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So you see a major expense relative to the small business as compared to the large business, and of course this is what H.R. 78 is aiming at.

We would like to on top of this very briefly go into the mechanism of H.R. 78, again to answer some questions that came up last time. I will let Mr. Eisner do that.

Mr. EISNER. The most advantageous pollution control financing possible is the assurance of tax-exempt industrial revenue bonds by a public body, the proceeds of which are used to finance pollution control facilities for a small business. Such bonds are known as pollution control revenue bonds.

To touch briefly on how it works, there is wide latitude in this type of financing under the laws of the various States, but a typical revenue bond financing for pollution control purposes would be as follows:

The public body or authority and the business enter into an agreement in which the business agrees to lease pollution control facilities from the public body. The public body, to obtain the funds for the acquisition of facility then issues its bonds, which are secured by a lien on the lease payments made by the business. The facility may also be mortgaged to a trustee for the additional security. The proceeds of the revenue bond issue are placed in a fund administered by a trustee. These funds are used to pay the cost of construction of the pollution control project as it is built. There are numerous variations on this plan. In the most common variation the business purchases the facility from the public body at the end of the lease term for a nominal consideration, thereby being considered an owner for tax purposes during the lease period. It is also possible for the transaction to be an ordinary lease with the lease payments deducted by the business as rental payments.

Public Law 68-590 provides that a corporation which enters into this type of financing can be considered the owner of the facility for Federal tax purposes, although in the typical financing the legal title to the facility remains in the public body.

In addition to the leasing route, in some States a public body may make a direct loan of bond proceeds to the business secured by a loan agreement or a note, and in other States we have the installment sale. But I would like to stress in no matter what form the transaction takes payments to the public body must be sufficient to cover debt service on the revenue bonds and other expenses incurred by the public body. The credit of the municipality or State creating the public body is not pledged to support the bonds in any way. The sole source of revenues to cover debt service must come from the small business or the business involved. H.R. 78 would shift this burden to the Federal Small Business Administration. The basic credit problem which has been touched upon earlier exists because the nature of the pollution control facilities is nonproductive. So pollution control revenue bond debt service is yet another charge on skimpy revenues. The major credit sources for funds to private industry are institutional and this is particularly true when it comes to financing nonproductive pollution control equipment.

The most significant institutional buyers of pollution control revenue bonds are banks and insurance companies, and both of these investors are under statutory and internal restraints as to the quality of the credit underlying securities in which they are permitted to

invest. The obligations of very few, if any small businesses would qualify for purchase by institutional investors. This is the reason why these obligations are at present without H.R. 78 unmarketable or marketable at interest rates which would make the whole process prohibitively expensive.

And I thought I would comment on combining these situations together, and in keeping with our goal of providing the lowest cost pollution control financing for small business, H.R. 78 proposes that pollution control revenue bonds be used to finance the facilities of a plurality of small businesses. Each of the small businesses would enter into a lease agreement for their respective share of the pollution control facilities so financed, the aggregate of the obligations under each lease agreement would equal and secure the bonds issued by the public bond, so that we would have one issue with multiple guarantees and multiple leases and multiple businesses being served. This is to hold down expenses. The SBA would guarantee each of such leases separately.

So for example if there were 10 small businesses in Ohio, each one needing half a million dollars, the Ohio Air Board would issue $5 million of tax-exempt pollution control bonds and it would use the proceeds to this issue to acquire and construct the pollution control facilities for each of the 10 small businesses. These 10 small businesses would have entered into lease agreements with the Air Board, and the lease rentals therefore would secure the bonds and the SBA would guarantee payment to the public body separately under each of the 10 lease agreements.

If there is no single statewide public body, and in fact there are two in Ohio, there is precedent to group together counties or issuing bodies, whatever they may be, and combine them into a single issue so that we can have our goal of multiple lessees in a single issue.

I think what we are anxious to do is to get through this spoken section and into the questions.

Thank you, Mr. Chairman.
Mr. SMITH. Mr. Conte?
Mr. CONTE. I have written to all the small businessmen in


district on H.R. 78 and so far the response has been just great, really favorable, they like it.

Everyone seems to welcome our attempt to find a way to use private investment to help solve some of the problems connected with pollution abatement, and they also like the idea of having the State and the local governments involved in the decisionmaking process.

I have only a couple of small questions. First, I noted that in H.R. 78 it does not specify how much of an SBA lease guarantee would be involved. In your opinion, to make the process work, would we need a 100-percent guarantee? An 80-percent guarantee? What type of a guarantee?

And, should the percentage of the guarantee be specified in the legislation ?

Mr. EISNER. I think yes, to both questions. It should be 100 percent to provide the lowest cost financing for small business and a cost which would be most parallel to your largest and best big business credits, the triple A's.

And I believe that, although I am no expert in this, that it should be set forth in the legislation.

