March 28, 1968
Page 8196
Meeting National Needs and Relieving Pressures on State and Local Bond Markets
HON. EDMUND S. MUSKIE OF MAINE IN THE SENATE OF THE UNITED STATES Thursday, March 28, 1968
Mr. MUSKIE. Mr. President, the spiraling requirements for public investment in educational facilities, housing, sewage treatment systems, transportation, and other public facilities are being felt in many quarters. As Members of the National Congress we are conscious of the impact on the Federal budget.
Recently, Bureau of the Budget Director Charles J. Zwick addressed himself to the problems States and municipalities are facing in trying to meet their share of these necessary investments.
He noted particularly the pressures which have developed on the market for State and municipal tax-exempt bond issues and the adverse impact those pressures have had on the cost of State and local borrowing.
The administration has suggested several remedies for the State and local financing crisis, none of which would interfere with necessary public investments. One of the remedies is contained in the new contract financing system which the President proposed for the sewage treatment construction grant program. It is a remedy which will relieve pressures on the Federal budget and the State and local tax-exempt bond market at the same time. The proposal is contained in S. 3206, which is now pending before the Senate Committee on Public Works.
I commend to my colleagues Mr. Zwick's remarks to the Municipal Finance Forum, March 19, 1968, and ask unanimous consent that they be printed in the RECORD at this point.
There being no objection, the remarks . were ordered to be printed in the RECORD, as follows:
REMARKS OF CHARLES J. ZWICK, DIRECTOR OF THE BUREAU OF THE BUDGET, BEFORE THE MUNICIPAL FINANCE FORUM OF WASHINGTON ON "THE "FEDERAL BUDGET AND STATE AND LOCAL GOVERNMENT FINANCE," WASHINGTON, D.C., MARCH 19, 1968
I am pleased to have this opportunity to discuss with you a topic of unquestioned timeliness and importance – the impact of the Federal budget on State and local government finances. At the same time, I want to commend you and wish you well in your efforts to promote an effective dialogue on State and local financial requirements. One of the identfying features of our federal system of government as it exists today is the heavy reliance placed on a genuine partnership of interest and efforts among the private sector of the economy and Federal, State, and local governments.
We have come to realize that it is myopic to speak of "local problems" in fact, we have national problems which typically manifest themselves most acutely at that level of government which bears primary, but not sole, responsibility for their solution – i.e. the local community. The solutions to many of these national problems, therefore, must draw upon the combined resources and expertise of the private economy and all levels of government. The resultant marriage, while not always harmonious, is nevertheless both necessary and fruitful. Your own efforts to promote a better understanding of these joint interests and problems are well-placed and, hopefully, will contribute toward more effective solutions.
I. NEW BUDGET CONCEPTS
Before looking closely at the various threads of fiscal federalism running through the Federal budget for fiscal year 1969, I must say a few words about the basic format of the new budget. We will, in effect, be celebrating the "rites of spring" a little early this year with a new organization being introduced to a new budget concept by a new Director.
It was just a year ago that the President appointed a group of 16 distinguished citizens to review the concepts and format of the Federal budget. The Commission was chaired by Mr. David M. Kennedy, Chairman of the Board of the Continental Illinois National Bank and Trust Company of Chicago and included eminent Congressmen, economists, accountants, and similarly knowledgeable spokesmen from other walks of life. Their assignment was to improve and clarify the budget as a vehicle of public policy, in order to enhance its usefulness for the public and Congress alike.
The President's Commission on Budget Concepts issued its report in October 1967. The budget submitted last January incorporates most of the important recommendations made by the Commission. The new concepts stress:
A single, unified format. In a 1-page summary statement, the new budget displays Federal spending, lending, receipts, and debt on a consistent and reconcilable basis. This largely replaces the older competing budget statements: the "administrative" budget, "consolidated cash," and the "Federal sector" of the national income accounts. Whenever the term "budget" is used now, it refers to the unified budget format – thus removing some of the ambiguity which prevailed when several "budgets" existed.
