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Mr. SCOTT. Mr. Chairman, I have a copy of a publication on all debt that the Ohio Municipal Advisory Council produces annually that I would like to leave with the committee.

Chairman PATMAN. Yes, it will be useful to us. We would like to have it. Do you have some copies of it?

Mr. SCOTT. I have one copy here. I can supply as many copies as you need by mail.

Chairman PATMAN. That will be fine. We will place in the record the parts we feel would be the most appropriate.

You may present your statement now, Mr. Scott.

(Material referred to is retained in the files of the subcommittee.) Mr. SCOTT. Chairman Patman, Mr. Proxmire, and gentlemen, I am presently the director of the Ohio Municipal Advisory Council as of 2 weeks ago, which is a nonprofit organization organized by the bond dealers and investment manager concerns, organized in 1931. My previous experience has been as finance director of the city of Cuyahoga Falls, a city of 50,000, for 10 years. I am a past president of the Ohio Municipal Finance Officers Association, and I am presently a city

councilman on the local level.

Generally speaking, municipalities in the State of Ohio are experiencing very little difficulty in the issuance of their obligations. It has been a long time since a properly presented bond issue has gone by the boards for want of a buyer. Most cities receive on the average of from five to 10 bids for their obligations. This excellent history of bond sales has been the dividends derived by the issuing subdivisions of Ohio for several reasons.

One, Ohio is a rich, industrial and growing State and so are most of its subdivisions. Two, the statutes allow Ohio municipalities to issue up to 6 percent par interest-bearing obligations-not limited to 4 or 5 percent as I understand cities in some other States are. Three, the State legislature has periodically taken a realistic view of debt limitations. By realistic, I mean they have not permitted an excessive amount of bonds to be issued by any subdivision, thus watering the quality of the bonds and yet they have taken the attitude that as costs rise and new facilities are needed by expanding communities, then an increase in debt limitations is also needed. Four, the permission of both the State constitution and the State statutes to issue mortgage and nonmortgage revenue bonds; and, five, having within the State statutes a uniform bond law making mandatory among other things, an approving opinion usually bond counsels on all bonds sold in the public market. We are also fortunate in the State of Ohio in having some highly respected firms in this field.

All of these factors, I believe, allow Ohio issuers flexibility in types of obligations to be issued thus allowing imagination and foresight to enter into the world of finance. The major problem of Ohio cities today is not so much capital moneys as it is in operating


This is not to say that it will always be this way. There are problems facing Ohio cities in the not too distant future that will certainly affect credit ratings and their ability to sell in the open market. The

old law of supply and demand takes hold in the money market just as it does in any other market and is one of the major problems I see on the horizon for smaller cities and cities of lesser credit ratings. The continuing increase in supply of municipal bonds is raising interest costs today and will make it more difficult for lesser credit cities and villages to find buyers for their obligations. The basic new supply of bonds marketed in Ohio are the tax-free industrial revenue bonds: $115 million worth of these bonds have been issued in the State of Ohio since May 1 of this year and there are pending at present between $25 and $30 million additional sales to be consummated within this month.

This means that in the first year, industrial revenue financing in the State of Ohio has amounted to $140 million and has been issued by only 24 subdivisions. Compare this figure to the total amount of aÏl other types of revenue financing (including universities) of $59,500,000 for the same period. Bonds voted by all subdivisions in the State of Ohio at our recent November election only amounted to $143,888,700. Certainly, these figures show the impact on the supply by this type of bond within the State of Ohio.

At the recent Investment Bankers Association meeting held in Miami Beach, it was estimated that this type of bond has raised the cost of local government borrowing on full-faith-and-credit bonds by about one-fourth of 1 percent and has raised the cost of other local government borrowing to perhaps twice as much. It is estimated that if this type of financing continues at an annual supply of $4 billion or more, nationwide, the already increased cost could conceivably be tripled. Certainly, we have all heard the pros and cons of this type of financing and we all understand that some cities may benefit but other cities will lose, and in my opinion, all cities in the long run will lose and especially those of lesser credit ratings first by higher interest costs on all of their obligations and second by perhaps losing the tax-exempt status of municipals. What investor will want to buy a bond of small community in the State of Ohio when he can buy a 412 percent tax-free industrial revenue bond of Middletown? Or in other words, Armco Steel.

