. No city can stand still and survive. Dayton is growing and progressing. It is taking its place as one of the major cities in the United States.

May I present Mr. Graham Watt, Dayton city manager, to my left, and Mr. Parent, our finance director.

Chairman PATMAN. Do you gentlemen have statements?

Mr. WATT. No, sir. We do not. We are prepared to answer questions. Chairman PATMAN. Would you like to file a statement for the record? You may do so, if you desire.

I want to ask you about this tax sharing.

I just wonder, Congressman, if you have two States side by side, and one has levied taxes heavily-income taxes, sales taxes, every kind of ad valorem tax, for education, schools, highway, all modern public improvements and the State adjoining it we will say has practically the same sources of revenue but they have not gone out for taxes. They have no income tax, no sales tax, low on their ad valorem taxes. And they have not done as well as the neighboring State.

How would you evaluate the share each one received? Would you just give them indiscriminately the same proportion of the tax-sharing formula, or would you try to evaluate what they had done in the past and what they owed?

Reprsentative WHALEN. No; Mr. Chairman, I think that any taxsharing program would have to have structured into it some test which would determine effort. And I think that criteria would have to be spelled out. Quite obviously it would be unfair, as you have implied, to provide one State with the same tax rebate as another State which has put forth a greater effort at the State level to collect taxes.

Chairman PATMAN. I just wonder how difficult the job would be to properly and fairly evaluate the two situations. And, of course, it is increased somewhat by the number of States, 50 States.

How would you do that? Would you have a board, or would you have something similar to a court of justice? Or something like the Interstate Commerce Commission-I mean

Representative WHALEN. A number of suggestions have been made, Mr. Chairman. As you know, there are a number of bills which have been introduced in both bodies of Congress. I am not here to espouse any particular system. I am talking rather in general terms. But I would say, first, that it would be necessary to provide in the tax-sharing