Comprehensive coverage. – The new concept embraces all activities of the Government, including about $47 billion in trust fund spending which was excluded under the old "administrative" budget. As a result, Federal spending appears to increase significantly over the older numbers to which we had become accustomed. But in real economic terms, the impact on demand of all that spending and taxing has always been there – whether counted or not.
The difference between spending and lending: The new budget recognizes the differing impact on the economy of Federal spending – which adds directly to current incomes – and the repayable lending activities of the Government, which represent essentially an offsetting exchange of financial assets. This treatment does not assume that the loan account has no impact on the economy, it merely recognizes that its effects are different in kind from those of direct spending.
Finally, certain loans are counted as spending rather than lending. These include foreign loans made on noncommercial terms and domestic loans where the terms of the contract make repayment contingent in some respects. Eventually, we hope to be able to cover the grey area between these "soft" loans and strictly commercial loans, by imputing a direct spending "charge" for any subsidy element which may exist in the loan terms. Thus, the capitalized value of the interest subsidy will be shown in the "spending" account at the time the loan is made. It will take some time to implement this recommendation of the Commission, however.
Other aspects of gauging economic impact accurately.– The Commission recommended that certain business-oriented receipts be offset or netted against their related expenditures to provide a more reliable guide of the net impact on the taxpayer. This proposal has been incorporated in the budget. We are working on another far-reaching Commission proposal, that of putting expenditures on an accrual basis. Our efforts to put tax payments on a more current basis in the past few years has already moved receipts close to an accrual approach. This will permit us to judge the current economic impact of the budget much more accurately than if the lags remained.
Participation certificates as borrowing, not receipts. – As recommended by the Commission, we now count the sales of participation certificates as means of financing the deficit, i.e., the same as the issuance of Treasury securities.
II. FISCAL FEDERALISM
Now that we have established the nature of "the budget," let's look a little more closely at those elements in it which directly affect State and local finances.
The "partnership" approach to solving problems which I mentioned earlier is not a revolutionary idea which arose full-blown in the mid-1960's. It has been with us, in one form or another, since the colonies banded together. National assistance for locally administered programs actually predates the Constitution. The Articles of Confederation in 1785 provided for grants of Federal land to support education in the Northwest Territory. The seeds of partnership can also be seen in the generous land grants for railroad expansion. The canal work on the Great Dismal Swamp in the early 19th Century was a combined effort of a joint stock company, the U.S. Corps of Engineers, the State of Virginia, the State of North Carolina, and the City of Norfolk. Many other early examples can be cited of this multilevel, public-private approach.
The technique is not new, but its use has been greatly expanded in scope in the last four or five years. In this sense, we may be experiencing a kind of quantum jump where a sizable change in degree is producing a change in kind. The reasons for the upsurge in multi-level, public-private undertakings are manifold and complex. At the risk of oversimplifying, let me cite two key factors:
(1) Rising demand for services: There has been a steady and impressive increase in the demand for services at all levels of government, but especially for the kinds of services provided locally. These demands have been fueled by increasing population, urbanization, rising incomes, accelerating economic growth – and the concomitant need for the training and education which such growth both requires and stimulates, and a host of related elements too numerous to mention.
(2) Complexity and magnitude of problems: As we moved forward to grapple with each of these problems individually, it soon became clear that many of them were closely interrelated. The boundaries between Problem A (e.g., poverty) and Problem B (e.g, inadequate education) are indeterminate; cause-and-effect relationships become lost in a complex system. Recognition of these interrelationships prompted comprehensive attacks, but it also brought home at an early stage that the solutions could not be bought at "dime store" prices. If the problems were to be met, all available resources would have to be marshaled. Thus, the characteristic partnership patterns were forged for such endeavors as Community. Action Programs to combat poverty; Model Cities to revivify large blighted areas in the Nation's core cities; the Concentrated Employment Program to provide training, job placement, and other employment services in areas of the city where they are most needed; and a variety of similar efforts.