Mr. CONTE. The other question is, the legislation places a good deal of discretion in SBA, with regards to fee setting. SBA can set fees that are reasonable and necessary.

Should we tighten up on that, specifying in the bill the fees that can be set ? Or, provide for some type of congressional veto?

Mr. ALDRICH. The objective there was to keep the program self-sustaining relative to the cost of maintaining the insurance program. And, indeed, the SBA did an analysis of it and decided that a 2.8-percent front-end insurance cost which can be financed by the bond, by the way.

As their effort of what would be realistic, I think in this case your suggestion of putting a figure—or at least arriving at a figure, in concert with discussions with your group and other congressional committees, would be a wise idea in order to control that end of the expense.

Mr. CONTE. The other thing that troubles me a little bit is that I visualize, if H.R. 78 goes through, that it has such sex appeal that we are going to sell billions of dollars worth of tax-exempt bonds.

Is there a danger here that we will be flooding the market with taxexempt bonds?

Mr. ALDRICH. We have the estimates that we think are real, relative to the way this is going to more in the next 5 years. Why do you not read them into the record ?

Mr. EISNER. These were developed by us, in conjunction with the Bank of America and Mr. Addison Parris, the senior economist at the SBA, who tragically died a month ago. And they are in the form of pessimistic, most probable, and optimistic.

And, for the first year, the most probable case would be $100 million. I would suspect that it will require substantial educating on the State authority level, and on a business level to achieve this. The most optimistic case is $200 million; and pessimistic is $10 million.

The $100 million “most probable" would be about 250 issues—250 small businesses, pardon me, with about 25 or 50 issues of bonds.

In the second year, that would go to $300 million; in the third year, $500 million; in the fourth year, $600 million; and in the fifth year, we would get to $1 billion.

We would have a total of around $21, to $3 billion out at the end of 5 years, would be the guess. Now, big business has financed $8.2 billion or so of pollution control equipment within the last 5 years, and we estimate that it would take at least as long to gear up the small business program, as it did a large business program.

Mr. CONTE. Thank you, Mr. Chairman. Mr. SMITH. Mr. Bergland ? Mr. BERGLAND. Thank you, Mr. Chairman. To follow on the questions posed by the gentleman from Massachusetts, we have a problem, of course, in trying to find ways and means of financing the Federal Government. There is growing criticism of the tax-free bond program, in spite of its merits.

There are some who argue that we need the revenue. How would the $5 billion that you think may come under this authority within 5 years time, compare with the current tax-free bond market? Do you have any idea what that may be?

Mr. ALDRICH. It is $2.5 billion, I think.

Mr. EISNER. $2.5 billion, at the end of 5 years, guesstimate. The range is anywhere from $1 to $1_$1 to $4 billion at the end of 5 years, with $2.5 billion being the most probable.

We are talking about, in any one year, the largest being about $1 billion. And we are talking about a municipal bond market last year of something like $23 or $24 billion. We have been addressing ourselves to this question and Mr. Merrill Ring, of the Bank of America is doing quite a bit of work in trying to square off against the question of-or, first of all, pollution control revenue bonds driving up the cost of borrowing to municipalities, in general. That is the basic question.

This $8.2 or $8.3 billion that is out, has it had an impact ? And, if so, is it definable ?

And then the next question is, given this progression, or a reasonable progression out of the next 5 years, in the event you pass—the Congress passes H.R. 78, and the parallel in the Senate, then what effect may that be expected to have?

And I do not think we are prepared to answer it, at the moment. We would like to present you with a finished study.

[The information subsequently received follows:]



PREPARED BY MERRILL RING, VICE PRESIDENT, BANK OF AMERICA There has been considerable publicity given in recent months to statements from the Treasury Department and certain governmental associations on the subject of pollution-control revenue bonds. The governmental associations maintain that the sizable volume of such bond issues since 1973 has had a significant impact on the general level of interest rates paid by state and local borrowers on debt sold for "traditional" public purposes. Treasury, which supports this view, would ascribe the cause to the “limited” nature of the municipal bondmarket, due chiefly to the lessening participation of commercial banks and their diminishing need for tax-exempt income.

Impact on Interest Rates.—The effect of pollution-control revenue bonds on the overall borrowing costs of states and their localities, cannot reasonably be separated in market terms from such other high-volume revenue bond issuances for health-care, housing and private university purposes. Increased investor emphasis on quality, resulting in large part from the difficulties of the New York State Urban Development Corporation and the City of New York, have imposed an inordinately high rate structure on revenue bonds as a class. While there has been some differentiation by issuer and purpose, the fact remains that present investor disinclination towards revenue bonds and their high volume of issuance have combined in mass to depress the market for state and local securities. The special obloquy reserved for pollution-control revenue bonds is likely attributed to their well publicized volume, the blue-ribbon list of corporate borrowers, the large size of individual issues, and an impaired perception that the tax-exempt benefits of such borrowing accrue only to private corporations and investors rather than to society at large.

