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Mr. GOODMAN. I believe it is.

Chairman PATMAN. And they have a better deal than the State has. You see, when the chances for winning are several times better than the State offers them-and in addition to that, the real bonus payoff is that if a person is fortunate, and he collects a hundred thousand dollars by having the right ticket, his name is not put in the newspapers. There is just nothing said about it. Of course, the obvious conclusion is that in the numbers racket, the winners do not pay income tax on their winnings, but in the legalized winning in New York, they would.

So you have every

Representative BROCK. Which are you advocating-the payment or nonpayment of income taxes?

Chairman PATMAN. Of what kind of tax? A lottery?
Representative BROCK. Never mind.

Chairman PATMAN. What I object to there is the numbers racket is helped, and it would be helped in every State, if the hoodlums could get the lottery legalized for any purpose. And always they pick out some really good purpose, like veterans, or hospitals, or something like that, to have a lottery for. If we could get them legalized in any State, that helps the numbers racket in that State, and the hoodlums make lots of money on the numbers racket.

So we would finally get down to the question of we would be paying more attention to gambling and lotteries than we are paying attention to thrift and savings.

So I think we ought to be in favor of the latter instead of the former. Any other questions or comments, Mr. Brock?

Representative BROCK. No, thank you.

I have enjoyed the testimony very much.

Mr. GOODMAN. Mr. Chairman, may I just ask your indulgence for one brief moment to indicate to Congressman Brock what I think represents the most concise answer I can find to the question he just raised.

Exhibit 9 of my testimony consists of two graphs, one of which projects the future volume of industrial revenue financing in 1969 to $8 billion. Now please note the graph on the left. The checkered portion of that bar in the year 1969 represents the proportion of industrial revenue issues.

Right here you have the potential danger, the really deep-seated and fundamental problem which industiral revenue bonds pose. If they ever reach the point where they comprise one-third of the total new issues being offered every year, and they very well may, in a few years, the whole structure of the municipal bond market will be endangered. Chairman PATMAN. Yes. You both have presented some interesting information. It will be very helpful to us.

Let us say 1950, New York was paying so much in interest, a certain rate. Could you estimate in your statement to be filed along with your testimony, when you look over your transcript, how much it has cost the city of New York since that time in what may be termed excessive interest rates, that is, interest costs above what might have occurred if the 1950 rate levels were still in effect in succeeding years? Representative BROCK. What cost to New York?

Chairman PATMAN. Interest. Interest rates were low in 1950.

Mr. GOODMAN. I would have to ask your assistance in defining excess, Mr. Chairman.

Chairman PATMAN. Anything that was higher according to rate would be excess. That is the way I would construe it.

Mr. GOODMAN. I would appreciate time to ponder that very complex question.

Chairman PATMAN. Yes, sir. If you find a better way of bringing out the point, to show the excess, it would be all right with me.

Now, some members of the committee are not here. Oftentimes they would like to ask witnesses certain questions which they propound in writing and send them to you gentlemen in advance of the time that you return your transcript. Will that be satisfactory with you? Mr. GOODMAN. Yes, sir.

Mayor HURLBERT. Yes, Mr. Chairman.

Chairman PATMAN. Fine.

Well, thank you very much for your appearance here. You have been wonderful. I appreciate it. I know other members of the committee will. We meet tomorrow at 10 o'clock in this room, and we will have as our witnesses Mayor Travis H. Tomlinson, of Raleigh, N.C., Mayor Herbert H. Behrel, of Des Plaines, Ill., Mayor Elmer H. Dodson, of Charleston, W. Va. Those three witnesses will be here tomorrow morning. And then Thursday we have four witnesses, including Congressman Whalen, of Ohio, Dayton, Ohio, and the mayor of Dayton, Ohio, also, as well as the mayor of Salem, Oreg., and the executive director of the Ohio Municipal Advisory Council of Cleveland.

So we will have some more very able witnesses in addition to the fine witnesses we have had today.

Thank you, gentlemen, again.

(Whereupon, at 11:45 a.m. the subcommittee was recessed, to reconvene at 10 a.m., Wednesday, December 6, 1967.)




Washington, D.C.

The subcommittee met at 10 a.m., pursuant to recess, in room S-407, the Capitol, Hon. Wright Patman (chairman of the subcommittee) presiding.