To help meet these critical national problems, the Federal Government tripled its grants-in-aid to States and localities in the short span of a decade. Federal aid, which was $6.7. billion in 1959, will surge to an estimated $20.3 billion for 1969. In fact, the $20.3 billion estimate for 1969 represents a doubling in just the last five years alone.
More than one-fifth of all Federal expenditures for domestic purposes that takes the form of grants to other levels of government – an increase of one-third during the decade.
Federal funds are also becoming increasingly important in the budgets of State and local governments. The latest estimate available reveals that Federal grants constituted nearly 17% of all State and local general revenues in 1967 compared to 13½ five years ago. This increase in the Federal share took place despite efforts to raise revenues on their own behalf which can best be described as "valiant." State and local governments have more than doubled revenues from their own sources over the 10-year period 1956-66. Nearly half of the increase was eked out by raising tax rates – a kind of political parlor game akin to Russian roulette at election time. During the same time span, State and local debt rose nearly 120% – or seven times as fast as the Federal debt.
The contours of Federal grant programs and their relative growth rates have been heavily influenced by national priorities as hammered out in the legislative process. For example, heavy stress has been placed on:
Equalizing opportunity (with sizable grants for the Office of Economic Opportunity, education aid to children of poor families, and "Medicaid").
Stimulating economic growth (with large amounts going for education at all levels, manpower training, and regional economic development).
Meeting urban problems (With total aid to urban areas trebling between 1961 and 1969).
Finally, a recent trend toward more comprehensive and flexible approaches has reflected the nature of the problems to which the grant programs are addressed. Community Action Programs, Model Cities, and the Partnership for Health program all combine a multiplicity of approaches and leave the setting of priorities largely in the hands of the grant recipient. In like manner, recent proposals would make a number of education and training grants more flexible and hopefully more effective.
III. PRESENT FISCAL SETTING.
While the current response to needs has been impressive, the problems we face show few signs of shrinking. As a matter of fact, both the scope and magnitude of manifest public needs have risen to almost staggering proportions. We have made great strides forward, but many formidable challenges remain. To cite a few examples:
Persistent poverty continues to gnaw at our conscience, dampen aspirations, and even threaten our security;
10% of our housing stock, most noticeably in core city areas, is in poor condition – a result of decades of neglect, and
Air and water pollution threaten to strangle us in our own affluence.
The report of the President's Commission on Civil Disorders adds one further note of urgency to the problems which our society must face. It emphasizes the need for simultaneous, rather than sequential, approaches. We can't wait for Problems A through D to be solved before we attack the remaining ones. Rather, we must make some inroads on all of them – and soon.
Yet, it would be an exercise in hyperbole to say that our current resources to accomplish these aims are limited. The sober facts are that our resources are stretched to their limits or beyond – to the point where we must seek new revenues and new financing techniques. The proposed income tax surcharge and other revenue measures are absolutely mandatory to: restrain inflationary pressures; relieve pressure on financial markets; and restore order to the international financial markets.
In the present context of acute fiscal stringency, private enterprise and State and local governments must bear an increasing share of the burden of coping with America's domestic problems. The Federal budget deficit is estimated to approach $20 billion for the current fiscal year, and $8 billion for fiscal year 1969. Only time will tell what additional demands may be placed on the budget, or how the Congress will respond to our proposal for increased taxes.
Clearly two back-to-back deficits in the neighborhood of $20 billion would place a severe strain on an already high-employment economy and frenetic financial markets.
Many of these requirements would have come home to rest on private and State local shoulders even in the absence of added demands for Vietnam, because of our growing reliance on an effective partnership of resources in solving deep-seated and complex social problems. There are few institutional alternatives for dealing with housing problems for low-income people, for example. We have, therefore, been especially concerned that these expanded requirements might place excessive burdens on the tax-exempt bond market.
