THE UTILIZATION OF REVENUE BONDS AS A MEANS OF FINANCING GOVERNMENT IN THE UNITED STATES by William J. Thomas AN ABSTRAC T Submitted to the School for Advanced Graduate Studies of Michigan State University of Agriculture and Applied Science in partial fulfillment of the requirements for the degree of DOCTOR OF PHILOSOPHY Department of Economics 1957 /\ /\ "I “l 4 3 LI ‘ . (1 Approved by __.; William J. Thomas ABSTRACT I The objectives of this study are to present a com- prehensive survey of the characteristics of revenue bonds and to analyze the economic aspects which are peculiar to this type of public credit instrument. The s tudy of revenue bond financing as a mode of gov- ernment finance points up the heterogeneous nature of the public credit instruments commonly referred to loosely as ”revenue bonds". Consequently this study first defines and delineates public credit instruments so as to avoid the am- biguity connected with the term as it is presently used in public finance literature. The depression of the 1930's provided the primary stimulus for the grewth of revenue bond financing. The feder- al government, through various work and loan programs, was instrumental in encouraging the use of revenue bond financing. Statutory and constitutional debt restrictions accompanied by public distaste for property taxes have been important factors sustaining the use of revenue bond financing of public enter- prises. Revenue bond defaults occurring during the Great De- pression were generally caused by a lessening of demand for the products of the revenue bond financed enterprise. During the period of high level economic activity since l9l+0 there have occurred few instances of default although bondholders generally have suffered very little loss. In a large portion William J. Thomas 2 of the instances involving default or near-default, the issuing political unit has applied tax money, or has used other less conspicuous means of providing aid, in attempting to avert default. Generally, rate covenants that ordinarily accompany revenue bond issues have not provided an effective means of averting default. If the enterprise is not economi- cally sound, the rate covenant remedy seems to afford little ‘ protection from financial loss. There is every indication, that, on the average, the net interest rate on revenue bond issues is somewhat higher than the net interest rate on general obligation bond issues. The advantage of general obligation bond issues, however, is not as great as first appearances may indicate. Adjusting the net interest rates for the negative effect of size and the positive effect of length of maturity tends to reduce the differential that exists in the interest rates of the original data. These same adjustments applied to special assessment bond issues resulted in a higher net interest rate than for either general obligation bond issues or revenue bond issues. Although the mere financing by means of revenue bonds does not enhance the debt-paying ability of a political unit, the financing by this type of credit instrument does insure a source of revenue with which to retire the outstanding obli- gation. This self-liquidating nature of revenue bonds combined with the controls which are ordinarily required by the bond William J. Thomas 3 underwriter gives this type of public credit instrument a ”built-in” safeguard with respect to excessive indebtedness. The most significant economic implications of revenue bond financing as compared with general obligation bond financing occur with respect to pricing policies, equity con- siderations. in the distribution of payments for the products of public enterprises, resource allocation, and the efficiency of public enterprises. In addition to these aspects which are more or less inherent in the case of revenue bond financing, there exists man-made laws which affect the desirability of this means of public finance. A quantitative evaluation of the merits and demerits of revenue bond financing as compared with general obligation bond financing which is applicable to every set of circumstances is not possible. YEHE UTILIZATION OF REVENUE BONDS AS A MEANS OF FINANCING