tended merely to divide up the territory, each having a monopoly in his own sector, and that the effect of the constitutional amendment was merely to strengthen the existing utilities by restricting the supervisory powers of the city councils and other legislative bodies.

In 1911, then, a constitutional amendment was offered returning authority to the individual legislative bodies and decreeing that cities might furnish these public-utility services or allow private companies to do so upon terms to be prescribed by the cities.

In the argument which was submitted to the voters with this constitutional amendment 40 years ago-curiously enough there was no argument submitted in opposition-Senators Lester Burnett and Leslie Hewitt say:

"The sequel has shown that to give the right to establish competing water or gas systems by law is one thing, to actually establish and maintain them, as against already intrenched monopolies is quite a different thing.

The fact is that the supplying of gas, water, electric light, and any other like public service is by its very nature monopolistic, and the true remedy, so far as any substantial benefit to the people is concerned, is to encourage the furnishing of these public necessities by municipal corporations themselves."

This amendment was adopted by the people of California by a vote of more than 2 to 1, and from that day to this competitive free enterprise in the public-utility field has been a dead issue in California. As a matter of fact, the only competition that has existed since then has been furnished by municipal plants that have, on occasion, competed with established privately owned companies.

Under these circumstances, for anyone to challenge municipal ownership as a threat to the American institution of competitive free enterprise is simply ridiculous.

For the reasons which I have stated, I am certain of the right of the municipal utility to a place in the economy of America.

But what is the proper objective of such a utility? An almost infinite number of worthy aims have been suggested and have won at least some adherents. Of these, three are sufficiently important to be worth discussion within the time available.

These three inconsistent objectives are: (1) A first-rate utility plant, free of debt; (2) a tax-free city, with all expenses paid from profits earned by the municipal utility; (3) rates to consumers at the lowest possible levels.

While we haven't time today for any really serious discussion of these alternatives, I am pleased to have this opportunity to give you the substance of my own beliefs.

As to the first suggestion-a utility plant free of debt-with this I have no patience at all.

The achievement of this objective means to me simply that one generation of ratepayers has been forced to pay the total of all costs truly attributable to the service rendered, and, by way of surcharge, has been forced to purchase a utility plant for the service of the next generation.

To me it seems clear that rates should be sufficient to cover a depreciation annuity equal to the diminution in value of the plant used in the service for which the rate is charged but, at the same time, it seems equally clear that the impulse to charge rates sufficient to provide for depreciation, plus amortization of debt. plus any additional sum necessary to finance current net additions and betterments is dead wrong.

As a matter of fact, considering the current rate of growth of the cities of California, any attempt to finance from current rates depreciation, amortization, and net additions simply means the deferment of the benefits of municipal ownership until some date long after my death-and your death too for that matter. This policy seems to me to have almost nothing to recommend it.

The second alternative-a tax-free city (with its many variants and modificstions) is probably the one most vigorously argued and the most bitter y contested.

As usual, the extreme positions involved in the debate are easily taken care of. Clearly it is wrong for any city to derive its total, or even its chief, support from the earnings of a municipal utility. At any such point, the utility rates cease to be a charge for a service rendered and become primarily a disguised tax for the support of government.

The burden of the support of government has probably never been apportioned with precise equity, but at least the normal apportionment of this burden in the form of taxes is based upon some hundreds of years of cut and try. Any summary shift of this burden onto a group chosen merely on the basis of its use of a particular utility service seems clearly unjust.

At the same time, and at the other extreme, it seems to me obviously improper that any municipal utility should fail to make, to the city which it serves, at least as great a contribution as would be made by a private utility serving the same purpose. A contribution in this amount seems to me to be simply one element in the cost of the service.

It is between these two extremes that the truly difficult situations arise. These difficulties are so individual; so dependent on particular situations, such as the desperate need of a particular city for an increase in the personnel of its fire department, and the equally desperate need of a utility in another city for funds to meet an indispensable construction program, that general comment is useless.

The last alternative is "rates to consumers at the lowest possible levels." While it seems to me that as a practical matter municipal utility rates will ordinarily give recognition in some degree to each of the three possible objectives which I have mentioned, yet this last must always receive the primary consideration and the greater weight.

First of all, it has the great, though intangible, virtue of offering to the management of the utility a necessary stimulus; that is, a sense of pride and accomplishment.

As all of you doubtless know, salaries paid to the executives of municipal utilities are almost invariably lower than the salaries paid for comparable responsibili ties in private industry. For this reason, I think it is of great importance that intangible rewards of this character be available to these men. In fact, I believe that such a sense of pride and accomplishment is almost indispensable to the efficient operation of a municipal utility.

Next, I believe that consideration of the fundamental principle justifying the existence of municipal utilities makes it clear that rates must be the true criterion. That justification, in my opinion, will always be, "We do a necessary job better than it would be done by any available alternative agency." As I view it, the "job' involved is primarily the rendering of a utility service, and success or failure must be measured by the character of that service and the rates charged.

We all know that great advantages are available to the municipal utilities-low interest rates and tax exemptions, to name but two. Some day there will be a demand for an accounting of our stewardship, and in that accounting I believe that inevitably the rates charged will be taken as the measure of our success or failure. Mr. CURTIS. The public power districts, by and large, are subdivisions of the State, are they not?

Mr. ELY. That is correct, sir. The ones for whom we speak are the local municipally owned projects which are subdivisions of the State.

Mr. CURTIS. Many of them have refinanced and paid off the Government by floating their own bonds and selling them to private parties; is that true?

Mr. ELY. Most of the projects that I referred to were not initially financed by the Federal Government but by the sale of municipal bonds directly. There are some of them which were perhaps aided by the United States but that is aside from the question on which I am expressing myself.

Mr. CURTIS. They are subdivisions of the State?

Mr. ELY. Yes.

Mr. CURTIS. I inserted in the record yesterday a telegram from Mr. Harding, of the Omaha Public Power District, and also Mr. Schact, the general manager of the Consumers Public Power District. Mr. ELY. I am very glad to hear that, Mr. Curtis.

The CHAIRMAN. Mr. Reed?

Mr. REED. I just want to say you have made a very interesting statement to the committee.

Mr. ELY. Thank you, Mr. Reed.

The CHAIRMAN. If there are no further questions, we thank you, Mr. Ely, for your appearance and the information given the committee. Mr. ELY. Thank you, Mr. Chairman.

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. 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.

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 prin ciple 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 I 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