a town, they don't want it. They don't want to take on that burden, and a Federal loan program isn't going to help those people because they are not going to vote the bond issue for Federal financing or for the private market.

Mr. ASHLEY. So what you are saying is, with these barriers, considering these barriers, which prevent financing, that the projects can't be financed privately.

Mr. CALVERT. I am sorry, I didn't understand that.

Mr. ASHLEY. Well, it wasn't very well put.

Mr. CALVERT. May I make one further point, which I think will perhaps wrap up what you are saying?

Mr. ASHLEY. Well, let me just say this.

Mr. CALVERT. All right.

Mr. ASHLEY. What I was trying to say is that your answer seems to me to be saying that there are a number of legal and engineering barriers that limit the amount of financing that can be done at the present time, and you are very frank about these restrictions that exist at the present time. If some of the legal and engineering restrictions were removed, then the situation, as far as private financing is concerned, might be different. That clearly is implied by your answer, as I get it.

Mr. CALVERT. I did not intend to imply that these various legal and practical barriers are precluding simply private financing. It is my point that they are precluding any financing, be it Federal or private, for these facilities, and my clincher point here is that I think throughout the country municipalities are making a reappraisal of these various limiting factors, and if there is one important thing we can agree on today, I would like to suggest that it is that we encourage these municipalities to do all they can to straighten out these legal and practical difficulties. It is our fear that this program will do just the opposite, in that it will create financial irresponsibility. If you have one municipality that is doing a good job, that is trying to get its laws amended, that has set up a sound financial program, as a result, they get an attractive interest rate of, let's say, 3 percent.

Mr. BROWN. Will you yield?

Mr. ASHLEY. Yes, sir.

Mr. BROWN. Do the municipalities and States vote for revenue bonds?

Mr. CALVERT. Initially, the legislation is required in any State to authorize a statutory or constitutional amendment which will authorize a particular municipality to issue revenue bonds. Even after such

Mr. BROWN. Do you know of any municipality or any State that votes on revenue bonds?

Mr. CALVERT. Mr. Brown, I am reading from one of the primary books on revenue bonds, which I have here in front of me.

This says that a survey shows that an election is required in 14 of the 41 States adopting revenue bond statutes, which would mean that in those 14 States, even after the authorizing legislation had been adopted, that it would still be necessary to have a vote, just as you have a referendum on a general obligation bond with respect to this specific issue. It says further that since the survey other States have included election requirements in their statutes.

Mr. BROWN. So it is not required in the other States, then?

Mr. CALVERT. In the other States, of the 41, at the time this survey was made, that had revenue bond statutes, it would not be required after the adoption of the statute to have a vote, but please note that the statute has to be adopted first, and secondly, any person in that area that objects to it, and thinks they shouldn't have that water or sewer facility, can file suit to get an injunction.

Mr. BROWN. I know, but people don't vote for the legislation. They don't vote for the general statute.

Mr. CALVERT. In many cases that is true. But quite an issue is an election is whether a given candidate is in favor of or against a proposed project.

Mr. BROWN. All right.

Now, give us the names of those States that require votes.

Mr. CALVERT. That is not indicated in this book, sir. This simply refers to the study and says that 14 of the 41 require it.

Mr. BROWN. Do you know of any single State yourself that requires voting on revenue bonds?

Mr. CALVERT. Do you mean after the authorizing statute has been adopted?

Mr. BROWN. Yes, sir.

Mr. CALVERT. Offhand, I don't, sir.

Mr. SPENCE. Some States may require a referendum, but under the constitution of most States revenue bonds can be authorized by the legislative body.

Mr. CALVERT. That is correct.

Mr. SPENCE. But in almost all of the States there is a limitation in the constitution as to the indebtedness of the municipalities. Revenue bonds are not considered as part of that indebtedness.

Mr. CALVERT. Well, certainly revenue bonds have been used most successfully in your State. They have used them there for a wide variety of financing, both for schools and water and sewer facilities. Mr. SPENCE. No vote of the people is required for their issuance. Mr. CALVERT. May I complete my answer to Mr. Ashley on this last point?

