been doing so in record volume. It is advisable to consider this particular subject as essential background for the consideration of major bills that are before you gentlemen.

The sale of new issues of municipal bonds to provide long-term financing for the construction of public facilities has steadily increased over the past 10 years and reached a record high in 1961. The record for the years 1952 to 1961 is set forth in the small table at the bottom of page 2.

The word "steadily" is used in the sense that there has been a very definite trend upward from the 1952 level, where the total volume was $4.4 billion to a total of $8.3 billion last year, in 1961. There have been fluctuations in the total volume trend, but the trend is really a very strong one, and it shows a very great ability that the States and municipalities have had in raising money from the private market, as distinguished from a Federal agency.

These totals do show fluctuations that are significant, as I will explain later.

The appendixes which are attached to my statement include as the first one, identified as A, a list of the total amount of new issues of State and municipal bonds sold in each State in 1961. The appendix is identified as a preliminary tabulation, and as not yet complete. The total of $8.3 billion is so substantial that it is properly indicative of the immense volume of securities sold during that year.

While I say it is not complete, there are probably very few issues that have not yet been tabulated and included in the total.

Attached as appendix B to this statement is a list of 3,629 new issues of State or municipal bonds sold during the first 6 months of 1961. That is only 6 months rather than the entire year. Appendix B numbers some 70 pages and, frankly, that has been included in order to show you gentlemen how our States and municipalities have been able to go forward in providing public works construction during the first 6 months of 1961 in each of your districts. The names of the issuers of each of these securities are set forth under the titles of each State, and the amounts of the securities, and, where we have a record of the interest cost at which those securities were issued, that is also included in the record.

Were we to have provided the entire year, I venture to say that the appendix would have numbered some 140 pages. Frankly, we are not yet in a position to give you the details on the last month of the year, and that is one reason why perhaps we were not burdening you with the additional volume of documentation. However, the first 6 months of 1961 is a fair representation of the wide scope of this particular volume.

The trend in the issuance of bonds continued this year, and in the first 2 months of 1962 the volume was a record $1.9 billion.

For many years advocates of various programs of Federal financial assistance to States and municipalities have alleged that local governments were not longer able to finance needed facilities because of inadequate revenues, or statutory, or constitutional debt restrictions; but the record clearly demonstrates that States and local governments can and are continuing to finance increasing programs of construction of public facilities.

The claim is made also from time to time that small municipalities are unable to finance needed public facilities because they must pay prohibitively high interest rates on their bonds, and are forced to pay higher interest rates than larger municipalities.

A year ago the association had occasion to compile data regarding sales that were made by communities of 10,000 population or less in order to determine whether there was any basis for this allegation. I have, and I would like to present for the record, if I may, sir, a tabulation made at that time which we believe is a fair and accurate sampling, and it displays the interest rates at which municipalities of that smaller population were able to sell securities at that time. I think that the fact that we chose only a particular 3 months presents no distortion as to the interest rates.

The information was compiled rather rapidly in connection with a bill then pending before the Congress. So in fact the record disproves the claims that prohibitive interest rates are charged to smaller municipalities, or that they are unable to obtain an accommodation in the private market.

A second major point, gentlemen, that I would like to make, is that financing through bond sales and construction by local governments operate automatically on a contracyclical basis. In other words, when we enter into a period of recession there is an expansion or augmentation of borrowing in the private market by States and municipalities. This is the very thing that the bill before us seeks to achieve, but I think that the situation which prevails by reason of the operation of the open market is much more effective and much more responsive and rapid than any program such as is envisaged by H.R. 10317. The reason why I say so is I can say from experience in the past, from my experience with the Federal emergency public works, and my observations with other loan and grant programs, that there is a tendency naturally for a State or for a municipality, when it sees the possibility of Federal aid through a grant program, or a loan program, at inordinately low rates, to sit on its hands and wait until that program becomes operative.