GOVERNMENT IN THE UNITED STATES by William J. Thomas A THESIS Submitted to the School for Advanced Graduate Studies of Michigan State University of Agriculture and Applied Science in partial fulfillment of the requirements for the degree of DOCTOR OF PHILOSOPHY Department of Economics 1957 'ACKNOWLEDGMENT 'The author wishes to express his sincere appreciation to the School for Advanced Graduate Studies of Michigan State University for counsel and assistance throughout his graduate program. Special gratitude is expressed to Dr. Denzel C. Cline of the Department of Economics for his patient guidance and lnany helpful suggestions during the preparation of this manuscript. The author also appreciates the counsel of other members of his guidance committee, Drs. Victor E. Smith and Leland Traywick of the Department of Economics, Dr. Leo Katz of the IDepartment of Statistics, and Dr. B. M. Stewart of the Mathe- 1matics Department. Particular acknowledgment is due the many Investment Bankers and the publishers of municipal bond statistics for :making available first-hand information and data pertaining to municipal bonds. The author is deeply grateful for the understanding and encouragement of his wife, Dorothy, during the preparation of this manuscript. Acknowledgment is due Miss La Home Riederer and Mr. Howard Baltz for their aid in typing and checking much of this manuscript, particularly the computations contained in ‘Appendix IV. The author, of course, assumes full responsi- bility for any inaccuracies that may appear in this thesis. ii Chapter Ii. IN II. DE TAJLE Oj‘LXXMMiJTS TRODUCTION . . . . . The Problem . . . . The Apparent Need . SCOpe and Method . . Sources . . . . . . Definition . . . . . 0 o o o o o o 0 o o o o o o o o o I O o O o 0 O O O o 0 O O o 0 O O O 0 Distinguishing Characteristics . Hybrids . . . . . . Pseudo-Revenue Sonds . . . . . Quasi -;{e venue Bonds The Bond Agreement . Covenants . . . . . VELOPKENT ALD USE BY Origin . . . . . . . Growth . . . . . . . Types of Enterprises Governmental Units Fade P81 0 o o o 0 Saint Lawrence Seaway . . . Lease-Purchase Program . . . Interstate . . . . iii . . . . Various . . . . . . . . . . . . . . . . Page *4 l...) 20 21 27 27 33 38 113 1L5 1&9 51 Chapter State . . . . . . . . . . . . . . . . Toll Roads . . . . . . . . . . . . . Toll Bridges . . . . . . . . . . . . Educational Facilities . . . . . . . Other State Projects . . . . . . . . Local . . . . . . . . . . . . . . . . Water, Sewer, Electric, and Gas Systems . . . . . . . . . . . . . Off-Street Parking Facilities . . . Public Transit Systems . . . . . . . Airports . . . . . . . . . . . . . . Industrial Aid Bonds . . . . . . . . Other Enterprises . . . . . . . . . Financing Non-Revenue Producing Facil- ities O O O O O O O O O O O 0 O O O O Lease-Rental . . . . . . . . . . . . . Housing Authorities . . . . . . . . . Summary . . . . . . . . . . . . . . . . III. LEGAL ASPECTS . . . . . . . . . . . . . . Restrictions . . . . . . . . . . . . . . The Public Purpose Doctrine . . . . . Early Development . . . . . . . . . Proper Government Function . . . . . Governmental Aid to Private Entities Recent Developments . . . . . . . . Permissive Legislation . . . . . . . . iv Page 55 so 67 71 7e 77 81 93 95 95 96 102 103 106 107 110 110 111 112 116 120 122 128 Chapter Pag The Special Fund Doctrine and Debt Linlitations 0 0 0 O O O O O O O O O O 135 Development . . . . . . . . . . . . . 136 Mortgaging Government Property . . . . 1&0 Supplementing the Fund . . . . . . . . 1N3 Rate Covenants . . . . . . . . . . . . 14h Ad Hoc Units . . . . . . . . . . . . . 1AA Federal Taxation of Bond Interest . . . 1&9 Tax Exemption and "non—Debt" Obliga- tions . C O O C O C O O . O . . O O 152 Tax Exemption and the Governmental Status of Ad Hoc Units Utilizing Revenue Bonds . . . . . . . . . . . 158 Negotiability . . . . . . . . . . . . . 160 Eligibility for Investment by Fiduciary Institutions . . . . . . . . . . . . . 162 National Banks . . . . . . . . . . . . 162 Other Fiduciary Institutions . . . . . 164 Summary . . . . . . . . . . . . . . . . 166 IV} DEFAULTS . . . . . . . . . . . . . . . . . 170 Definitions . . . . . . . . . . . . . . 