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COMMUNITY FACILITIES ACT OF 1959

MONDAY, APRIL 27, 1959

HOUSE OF REPRESENTATIVES,
COMMITTEE ON BANKING AND CURRENCY,

SUBCOMMITTEE No. 1,

Washington, D.C. The subcommittee met, pursuant to adjournment, at 10 a.m., in room 1301, New House Office Building, the Honorable Brent Spence (chairman of the subcommittee) presiding.

Present: Messrs. Spence, Brown, Ashley, and Widnall.
Mr. SPENCE. The committee will be in order.

Our first witness this morning is Mr. Hazeltine, Community Facilities Commissioner of the Housing and Home Finance Agency.

Mr. Hazeltine, do you have a prepared statement? If so, you may read it without interruption and then submit yourself to interrogation.

Mr. HAZELTINE. Thank you, sir.
Mr. SPENCE. Identify yourself and proceed, please.

STATEMENT OF JOHN C. HAZELTINE, COMMUNITY FACILITIES

COMMISSIONER, HOUSING AND HOME FINANCE AGENCY

Mr. HAZELTINE. Mr. Chairman and members of the committee, I am John C. Hazeltine, Community Facilities Commissioner, Housing and Home Finance Agency.

I consider it a privilege to appear before the committee to assist in your consideration of community facilities legislation.

Pursuant to title II of the Housing Amendments of 1955, the Housing Administrator, acting through the Community Facilities Administration, is authorized to purchase the obligations of, or make loans to, municipalities and other local government units to finance essential public works where financial assistance is not otherwise available on reasonable terms. Loans may be made for periods up to 40 years at an interest rate set by the Administrator. An interest rate formula devised to reflect changes of market yields on long-term Government bonds and various municipal bond indexes has been adopted. The current interest rate charged on public facility loans are 412 percent for 30-year general obligation bonds and 478 percent for 30-year revenue bonds. Interest rates are adjusted downward or upward by one-eighth of 1 percent for each full 5 years differential from the 30-year maturity—that is, a 25-year general obligation loan would currently bear a 438-percent interest rate.

Title II established a revolving fund in the amount of $100 million to finance public facility loans. The funds are borrowed from the

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Secretary of the Treasury at a rate of interest determined by the Secretary of the Treasury, taking into consideration the current average rate on outstanding marketable obligations of the United States of comparable maturities. As of March 31, 1959, $58 million of the authorized revolving loan fund have been committed, leaving an uncommitted balance of $42 million. In accordance with section 202(c) of the authorizing legislation, processing priority is given to applications from communities which had a population of less than 10,000 at the time of the 1950 Federal census for loans to provide basic public works such as water, sewage and gas systems for which there is an urgent and vital public need.

I would like to comment briefly on H.R. 5944 introduced by Representative Spence. This bill would increase the revolving fund for public facility loans from $100 million to $1 billion, of which $250 million would be set aside and used exclusively for loans to communities having a population of 35,000 or less.

The bill would redefine the facilities for which loans may be made, restricting loans to finance projects for the storage, treatment, purification, or distribution of water; sewage, sewage treatment, and sewer facilities; hospitals or nursing homes owned and operated by public agencies or hospitals owned and operated by nonprofit private organizations.

The bill would increase the revolving fund authorization for public works planning pursuant to section 702 of the Housing Act of 1954, as amended, from $48 million to $98 million.

The bill would also revise the basis on which interest rates to be charged for public facility loans would be made. The revised interest rate formula would require that all loans be made at an interest rate that may not exceed the total of one-quarter of 1 percent plus the average annual interest rate on all interest-bearing obligations of the United States then forming a part of the public debt as computed at the end of the immediately preceding fiscal year.

For fiscal year 1959, this formula would produce an interest rate to borrowers of 278 percent.

The bill would also restrict loans for projects in any one State to not more than 10 percent of the total funds authorized and would make the prevailing wage rate and 40-hour week provisions of the Davis-Bacon Act applicable to projects financed thereunder.

By virtue of the proposed revision of the interest rate formula, this bill would immensely expand Government lending for community facilities.

The statutory required interest rate of 278 percent for the current fiscal year is lower than the market yield of the highest grade of municipal obligations since August 15, 1958. Since that date the yield on the Moody Aaa municipal bond index has been higher than 3 percent. For lower rated bonds, market yields have been commensurately higher.

Thus, a current interest rate of 278 percent would mean that most, if not all, of the financing of water, sewage, hospital, and nursing home facilities would be coming from the Federal Government rather than from the capital market, despite the Federal income tax exemption accorded to municipal obligations.

