To Permit National Banks to Underwrite and Deal in "revenue Bonds"

general obligation bond financing to the use of revenue bonds payable solely from the rate and toll schedules of the facility to be acquired, constructed, or improved.

As the annual total of new issues of municipal bonds exceeds $10 billion as it did in 1963 and 1964, and approximately one-third of the total represents revenue bonds, it is apparent that municipal revenue bonds are becoming an Increasingly more important form of investment securities. As each year's net increase in total State and municipal debt outstanding is added to the $91.3 billion outstanding June 30, 1964, that segment representing new municipal revenue bonds will also increase proportionately the total of outstanding revenue bonds.

Does it seem consistent and in the public interest that our States and their political subdivisions are denied the added competition which would be provided by commercial banks as envisioned in H.R. 7539, when selling new issues of municipal revenue bonds? Most public contracts are let on competitive bids seeking broad participation by intrested bidders. In the case of municipal revenue bonds, competition is limited to nonbank dealers, public agencies and on occasion banks bidding for their own investment account, thus generally eliminating commercial banks as one of the most important sources of capital and underwriting strength which has been a significant factor in the highly competitive marketing of general obligation bond issues.

Authorizing banks to underwrite and deal in municipal revenue bonds in which they can invest not only would add their capital to the new issue market but would enhance the secondary market for outstanding municipal revenue bond issues, being a substantial percentage of the estimated $91.3 billion total of all types of municipal bonds outstanding June 30, 1964.

Opponents of the proposed legislation have attempted to confuse their listeners who have who have been told on one hand that the bill will not change the authority of commercial banks to invest in municipal revenue bonds and on the other hand that authority to underwrite and deal in municipal revenue bonds will result in lessening of commercial banks' interest in general obligation bonds, thus raising interest costs.

To clarify the point, please keep in mind that there is a distinct difference between the investments of commercial banks and investment securities acquired for resale as a dealer. Banks have and will continue to be substantial investors in municipal bonds including revenue bonds. (According to the preliminary report of the Federal Deposit Insurance Corporation, insured commercial banks held $33,343,807,000 obligations of States and subdivisions, up from $29,611,314,000 reported as of December 20, 1963.) H.R. 7539 does not change this authority. However, the authority to underwrite and deal in municipal revenue bonds will not result in raising interest costs on general obligation bonds simply because of the broader authority. On the one hand, commercial banks will continue to make investments in accordance with individual policy while its purchases as a dealer of municipal revenue bonds for resale will be predicated on its customers' needs. What might take place in time is a decline in the amount of general obligation bonds as municipal revenue bonds increase in volume, further accentuating the need for the proposed legislation. Banks such as ours throughout California, Arizona, Colorado, Oregon, Washington, Utah, Idaho, Montana, Wyoming, and New Mexico, both independent and branch, know their local communities, trade areas, and States intimately. Who would be better informed as to the financial standing of his community than the banker who loans money, receives deposits, invests and offers a variety of banking services while paying taxes and participating in community affairs? This is his business and his responsibility. It should follow that when it comes to local municipal finance, whether it be city, county, district, authority, township, town, State, or revenue bonds, general obligation bonds, or special tax bonds, he should be informed or have available the sources of information on which to render advice or make decisions. If such banker in order to serve his customers engages in underwriting and dealing in municipal revenue bonds, it can be anticipated that his regional know-how will enable him to be of service particularly on small local issues. Branch offices of out-of-State nonbank dealers are generally not as well informed or as well equipped to render this kind of local service.

As you are aware, one of the major supporting arguments advanced in favor of the proposed legislation is that by increasing competition, there will be a trend towards reduction of borrowing costs of individual issuers of bonds. This is

predicated on the fact that more bidders providing additional capital through the competitive process will broaden the market for municipal revenue bonds both primary and secondary.

It has been pointed out that instead of bidding groups comprising only nonbank dealers there will be added groups comprising commercial banks, and commercial banks and nonbank dealers commingled, if the proposed legislation is approved. By the process of evolution common in the investment banking field, new groups will be formed, old ones will add or lose members or dissolve and the mix between commercial banks and nonbank dealers will change with the passage of time. By providing more bidding groups individual commercial banks and nonbank dealers wil have their interest rather than the limited choice of only nonbank dealer groups currently available.

It has been argued by the opponents to the proposed legislation that permitting commercial banks to underwrite and deal in municipal revenue bonds will not lower interest costs and at best produce only minimal savings. It has also been advanced that small investment banking firms would be driven out of business, if large commercial banks dominated the municipal revenue bond market as this would lead to higher borrowing costs for smaller communities because of fewer outlets.

It is difficult to follow this reasoning as on the one hand the nonbank dealers say that banks would have no interest in the issues of smaller communities yet they are also saying that smaller dealers who serve the smaller communities would be driven out of business because of the competition from large banks. What it amounts to is that the large nonbank dealers do not want competition from the commercial banks. The small nonbank dealer would be in a far better position as he would continue to be a welcome addition to any underwriting group if he was a producer and he would have more choices.