We were there suggesting that where a given municipality has adopted a very careful financial program, and has worked hard to eliminate legal barriers, public opinion barriers, and obtains a rate of 3 percent, then compare another municipality which has been very careless, their financing has been delayed by litigation, they have a very sloppy program of tax collecting, their collection record is poor, and as a result, in the market they would have to pay 4 percent. If a loan program such as is proposed in H.R. 5944 is adopted, what you do in effect is to encourage financial irresponsibility, because there is no longer a particular incentive for the municipality that is doing a good job to do that. Either one of them can get, under the Federal program, a rate lower than what they have been paying, regardless of what their financial policies are.

Mr. ASHLEY. Well, I have got to admit that there doesn't appear to be anything in the bill at the present time which would differentiate beteween cities that are able to get private financing, and those who for one reason or another are not able to.

I think that perhaps this is a weakness in the bill.

I haven't heard any testimony that would contradict what you say about the cities that are listed in your appendixes would quite naturally take advantage of the Federal program at an interest rate of 2%, rather than pay the cost that is indicated in your testimony.

I wonder one thing, with respect to your earlier testimony: In order to get financing, do cities ever have to pledge credit other than the revenue to be derived from the particular facility?

Mr. CALVERT. Oh, yes, sir. There is frequently what is called a double-barreled obligation in the trade, which means that it is secured primarily by a pledge of revenues from the specific facility, but secondarily by a pledge of general revenue.

Mr. ASHLEY. Well, this would certainly tend to discourage financing, it would seem to me, particularly in small towns, which have to pledge the revenue and also part of their general obligation.

Mr. CALVERT. Well, please understand, I am not saying that is required. I am saying that that is done in some cases, because it adds to the security of the bond, and where there is a so-called doublebarreled bond, they would ordinarily get a much better interest rate than if there was only the pledge of revenues from the particular facility.

The additional security by the secondary pledge of general revenues would lessen the risk on the obligation and get them a much more attractive rate.

Mr. ASHLEY. It is required by the investment house in order to vote the issue?

Mr. CALVERT. No, ordinarily, where an issue is put up to compulsory competitive bidding for sale, the municipality sets its own terms and puts it up for bids. In many cases they will employ a so-called financial adviser who will advise them as to how they can set it up to get the best bid.

Mr. SPENCE. Will the gentleman yield?

Mr. ASHLEY. Yes, sir.

Mr. SPENCE. If it was a direct obligation involved, it would require a vote of the people. It would in Kentucky.

Mr. CALVERT. That is ordinarily true, Mr. Chairman.

Mr. SPENCE. Yes, sir. So there would be no great benefit in that. A vote of the people would be absolutely necessary.

Mr. ASHLEY. That is part of what I am getting at. I think that there are probably a lot of cities and small towns that consult with financial people, and are told, during this consultation, that considering their position they would have to do more than pledge the revenue from the facility; they would have to pledge further credit, and that in all likelihood this sufficiently discourages the municipality so that it never does get to the actual offering stage.

So that the figures which you present-and I don't blame you for a minute for presenting them, as a matter of fact, I think your testimony is tremendously effective but I am not entirely sure that it reflects anything that this committee should be interested in with respect to the subject before us.

Mr. CALVERT. Mr. Ashley, I think the easy answer to the po sibility that you suggest is that these municipalities, if there are a few who are advised that they would have to pay a higher rate in the private market, have a direct avenue to the existing community facilities

program, where they can get their money at the rates presently in effect under that program. As we pointed out, they are not being swamped with applications for Federal loans under the present program because over a period in excess of 3 years, they have committed only $58 million out of a hundred million dollars authorized.

Mr. ASHLEY. But of course the interest rates available under the program you are referring to couldn't be described as a giveaway, could they? I mean they are 42 percent, 4% percent. They are pretty staggering for a small community.

Mr. CALVERT. I think we would agree that they should not be on terms that were a giveaway, and I think probably that is the object of the level at which they are set, to put them at a realistic level in view of the present market.

As you point out, at present they are 42 percent for general obligation, 47% percent for revenue bonds, in both cases for 30-year maturities, and I believe that they adjust the rate up or down oneeighth of 1 percent for each 5 years longer or shorter maturity.

