limited to extending SEC jurisdiction over industrial revenue bonds in such matters as disclosure to bondholders of the companies' financial results; the SEC doesn't have the authority to prevent local authorities from issuing such bonds. Meanwhile, industrial revenue bond financing continues to grow apace. A survey of investment bankers at the Miami Beach convention showed that $1.2 billion of such bonds were being readied for the market, indicating that next year will see another spectacular rise in community-financed industrial construction.

The pressures to engage in industrial revenue bond financing are well illustrated by a proposed $75 million issue to finance the building of a pulp and fine paper facility for Weyerhaeuser Co. in North Carolina. Bidding on the issue is awaiting a favorable ruling from the state's supreme court on a recently passed law permitting corporations there to benefit from the tax-exempt feature of municipal bonds.

State officials say they are backing the law only as "a matter of self-defense," in the words of Dan E. Stewart, director of North Carolina's Department of Conservation and Development. Since the legislature approved the law, he notes, "five, six or seven companies come down every day to discuss setting up factories."

MORE BANKS ENTER FIELD

In addition, Weyerhaeuser has identified as a potential manager of the financing Morgan Stanley & Co.--one of the most prestigious members of the Investment Bankers Association, which has opposed such bonds as a matter of principle. It would be Morgan-Stanley's first venture into this method of financing.

Several weeks ago, Chase Manhattan Bank, another prominent IBA member, headed a syndicate that purchased $130 million of Mississippi bonds that will be used to build facilities for lease to Ingalls Shipbuilding Co., a subsidiary of Litton Industries Inc. These bonds, however, unlike the general run of revenue issues, will be backed by the "full faith and credit" of the state.

The advantages of industrial revenue bond financing can be substantial for expanding companies, proponents of the system assert. Companies can obtain 100 percent financing in this manner, whereas they invariably are forced to put up some of their own cash when issuing their own debt securities, and companies that lease plants also enjoy certain tax and depreciation benefits.

COST SAVINGS ARE CONSIDERABLE

Most important, however, are the interest cost savings. Consider, for example, the $82.5 million of bonds sold last February by Middletown, Ohio, to finance the building of a steel mill and provide equipment for Armco Steel Corp. as part of the company's $600 million expansion program.

According to the agreement, the facilities were leased to Middletown Growth Inc., a community improvement corporation, which in turn sublet the mill and equipment to Armco on terms sufficient to pay principal and interest on the bonds. The arrangement was "a way of expressing our thanks to Armco for its previous help to our community," says Richard Slagle, executive vice president of the local chamber of commerce.

Middletown obtained a 4.5 percent annual net interest cost in selling its bonds. "The available rate on this type of financing is certainly below what we could have gotten in the competitive market," says an executive of Armco, "probably at least 1 percent lower." Thus, over the life of the issue, Armco stands to save an estimated $8 million in interest charges.

Georgia-Pacific Corp., Portland, Oreg., is a prime user of industrial revenue bonds. Last July, the city of Crossett, Ark., sold $75 million of 25-year bonds at a net interest cost of 5.65 percent to pay for expansion of Georgia-Pacific's paper manufacturing facilities there. Officials are reluctant to pin down the savings resulting from use of the issue, but one concedes that "something like $10 million over the life of the bonds might be a realistic figure."

CONTRIBUTIONS TO COMMUNITIES

In addition, the new facilities won't be subject to certain local taxes, although an official says the company "will be making a substantial contribution in lieu of taxes." This arrangement is fairly typical: Joy Manufacturing Co., for instance, pays an annual gift to the city of Claremont, N.H., in lieu of taxes on a plant financed through industrial revenue bonds. The amount of the "gift" will vary with the community's tax base, in Joy's case.

Tight credit has also served as a spur to industrial revenue bond financing. During last year's money "crunch," for example, Phoenix Steel Co., a Claymont, Del., concern that had been sustaining losses as recently as 1963, found that bankers were unwilling to finance a $28 million modernization program that the company badly needed to remain competitive.

Instead, the company turned to the Northern Delaware Industrial Development Corp., which promptly marketed $35 million of 54 percent first mortgage industrial revenue bonds, the proceeds of which were turned over to Phoenix Steel. The issue "was a godsend to us," says a Phoenix official. "Some people raise eyebrows when you mention an industrial revenue bond, but without it we would have had to close down our Claymont plant," which employs 1,500 people.

OTHER ADVANTAGES CLAIMED

And Jason L. Honigman, chairman of Allied Supermarkets Inc., which has used industrial revenue bonds to finance a new food processing plant and distribution center, contends that although the amount of money available in a tight money market for normal financing is frequently limited, it's usually easier to raise money in the tax-exempt market than through conventional channels. "Tax-exempts have an entirely different market-a different group of people," Mr. Honigman says. These include wealthy individuals in high tax brackets, who can often profit more from a lower yield but tax-free bond than from a high yield corporate-type issue.

