« iepriekšējāTurpināt »
Because the city real estate tax is its largest single source of revenue and the major single provider of coverage for debt service, the growth in taxable real estate valuations assumes special significance. In the fiscal year 1956-57 the full value of taxable real estate was $24.1 billion compared to a value of $44.0 billion in 1966-67. The amount of commercial office space added to Manhatton alone since World War II is greater than that of the rest of the Nation put together.
Walter H. Tyler, for 25 years the head of Standard & Poor's Municipal Bond Rating Department and now president of his own bond rating service, summed up the inadequacies of the existing system of bond rating, as follows:
1. Ratings cover only about 70 percent of the outstanding bonds and about 10 percent of the municipalities capable of selling bonds.
2. They are expressed in such broad bands that even with a fairly long record, it is difficult to tell whether a credit is improving or deteriorating. There is a real wide swing between the top of the A group and the bottom of the Baa category and the only time an investor would know his bond was getting better or worse would be if it crossed the single dividing line.
3. No one, including some of the analysts involved, is quite sure what a rating is based on. This is particularly frustrating for the municipalities or their financial advisors.
4. There is no way to relate quality ratings to market. Any bond is attractive at a price. A good rating system should permit comparison of rating with market. 5. Ratings make no allowance for the fact that a short maturity of a BBB bond is more attractive than the 1996 maturity of an AAA bond.
6. The rating services are basically unprofitable and hence cannot develop the staffs and the automation and the on-the-spot inspection services required to generate consistent and reliable information.
7. The present systems were set up in the 1930's and 1940's designed to solve the problems of the big depression with the tools then available. They have been modified from time to time as new problems became apparent or new tools became available but changes have only contributed to the overall confusion. Tyler has provided a questionnaire, labeled Exhibit VI, which sets forth the kinds of information he believes a rating agency should be equipped to consider.
1. A searching study should be undertaken by a leading and objective research institution such as The Brookings Institution or the National Bureau for Economic Research to answer the following kinds of questions:
"(a) How can bond rating services be adequately financed without either involving them in conflicts of interest or subjecting them to political pressure? "(b) How can staffing inadequacies be overcome to deal with the gigantic statistical and analytical workloads occasioned by the eleven-fold increase in municipal financing since 1946?
"(c) How can fact-gathering techniques be improved through the use of computer technology not now employed by any of the rating services?
"(d) How can a rating scale be devised which will more sensitively reflect whether a credit is improving or deteriorating, relate quality of rating to bond price, and make allowance for the fact that short maturity of a Baa bond might be a better risk than a 30-year maturity of a AAA bond?
"(e) What can be done to develop more explicit rating criteria rather than the present system in which no one, including some of the analysts involved, is quite sure what a rating is based on?"
2. Interested parties such as municipal finance officers, institutional investors, municipal bond dealers, the Federal Deposit Insurance Corporation, the Federal Reserve Board, and the Comptroller of the Currency, as well as representatives of the rating services, should form an ad hoc committee to activate the findings of the research institution.
3. Bond rating service, in whatever form the study deems best, should be financed from contributions to be made by municipalities, banks, institutional investors, and municipal securities dealers. The individual subscriptions could be in modest amounts if enough were willing to participate. This form of financing would fully insulate the rating agency (ies) from political interference and conflicts of interest. It could permit a staff large enough to make
continuing on-the-spot inspections and computerized techniques of fact-gathering.
PART II THE GRAVE THREAT OF INDUSTRIAL REVENUE FINANCING
An even more serious threat to our cities' financial condition is posed by a relatively new kind of tax-exempt security known as the industrial revenue bond. Industrial revenue financing involves the sale of tax-exempt, municipal obligations for the benefit of private profit corporations. It has seriously impaired the functioning of the municipal bond market in 1967, accounting for $1 billion out of a total of approximately $12 billion of tax-exempt issues. The added volume and high interest rates of these hybrid securities threaten the ability of many municipalities to borrow for schools, hospitals, roads, and other long-accepted public purposes.
Industrial revenue bond proceeds are used to build an industrial facility for a private corporation which leases it for a long-term contract, with the rental payments pledged to amortize and pay interest on the bonds. Exhibit VII provides a quick history of industrial-aid financing. As more and more States and municipalities offer tax exemption to attract new industry, the practice will become self-defeating. Great damage will be done to the independence of local government and to all taxpayers.
Further descriptions of industrial-aid financing are provided in Exhibits VIII and IX which are memoranda prepared by experts on the subject. Exhibit X is an article from the Wall Street Journal of December 4, 1967 giving an up-to-date survey of the industrial revenue scene. Taken together, all of these documents provide comprehensive data on the subject.
