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The CHAIRMAN. Without objection, the committee will recess until 2 o'clock.

(Whereupon, at 12:20 p. m., a recess was taken until 2 p. m. this same day.)

AFTERNOON SESSION

The CHAIRMAN. The committee will please be in order.

William B. Collier, city manager, Corpus Christi, Tex. Mr. Collier? (No response.)

Joseph F. Clark, executive director, Municipal Finance Officers Association. Mr. Clark?

Please give your name and address to the stenographer for the benefit of the record, and the capacity in which you appear. STATEMENT OF JOSEPH F.

OF JOSEPH F. CLARK, EXECUTIVE DIRECTOR, MUNICIPAL FINANCE OFFICERS ASSOCIATION OF THE UNITED STATES AND CANADA, CHICAGO, ILL.

Mr. CLARK. My name is Joseph F. Clark. I am executive director of the Municipal Finance Officers Association of the United States and Canada. My address is 1313 East Sixtieth Street, Chicago.

Mr. Chairman and members of the committee, my appearance before your committee in the present matter is in behalf of the Municipal Finance Officers, of which I serve as executive director. In testimony in earlier years as presented in behalf of this association on February 10, 1939, by the then special committee of the United States Senate, Seventy-sixth Congress, first session, on the taxation of governmental securities and salaries, and later on March 27, 1942, before the then Ways and Means Committee of the United States House of Representatives, an appearance was likewise made in behalf of this association. The view and concepts expressed by the then executive director on those two occasions are, as far as we are concerned, as valid today as when uttered previously. Those expressions shall not be reiterated here except indirectly.

The Municipal Finance Officers Association is a nonprofit and nonpolitical professional, technical, and research group having 2,401 members, of which 1,756 are members representing 1,004 municipalities, 68 counties, and 34 States in the United States. The remaining 645 members are representatives of municipalities and Provinces in foreign countries or in Territories of the United States. The member cities in this association represent 90 percent of the United States municipalities with a population of 50,000 or over, and 79 percent of the municipalities with a population of 25,000 and over.

The membership of the association which I represent has never repudiated the original position it has taken in opposition to any proposal to tax the income from municipal and State obligations. On the other hand, it traditionally and consistently has and does now oppose any such proposal which would void the Federal tax immunity on State and municipal obligations. Within the time at our disposal since the announcement of the instant hearings, we have made a study of some of the aspects of the issuance of municipal obligations as pertaining to the present time, as shown in tables A and B, which are attached to this report, but which I shall not put in the record verbally here. I shall ask to have it filed.

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In order to determine, on a conservative basis, the probable increase in interest rates to municipalities if exemption from Federal taxes were removed, a complete analysis was made of the bond record during 1950, and a less extensive study was made of the bond market for the past 10 years. Table A represents 3,179 issues out of 5,864 issues with average maturity of over 10 years that were sold by municipalities during calendar 1950. There were 2,685 issues which had either a shorter average life than 10 years or insufficient data were supplied. Table B represents a trend study for a 10-year period. An increase in rates of the amount indicated in these tables would make capitalimprovement programs impossible for many municipalities, particularly for cities and schools. These particular jurisdictions have been extremely hard pressed, revenuewise, to obtain sufficient revenues to finance current operating programs. Construction has been limited for the most part to a minimum of that obsolutely necessary. In several States, notably New York, Pennsylvania, Florida, and Mississippi, cities have had to seek authority to utilize nonproperty taxes to supplement income received from the traditional local tax, which is the property tax. But, even with improved and prudent management, they have not been able to expand services as needed, and, particularly, they have not been able to meet minimum programs for public improvements.

Few if any municipalities have been able to overcome the dearth in improvements that has existed since the 1920's. The depression delayed construction, and further postponement was caused by World War II.

Another study made by this association is of interest in regard to capital improvements. A survey, on a sample basis, was made of the plans of municipalities with reference to bond sales for 1951, to discover capital-improvement plans to be financed by bond issues. The results of this survey are incorporated in table c. It should be particularly noted that this survey discloses that only 1.8 percent of the proposed bond sales were for recreational facilities. Over 38 percent were for essential utilities; 13.5 percent were for schools, and 10.9 percent were for streets and roads. Most frequently proposed municipal construction, other than for these categories, were for hospitals, fire and police stations, and incinerators. Very few even proposed new city halls, although, admittedly, many of them are antiquated. It should be noted that the facilities proposed are those essential for the health and safety of the public, and that many are essential for the defense effort.

