You know better than I do, gentlemen, the authorizations that do exist and which are available. I have identified a number of them in my statement, setting forth first the grant programs that now exist and which are authorized and can operate, and, secondly, the Federal loan programs.

In these programs the Federal Government already has authorization for fiscal 1963 alone to make grants aggregating close to $6 billion for assistance to States, local governments, and educational institutions for public facilities; and authorization to make loans aggregating over $1 billion in fiscal 1963 to municipalities and educational institutions for various forms of public facilities.

Furthermore, as you know, the proposed College Academic Facilities Act, as it passed the House and Senate, and which is now awaiting reference to a conference committee, would authorize Federal grants of additional large amounts.

These substantial authorizations for Federal grants and loans provide adequate funds for the Federal Government to accelerate capital outlays by States, municipalities, and educational institutions at any time, if such action should be deemed necessary and desirable. Accordingly, it is unnecessary and undesirable to adopt the additional program proposed in the bills under consideration.

May I say also that the most effective stimulus in a recession would be a reduction in Federal personal income taxes. In the event of a recession, certain so-called built-in stabilizers, principally the automatic decrease in income tax revenues and the automatic increase in unemployment benefits, operate without action by either the executive or legislative branch of the Government. However, if an additional stimulus to the economy is needed, we believe that the most immediate and most effective device would be a reduction in individual Federal income taxes which would operate immediately to increase spendable income. This device would have the great advantage of operating to invigorate the private segment of the economy, which would need the greatest stimulus.

In this connection it should be noted that the staff report by the Bureau of the Budget, which I have mentioned previously, regarding Federal fiscal behavior during the recession of 1957-58, rated the major contracyclical policies that operated automatically in the 1957-58 recession. It stated that the so-called built-in stabilizers had the greatest relative economic impact and, indeed, that they had the additional advantage of good reversibility when the recovery period began.

Thus, gentlemen, I would like to conclude my statement by identifying the four major points which I have endeavored to present before you.

First, State and local government financing of public facilities through bond sales in the open market continues at record levels. Second, financing through bond sales and construction by local governments operate automatically on a contracyclical basis, increasing in recession periods.

Third, existing Federal financial assistance programs already provide substantial funds to accelerate capital expenditure programs of the Federal Government and local governments.

Fourth, the most effective stimulus in a recession would be a reduction in Federal personal income taxes.

Thus I conclude my statement and I shall be happy to answer any questions you may have, and let me reiterate, I appreciate the kindness you have shown me and the permission you have given me to address you.

Thank you.

(The prepared statement of Mr. McGee is as follows:)

STATEMENT BY CUSHMAN MCGEE, CHAIRMAN, MUNICIPAL SECURITIES COMMITTEE, INVESTMENT BANKERS ASSOCIATION OF AMERICA

INTRODUCTORY COMMENTS

The Investment Bankers Association of America is a voluntary unincorporated trade association of investment banking firms and securities dealers who underwrite and deal in all types of securities. The association has over 800 member firms engaged in the securities business in the United States and Canada, including about 100 commercial banks. Our members have, in addition to their main offices, about 2,100 registered branch offices. The underwriting and distribution of State and municipal bonds in the United States are done by firms which, with a few exceptions, are members of our association. We believe that the information in this statement and its appendixes will be helpful to the committee in determining whether the proposed legislation is necessary or desirable.

SUMMARY OF H.R. 10317 AND H.R. 10113

H.R. 10317 is designed to provide standby authority for the President to accelerate capital expenditure programs of the Federal Government and State and local public bodies. It would include a finding by Congress that virtually every community in the Nation has a backlog of needed capital improvement projects, and that an acceleration of these projects during intervals of unemployment would increase employment and expenditures at a time when such action is most urgently required. The President would be authorized to proclaim a capital improvment acceleration period:

(1) Within 60 days after the date when data compiled by the Department of Labor reveal that the national unemployment rate adjusted for seasonal variations and stated to the nearest one-tenth of 1 percent of the civilian labor force, (i) has risen in 3 of the 4, or in 4 of the 6, most recent consecutive months for which such data are available, and (ii) has risen by not less than 1 percentage point measured from the month immediately preceding such 4 or 6-month period to the last month of the period; and (2) After the President has determined that existing employment and unemployment indicators and other available economic data clearly reveal that extraordinary action is needed to assure achievement of the objectives of the Employment Act of 1946.

During the existence of a capital improvement acceleration period, the President would be authorized, among other things (through executive agencies) to: (a) Direct Federal expenditures aggregating $750 million to accelerate Federal capital improvement projects or to initiate new projects already authorized by law.

(b) Direct Federal grants aggregating $750 million to States and municipalities to finance the initiation or acceleration of capital improvement projects for which Federal grants are authorized by the Congress or which are not eligible for grants under other acts of Congress; provided that the amount of any grant shall not exceed 50 percent of the cost of undertaking and completing the project.

(c) Authorize Federal loans aggregating $250 million to States and municipalities which otherwise would be unable to meet their share of the cost of projects for which grants are authorized. Such loans would be made at an interest rate determined under a formula in the bill, which presently would be 3% percent.

(d) Allocate an aggregate of $250 million among the foregoing programs to supplement the available funds.