IV. PRESSURE ON THE MUNICIPAL BOND MARKET
It may be useful to review briefly the broad developments and prospects for the municipal bond market now – before discussing later some of the new policies designed to avoid any untoward pressure on that market. I would not want to pose as an expert on the market – least of all before this forum. However, as an amateur kibitzer with a great interest in the financial future of State and local governments, as well as in the welfare of the Federal taxpayer, I should like to summarize some of my impressions and the conclusions I draw from them.
1. Over the past two decades, new capital issues of State and local governments have been rising with few interruptions from $2.3 billion in 1947 to $11.3 billion in 1966. In 1967, new capital issues will exceed $14 billion. The net increase in outstanding State and local debt as a percentage of the gross national product has been gradually rising.
2. The outlook for the next decade is for more of the same. A study done by the Joint Economic Committee 15 months ago, for example, projected a rise in the total State and local debt from $100 billion in December 1965 to well over $200 billion by the close of 1975.
3. With the increased demand for funds for all types of State and local borrowing, the annual average yields on prime long-term obligations have risen from 1.45 in 1947 to 2.51 in 1956, and still higher recently to 3.67 in 1966 and 3.74 in 1967. As you know, the interest rates paid on new issues are even higher. For example, the public housing bond sales this month involved a net interest cost of 4.43% – the highest in the history of this program.
4. Any sizable relative increase in net offerings of tax exempts causes yields – the market measure of the cost of municipal financing – to rise more rapidly than yields on taxable obligations. This is primarily because the tax-exempt bond market at present yields is limited to buyers with relatively high marginal tax rates. Again citing the Joint Economic Committee study, a rapid increase in volume of municipal credit demands could exhaust the market from such buyers and cause yields of municipals to rise to as much as 90 % of corporate yields, compared to the 75% to 79% ratios prevailing in the 1955-65 decade.
5. A large share of the increased funds required by State and local governments in the past two decades came from commercial banks. Unless present trends are reversed, they must provide an even larger share of the increased financing projected for the 1965-75 decade. The ability and willingness of banks to add to their municipal portfolios at current yields, however, depends to a considerable extent on monetary policy. If economic conditions require tighter credit, the market for municipals declines and yields increase. This was clearly visible in the "credit crunch" of August-September 1966, when the spread between long-term U.S. bonds and high grade municipals reached a low of 74 basis points in the week ending September 2, 1966.
V. FINANCING REQUIREMENTS FOR HOUSING
With this impression of the demands on and limitations of the municipal market as background, I would like to talk for a moment about the special impact which Federal housing programs can be expected to have on the municipal market. These programs right now probably have a greater influence on the capital markets than any other activity of the Federal Government outside of its direct borrowing. In fiscal year 1967, the Federal Government issued new commitments to guarantee almost $17 billion of private borrowings, of which about $14 billion was for housing.
The comparable estimates for 1969 are $25 billion in total borrowings and $20 billion specifically for housing. Moreover, one of these programs – public housing – relies on local tax-exempt borrowing and thus has a direct impact on the municipal market.
The President's recently announced housing production goals can be expected to increase this impact on the capital market in general, and on the municipal market in particular, for two reasons:
Accomplishment of the goals will substantially increase the demands on the mortgage market.
Changes will be proposed to allow housing to be able to compete more effectively for the same capital funds on which the municipal market must also draw.
More importantly, an expected expansion of the public housing program will compete directly with other municipal borrowing.
I think it is worthwhile to discuss these goals here, and to describe the proposed new housing assistance programs which are geared to avoid undue reliance on public housing and its demands on the municipal market.
In his February 22 message on the crisis in the cities, the President asked the Congress to recognize a goal of starting 26 million housing units over the next 10 years. Just looking at the goal in terms of averages for a moment, it means that for the next 10 years we should be starting 2.6 million units of housing annually. Over the last 10 years, this country started an annual average of 1.4 million units. Starting 12 million more units each year will obviously require substantial amounts of additional financing. Additional net mortgage requirements could reach as high as an average of $20 billion a year. Over the last four years, net mortgage flows have ranged from $38 to $50 billion a year.