Critics of industrial revenue bonds argue, however, that the sudden and huge volume of industrial revenue bond issues has placed serious pressure on the municipal bond market itself. An official of First Southwest Co.. Dallas, notes that industrial revenue bonds attract anywhere from 4 to 12 percentage points yield over other municipal securities. "Particularly for the smaller towns that sell (municipal bonds) at higher rates, it's like tilting with windmills," he says.

A special committee of the Investment Bankers Association, formed to look into the situation, claimed in a press conference at the Miami Beach convention last week that the sudden and spectacular increase in industrial revenue bond financing had forced up municipal bond rates generally "on the order of onequarter of a percentage point."

In terms of the $11.8 billion in "standard" municipal bonds that have been or are in the process of being sold this year, the effect has been to add a hefty $200 million in interest costs, the IBA committee asserted.

Some critics also question whether industrial revenue bonds are really advantageous for most companies. Approval of a bond issue can take up to a year, they note, and state officials, mayors, and voters can sometimes prove more prickly to deal with than professional bankers.

LOOP-HOLES FEARED BY SOME

Says an official of a large Eastern steel company that hasn't yet resorted to industrial revenue bonds: "A lot of these States have legislation on the books (permitting issuance of such bonds), but they haven't ironed out the wrinkles. This might be a fine way to get the money, but when you're involved in a construction of a mill that may cost several hundred million dollars, you don't want to risk getting caught by a subclause somewhere or fight some local councilman who for some reason has a beef about the project."

One company that refuses to use industrial revenue bonds is Southern Co., an Atlanta-based utility holding company with operating units in Georgia, Alabama, Mississippi and Florida. The concern would appear to be a prime candidate for such financing-its construction budget this year totals $240 million, and next year its outlays will total $250 million.

But, notes a spokesman for the company, "we couldn't include the value of the plant or facilities in our rate base" if they were financed through industrial revenue bonds. The company's rate base is the figure on which public service commissions determine how much the utility is allowed to earn.

"Further," says the spokesman, "we're philosophically opposed to government being in any enterprise in which private business can handle itself adequately. Giving a community ownership of a plant with that type of bond puts it in the business of generating electric power."

Chairman PATMAN. This is very helpful to all Members of Congress, and this subcommittee particularly.

Mr. Brock, if it is all right with you, you may go ahead for 10 minutes, and then I will take 10 minutes. We will ask these gentlemen some questions.

Representative BROCK. Let me say, gentlemen, I have been fascinated by your testimony. I hardly know where to begin. You have covered a lot of territory.

One of the things that occurs to me-I think it was during your testimony, Mayor Hurlbert-was the plight of the city in general terms, not just as it relates to ratings, or even municipal bond issues, but the plight of the cities as it relates to their ability to finance the needs of a growing population, of a more sophisticated society, a society which demands more services.

Your comment about the tax burden on the average citizen is particularly relevant.

I was frankly amazed at your comment that a family having a $20,000 home in Aberdeen would be paying $600 a year in property taxes. That is incredible to me.

Do you have a sales tax?

Mayor HURLBERT. State sales tax: yes.

Representative BROCK. From which you receive no revenue?

Mayor HURLBERT. None whatsoever.

Representative BROCK. Do you have a State income tax?
Mayor HURLBERT. No.

Representative BROCK. So your total source of revenue is the property tax?

Mayor HURLBERT. It is not the total. You see, we also collect for

services.

Representative BROCK. This would be the great bulk?

Mayor HURLBERT. That is right-from a tax standpoint, that is the only source we have.

Representative BROCK. One of the things that has been most interesting to me and again it perhaps is not directly related to the subject has been the proposal that in some form or fashion we must make available to the municipalities, counties, and even States of this country, a broader financial base, specifically in the form of greater block grants or some form of tax sharing-making available to the communities the resources of the income tax, which is in my opinion probably the most equitable tax, and certainly the most productive that we have available in the country.

I wonder if you wanted to comment on something along that line, insofar as it relates to your basic problem?

Mayor HURLBERT. Apparently we are going to have to go to some route such as that if we are to have sufficient revenues to operate and do this capital improvement. Federal grants have been a tremendous help in projects that we have just accomplished. Whether it would mean the return of possibly some income tax, this is a matter that apparently you folks have discussed from time to time. But we need a source other than from the people that are living there-from a tax on them directly. We realize this money has to come from some place. Possibly this Federal borrowing, like HHFA, is a good answer, be

cause there the entire cost of a facility is borne by the income, and paid off over a longer period of years. This would help.

Representative BROCK. Just as a matter of curiosity, what do you pay on your last bond issue-what rate of interest?