Another one of the areas that I see rapidly pushing Ohio cities in their debt limitations is the fact that the cost of construction is increasing more rapidly than the valuations of the issuing subdivisions. In the State of Ohio all of the debt limitations (of which there are three), are imposed upon Ohio cities and villages based upon assessed valuations. In my own hometown of Cuyahoga Falls, construction costs have risen 15 to 20 percent in the past year while the valuation of our city has increased only about 1 percent. Thus, our debt limitations have not grown at an equal pace to the rising costs of construction.

Along the same line, the type of improvements that cities find themselves constructing today are air and water pollution facilities, sewage disposal facilities, water treatment facilities and so forth. This type of construction, very much needed, is, however, expensive. So here again we are facing our debt limitations. Certainly, the interest costs which approached the 6-percent level last year and are on the rise again, will preclude many lesser credits from issuance of their obligations unless somehow this trend is reversed.

In Ohio we are fortunate to have the 6-percent limitation on the coupon rate for the issuance of bonds. I understand that there are States where this rate has been set at 5 and even 4 percent. In these

States I can see where they have problems today in selling in a market where the average yield on a triple "A" rated bond is about 4 percent and "AA" or lesser bonds are over 4 percent, more nearly 4.5 percent.

There are areas at present in the State of Ohio where some subdivisions are finding it difficult to finance needed improvements. Although I have made no study as to all cities and/or villages faced with this problem. I can cite one example within rich and industrial Cuyahoga County. This is Westlake City with a population of 14,500 an area of 16.5 square miles, an assessed valuation of $54 million, existing debt of only $463,000, but with a need for trunk and main interceptor sewers that are estimated to cost $12 to $16 million. This cost is equal to 30 percent of the city's present total assessed valuation.

Some other communities have for years, as a matter of course, dumped raw sewage into the local river. Recent State law passed during the last session of the legislature prohibits this type of dumping and so these cities will of necessity be faced with a terrific problem of constructing sewage disposal systems. It is quite conceivable that due to the low tax valuation of these cities, they will be unable to issue (due to limitations imposed by the statutes) general obligations bonds.

They may also be unable to issue revenue bonds due to the low population, the high cost of construction, and exorbitant public utility rates; therefore, these cities must of necessity look to the State and/or Federal Government for aid. Here, too, lies a credit problem, one of importance to large cities and extremely important to small ones. Federal and State grants given to municipalities on a reimbursable basis is causing at present and will continue to cause, unless rules or laws are changed, much dilemma on the parts of the municipalities. There are several cities in the State of Ohio, which are building new airport facilities along with the Federal Government on a reimbursement basis. The city awards contracts for the full cost of the improvement but only finances its portion of the cost. Cities now term this type of financing "net financing."

If they would finance the total costs of the project they would then, in fact, be paying interest on the Federal Government's share or, in other words, be loaning their limited city credit to the Federal Government. As the construction progresses and the city pays under its contract to the construction company, it periodically sends documents to the Federal Government for reimbursement.

If there is any lag in either the city's supplying their reimbursement forms or in the Federal Government's payments, it is quite possible the city finds itself without funds to pay the contractor, or it may of necessity have to overdraft the fund, thus using treasury funds or moneys of other city agencies to offset the overdraft.

Smaller cities with less overall moneys will find this situation impossible. Larger cities like Cincinnati find it most difficult. I hope that in the not too distant future some method of reimbursement based on estimates with the Federal Government withholding 10 or 15 percent until after audit can be arrived at. In actuality, through this procedure of reimbursement to the local government, the local government is lending its money or credit to the Federal Government and I do not believe this was the reasoning behind these original Federal Government grants.

This briefly discusses some of the problems faced by the cities in the State of Ohio in issuing their bonds. You asked in your letter that 1 also remark on the importance of bond ratings on the borrowing costs of municipalities in our State. Bond rating certainly plays a major role in setting interest costs; however, almost two-thirds of all issuing subdivisions in Ohio are unrated by the major rating firms. As of January 1 of this year, there were 1,595 taxing subdivisions with outstanding debt of one class or another. Of these subdivisions, only 420 were rated by Standard & Poor and 507 by Moody. Standard & Poor has set a $1 million minimum per each class of debt for rating purposes. Moody's minimum for this same purpose is $600,000.

This is due primarily to the almost impossible job of rating every bond issue in the United States and the fact that there is no widespread interest in the smaller issues. Of those Ohio bonds rated by Moody, all but 5 or 99 percent are in the upper four classes and 78 percent of all Ohio bonds rated by Moody's are rated "A" or above; 100 percent of all bonds rated in Ohio by Standard & Poor are in the upper four classes and 75 percent of these bonds are "A" rated or above.