In other words, instead of speeding up and inspiring rapid action on the part of States and municipalities, the loan program actually acts as a deterrent. Not only is there a deterrent in waiting to determine what terms and conditions are for which these loans and grants will be given, but there is also a considerable loss of time in processing applications through any agency setup, no matter how efficient that agency is. Any Federal agency ordinarily operates through district offices, as well as its Washington headquarters. That is true of the existing Federal agencies of which I know that are likely to administer such a program, and I am speaking particularly of the Community Facilities Administration of the Housing and Home Finance Agency.

Regardless of how zealous they are of speeding public works, if they are going to do a competent job they have to send out forms and applications, and ask for a considerable amount of data to be filed in connection with each and every application. After the completion of the application of the State or municipality, they will examine that and they have to examine it at the local office, and then forward it to Washington for their recommendations. Ordi

narily, in Washington they reexamine the application, or at least consider the report made by the district office. That processing in the several States and the different stages, takes a considerable period of time. It is more than a matter of weeks and it can run into months. The result is that under Federal financial assistance programs you lose much more time, which is the very thing you want to avoid. What you want to achieve is getting this into operation at the earliest possible time.

This contracyclical situation, which is produced by the market itself through its natural operation, is much more rapid and efficacious than a Federal loan and grant program.

Under a flexible monetary policy, interest rates generally have declined during periods of economic recession, and many municipalities have taken advantage of the lower interest rates to finance the postponed projects. Consequently, there was a sharp rise in municipal bond sales during the 1953-54 recession, the 1958 recession, and

the 1960-61 recession.

This contracyclical reaction in local government financing was noted recently in the March 1962 Monthly Review of the Federal Reserve Bank of New York, as follows:

As in past recessions and recoveries, State and local governments stepped up their borrowing in the 1960-61 recession and increased their outlays on construction.

Thus, the increase in construction outlays in this recession represented a reversal of a downward movement, rather than just an acceleration of the previous absolute rate of growth as in 1954 and 1958.

That quotation is from page 39 of the publication.

Since this contracyclical action occurs automatically, it would appear both unnecessary and undesirable to authorize increased Federal financial assistance at such times, because increased Federal assistance would probably simply substitute Federal financing for financing obtainable from other sources. This result was recognized in the staff report from the Bureau of the Budget in January 1961 on "Federal Fiscal Behavior During the Recession of 1957-58," which remarks:

However, in a short recession in which monetary conditions ease and credit is available Federal lending tends to replace rather than supplement private lending.

Federal revenues undoubtedly would automatically decrease in a recession period, and the decrease would be accentuated if tax reductions were put in effect, while Federal expenditures would be increasing under previously authorized programs. Thus, it would appear highly undesirable at such a time to increase Federal financial commitments further. Federal financial assistance to States and municipalities at such times would simply replace rather than supplement financing from other sources.

In this connection, it is appropriate to observe how one of the major present Federal lending programs operates to substitute Federal financing for financing which is readily available from other sources. The community facilities loan program (42 U.S. Code 1491-1493) authorizes long-term Federal loans to municipalities for community facilities at an interest rate determined under a formula in the law (presently 35% percent, except in redevelopment areas, where it is

33% percent) "unless the financial assistance applied for is not otherwise available on reasonable terms." The determination of what constitutes "reasonable terms" is made administratively and was established in September 1961 at 3% percent for 30-year maturity bonds, reduced one-eighth of 1 percent for each full 5 years shorter maturity, but not less than 35% percent one-fourth of 1 percent lower in redevelopment areas). This administratively determined "reasonable” rate is too low in relation to current market interest rates. In effect, it declared unreasonable:

(a) The yield at that time on U.S. bonds of comparable maturity.

(b) For new issues of municipal bonds sold in the open market during the 6-month period January-June 1961:

14.3 percent by value and 25.2 percent by number of issues maturing 1 to 20 years;

37.8 percent by value and 42.1 percent by number of issues maturing 21 to 25 years;

31.7 percent by value and 48 percent by number of issues maturing 26 years and over.

Mr. DOOLEY. I wonder if the witness would mind being questioned, if I interrupt your testimony?

Mr. MCGEE. I would be glad to have you do so, sir.