Mayor HURLBERT. I somehow or other do not feel quite so badly. Three and a quarter percent. Actually-this is about 2 years ago—a comparable city, a little larger-Sioux Falls, which I understand has a double A rating, was selling bonds, $600,000-they turned down an offer of a little over 4 percent. They recently were authorized by an election to issue somewhat under $4 million for airport improvement. The maximum, according to law, that they will be able to sell those for-was 5 percent. But here within the past few months they had an offer of just over 4.

Representative BROCK. I am interested in some of Mr. Goodman's charts, and one of the things that disturbs me is that when you are talking anywhere from three and a quarter to 4 percent, you are considerably under what we have to pay here.

Mayor HURLBERT. This I cannot understand.

Representative BROCK. You are tax exempt. We are not. It makes a difference. So I am not entirely sure that going through HHFA or those devices would save you money-it might cost you more.

May I turn to you, Mr. Goodman, just for a moment.

I was flabbergasted to hear you say that they do not use computer technology in these rating services. I do not see how they can calculate the ratings on 16,000 issues without computer techniques.

There is no computer available to these people who have to make the ratings?

Mr. GOODMAN. I understand that Standard and Poor's has a computer, but it is being used for projects other than their bond rating service. They are exploring the use of computers for rating but are not yet using them to my knowledge.

Moody's seemed dubious that a computer could be helpful in rating. I found this very difficult to understand.

Representative BROCK. Well, as a businessman, if you have only got 12 employees, it is very difficult to justify a computer on a cost basis. But in terms of productivity, I do not see how you can have a relative comparison of 16,000 issues without a computer. I do not think it is within the competence of 12 men, no matter who they are.

Mr. GOODMAN. My whole point is that the rating system has grown by accident. The fact that there are only two relatively small private services with limited staffs handling this enormous job is fundamentally unacceptable.

I have placed as an exhibit to this report a questionnaire given me by an expert in bond rating who for a quarter of a century was the chief rater at Standard & Poor's. He parted from Standard & Poor's feeling that the techniques of the present services were not adequate. And he gave me a questionnaire which I place as exhibit 6 to this report. You will notice that it outlines 427 factors which a bond rating service ought to look at in appraising a city.

A city is a very complex mechanism, and to think that it is being studied and rated on an average of about 30 minutes per rating is simply incomprehensible. This illustrates the inadequacy of the strictly private rating facilities now available. A whole new system must be created if the cities are to be properly evaluated.

Representative BROCK. Of course, you are taking 30 minutes-you are dividing all the issues into the number of man-hours available. And in actual fact, probably 10 percent of the issues will receive 90 percent of the attention.

Mr. GOODMAN. Yes, of course, that may be. But if that is true, then the balance of the issues are receiving that much less.

Representative BROCK. No attention whatsoever, in effect.

I am somewhat surprised.

Neither of you gentlemen commented on a bill which is before the House Banking and Currency Committee on the financing of revenue bonds, the underwriting of revenue bonds.

I gather that you feel to the extent that you do not want any industrials, you are relating your comments only to general obligation bonds. Is that a fair statement?

Mayor HURLBERT. I do not think so.

You see, at this time-the last legislative session in South Dakotathey passed enabling legislation giving municipalities this authority to issue revenue bonds for industrial building, and there is a test case now before the courts to see whether or not this will be possible.

There was one other-if I could at this time-point out that we have not quite our minds have not met. And that is this question of Federal borrowing through the HHFA as it compares to revenue borrowing on the market.

You see, if we did not go through the HHFA, we would have to go to a revenue bond issue. This, of course, would go back to the 60-percent requirement that you would have to have by election, and also it would go into a bond that is not rated, a bond that we would have no experience to substantiate its worth. And we would certainly be paying-up around this 5 percent, or possibly a little more. We feel, in our investigating and visiting on this with people that have the HHFA loans, that certainly there would be 1 to 2 percent difference in interest, plus the fact that you could get it over, say, a 40-year term-where a bond, trying to go that far, I am sure you would have difficulty.

So this was one point that you had asked about.

Representative BROCK. Thank you for clarifying this. My time has expired.

Chairman PATMAN. I want to ask you gentlemen some questions about this.

On the bond question that Mr. Brock mentioned, that is pending before our committee now, that has passed the Senate?

I do not look with favor on that for one or two particular reasons. Of course, I will be glad to hear the testimony and be governed by it--but one that impresses me is that it monetizes a substantial part of our debt.

I know we have gone through a period in this country when people were so afraid of inflation that they looked with disfavor on the monetary authorities monetizing a substantial part of the debt. Even Government bonds at one time were very much limited in that respect. I do not think there is any limit now-I do not know of any. But to reach out and just monetize debts indiscriminately, and without any reason, could cause considerable trouble.

Another thing-the evidence showed, back in 1933, when there was a prohibition against these bonds written into the law, that