Let me point out that I have been talking in averages. Production will not, and cannot, start with an increase of 1.2 million units immediately. Actually, the projection for fiscal 1969 is only 1.7 million housing starts, 300,000 above the average for the last 10 years, and only slightly above the 1964 level for actual starts. Housing starts for 1970 and 1971 are projected at 2 million and
2.1 million, respectively.
As the President stated in his message, these housing goals can be attained only if the Congress takes steps now to insure strong, stable economic growth for the Nation as a whole. If our economy continues to thrive, additional savings will be available for the augmented investment levels needed, in housing as well as in other sectors. This is one of the reasons the tax surcharge is so urgently needed.
However, additional steps must be taken to allow housing to compete on an equal basis for the supply of investment funds. New proposals this year would:
1. Free the FHA and VA mortgage interest rates from arbitrary legislative ceilings. To attract sufficient savings capital, mortgages must provide a yield equivalent to that available from other investments, without the clumsy device of deep discounts (or points) on origination.
2. Encourage the translation of mortgages into debt instruments more convenient for large investors by:
Providing a Government guarantee of bonds issued against pools of FHA or VA mortgages by private financial institutions; and
Establishing the FNMA secondary market operations as an independent, privately owned corporation, borrowing on the private market for the purpose of buying mortgages to meet mortgage market needs.
These steps should help assure that necessary private financing will be available to meet the Nation's housing goals.
However, we realize that there are many families that need standard housing but cannot afford to pay the full cost without spending a disproportionate share of their incomes. The Nation has long recognized the need to assist low-income families in obtaining decent housing, and has been providing such aid for over 30 years. Within the total 10-year housing goal, therefore, the Federal Government plans to provide direct-assistance for some 6 million housing units.
In the past, the principal means for rendering assistance has been the low-rent public housing program. Under this program, tax free municipal bonds are issued to finance housing construction. The Federal Government provides needed funds to local housing authorities to enable them to pay the principal and interest on the bonds. Over 850,000 units of public housing have been, or are being, made available to low income families. However, no one expects that the public housing program can provide the necessary funds for the 6 million units of assisted housing which will be required over the next 10 years. There are many reasons for this: local political and social problems, need for greater involvement of private enterprise, and perhaps not the least, the limitations of the municipal bond market. Other approaches to provide housing assistance are obviously necessary.
The Government began one such approach in 1959, when low interest rate loans for housing for the elderly were first authorized. This notion was expanded in 1961, with the initiation of the so-called "221-d-3" program to provide housing for families with low and moderate incomes. Under this program, the Federal National Mortgage Association, within its special assistance functions, buys FHA-insured mortgages on rental housing that bear interest rates substantially below the current market interest rate. The interest rate on loans in these two programs is now 3%.
However, we have long recognized that direct, low-interest-rate loans is an inefficient way to use scarce current budget dollars to provide a subsidy. These programs, for example, require the Government to pay out $13,000 immediately in order to reduce the tenants' rent by $25 a month. Moreover, a low interest rate loan provides a fixed subsidy, that cannot be varied to meet needs or respond to changes in the tenants' own ability to pay.
For these reasons, the Administration is relying on the public housing technique of providing needed subsidy through periodic grants, rather than immediate disbursements on low interest rate loans. In 1965, the President proposed, and the Congress adopted, the rent supplement program. These supplements make up the difference between 25% of a tenant's income and the rent needed to cover the costs of his apartment.
This year, the President has proposed extending this principle to two new programs, by substituting interest subsidy payments for direct low interest rate loans.