Mr. DOOLEY. In previous testimony regarding other programs it was pointed out by some witnesses that a number of communities have reached their bonded debt limit. Do you have any statistics to show how many communities throughout the country may be in that category?

Mr. McGEE. Congressman Dooley, may I remark that Federal loans apply against the debt limit just as well as loans that are sold on the open market, so that the existence of a constitutional debt limit is definitely a barrier to any type of loan, regardless of what it is.

May I also say that debt limits are much more flexible generally than is usually realized, and where they are not, there has been developed over the last 20 to 30 years the authorization of revenue bonds which can be issued outside of a debt limit.

To give an example, for instance, in Indiana, where there is a very restrictive constitutional debt limit, and it is very difficult for a school district to issue bonds payable from ad valorem taxes, they have developed a device known as a school corporation. The school corporation issues its obligations in the tax-exempt bond markets to dealers who sell them in a ready market at good interest rates. By that means they are able to provide the essential school facilities. That is an example in only one State.

I frankly think the constitutional debt limitation proposition has been raised pretty much as a bugaboo for the last 10 or 15 years when it actually is not as operative and restrictive as might appear on the face of it.

Mr. DOOLEY. Thank you very much, Mr. MCGEE.

Mr. MCGEE. May I quote just one example, on the CFA policy, and how it operates? I am going to refer to Charleston, W. Va., which offered for sale $4 million of sewer revenue bonds on July 31, 1961. Seven bids were submitted by investment bankers, the best bid providing a net interest cost of 3.9453 percent, or less than 3.95 percent.

However, a representative of the CFA, present at the opening of bids, let it be known that his agency might provide the financing at a lower rate of interest.

When the bonds were readvertised for bids on November 20, 1961, pursuant to a CFA commitment to buy any of the issue that was not purchased by other buyers at a net interest cost of 35% percent or lower (the so-called reasonable rate applicable in a redevelopment area), investment bankers purchased nearly $485,000 of the early maturities and the CFA proceeded to buy the balance of about $3.5 million. In other words, they bought the bulk of the issue.

The important point here is that the entire $4 million loan could have been provided without Federal assistance at an interest rate which was in line with the prevailing market rates at the time.

I will not go into detail on the prevailing market rates unless you wish me to. The statement sets it forth. The rate bid by investment brokers on July 31 was in line with rates paid by the city on two previous occasions when it offered and sold its sewer revenue bonds at a price that was quite close to Moody's Index on Baa quality bonds. This is a standard index provided by an impartial investment service. The bid in July 1961, of 3.94 percent, was consistent with the Moody Index at that time. Furthermore, the financial adviser to the city was prepared to recommend that it accept the bid submitted by bankers until the city was informed the CFA might provide financing at a lower rate.

Such substitution of Federal financing for that which is available from other sources at reasonable rates is contrary to our system of government and is contrary to the express provision of the law that no Federal loan shall be made under the program unless financing is not available from other sources on reasonable terms.

Consequently, it is important when considering any similar program of Federal assistance to avoid such unnecessary substitution of Federal financing, particularly at a time when we are confronted with problems of balancing the budget and meeting an adverse balance of international payments.

We had the latter situation with us as a very crucial practical problem in 1961, according to data released by the Treasury Department recently. The adverse international balance of payments was some $2.5 billion. Agreed, it was less than that in a preceding year, when it approximated $3.8 billion, but the official sources, and I am now talking about the Treasury Department, and the Federal Reserve Board, and other agencies concerned with this problem, are quite alarmed by it, and rightfully so. It represents a very definite hazard to the preservation of the integrity of the dollar, and I think it is imperative that we have a budgetary balance in order to prevent a loss of confidence abroad, as well as domestically.

It is extremely important not to retrace that adverse balance of international payments, so that there may not be an outflow of gold and a loss of U.S. prestige abroad.

I shall not give you the details of my point No. 3. They are presented adequately in the statement. Basically they point out that existing Federal financial assistance programs provide funds to accelerate capital expenditure programs of the Federal Government and local governments.