While it has not always been true, today the small city—those under 25,000 population-are able to sell their bonds at a rate that compares quite favorably with that received by the larger city. During the last 20 years the interest cost to the small city has declined, but there is evidence that the average size of bonds issued is larger, which is primarily due to increased cost of constructing municipal facilities. Consequently, total debt service costs of the smaller city have not declined as much as the cost of borrowing money, The

. small city's problem is further complicated because it must depend almost exclusively upon the property tax. If municipal bonds were taxed, it would have serious consequences on these cities, because many would find it impossible to increase already high property-tax rates either because of constitutional and statutory tax-rate limitations or because the rate now levied is as high as the community can support. A natural result would be abandonment of almost all major capital improvements, many of which are urgently needed to assure the welfare, health, and safety of the community. Some comparative statistics compiled in this study made by the Municipal Finance Officers Association are incorporated in table D.

Municipal obligations, now tax-exempt, find a ready market because local governments appear to have generally managed their affairs rather well, all things considered, and because, too, they are circumscribed in their ability to issue municipal debt. This gives some safeguard to the investing public against extravagance and provides a healthy respect on the part of the investor for the value of local government obligations.

The Federal Government, in shaping its tax- and defense-expenditure program, should have due regard also for the problems of State and local governments in their extraordinary requirements, especially in the face of spiraling inflation and higher costs, both capital and operating. Municipal governments are called upon to cooperate with the Federal Government; and, of course, it goes without saying that they shall, but the Federal Government should try through its policies and programs to reduce the difficulties created for local governments instead of seeking to upset a financial pattern which local officials believe to be sound but which we think will become unsound if the Treasury should in any measure be successful in its recurrent efforts to impose taxation on local debt obligations.

The municipal-obligation portfolio holdings of our insurance companies, our banks, and the retirement funds of State and local governments may be in jeopardy marketwise if municipal obligations are taxed so as to inspire a decline in prices. After all, the people of this country are the ones that possess the stake in such institutions and who will be financially injured if a decline is engendered by the present proposal. Our opposition to the proposal may be summarized by a few observations:

1. Inflation is becoming accelerated and is causing rising budget costs for operation, maintenance, and capital acquisitions for municipalities, school and other districts. Any increase in annual costs of debt service will increase the financial burden of local taxpayers and home owners.

2. Federal taxation of municipal obligations will breach the principle of local government autonomy, thereby providing a theory that the Federal Government has gained a right to tax the revenues of municipal utilities and other enterprises and perhaps other revenues as well. Local public officials are uneasy about this aspect of the proposal. It spells centralization, and that is undesirable.

3. Who seems to be concerned about what may happen to thousands of small municipalities, school and other districts, in a marginalcredit position, when it becomes difficult for them to market their debt obligations at higher interest cost that many cannot assume?

4. Acquisition of facilities for civil defense will quite likely require new and extraordinary local financing. No barrier should be erected that will impair their ability to borrow money to secure essential facilities.

5. The consensus of opinion of finance officers, economists, and bond underwriters is that removal of the tax immunity on municipal obligations will increase the rate of debt-service costs by as much as 0.75

to 14 percent, depending upon the credit of the borrowing unit of government.

6. It is doubtful whether it is worth the effort for the Federal Government to place itself in a position of having disturbed the traditional status and the validity of the long-accepted principle of nontaxable municipal obligations, or of complicating and burdening the financial position of cities, counties, and States, to obtain revenues of undetermined value at a cost to other levels of government.

7. What advantages, if any, will municipal and State governments receive if the Federal Treasury taxes their obligations?

Mr. Chairman, the tables I shall leave for further study of the committee.

(The tables referred to follow:)

TABLE A.