Restrictions on financial assistance under the proposed act would include requirements that the project or program (1) can be initiated or accelerated within a reasonably short period of time, (2) will meet an essential public need, (3) if initiated under the act, can be completed within 12 months after initiation and (4) will contribute significantly to the reduction of unemployment. H.R. 10113, a similar bill, would provide the Public Works Coordination and Acceleration Act. This would establish an Office of Public Works Coordination and Acceleration and, if the unemployment rate reached prescribed levels, would authorize the President through the Director to allocate (a) an aggregate of $500 million to accelerate construction of Federal public works projects, and (b) an aggregate of $1.5 billion for Federal assistance to accelerate construction of State and local government public works projects; provided, that no such funds shall be made available to any State or local government unless the public works project results in a net increase in the current annual level of expenditures of such government for capital improvement projects. This bill would also amend the community facilities program (sec. 202 of the Housing Amendments of 1955) to authorize Federal grants-in-aid, up to 50 percent of the cost of construction of any public facilities project, to any municipality eligible for Federal assistance under that program-without regard to requirements therein that the financial assistance not be otherwise available on reasonable terms and that it be extended only to municipalities with a population not in excess of 50,000 (or 150,000 in a redevelopment area).

It appears that the principal question for the committee is whether the proposed program is necessary, desirable, and the most effective means to accomplish the desired result.

(1) State and local government financing of public facilities through bond sales continues at record levels

In considering any proposal to provide Federal assistance to States and municipalities for financing public facilities, it is essential background to consider whether States and municipalities can and are financing needed public facilities without the proposed assistance.

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, as evidenced by the total sales of new issues of State and municipal bonds during each of those years:

Attached as appendix A is a list of the total amount of new issues of State and municipal bonds sold in each State in 1961 (a preliminary tabulation, not yet complete). Attached as appendix B is a list of the 3,629 new issues of State or municipal bonds sold during the first 6 months of 1961 (January-June). We request that these appendixes be included in the printed record of the hearings because the information in them is essential in considering whether financial assistance is necessary in the financing of public facilities by State and local governments.

The high level of sales of new issues of municipal bonds has continued this year with sales aggregating over $1.9 billion during the first 2 months (JanuaryFebruary 1962).

For many years advocates of various programs of Federal financial assistance to States and municipalities have alleged that local governments were no 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 also made 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. Again, the record disproves such claims and demonstrates that small municipalities can and do obtain favorable rates on their financing. For example, during the first 3 months of 1961 (January-March), municipalities with population under 10,000 sold in the open market 305 issues of general

obligation bonds aggregating over $102 million; and over 92 percent by dollar amount of these issues were sold at a net interest cost under 4 percent.

(2) Financing through bond sales and construction by local governments operate automatically on a contracyclical basis

The record during the last three recessions has demonstrated that financing (and the resulting construction) by State and local governments has operated automatically on a contracyclical basis. Projects which are less readily postponable, such as schools, water and sewer projects, have in general been financed when they have been needed. However, the record indicates that many postponable projects have been held until interest rates declined. 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 iocal 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" (p. 39).

This

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. result was recognized in the staff report from the Bureau of the Budget in January 1960 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. 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.C. 1491–1493) authorizes long-term Federal loans to municipalities for community facilities at an interest rate determined under a formula in the law (presently 3% 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 3% percent (one-quarter 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 1-20 years.

37.8 percent by value and 42.1 percent by number of issues maturing 21-25 years.

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

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When $4 million of Charleston, W. Va., sewer revenue bonds were advertised for bids on July 31, 1961, seven bids were submitted by investment bankers, the best bid providing a net interest cost of 3.9453 percent. However, a representative of the CFA present at the opening of the 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 cost of 3% percent or lower (the so-called reasonable rate applicable in a redevelopment area) investment bankers purchased $485,000 of the early maturities and the CFA proceeded to buy the balance of about $3.5 million.

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. The facts clearly refute a statement by a Federal official that the city, on the basis of past experience, expected bids at an interest cost of 3 or 34 percent. On the two preceding issues of Charleston sewer revenue bonds in 1955 and 1957 (which had comparable maturities), the interest rates obtained were close to Moody's Baa municipal index at those times, so that Charleston would expect to obtain an interest rate close to that index on its sewer revenue bonds. On the date in question Moody's Baa index indicated an interest rate between 3.9 and 4 percent, so that the best bid submitted by investment bankers (3.945 percent) was in the range to be expected by the city. We have been informed that the financial adviser for the city was prepared to recommend that the city accept the bid of 3.945 percent until the city was informed that the CFA might provide the 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 in the law that no Federal loan shall be made under the program unless the 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. The requirement in H.R. 10317 that the project can be initiated within a reasonably short period of time and the requirement in H.R. 10113 that no funds shall be made available to any State or local government unless the project results in a net increase in the current annual level of expenditures of such government for capital improvement projects would not avoid substitution of Federal financing for that available from other sources because (a) proceeds of municipal bond sales (increasing automatically on a contracyclical basis as indicated by past experience) could initiate construction projects just as quickly as Federal funds and (b) since most new capital improvements by a local government would increase its level of expenditures for capital improvements, Federal funds normally would not increase the level of such expenditures above that which would be obtained by regular municipal financing from private

sources.

(3) Existing Federal financial assistance programs provide funds to accelerate capital expenditure programs of the Federal Government and local governments

It is not necessary to detail here the billions of dollars authorized for direct expenditure by the Federal Government on public works and military construction. However, since the primary emphasis of this statement is on the lack of necessity for additional Federal assistance to State and local governments, it is appropriate to summarize briefly some of the presently authorized programs which could be used to accelerate capital expenditures by States and municipalities. Some of the major Federal grant programs are the following, which include varying requirements for matching funds by the State or local government:

(a) Urban renewal capital grants of $2 billion are authorized to help defray the net cost of projects. (This amount authorized under the Housing Amendments of 1961 is in addition to $2 billion previously authorized.)

(b) The Federal Highway Act of 1956 as amended by the Federal Aid Highway Act of 1961 authorizes Federal grants of $2.4 billion in the fiscal