Local authority bonds mature in such a way that the debt service (amortization plus interest) will be approximately the same amount each year. On all projects financed under the 1949 act, the maximum. statutory contribution is reduced at the time of permanent financing to a "fixed contribution" equal to the debt service. The fixed annual contribution is further reduced each year by the housing authority's residual receipts for the year. These receipts constitute the excess of operating income over operating expenditures, exclusive of debt service.

Annual contributions have been greatly reduced in recent years on the older projects, because, while the debt service has remained fixed, economic conditions generally have resulted in higher residual receipts. During fiscal year 1953, the payments becoming due and made on all low-rent projects were:

Chapter II

RECENT DEVELOPMENTS IN THE FINANCING OF LOW-RENT PUBLIC HOUSING

A. Method of Financing

Three principal methods (or combinations of these methods) are available to local housing authorities for financing the capital cost of low-rent housing projects:

1. Local authorities may sell to private investors serial bonds maturing over periods not in excess of 40 years. Payment of interest and principal on these bonds is secured by a pledge of the annual contributions to be paid by PHA, and their security features are comparable with obligations directly guaranteed by the Federal Government.

2. Local authorities can borrow capital funds from PHA for periods up to 40 years at an annual cost equal to the cost of long-term money to the Federal Government, at the time the project is contracted for.

3. Local authorities may sell to private investors short-term notes, generally running from 6 months to 1 year. These "temporary notes" are secured by a commitment of PHA to loan amounts sufficient to cover principal and interest of the temporary notes at their maturity. All of the above obligations of local authorities, like other obligations of State and local public bodies, are exempt from all Federal income taxes. In addition, the obligations of local authorities are usually tax exempt in the authority's own State.

B. Construction Loans and Permanent Financing

During construction of low-rent projects, loans are made directly by PHA until a sufficient amount is outstanding to warrant selling temporary notes to private investors. When the first temporary notes are sold, the loans from PHA are paid off. Further funds are obtained when needed by selling additional temporary notes. The use of temporary notes during construction has resulted in substantial savings of interest, with corresponding reductions in the capital cost of projects and in the annual contributions paid for the liquidation of capital costs.

As construction nears completion, projects are permanently financed, primarily through the sale of long-term bonds by the local authority. These bonds, known as New Housing Authority Bonds, are sold by competitive bid to banks and bond dealers, who in turn

resell to investors the bonds of the various issues and maturities. For the reason explained below, permanent financing done during calendar year 1953 was accomplished through a combination of bonds and temporary notes guaranteed by PHA.

The permanent financing of projects is arranged so that the debt service (amortization plus interest) payable in each year is a level amount. The amount of the annual contributions paid by PHA is exactly equal to this level debt service, reduced by the amount by which rents collected exceed current operating costs. Any saving in debt service through reduction of interest rates thus correspondingly reduces the annual contributions paid by the Federal Government.

To achieve every possible economy in the low-rent program, PHA has sought continually to employ whichever financing authorizations available that would hold the cost of long-term debt service to a minimum.

C. Attorney General's Opinion on Security of New Housing Authority Bonds

Any new type of security, such as New Housing Authority Bonds, usually requires a seasoning period during which the investing public becomes acquainted with it, but the period required for full acceptance of housing bonds seemed over long. This was perhaps due to the new and unusual features of these bonds. Although issued as direct obligations of the local housing authorities, their principal security is the pledge of annual contribution payments by the Federal Government.

Lack of a full realization of this fact by the investing public appears to have been largely responsible for the belated acceptance of housing bonds. The new Housing and Home Finance Administrator, shortly after he took office in March 1953, was impressed by the relatively high market yield of these bonds—a yield which did not appear to reflect fully the prime security features and tax-exempt character of these bonds. The Administrator accordingly, in cooperation with the Department of the Treasury, requested the President to obtain a formal opinion from the Attorney General of the United States on the security behind New Housing Authority Bonds.

After a thorough study, the Attorney General, in a letter to the President on May 15, 1953, stated the following:

In reaching the conclusions that an Annual Contributions Contract creates a valid and binding obligation of the United States, it is pertinent to note that the language of section 10 (e), italicized herein, "the faith of the United States is solemnly pledged to the payment of all annual contributions contracted for pursuant to this section," is identical with language used by R. S. 3693 (31 U. S. C. 731), with respect to the interest-bearing obligations of the United States. It would be appropriate to conclude therefrom that the Congress

intended to place on a similar footing the obligation to pay annual contributions contracted to be paid pursuant to the terms of the act.

In summary, I am of the view that:

(1) The United States Housing Act, as amended to this date, is valid and constitutional; and

(2) A contract to pay annual contributions entered into by the PHA in conformance with the provisions of the act is valid and binding upon the United States, and that the faith of the United States has been solemnly pledged to the payment of such contributions in the same terms its faith has been pledged to the payment of its interest-bearing obligations.

This opinion was disseminated widely by PHA and by bond houses and banks specializing in housing bonds. This action is believed to have been largely responsible for the better acceptance of New Housing Authority Bonds in the second half of 1953.

D. Sales of Housing Bonds in 1953

In the last half of 1952, there was a marked rise in the interest cost at which all long-term tax-exempt securities were marketed. This increase continued even more rapidly during the first half of 1953, particularly for bonds maturing in periods over 30 years. Because of this high cost of financing through the sale of bonds, PHA, in each of the four bond sales conducted in 1953, limited the bonds sold by local authorities to a uniform period of 30 years. However, in order to hold Federal contributions payable in each year to the lowest possible level, advantage was taken of the statutory authorization to pay such contributions over periods running up to 40 years and to extend amortization of capital cost to like periods. To accomplish this, PHA undertook to purchase permanent notes from local authorities for all maturities exceeding 30 years. As a result, in the four 1953 sales, the bonds sold amounted to an average of 68 percent of the total amount financed, while the PHA commitment for maturities beyond 30 years amounted to 32 percent of the total.

In practice, however, the portion of the project cost not covered by bond sales during 1953 has been secured by local authorities through the sale of temporary notes, instead of borrowing from PHA on permanent notes. Money on a short-term basis has thus been obtained at interest rates much less than half the rate at which PHA itself could lend on permanent notes. This saving is being applied to the advance amortization of the long maturities. If the interest rates of this temporary financing average 112 percent, the advance amortization made possible through interest savings will result in reducing the period of amortization by about 5 years, with a corresponding reduction in the number of annual contributions payments to be made by PHA.

This plan of combining permanent bonds with temporary borrowing admittedly was an expedient adopted by PHA when long-term