Bond sales during 1950

Number Number
of issues of issuers

Volume of

sales

Bond Average Average Estimated buyers' coupon yield

coupon rate index 1 rate 2

rate 2

if taxed 3

Estimated yield rate if taxed 3

1950 month

(1)

(2)

(3)

(4)

(5)

(6)

(7)

(8)

January
February
March
April.
May
June
July
August
September
October.
November
December

430
353
465
477
552
642
512
600
454
476
462
441

355
292
385
393
443
517
427
492
383
381
359
372

$248, 175, 717
568, 838, 942
361, 725, 962
184, 191, 816
355, 150, 178
361, 301, 682
206, 854, 671
322, 794, 636
290, 005, 545
229, 427, 238
394, 580, 937
162, 190, 815

Percent

2, 07
2. 05
2.02
2.02
2. 02
1. 99
2. 02
1.85
1.83
1.82
1.75
1. 75

Percent

2. 407
2. 435
2. 369
2. 354
2. 344
2. 256
2. 466
2. 209
2.318
2. 179
2. 144
2. 250

Percent

2. 290
2. 267
2. 160
2. 162
2. 145
2. 141
2. 179
2.012
2. 101
2. 008
1. 993
2. 084

Percent
3. 157-3. 907
3. 185-3.935
3. 119-3. 869
3. 104-3.854
3.094-3. 844
3. 006-3. 756
3-216-3. 966
2, 959–3. 709
3. 068-3.818
2. 929–3. 679
2.894-3. 644
3.000–3. 750

Percent
3. 040-3. 790
3. 017-3. 767
2, 910-3. 660
2. 912–3, 662
2. 895-3. 645
2. 891-3, 641
2. 929-3. 679
2. 792-3. 542
2.851-3. 601
2. 758-3. 508
2. 743-3. 493
2. 834-3. 584

Total.

5,864

4,799 3, 693, 604, 165

1.933

2. 318

2. 133

3. 068-3. 818

2.883-3. 633

1 Index for 20 municipal bonds. (Arkansas; Baltimore, Md.; Boston, Mass.; Cincinnati, Ohio; Cleveland, Ohio; Dallas, Tex.; Detroit, Mich.; Houston, Tex.; Illinois; Los Angeles, Calif.; Metropolitan Water; Newark, N. J.; New Jersey; New York City, New York City (long 3's); New York State; Philadelphia. Pa.; Pittsburgh, Pa.; St. Louis, Mo.; San Francisco, Calis.) 2 Estimated for bonds having an average life of 10 or more years. : Adding 0.75 to 1.50 percent estimated increased rate.

TABLE B.-10-year trend of bond sales

Num-
ber of
issues

Num-
ber of
issuers

Bond buyers'

average Average Average Volume of sales yield coupon yield

index (20

rate 2

rate 3
munici-
pals)

Estimated Estimated coupon rate yield rate if taxed 4 if taxed 4

Year

(1)

(2)

(3)

(4)

(5)

(6)

(7)

(8)

1950). 1949. 1918 1947 1946. 1915 1944. 1943 1942 1941

5, 864
5, 107
4, 706
3, 803
3,319
1,876
1, 275
1, 036
2, 565
5, 548

4,799 $3,693, 604, 165
4,300 2, 995, 425, 049
3,832 2,989, 731, 949
3, 051 2, 353, 771, 562
2, 596 1, 203, 557, 909
1, 561

818, 781, 728
1, 101 712, 305, 515

884 507, 566, 466 1, 960 575, 588, 228

1, 229, 493, 072

Percent

1. 933
2. 156
2. 369
1. 891
1. 488
1. 505
1. 655
1. 933
2. 259
2. 168

Percent
52.318
2. 262
2. 418
2. 613
2. 309
1. 981
2. 143
2. 255
2. 680
2. 671

Percent
32, 133

1.850
2. 000
2. 180
1. 790
1. 470
1. 610
1. 710
2. 100
2. 120

Percent
3. 068-3. 818
3. 012-3. 762
3. 168-3. 918
3. 363-4. 113
3. 059-3. 809
2. 731-3. 481
2. 893-3. 643
3. 005-3. 755
3. 430-4. 180
3. 421-4. 171

Percent
2. 883-3. 633
2. 600-3. 350
3. 750-3. 500
2. 930-3, 680
2. 540-3, 290
2. 220-2. 970
2. 360-3, 160
2. 460-3. 210
2. 850-3. 600
2.870-3. 620

4, 178

1 Average of 12 monthly rates.
* Estimated from data compiled by the Chemical Bank & Trust Co. for year 1941-49.
* Per Chemical Bank & Trust Co. data for 1941-49.
1 Added: 0.75 percent to 1.50 percent as estimated rate increase if taxed.
! Includes 3,179 issues with average maturities of 10 or more years.

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TARLE D.- Pond sales by municipalities with a population under 25,000 (selected

years)

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