The annual volume of over $10 billion in new municipal bond issues involving in excess of 8,000 individual issues geographically located throughout the United States represents a total underwriting exposure far in excess of any one bank, nonbank dealer or any group comprising commercial banks and/or nonbank dealers to bid for. It results in nationwide underwriting groups competing for the major issues with smaller local groups bidding for the lesser par value issues. Limitations on capital, different customer requirements, changing markets and the physical impossibility of placing bids all over the United States at any one time develops bidding practices that result in few if any bids, either from major commercial banks or nonbank dealers originating in major metropolitan financial centers, for small issues originating in remote geographical areas. These bond issues are generally bid for by local commercial banks or nonbank dealers. California and other Western States are prime examples of commercial banks providing local communities with bids for all of their marketable general obligation bonds regardless of size of issue.

To set the record straight on what causes investment dealers to go out of business, I should like to present for the record an extract from the 1964 report to members of the National Association of Securities Dealers, Inc. This discloses that of the 571 memberships terminated, 271 are listed as normal resignation, 170 for cause and only 16 are due to lack of production or operating loss. In other words, unprofitability appears to be a very minor reason for termination. The 80 member firms that terminated their memberships through merger did not necessarily base their action because of competition from other dealers. In other words, the decision for a dealer to go out of business is a complex matter and varies from firm to firm.

In conclusion, no matter what charts, graphs, or other statistical devices are used to allegedly show that commercial bank competition for municipal revenue bonds, if authorized, would result in little or no interest savings to the issuing body, please keep in mind that the law of averages would work to the end that bank-led underwriting syndicates would buy some issues and nonbank dealerled underwriting syndicates would buy other issues. In each case there would be an interest saving over the life of the bond issue by comparison between the winning bid and the second bid, at the then existing market level. The added competition from commercial bank bidding would produce interest savings through the process of their being the successful bidder on occasion and by stimulating the competition to their best efforts, if not the winning bidder. Nonbank dealers do not want this to take place, yet they cannot evade the law of averages. Reduction of interest cost to the issuer benefits the taxpayer and the ratepayer, no matter how small.

This concludes my prepared testimony. I shall welcome any questions, and of course, will be quite willing to answer any questions in writing if time does not permit their discussion at this time.

Thank you for your attention.

CALIFORNIA LEGISLATURE-1965 REGULAR (GENERAL) SESSION-ASSEMBLY JOINT RESOLUTION No. 34-RELATIVE TO MUNICIPAL REVENUE BONDS

WHEREAS, There is currently under consideration by the Committee on Banking and Currency of the United States House of Representatives a bill designated H.R. 7539 to assist cities and states by amending Section 5136 of the Revised Statutes as amended, with respect to the authority of national banks to underwrite and deal in securities issued by state and local governments, and for other purposes; and

WHEREAS, The proposed legislation will permit commercial banks to underwrite and deal in municipal revenue bonds in which they can invest; and

WHEREAS, Municipal revenue bond financing has become a standard and popular means of financing self-liquidating public improvements particularly in the fields of water, sanitation, airports, parking, streets, highways, bridges and tunnels; and

WHEREAS, California's unprecedented growth will require an ever-expanding volume of general obligation bond financing to meet all of the needs of the state, its counties, cities, special districts and authorities which are not self-liquidating; and

WHEREAS, Commercial banks have long been the backbone of general obligation bond financing in California both as dealers and investors; and

WHEREAS, It is essential that strong financial agencies such as commercial banks be in a position to make their capital available for underwriting municipal revenue bonds in which they can invest; and

WHEREAS, Added competition for public contracts such as commercial bank underwriting of municipal revenue bonds will broaden the market for such bonds and will tend to lower borrowing costs through reduction of interest rates; and

WHEREAS, The resulting substantial public benefits to be derived through enactment of H.R. 7539 will be especially advantageous to California; now, therefore, be it

Resolved by the Assembly and Senate of the State of California, jointly, That the Legislature of the State of California respectfully memorializes the Congress of the United States to enact H.R. 7539 or similar legislation which will authorize commercial banks to underwrite and deal in municipal revenue bonds in which they can invest in order that every assistance be given to hard-pressed state and local governments in their tremendous efforts to keep abreast of the needs of our fast-developing rural, urban and suburban areas; and be it further Resolved, That the Chief Clerk of the Assembly is hereby directed to transmit copies of this resolution to the President and Vice President of the United States, to the Speaker of the House of Representatives, and to each Senator and Representative from California in the Congress of the United States.

MISUSE OF PUBLIC CREDIT TO AID PRIVATE ENTERPRISE OR THE CASE AGAINST MUNICIPAL INDUSTRIAL REVENUE BONDS, BY ALAN K. BROWNE, VICE PRESIDENT, BANK OF AMERICA, N.T. & S.A., PRESENTED BEFORE TAX INSTITUTE OF AMERICA SYMPOSIUM ON STATE AND LOCAL TAXES ON BUSINESS

I. OPENING REMARKS

Today's meeting dealing with intergovernmental fiscal competition affords me the first real opportunity to speak out on the subject of municipal industrial revenue bonds since I served as chairman of the Municipal Securities Committee of the Investment Bankers Association (1960-61). In the interim period I have referred to the subject on a few occasions but not from a specific viewpoint.