One of these programs will replace the two existing low interest rate loan programs I just described. It will provide a greater maximum subsidy, but at a lower current drain on the Federal budget. Under the proposal, the Government will contract with private housing owners (cooperatives, nonprofit organizations, or limited dividend corporations) to pay an interest subsidy on mortgages issued to cover the cost of building the housing. The subsidy will reduce the effective mortgage interest rate to as low as 1%. Basic rents will be established to enable the owner to cover operating costs and amortization of the mortgage at the subsidized 1 % rate. Tenants will pay the basic rent, or a higher amount up to 25% of income. Rents collected in excess of the basic rent will be returned to the Government for use in making the interest subsidy payments.
The second program is an improvement over the subsidized home ownership program proposed by the Senate Banking and Currency Committee in S. 2700, reported out last year. Under the President's proposal, the Government would make payments on mortgages on new housing sold to low or moderate income families. The payments would be calculated to keep the owner's mortgage payments at 20% of his income. However, the Government payment could not reduce the owner's payment below the amount needed to amortize a 1 % mortgage.
These programs, which will rely on the mortgage market for financing, are expected to provide the bulk of the 6 million assisted housing units needed over the next 10 years. The low rent public housing program is expected to provide only one-fourth of the total.
This means that we expect 1.5 million units of public housing to be provided over the next 10 years. We can expect this to require municipal bond financing of about $25 billion, or an average of $2.5 billion a year. This average compares to the $472 million of new public housing bonds issued in fiscal year 1967, and the $700 million expected this fiscal year. Again, this is an average and should not be expected to be reached next year. In fact, we estimated in the budget that public housing bond issues in fiscal 1969 will total $12 billion. To meet the average of 150,000 public housing units annually over the next 10 years, we expect to reach a peak of 200,000 starts in fiscal year 1972, which should translate into a similar number of completions to be financed with public housing bonds in the following year. In 1973, therefore, the municipal market should expect to finance some $3 billion to $3.5 billion of public housing bonds.
VI. MEASURES TO ALLEVIATE STRESS
The increased housing program, along with all the other anticipated requirements for State and local borrowing, will add to the demand for municipal financing. In this situation, we believe it is in the interest of both the municipal borrowers and the Federal taxpayers, in planning Federal assistance to State and local governments, to seek ways in which to relieve the increasingly heavy pressures on tax-exempt financing.
Several measures have been adopted recently or are now proposed to accomplish this objective.
(1) Preventing abuse of the tax-exempt principle.– The most rapidly increasing type of tax-exempt financing has been the so-called "industrial development bond." These bonds are issued at tax-exempt rates to provide facilities and services to private firms at interest rates not otherwise obtainable. The intense competition among the States to offer such advantages has been aptly termed the "New War Between the States," and leaves the private business firms as the chief gainer, and the Federal Treasury – and the general taxpayers – as the ultimate losers. Moreover, to the extent to which these industrial development bonds drive up the costs of other State and local borrowing, then these same States and localities can also be counted among the losers.
In 1962, some 23 States had authority to float tax-exempt securities for such private industrial purposes, and the value of new issuances at that time was less than $70 million. However, by 1967, 40 States had such authority and new issuances had skyrocketed to an estimated $1.3 billion. In response to this staggering pressure on the tax-exempt market and the abuse of the tax-exempt principle, the Internal Revenue Service issued Technical Information Release 972 on March 6, 1967 – indicating that the Treasury Department was going to reconsider the tax-exempt status of bonds for industrial development purposes. Draft regulations, effective March 15, 1968, would require income from these obligations to be treated as regular income rather than be tax exempt. This should reverse the unhealthy trend for large, corporate borrowers to add to the congestion in the markets for tax-exempt bonds for traditional public benefits.
(2) "Debt service" grants for water pollution control.– One new funding mechanism has been developed to meet the relatively unique problems associated with water pollution control. The Water Quality Act of 1965 revolutionized the Nation's fight against water pollution. Rather than piecemeal efforts, the Act required comprehensive national water quality standards for all interstate and coastal waters. These standards, required from the States as of July 1, 1967, were to contain quality criteria to meet designated water uses, and concrete implementation plans – firm-by-firm and city-by-city to meet the standards. Although the law was not explicit, the general intent was that treatment facilities were to be installed within five years. The Clean Water Restoration Act of 1966 authorized $3.4 billion for grants to help communities meet the standards.