Some perspective, to begin : the revenue-bond sector of the tax-exempt market represented 44.1% and 42.9% in turn of total bonds sold in 1973 and 1974, amounting an average to nearly $10 billion each year. By contrast, revenue bonds sold in the previous five years accounted for 35.2% of aggregates issues or an annual average of $6.6 billion. While some measure of this increase may be ascribed to antipollution bonds, their growth from $565 million in 1972 to $1.8 billion and $1.7 billion respectively in the next two years, compares meaningfully in both percentage gain and par value with the year-to-year rise in medicalcare financing from $611 million in 1973 to $1.3 billion in 1974, as well as with the $1.2 billion bonds sold for housing purposes in 1974. The comparison is even more striking through the first six months of 1975, where the rapid growth in medical-care bonds brought their issuance to nearly $1 billion, or about equal to antipollution financing during the same period. Actual figures in each case could

be appreciably larger, considering that an undetermined amount of both antipollution and medical-care debt is placed privately with commercial bonds and other investors. The outlook, in any event, is for continued heavy issuance of these bonds, with the most substantial gain likely to be registered by the housing sector.

The point of this statistical rehearsal is hardly to indict bond sales for medical care or housing. They are bona fide public purposes. But so is the antipollution effort! Environmental preservation and enhancement start in both Federal and state law as legitimate objectives of public policy. The position that pollutioncontrol revenue bonds, which ensure the lowest possible financing cost for the objective, are inimical to the greater social good, is more an indictment of state and local debt policies than a defensible illustration of an abuse of the taxexempt privilege.

Antipollution bonds require for issuance the prior approval of an appropriate state or local agency. It is with such agencies that control over debt emissions rests. Accordingly, it is upon such agencies also that the responsibility must. reside for the proliferation of antipollution bonds and any breach of the taxexempt privilege where there are greater balance-sheet gains to the corporation than pollution-control benefits to the community. The cause of neither tax exemption nor pollution abatement is served, assuredly, by the condemnation of industrial-revenue bonds by certain governmental associations. Only the foe is served.

It is a matter of record that major corporations have been the principal beneficiaries to date of pollution-control revenue bond financing. Given present laws, the nature of the financing and the prevailing credit and purchase standards of institutional investors, one result could scarcely be otherwise. In view also of the magnitude of major corporate abatement needs and the narrowing time frame for regulatory compliance, the size of individual pollution control issues is typically quite high relative to the average par value of municipal bond offerings. In the 1972–74 period, for example, antipollution bonds averaged $13 million per issue against the overall norm of $4.9 million. While the average for antipollution issues has declined somewhat through the first half of 1975, the norm for all issues has increased, owing in part to the rise in average medical-care offerings to $10.3 million from $8.3 million in 1974.

Size, however, is not without certain virtues. The bulk of antipollution issues contain one or more substantial term maturities. Where the corporation, as in most cases, is a nationally known credit, the usually large number of purchasers will increase the liquidity of the issue and enhance its investment merits over similar issues of smaller size. Less clear, on the other hand, than the advantages of issue size to corporation and bondholder are the benefits to society of a sizable interest subsidy for pollution-control revenue bonds. The original intent, of course, was to accelerate the clean-up process by ameliorating the financial burden of corporations to enable or advance their antipollution efforts. State and local governments, presumably, would authorize such bonds only in pace and keeping with comprehensive state or regional financing and planning programs for pollution control. But little of the like occurred, or could have indeed, merely by regulatory fiat. The pollution-control revenue bonds were sold, to be sure, by reason of the existing infrastructure for straight industrial revenue bonds and their suitability for large corporations. Yet it is only now that state and local governments have begun to make progress on the total financing and planning issues, given the relative newness and complexity of the problem and in spite of the mutable regulatory environment, continuing Federal and intrastate jurisdictional difficulties, and overriding fiscal and budgetary concerns.

Industrial revenue bonds for pollution-control have a significant role in the environmental effort of state and local governments, to the extent that their use is integrated into a well-conceived overall program. Mechanisms are already in place to accommodate the needs of public bodies and large corporations. Small businesses, whose claims are no less just and urgent, await equal accommodation with the passage of H.R. 78 and S. 1952. The S.B.A. guarantee which these bills would provide for lease payments between a small business and a public pollutioncontrol authority for the issuance of industrial revenue bonds, will complete the infrastructure for effective antipollution financing and enhance the opportunity for its achievement. Small businesses are an important contributor to the manufacturing output and workforce of the country. In the measure that their shutdown is averted through long-term, low-cost pollution-control bonds, the subsidy associated with tax-exempt financing will be offset correspondingly through re

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