170 Remedies . . . . . . . . . . . . . . . . 173 Defaults Prior to 19u0 . . . . . . . . . 175 Water Systems . . . . . . . . . . . . 176 Educational Facilities . . . . . . . . 181 Other Types of Enterprise . . . . . . 183 Defaults Since 19h0 . . . . . . . . . . 189 l11:01.1- bridges . O O O O O O O O O O O O 189 Chapter Two Nebraska bridges . . . . . . . Two West Virginia Bridges . . . . Other Toll Bridges . . . . . . . . Water Systems . . . . . . . . . . . Other Types of Enterprises . . . . . Comparison of Default Record by Type of Credit Instrument . . . . . . . . . Summary . . . . . . . . . . . . . . . V. COMPARATIVE ANALYSIS OF INTEREST RATES . Price and Yield . . . . . . . . . . . Factors Affecting Municipal Interest Rates 0 O O O 0 O O O O O O 0 O O 0 Tax Exemption . . . . . . . . . . . Coverage . . . . . . . . . . . . . . Revenue Lien . . . . . . . . . . . . Other Non-Quantitative Factors . . . Effect of Size and Length of Time to It’laturi ty 0 o o o o o o o o o o o o 1‘18 tho d o o o o o o o o o o o o o 0 Findings Using Third Quarter 1955 Data . . O C C C C C O O O C C 0 Findings Using Fourth Quarter 1956 Data 0 O C C O O C C O Q C . C 0 Comparison of Interest Rates with Some External Factors Controlled . . . . Summary and Conclusions . . . . . . . VI. ECONOMIC ASPECTS . . . . . . . . . . . . Pricing Policies . . . . . . . . . . . vi. Page 189 192 19h 197 198 200 203 205 206 210 211 213 21h 215 217 218 228 236 2h2 2A9 251 251 Chapter APPEnDIX APPEMDIX APPENDIX APPENDIX Effects Upon Resource Allocation . . . . User Charges as a Basis of Raising Gov- ernmental Revenues . . . . . . . . . . Benefits Received by the Purchaser . . Nonrevenue Considerations . . . . . . Other Attributes of User Charges . . . Counter-Cyclical Aspects . . . . . . . . Limited Liability of the Issuing Govern- ment 0 O O 0 C O O O O O O O O O O O 0 Restrictions in the Underwriting of and Investing in Revenue Bonds . . . . . . Efficiency of Revenue Bond Financial PrOjeCtS . O O O O C O O O O O O O O 0 Revenue Bonds and Debt Restrictions . . Summary and Conclusions . . . . . . . . I. . . . . . . . . . . . . . . . . . . II. . . . . . . . . . . . . . . . . . . III. . . . . . . . . . . . . . . . . . . IV. C O O O O O O O O O C O O O O O O O BIBLIOGl-{AEEZY O O O O O O O O O O 0 O O O O O O 0 vii Page 258 262 2611 268 271 273 278 283 292 296 299 Bob 306 308 317 343 LIST OF CHARTS Chart Pa: 1. New devenue and General Obligation Bond Issues (1938-1955) . . . . . . . . . . . . 35 2.' New Long-Term Bonds Issued by State and Local Governments for Construction by Type of Security Pledged (lane-195A) . . . 36 3. Average Dollar Size of Bond Issues (July to December, 1956) . . . . . . . . . . . . . no A. Revenue Bond Offerings (l9h9-l952 Average) . Al 5. Long-Term, Eon-Guaranteed Governmental Debt Outstanding at 5nd of Fiscal Year, 1995 . AZ 6. Long-Term Debt Outstanding of the Forty- Eight States as of June 30, Selected Years 0 o o o o o o o o o o o o o o o o o 57 7. Long-Term Non-Guaranteed Debt Outstanding of Various Local Governmental Units as of June 30, 1955 . . . . . . . . . . . . . 78 8. City Government Long-Term Debt Outstanding at End of Fiscal Year, l95h, by Size of City, 1950 Population . C C . C O O . C . 79 9. Relationship of Net Interest Rate to the Size of Issue, Third Quarter 1955 . . . . 2M3 10. Relationship of het Interest Rate to Average Length of Years to haturity, Third Quarter 1955 O O 0 O 0 O o 0 o o O o o o o o o o O 21L“. viii Table 5. 6. 7. 10. 11. LIST or TABLES New State and Nunicipal Send Issues (Exclud- ing Short-Term Notes Having a Maturity of Less Than a Year) . . . . . . . . . . . . Facilities of the Port of New York Authority as of January 1, 1957 . . . . . . . . . . Long-Term Debt Outstanding, by State, as of J1me 30, 1956 O O O O O O O O O O O O O O Long-Term Eon-Guaranteed Debt Outstanding of Local Governmental Units, as of June 30, 1955 o o o o o o o o o o o o o o o o 0 Number of Local Governmental Units Which have Issued Bonds Secured Solely by the Earnings of Publicly Owned Waterworks, by State . . . . . . . . . . . . . . . . . Rumber of Local Governmental Units Which Have Issued Bonds Secured Solely by the