To my knowledge, other than the four major cities reduced in ratings, only one smaller subdivision and its school district were reduced in recent years and they are the city and school district of Coshocton, Ohio. The rating was reduced from an "AA" to "A" by Moody.

I cannot tell you just what effect this reduction has had on the issuance of their obligation. Certainly it has had some, but to describe it in a dollar and cents figure is virtually impossible. I have tried to compare their sales of 1964 with the market in the State of Ohio at that time along with their later sales compared to the same market and I can come to no concrete decision.

The brokers inform me that in today's market the difference between ratings is at least one-eighth of 1 percent which amounts to $1.25 per $1,000 outstanding per year in added interest costs. In checking some of the major cities that have had their interest rates dropped, I find that it hurt them to some extent but that they themselves cannot put an exact amount to this reduction.

The circumstances on a bond issue of the same community sold at different times are very seldom comparable. The city of Cincinnati believes after their studies that the drop in rating cost them someplace between 5 and 10 basis points, or not quite one-eighth of 1 percent. If the change between rating is one-eighth of 1 percent or $1.25 per $1,000 per year, then the total increased cost of issuance to any city would depend upon the number of bonds issued and the length of the time they are outstanding. On a $1 million, 20-year issue, interest cost would increase $13,000 to $14,000 over the life of the bonds with a one-rating drop.

Bond ratings alone do not set the price bid or the coupon rate. The length of debt, the maturity schedule, the frequency of issuance, the availability of supply of all bonds, and the number of sales on that particular day all have a bearing on the price bid. There are over 1,000 subdivisions in the State of Ohio alone with outstanding debt that are unrated by any major rating firm and yet they are able to sell their securities at interest rates favorable with the rated security.

We in our firm like to feel that we play a major role in finding buyers for these unrated securities by putting the available facts and figures before most of the municipal dealers in Ohio. In checking with these bond dealers we find that they rely quite heavily upon the information supplied by our firm in the bidding of unrated bonds.

We also find that the major rating companies use the information provided by us to help set the ratings on all bonds in Ohio. There are only five other firms to my knowledge in the United States performing this same service. Certainly smaller communities in those States without similar agencies must of necessity present a better prospectus and more information to prospective bond dealers than the unrated municipalities of the State of Ohio.

In conclusion, bonds ratings are not the major problem facing Ohio subdivisions. Their problems are ones of increased supply of municipal securities, the increased interest rates partially caused by this supply, the ever-rising costs of construction, the entering into new fields of improvements such as urban renewal and pollution problems, and the never-ending plague of inadequate operating revenues. Chairman PATMAN. Thank you, sir.

Senator Proxmire, you are recognized to ask any questions you desire to ask.

Senator PROXMIRE. I would like to ask both Dr. Miller and Mr. Scott-because both you gentlemen put emphasis on this in your statements to document a little bit further your contention that the tax exemption for publicly issued municipal bonds used by private corporations has a perverse or adverse effect on the ability of municipalities to borrow. And I think Mr. Scott said in his judgment it increased the interest rate by a quarter of 1 percent. This is, I think, very interesting to me, because I have had a long, strong bias against this what I think is a misuse.

Mayor MILLER. Senator, I do not claim to be an expert in this field. But I would say that we feel that this is a perversion of the traditional function of municipal bonding, and it is unfair for one city to preempt this practice and the others not. It is the position of the National League of Cities, after much discussion, that this is wrong. Now, from a pure economic basis

Senator PROXMIRE. Let me ask you about the National League of Cities. Is it your recollection that this was a pretty overwhelming view, or was it the bare majority?

Mr. MILLER. It caused considerable discussion. But I think, to those of the like mind that we are, it is not a satisfactory practice.

May I refer to Mr. Ayres who, on an economic basis is much more informed than I.

Would you make some remarks, Mr. Ayres, on this.

Mr. AYRES. In our testimony we say: "It is significant to note that a recent tax-exempt industrial bond issue of the Port of Astoria, Oreg. (population 10,700), is the amount of $140 million for the benefit of the Northwest Aluminum Co. exceeds by $19 million the total net debt of all Oregon cities for all municipal purposes combined." I would also go

Senator PROXMIRE. That is an astonishing figure. That is in your documentation?

Mr. AYRES. Yes, sir-in one bond issue.

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