Municipal water and sewer bonds sold in January and February 1959—Continued 1 Where the net interest cost of an issue was not immediately available from our records, there is a notation. In a few issues where several issues were sold together by the same issuer at the same time, the net interest cost given is the combined net interest cost for all of the issues. 2 Not available. Mr. SPENCE. Your organization is basically opposed to governmental loans to municipalities for community facilities, is it not? Mr. CALVERT. I would have to answer that by saying that we are opposed to the program proposed in this bill. Mr. SPENCE. How do you stand on the rest of the things that you have mentioned? Weren't you opposed to all of them? College housing and all the loans provided under the housing bill? Mr. CALVERT. Of the programs that are listed in our statement under the point (3) to the best of my knowledge the only one that we have opposed in any degree was the college housing loan program, because the interest rate in that program resulted in exactly what would result here, and that is that practically all of the college housing is now being financed by the Federal Government. We did not to the best of my knowledge, oppose any of the other programs. Mr. SPENCE. I notice in your statement a tabulation of interest rates paid by municipalities. There are three bond issues in my district: Campbell County, Cold Spring, and La Grange. All of them were very much over 4 percent. There is another town in my district which recently issued bonds. They had to sell at par, and the interest rate was 4.76; Carrollton, Ky. Why is it some of these cities have to pay these high rates while others can obtain lower rates? Can you tell me that? Mr. CALVERT. Yes, sir, I will try. Might I preface my answer to that by saying that we are preparing for publication later this year, a handbook on fundamentals of municipal bonds. One chapter of that book will deal with practical suggestions for issuers marketing municipal bonds, how issuers can obtain the best bids on their bonds. Another chapter will deal with analyzing municipal credit general obligations. Another chapter will deal with analyzing municipal credit revenue bonds. Now, to come back to a more direct answer to your question, Mr. Chairman, there are many factors that go to make up differences in risk involved in the purchase of bonds. All bonds that are sold must face the competition in the money market of other bonds that are sold. So that when bonds are offered by an issuer whose credit is suspect, or whose issue involves a greater risk than some other issue, the competitive factors demand a higher rate of interest on those bonds than on the better credits. Now, going directly to the rates to which you have directed our attion in Kentucky, actually I think your Kentucky credits are going very well, because you have nothing there over 4.9. Some of them are down as low as 2.7 and 3.1, which seems to compare very favorably, when you consider that most of these are long-term bonds, and comparing that with the fact that the Federal Government, in its most recent issue of bonds, with only a 10-year maturity, had to pay an interest rate of about 4 percent. So here you have a gap of less than 1 percent interest between credits of small municipalities and that of the Federal Government, which is considered the primary credit of this country. Mr. SPENCE. I am talking about a municipality that has to pay 4.9. Mr. CALVERT. Yes, sir. Mr. SPENCE. Why do some of them have to pay 4.9? Mr. CALVERT. Because the risk is greater in that particular municipality than in the one that had a lower interest rate. Mr. SPENCE. Who defines that risk? Mr. CALVERT. The money market defines that risk. The investment bankers who underwrite on bonds and investors who purchase the bonds, analyze very carefully the many factors that go into the risks involved, and there are millions of dollars of these bonds offered every day. It is for that reason that I directed attention to these chapters in our book, because one of those, on how the municipality should set up its issue, is a list of recommendations of what they can do to improve their credit, to lessen the risk, and to get better bids. The other chapters that I referred to on analyzing municipal credit point to the factors at which investment bankers and investors are going to look in determining the risk in buying those bonds. Mr. SPENCE. I might tell you that this bill might be addressed to the benefit of those who have to pay this higher rate of interest and who cannot get the funds necessary for adequate water supply and sewage treatment works unless they do borrow the money. If they cannot borrow the money the program to clean up the pollution in our streams is just a nullity, because as long as some of these cities dump their untreated domestic sewage into the rivers, they will never be cleaned up. Do you think the question of purification of our waters is a national problem? Mr. CALVERT. Yes, sir; it is undoubtedly a national question, and I think that the remedy is clearly twofold. One is that there are already numerous existing Federal programs, to which we have referred, that are providing funds, and indeed they are providing them on a grant rather than on a loan basis. And secondly, we think that the private market can absorb that financing without this program. Mr. SPENCE. Are you more favorable to grants than you are to loans? Mr. CALVERT. No, sir, I am taking no position on the grants, because that is not involved here. Mr. SPENCE. You are opposed to grants? Mr. CALVERT. I am taking no position one way or the other, sir. Mr. SPENCE. On grants? Mr. CALVERT. Yes, sir. Mr. SPENCE. But