Earnings of Public Owned Sewers, by State . . . . . . . . . . . . . . . . . . Number of Local Governmental Units Which Have Issued Bonds Secured Solely by the Earnings of Publicly Owned Electric Systems, by State . . . . . . . . . . . . Number of Local Governmental Units Which Have Issued Bonds Secured Solely by the Earnings of Publicly Owned Gas Systems, by State . . . . . . . . . . . . . . . . . Number of Local Governmental Units Which Have Issued Bonds Secured Solely by the Earnings of Publicly Owned Multiple Systems, by State . . . . . . . . . . . . Number of Local Governmental Units Which Have Issued Bonds Secured Solely by the Earnings of Off—Street Parking Facil- ities, by State . . . . . . . . . . . . . Average of Variables, Third Quarter 1955 . . 1x 37 Sh 58 80 83 85 87 89 9O Table Page 12. Adjusted Net Interest Rates and Adjusting Coefficients, Third Quarter 1955 . . . . . 230 13. Average Interest Cost Adjusted to Equal Size ($250,000) and Equal Length of Time to Naturity (12 Years), Third Quarter 1955 . . . . . . . . . . . . . . . 232 1h. Variation in Net Interest Rates, Third Quarter 1955 . . . . . . . . . . . . . . . 23h 15. Coefficients of Multiple Determination, Third. Quarter 1955 o o o o o o o o o o o 0 23M. 16. Relative Importance of Size of Issue and Average Length of Time to Maturity on the Net Interest Rate, Third Quarter 1955 . . . . . . . . . . . . . . . . . . . 235 17. Variances, Regression Coefficients, and Coefficients of Multiple Determination, Fourth Qilarter 1956 o o o o o o o o o o o 237 18. Average of Variables, Fourth Quarter 1958 . 239 19. Unadjusted and Adjusted Net Interest Rates, Fourth Quarter 1958 . . . . . . . . . . . 240 20. Comparison of net Interest Rates on Revenue Bonds Before and After Adjustment for Dollar Size and Average Length of Time to Maturity, Third Quarter 1955 and Fourth Quarter 1956 . . . . . . . . . . . . . . . 2A1 21. Texas Municipalities Selling Two Separate Bond Issues on the Same Date, 1956 . . . . 2h6 CHAPTER I INTRODUCTION The Problem This study deals with the deficit financing of governmental units by means of the issuance of revenue bonds.1 The aim of this study is to present a compre- hensive survey of the characteristics of revenue bonds and the practices that accompany the issuance of this type of credit instrument. Further, this study attempts to analyze the economic aSpects that are peculiar to revenue bonds from the view of the borrowing political unit. In order to accomplish the objectives of this study, ancillary considerations necessarily arise which require investigation and analysis. For example, the questions arise as to why, when, and how the practice of issuing revenue bonds originated in this country. Closely related to these questions are the eXplanations for the various evolvements that have occurred in con- nection with this type of public credit instrument. 1There exists no well-defined generally accepted meaning of the term "revenue bond." A discussion of this concept is given later in this chapter. 2 This study should aid government practitioners in making decisions regarding the most advantageous public credit instrument in the financing of public enterprises. In accomplishing this objective, the questions pertaining to the default record of revenue bonds must be examined. Also, the closely related matter of the limited liability feature of revenue bonds must be analyzed. Of course, any evaluation of revenue bonds should provide an analysis regarding the cost to the issuing unit as compared with alternative types of public credit instruments. Not only is it desirable to know the factors, both quantitative and qualitative, that affect the interest costs associated with public credit instruments, but also to determine, insofar as possible, the relative importance of these factors. Additional questions arise pertaining to the economic effects of revenue bond financed enterprises with respect to such things as incentives toward effi- ciency, user charges as a method of providing govern- mental revenues, legal provisions peculiar to this type of credit instrument, and the allocation of resources. Although each of the aforementioned