I have entitled my paper "Misuse of Public Credit To Aid Private Enterprise or the Case Against Municipal Industrial Revenue Bonds."

As a preliminary to my remarks I must confess to my amazement at my growing file and reference library on the subject of municipal industrial aid. A review of the material discloses many of my friends on both sides of the debate as to the propriety of local subsidies to industry. The pros and cons have been subjected to repeated analysis, discussion, and reaffirmation; yet the volume of municipal revenue bonds to aid industry has been on the increase though the annual volume compared with the total of all long-term municipal bond financing is not significant.

It would appear that more investment bankers are participating in various aspects of municipal industrial revenue bond financing despite the passage of resolutions by various professional and trade groups in opposition to this form of financing.

So far there seems to be no easy solution to the dilemma, yet there should be some meeting of minds in assessing the problems and dealing with them. If we believe in the American free-enterprise system and can act as men of good conscience I am sure that we can achieve progress in meeting the challenge of municipal industrial revenue bond financing. Whether we are taxpayers, public officials, bankers, investment bankers, corporate officials, stockholders, wage earners, or investors, we all have a stake in the subject.

In today's remarks I hope to remove the stigma that has occasionally been placed on certain groups for their role in opposition to or in support of municipal industrial revenue bond financing. Rest assured, however, I intend to oppose this form of public financing, even though I may be understanding of those who are actively in support of municipal industrial revenue bond financing.

II. DEFINITION OF MUNICIPAL INDUSTRIAL AID

There are various methods of public assistance for the benefit of private enterprise both at the Federal as well as State and local level. In order that there will be no misunderstanding as to the specific form of assistance it is appropriate at the outset to define the method and to limit the donor.

We are specifically discussing the issuance of municipal revenue bonds, the proceeds of which are used to acquire, construct, or improve industrial facilities which in turn are leased to private enterprise. Such rentals in part being used to pay the principle and interest when due on the revenue bonds.

The Investment Bankers Association of America in their resolution adopted November 29, 1951, and subsequently reaffirmed and clarified, dealing with municipal credit and industrial properties defined their position as follows:

"It is the intent to include within the scope of the resolution the issuance of bonds by municipalities to finance the construction or acquisition of land, buildings, facilities, equipment, or any combination thereof, to be leased to private interests for manufacturing, assembling, fabricating or processing articles, unless such manufacturing, assembling, fabricating, or processing is merely an appurtenance to, or incidental to, the development or operation of, a public facility open to use by the public";

Resolutions passed by other professional organizations in opposition to municipal industrial aid financing vary as to detail but essentially cover the same ground.

You will note that the IBA resolution seeks to exempt from its ban, municipal debt incurred for airport improvement port development, electric powerplants, water development, recreational and cultural facilities and similar municipal improvements that in part appear to assist private enterprise. These purposes have generally been accepted as public in nature and a natural extension of municipal debt incurrence.

While the opposition to municipal industrial aid is expressed in the various resolutions encompasses the issuance of bonds generally, I am discussing revenue bonds, not general obligation bonds. The issuance of general obligation bonds, while creating a potential threat to the credit of the obligor are limited to a relatively few States and are generally within the limitations of voter approval, tax and debt limits of the State of origin. Revenue bonds which constitute the greatest source of municipal industrial aid financing are the subject for the deepest concern by opponents to this form of financing not because of a specific credit risk to which the issuing body would be exposed if there was a default as there would be no responsibility upon the part of the related community to service the debt, but because of other factors which we will discuss.

This concludes my prepared testimony. I shall welcome any questions, and of course, will be quite willing to answer any questions in writing if time does not permit their discussion at this time.

Thank you for your attention.

CALIFORNIA LEGISLATURE-1965 REGULAR (GENERAL) SESSION-ASSEMBLY JOINT RESOLUTION No. 34-RELATIVE TO MUNICIPAL REVENUE BONDS

WHEREAS, The proposed legislation will permit commercial banks to underwrite and deal in municipal revenue bonds in which they can invest; and

WHEREAS, Commercial banks have long been the backbone of general obligation bond financing in California both as dealers and investors; and

WHEREAS, The resulting substantial public benefits to be derived through enactment of H.R. 7539 will be especially advantageous to California; now, therefore, be it

I. OPENING REMARKS

Today's meeting dealing with intergovernmental fiscal competition affords me the first real opportunity to speak out on the subject of municipal industrial revenue bonds since I served as chairman of the Municipal Securities Committee of the Investment Bankers Association (1960–61). In the interim period I have referred to the subject on a few occasions but not from a specific viewpoint.

I have entitled my paper "Misuse of Public Credit To Aid Private Enterprise or the Case Against Municipal Industrial Revenue Bonds."

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