The dilemma is obvious. How can we greatly accelerate construction of treatment facilities to meet standards required by law during the period of budgetary stringency? The President proposed a comprehensive program to resolve this problem in his recent conservation message – "To Renew a Nation."
(a) The program would no longer be funded by direct lump-sum grants only, as is now the case. Instead, the Federal Government would also be authorized to make periodic principal and interest payments over a period up to 30 years on the Federal share of State and local borrowing to finance the needed treatment facilities. Under this program, the Secretary of the Interior would enter into long-term contracts with States or municipalities to make the periodic debt service payments, either to them, or in some cases, to the bondholder.
(b) The interest income to private investors on obligations issued by States and localities to finance these projects would be subject to Federal income taxation.
(c) The States and localities, however, would receive an interest subsidy adequate to bring their costs down to a level reasonably comparable to tax-exempt rates. Thus, there would be no financial disadvantage to States or localities under this program.
Without these latter – somewhat novel – provisions, the water pollution control program would add substantially to the volume of new issues of tax-exempt bonds by State and local public bodies.
For example, the currently-authorized program levels would enable local communities to begin construction of approximately $8 billion of waste treatment plants over the next three fiscal years. Apart from the Federal grants, almost $5 billion of the financing would be provided through borrowing by the State and local public units. To add such requirements to the tax-exempt market would be particularly undesirable in view of the already large volume of municipal bond issues and the current high interest rates which States and localities are required to pay. Making the proposed new bonds taxable rather than tax-exempt would avoid adding pressures on the municipal bond market and would thus result in long-term savings in interest costs to States and localities on their borrowings for other urgent needs, such as schools, roads, and other public facilities.
Both the payments on the Federal share and the interest differential may be fully guaranteed by the Federal Government. This provision, plus the flexibility allowed in making payments, should help greatly to make the obligations sound and marketable instruments.
We have discussed this proposal with representatives from State and local governments. We have had a frank exchange of views, especially on the question of requiring that, for the purposes of participating in this specific program, bonds issued must be taxable. We do not believe this proposal erodes the principle of tax exemption, since general tax exemption is not challenged in any way. Actually, the proposal recognizes and underscores the necessity for reasonable interest rates if State and local governments are to make the large public facility investments necessary in the near future. It does this by offering an interest subsidy to reduce costs to levels comparable with those of tax-exempt borrowing. Finally, the regular direct waste treatment grant program will continue, and communities will retain the opportunity to utilize this program alone if they so desire.
VII. CONCLUSION
In conclusion, we recognize that extraordinary demands are now being placed on the
municipal bond market. The foreseeable future holds few prospects for abatement in these requirements. If anything, the market will be called upon to provide ever-increasing amounts of capital for essential public programs. It seems clear at this point that State and local debt outstanding will soon be increasing at an annual rate of $10 billion or more, as forecast in the study done by the Joint Economic Committee. Keeping in mind the projections of several billions of tax-exempt financing each year for public housing, an additional $2 to $3 billion a year for pollution control facilities, and several billions of industrial development bonds each year, it is conceivable that the combined effect would be to double the annual increase in tax-exempt bonds. Thus, it is clear that some actions must be taken. We are proposing means to alleviate that pressure on many fronts
Increased taxes, to relieve some of the congestion in the general money market;
New debt instruments, and heavier reliance on some older ones, to help ease some of the pressure on the tax-exempt market; and
Termination of tax exemption for industrial development bonds, to relieve the municipal market of inordinate private demands on limited public resources.
None of these changes will be easy to obtain, despite their benefits for State and local financing.
Here is a golden opportunity for your newly-formed organization to perform a key role in promoting public understanding for the need for such change. There are few alternatives available to meet pressing national goals within the narrow confines of today's limited resources.