you are taking a position on loans? Mr. CALVERT. We are simply testifying today with respect to H.R. 5944, which is a loan program, and it is our conclusion that there is no need for that at the present time. Mr. SPENCE. Well, you are testifying from the basic belief and policy of your organization, of course? Mr. CALVERT. That is correct. Mr. SPENCE. Yes, sir. Mr. Brown, do you have any questions? Mr. BROWN. Yes, sir, Mr. Chairman. Now, municipal bonds are nontaxable, are they not? Mr. CALVERT. That is correct, with respect to Federal income tax. Mr. SPENCE. Federal Government bonds are taxable? Mr. CALVERT. That is correct. Mr. BROWN. That is all. Mr. SPENCE. What is the history of loss on these bonds? Have you any statistics on that? Mr. CALVERT. I do not have at hand; no, sir. Mr. SPENCE. Could you find any? Mr. CALVERT. I doubt if there are any accurate statistics on that. Mr. SPENCE. When the bonds that you have purchased are offered for sale, you certainly get some information on the subject? Mr. CALVERT. That is correct, but it is certainly very difficult to find out when small issues have run into difficulties, because naturally the issuers don't go around publicizing that fact, and frequently, over a period of time, they are able to work out those difficulties, so that even though there may be a temporary default for a period of months or years, they can subsequently work the situation out. Mr. SPENCE. Isn't it a fact that the loss has been remarkably small. Mr. CALVERT. I would certainly accept that; yes, sir. Mr. SPENCE. Very little loss on any of these bonds, whether they be revenue bonds or general obligations; isn't that true? Mr. CALVERT. That is true. Mr. SPENCE. Now, isn't it true, too, that many of the States, by reason of the limitations prescribed in the constitution, as to the tax rate, as to the indebtedness and expenditures, are unable to issue general obligations, and have to resort to revenue bonds. Mr. CALVERT. Well, there are two points in the answer to that, Mr. Spence. First, where there are constitutional or statutory debt limits, which preclude additional bonded indebtedness, the proposed program isn't any help to them, because a loan from the Federal Government would apply against that constitutional or statutory debt limit, just as would bonds sold in the private market. Mr. SPENCE. It wouldn't if they issued revenue bonds, because the revenue bonds wouldn't be included in the debt limit. It is only the general obligations that are included in the debt limit, the direct obligations of the city. The revenue bonds are not included. Mr. CALVERT. That is generally true. In most States revenue bonds do not apply against the constitutional or statutory debt limit. Mr. SPENCE. Are there further questions? Mr. ASHLEY. I have a question or two, Mr. Chairman. Mr. SPENCE. Mr. Ashley. Mr. ASHLEY. Mr. Calvert, one of the points you made was that the private market can handle the financing for the facilities that are mentioned or included in this bill. Now, we had testimony earlier this week which included the following statement from an article from Fortune magazine, entitled, "The Worst Public Works Program," by Edward Thompson. Mr. Thompson said as follows: In Alabama, says the Business and Defense Services Administration, the U.S. investment in sewer systems is at least $6.9 billion short of what it would be and in waterworks, it is short by $4.6 billion of the needs in the next 17 years to correct today's deficiencies, and to provide for the expected surge in pollution and for depreciation of existing facilities, the Nation should spend at least $44 billion on waterworks, sewerage, and sewage-treatment plants. This would mean spending $2.6 billion a year, which is about twice the average rate of outlays for this purpose since 1946. Of the two problems, water and sewerage, the latter is by far the more critical. Says one BDSA official, "I don't think that the municipalities will catch up on sewerage for 40 years.” Well, taking those figures, or assuming that those figures have some basis for being projected, do you still feel that the private market can handle the financing on any such scope as they indicate? Mr. CALVERT. Yes, sir, very definitely, and if I may, I would like to outline about five points that I think are relevant to your question. The first is that these estimates are admittedly very general, and anyone can make an estimate of the need for a particular facility, but the fact of the need is no proof that the facility cannot be financed without Federal assistance. Secondly, a facility that may be needed by some arbitrary standard may not be practical for financing, either by Federal financing or by financing from other sources, because there are minimum sizes of installation that are practical for various facilities. You can't just that every small town in America must have a water and sewerage system. Admittedly, it may be desirable socially, but there are minimum sizes of numbers of units served before, from an engineering viewpoint it becomes practical to put them in. say So I think you have to take some of these estimates on that basis, on feasibility, with a grain of salt. The third point is that you run into the problem that Chairman Spence has referred to, of constitutional and statutory debt limits, and that is up to the local municipality to adjust those limits if they have reached the limit of their indebtedness. The fourth point-and I think perhaps this is the most significantis that legal barriers may prevent the financing of facilities which planners think desirable. While planners may say that a certain town needs a water and sewer system, when it is put up to a vote in |