THE DAMAGE BEING DONE TO NEW YORK BY INDUSTRIAL-AID FINANCING
Expert estimates as to how much more New York City must pay in interest because of the mounting pressure of industrial revenue financing range from 25-40 basis points. Assuming the true figure lies in between, New York's annual interest penalty this year amounted to three-eighths of 1 percent. This extra interest equals $1.9 million. Taken together with the effect of its BAA rating, the combined damage amounts to no less than three-fourths of 1 percent which is $3.75 billion a year. If something is not done to stem this double threat, New York will soon be faced with a total interest of $30 million a year. That is enough to put 3,000 policemen on the beat or provide hospital space for 750 patients or build ten schools.
The solution to the industrial revenue problem is Congressional action to deny to corporations the deductibility of lease rental payments which support taxexempt debt. This approach would be far more acceptable to those who hold that exemption of local debt derives from sovereignty of the States as preserved by our national constitution and would have a far better chance for a quick passage by Congress. This route appears more acceptable than the Treasury's approach which involves a withholding of tax exemption from industrial bonds by amendment to the Internal Revenue statute. A bill for this purpose has been introduced by Representative John W. Byrnes.
With tax-exempt interest rates now at a 33-year high, we cannot afford the luxury of protracted debate while ou rcities are forced to cut basic services. High interest rates are choking us and with the two steps I have suggested we can ease the pressure. This must be done before it is too late.
[From the New York Times, May 8, 1967]
RATING THE CITIES
City Finance Administrator Roy M. Goodman's charge that the present system of rating municipal bonds is inadequate has found a sympathetic audience at the Federal Reserve Board and other Government agencies. Mr. Goodman, of course, is chiefly concerned with the comparatively poor rating given New York City. But the Federal authorities rightly consider that inadequacies in the rating system pose a problem for municipalities across the nation.
Unquestionably, Standard & Poor's and Moody's, the two private rating agencies, have certain deficiencies. They lack the manpower for searching examinations; they are frequently subjective in their decisions, and they often disagree among themselves. Yet their obvious fallibilities have little influence on investors, who treat their ratings with an awesome respect.
Mr. Goodman has recognized that there is little to be gained by asking Washington to set up a brand-new rating system. In the first place, neither the Federal Reserve nor any other independent agency has special competence in the field, so that a great deal of time and money would have to be spent to provide it. Even more important, it is questionable that investors will regard as objective the findings of a Government agency facing all sorts of pressure.
A nongovernmental expert body, such as the National Bureau of Economic Research, would represent a much superior choice for setting up some clear and open standards for rating the nation's cities. It could win the market's acceptance of its findings much more readily than would a study by Washington. The nation's banking community, which is deeply involved in municipal bonds as sellers and investors, ought to consider financing such a study. Apart from serving their own economic interests, the banks would be demonstrating a sense of civic responsibility in seeking improvements in the rating system.
New York City cannot wait, however, until a painstaking investigation of ratings is carried out. It can help itself by enlisting the support of the financial community and campaigning more effectively with investors, acquainting them with the facts about the city's unparalleled wealth and the changes that have been made to restore its fiscal integrity. It must also press for greater aidand increased authority-from Albany. The goal must not merely be restoring the city's old rating but gaining acceptance for its status in a class by itself.
FAIRER MUNICIPAL RATINGS
New York City has had to postpone a projected sale of $96 million in bonds because of "unfavorable conditions in the money markets." And it has come under renewed criticism from Moody's Investor Service, Inc., one of the major credit rating agencies. Since New York's downgrading by Moody's and Standard & Poor's, the city has attracted fewer bidders for its obligations even though it has offered very generous rates of interest.
While the City Council's politicking in respect to the operating budget has not helped, Mayor Lindsay's administration has launched a series of constructive and responsible financial reforms to repair the previous damage done to New York City's credit standing. And because the rating agencies have been slow to recognize the prudent new look in the city's fiscal program, the Mayor has decided to tell the story to the nation's investment community.
He has started a fiscal newsletter that will acquaint potential investors with what has been done and what will be done. He is planning official visits to market centers across the country in order to increase receptivity for the city's issues. And he proposes to invite institutional investors to New York to make their own appraisals of the city's determination and ability to pay its capital debts. But apart from continuing to initiate fiscal reform, the most important proposal of all is City Finance Administrator Roy M. Goodman's call for an improvement in the present system of credit rating. There is a demonstrable need for more current and comprehensive ratings of all municipalities, large and small. More adequate rating will not always make it easy to borrow. When money is tight and interest rates are rising, any municipality will have a hard time. But cities should not be unduly penalized by inadequate or improper ratings. The municipal market should itself take the lead in establishing more adequate ratings, preferably by financing a thorough study by an objective and expert body. The goal should not be to make things easier for New York City, but to provide more accurate assessments of all cities so that the municipal market can function more effectively.
STANDARD & POOR'S BOND RATINGS
In the Standard & Poor's bond quality ratings system, interest-paying bonds are graded into eight classifications ranging from AAA for the highest quality designation through AA, A, BBB, BB, B, CCC to CC for the lowest. Bonds on which no interest is being paid, either because of default or because of "income" characteristics, are given C, DDD, DD and D ratings. Rating symbols are the