Present: Representatives Patman and Brock; and Senator Proxmire. Also present: John R. Stark, executive director, and Arnold H. Diamond, consulting economist.

Chairman PATMAN. The committee will please come to order. We are honored to have with us the chairman of the Joint Economic Committee, the Honorable William Proxmire of Wisconsin. You gentlemen know him, I am sure. He will participate with us today. Today we continue our inquiry into the problems of municipal finance. From the testimony received here yesterday, the bond rating houses are guilty of either outright fraud or shocking negligence in their rating of municipal bonds. It appears from the evidence that these ratings are not based on a genuine sound analysis of finance, but are really based on the opinions of poorly informed and poorly paid personnel who are overburdened with the task assigned them. I do not criticize the people themselves; I criticize the indifference of these bond rating institutions.

Although this strikes me as a serious indictment of their conduct, I have heard no murmur from them, nor is there any indication that they would like to testify. Let me say that our subcommittee intends to pursue this matter further. As a matter of fact, we may bring representatives of the investment banking community-some of the so-called bond houses-in as witnesses to testify as to their observations on this question of bond rating, and its effect on our communities. Our study of last year shows clearly that the communities face. heavy demands now for facilities construction, and that these will grow sharply in the 10 years ahead. At best, it will be a difficult challenge to meet these requirements. In the circumstances, it is clearly against the public interest to have outmoded and harmful practices like the current bond rating practices, standing as barriers to meeting our financial problems.

We are privileged to have with us today three outstanding mayors. Mayor Dodson has not arrived yet, but he will be here momentarily. You might say these men are in the frontline, facing the financing problems that confront most of our communities. They are Mayor


Travis H. Tomlinson, of Raleigh, N.C., Mayor Herbert H. Behrel, of Des Plaines, Ill., and Mayor Elmer H. Dodson, of Charleston, W. Va. Mayor Tomlinson, you may begin and proceed in your own way. Do you have a prepared statement?

Mayor TOMLINSON. Yes, I do, Mr. Chairman.

Chairman PATMAN. We would be very glad to hear you, sir. You may proceed in your own way.


Mayor TOMLINSON. Thank you very much, Mr. Chairman. If it is agreeable, I will simply read this statement, and then we will have a discussion if you like.

Chairman PATMAN. After the witnesses conclude, we will interrogate you gentlemen.

Mayor TOMLINSON. I am Travis H. Tomlinson, mayor of Raleigh, N.C., and chairman of the National League of Cities Revenue and Finance Committee. I am here to represent the National League of Cities which is composed of nearly 14,400 members, municipalities, large and small, in all 50 States.

I regret I was not able to appear yesterday as originally requested. Nevertheless, my purpose is to provide a general background for the other testimony you will receive in the course of these 3 days. Surely the subject matter which the committee has chosen to explore is of vital concern to all cities.

Cities rely as never before on bonded indebtedness as their major financial tool for providing needed public facilities. Many of our older and established cities are facing physical deterioration. The effects of urbanization and technological revolution and resulting demands for new and better services place added stress on the need for physical revitalization and modernization. Thus, the capital program of cities is of great importance to their future physical, social, and economic vitality. Without the ability to borrow, which, even so, I might note is often limited by archaic State constitutional or statutory provisions, cities could not stand the strain of paying for capital projects.

As an indication of the increased reliance on bonded indebtedness, cities and States in 1966 issued more than $7 billion of general obligation bonds and over $4 billion of revenue bonds. Totals for this year of both types are expected to substantially surpass the figures for the preceding year. Outstanding debt of municipalities has now reached better than $33 billion.

Of greatest significance in the municipal finance field is the tremendous surge of revenue bond issues since the late 1940's when few of these bonds were on the market. The importance of revenue bonds to cities cannot be overemphasized. Revenue bonds often provide the only practical method of financing facilities when a community is unable to commit its taxing power to debt service or where State legal limitations on general borrowing and taxing powers preclude or limit the use of GO's. Likewise, it makes good financial sense to use a revenue bond when a project can provide a source of revenue sufficient for debt service.

With the importance of municipal borrowing firmly established and with clear indications that cities will turn to borrowing even more

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