Again, it seems to me that that is a fairly realistic yardstick compared with 4 percent paid recently by the Federal Government for 10-year bonds.

Mr. ASHLEY. Well, maybe we want to subsidize, though. Maybe we think it is important enought to clean up the extremities that it is a social decision and we are willing to go ahead and subsidize.

The comparative rate that interests me is the net cost that you mentioned in your testimony. I have been looking through them, and most of them are 3.5, 3.6, around there, as against 4%. And it just freezes out those communities that are required to pay anything of that sort. They are not going to finance on that basis. I think it is prohibitive.

I want to say to Mr. Calvert that he has presented a very fine statement. It is certainly provocative, and I commend him for it. Mr. SPENCE. Are there any further questions of this witness? If not, Mr. Calvert, you may stand aside.

Mr. CALVERT. Mr. Chairman, we appreciate the courtesy of you and the other gentleman of the committee.

Thank you.

Mr. SPENCE. Our next witness is Dr. Lutz, representing the National Association of Manufacturers.

Dr. Lutz, you may read your statement or proceed as you wish, and subject yourself to interrogation later.

Dr. LUTZ. Thank you, Mr. Chairman.

STATEMENT OF HARLEY L. LUTZ, CONSULTANT IN GOVERNMENT FINANCE TO THE GOVERNMENT FINANCE DIVISION, NATIONAL ASSOCIATION OF MANUFACTURERS

Dr. LUTZ. My name is Harley L. Lutz. I am professor emeritus of public finance, Princeton University. I am appearing in my capacity as consultant in government finance to the Government Finance Division of the National Association of Manufacturers. This organization is a voluntary association of some 20,000 business enterprises which produce about three-quarters of the Nation's manufactured goods. Over 83 percent of these business enterpirses employ less than

500 persons and thus fall within a commonly accepted definition of small business concerns. Our association is vitally interested in promoting sound economic and governmental principles without regard to partisan political consideration.

We are opposed to H.R. 5944 on two general grounds: First, the kind of governmental policy illustrated by the bill conflicts with the principles which should govern the role and functions of the Federal Government in its relations and dealings with the States and with the people.1

1. From principles of "Bring Government Back Home"

In a country which seeks to retain free, popular government, service responsibilities should be performed by the smallest units competent to handle the several public services satisfactorily and economically. The areas of national interest and concern in which only the Federal Government can adequately serve the national good must be distinguished from other areas in which State, or State-local, action constitute as good, or a better way of promoting the national interest. 2. Grants-in-aid

Federal collaboration in State and local responsibilities or programs should be confined to leadership through research and advice. It should not extend to initiation or subsidy of, nor to other financial participation in, the functions of those jurisdictions.

The fiscal position of the States, their local subdivisions, municipalities, intermunicipal or interstate agencies should not be supported by direct Federal payments to them. Use of grants-in-aid by the Federal Government should be terminated with all practical promptness. Where immediate termination is impracticable, termination should be carried out by formulas appropriate to the terms of particular grants. 3. Federal lending operations

The lending of its funds or credit should not be a normal function of the Federal Government in the domestic economy.

Second, various provisions of the bill illustrate the bad devices and mechanisms which tend to get into bills intended as props for the people and the economy.

H.R. 5944 EMBODIES AN UNSOUND CONCEPTION OF FEDERAL FUNCTIONS

1. This bill provides for the loan of Federal funds or their investment in municipal debt obligations. The fact is that the Federal Government has no funds of its own to lend, invest, or give away. All of this money must first be taken from the people through taxes or Federal borrowing. The grant and loan systems have created the illusion among the people and many of their state local officials that Federal money is free money, that it does not cost anybody anything. The fact is, further, that when the Government lends or gives away money that it has first taken from the people in taxes, there is no net increase of available funds, but only a transfer from the citizens to the Government. Less income is left at home with the people,

1 The general subject of the role and functions of the Federal Government has been a matter of study and concern for the NAM over many years. Out of this active interest have been developed various policy positions which are germane to the issue presented by H.R. 5944. Pertinent extracts from these positions are given here.

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