In 1958, municipal bonds issued for water, sewage, and health facilities totaled about $1.2 billion.

For 1959, a comparable amount of bonds can be expected to be issued.

Under the proposed legislation, these bonds would in large part be acquired by the Federal Government, resulting in a undesirable substitution of Government funds for available private funds.

The reason that the Government would find itself in such a situation is that little private capital is available at a 278 percent interest rate.

The Secretary of the Treasury is currently paying over 4 percent for long-term funds in the capital market. When he is required to lend to the Housing Administrator at an interest rate of 25/8 percent for relending at 278 percent, such loans would bear an interest rate considerably below what the Treasury itself would have to pay if it went into the market to borrow funds for a comparable length of time. Such an interest rate would give borrowers under the program a subsidized pipeline to the Federal Treasury.

In addition, there is a basic weakness in the failure to provide for an interest rate differential between general obligation bonds and revenue bonds.

The preamble to the bill states that immediate construction of essential community facilities would reduce unemployment and stimulate business activity.

As previously explained, the real effect of the bill would be to substitute in large part Federal credit for private credit so that the effect on employment would be relatively insignificant, particularly since the bulk of public facility loan applications will come from communities that are experiencing an upsurge of other construction and business activity.

The increased authorization for community facilities loans from $100 million to $1 billion and the increased authorization for public works planning advances from $48 million to $98 million are outside the President's budget and would permit new expenditures exceeding that which the administration has considered to be consistent with its budget objectives.

I wish to make it clear at this point that we of the Housing and Home Finance Agency feel that the Federal Government has an important role to perform in connection with the provision of community facilities by local governments.

As the committee knows, the Community Facilities Administration and its predecessors have had long and successful experience, dating back to the 1930's, in administering various programs of assistance for community facilities, currently including both the public facility loans program and the public works planning program.

On the basis of our experience, we are convinced of the desirability of a continuing Federal loan program to help finance such public facilities as are urgently needed and which cannot be successfully financed through regular operations of the private market.

The problem of providing adequate community facilities needs to be related to the factors of economic growth as reflected by population growth and housing construction and the development of new, or expansion of old, communities. The shift of population from the farm to urban areas and from the city to the suburbs has accentuated the problem of providing adequate community facilities.

We, in CFA, have undertaken studies involving long-range thinking regarding community facilities and economic growth and the possible role of the Federal Government.

In this connection it would appear that the role of the Federal Government is threefold:

(a) providing assistance that serves as a catalyst to get much needed projects

started by making use of the public works planning program;

(6) providing technical advisory services regarding construction and financing aspects of community facilities to help achieve economies; and

(c) providing long-term financial assistance where it is otherwise not available at reasonable terms, that is, the Government serves as a lender of last resort.

In contrast to this helpful but nonexclusive role for the Federal Government, the provisions of H.R. 5944 would establish the Government as a lender of first resort, driving out most presently available private capital for the financing of publicly owned water, sewage, hospital, and nursing home facilities.

This consequence should be carefully weighed since I believe that the committee shares my feeling that such a development would be highly undesirable.

The Bureau of the Budget advises that it has no objection to this testimony, and concurs in the views expressed on H.R. 5944.

This concludes my prepared statement, and I will try to answer any questions which the committee may have on this legislation.

Mr. SPENCE. Mr. Hazeltine, when did the Community Facilities Administration commence operations in the Housing and Home Finance Agency?

Mr. HAZELTINE. It was transferred from the General Services Administration in 1950.

Mr. SPENCE. Under the present act the authorization is $100 million, and you have loaned $58 million.

Mr. HAZELTINE. Yes, sir.

Mr. SPENCE. With the immense need for these facilities, and the immense shortage that exists, why is it that only $58 million has been loaned ?

Mr. HAZELTINE. The original statute requires that the need for this facility be urgent and that it might not otherwise be obtained at a reasonable interest rate, or at any interest rate at all.

In the vast majority of all situations, in the larger cities and in all of the cities except the very small ones, they have been able to get their money, as evidenced in my statement here that last year they got $1,200 million from private sources for necessary public water, sewer, and hospital facilities.

Mr. SPENCE. Isn't it a fact that many of the municipalities that are in great need of these facilities have been unable to obtain necessary funds to furnish them?

Mr. HAZELTINE. No, sir, I do not believe that is a fact.
Mr. SPENCE. You don't believe that is true ?
Mr. HAZELTINE. No, sir.

Mr. SPENCE. Do you think that almost all of the small cities that are in need of water supply, sewage treatment plants, were able to obtain them?

Mr. HAZELTINE. I believe they are able to obtain the necessary financing at an interest rate which is not prohibitive.

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