questions has been analyzed, complete and final answers to all of them cannot be expected. This study will have served its purpose if it provides the stimulus and groundwork 3 for more extensive investigations in this peripheral area of public finance. The Apparent Reed Perhaps the most significant development in the field of public debt finance of the past two decades is the rapid growth in the utilization of revenue bonds to finance self-liquidating projects. The use of revenue bonds has not only been increasing relative to total obligations outstanding, but there has also been an extension in the kinds of projects financed by the pro- ceeds of this type of public credit instrument. Immed— iately following World War II, revenue bonds constituted less than 20 per cent of the total annual issues of state and municipal governmentS.2 The proportion of the total state and local bond issues of the revenue bond type has increased to about 30 per cent in the last few years; in the peak year of 195M, revenue bonds constituted approxi- mately he per cent of the total new state and local bond issues. It has been estimated that as of the end of 1955 revenue bonds constituted approximately 25 per cent of the total dollar volume of state and local bonds out-. standing.3 2See Chapter II for more detail concerning the growth of this type of financing. 3"State and Municipal Bond Financing," Review of the Federal Reserve Bank of Richmond, 1956), pp. 3-h. Nonthl h An economic analysis and appraisal of this type of public credit instrument seems past due. One of the most pressing problems of our state and local government officials is the obtaining of funds to finance public improvement projects which cannot usually be financed from current expenditures. In Spite of the pressing problems in this area, public credit instruments com— monly referred to as revenue bonds have received very little systematic study. Many government officials have pondered the relative merits of the various means of public debt of the increasin‘ t—I‘ \J financing L.) number of commercial type enterprises that society has adjudged to be publicly owned and operated. It is apparent that little has been done concerning a general analrsis of the loosely defined area known as revenue bonds. Scope and Kethod This study is not a complete historical analysis of revenue bond financing. A survey of early revenue bond financing is included in order to provide a setting for the study of the subject; however, the time most pertinent to this study is the seventeen-year period from 1940 through 1956.’Jr LLThere have been two studies dealing solely with revenue bond financing, both of which were published just prior to the l9hO‘s. Tnese studies are: John F. S itial problem in the study [—10 :3 The most pressing [—10 of revenue bond financing 3 the framing f a precise definition of what constitutes a revenue bond. Once a workable definition is provided for what in this study is termed "true revenue bonds," an analysis is then extended to public credit instruments that possess more or less similar characteristics which have been desig- nated as quasi— and pseudo-revenue bonds. Chapters II and IV record and analyze certain facts and events pertaining to revenue bond financing. Chapter III records and analyzes the legal aspects of this type of public credit instrument. These three chapters are designed to present relevant material necessary for an evaluation of revenue bonds as a method of financing public projects. Prior to Chapter V, this study does not attempt to judge the relative merits or to evaluate the significance of the various characteristics or attributes of revenue bond financing. These evaluations are confined principally to Chapter VI. Fowler, Jr., Revenue Bonds (New York: Harper & Brothers, 19357; and Laurence S. Knappen, Revenue Bonds and the Investor (New York: Prentice-Hall, Inc., 19397. In addition to these two general studies there exists a study pertaining to the legality of revenue bonds as viewed by investors and underwriters. This latter study is: Lawrence E. Chermak, The Law of Revenue Bonds (washington: National Institute of Municipal Law Officers, l95h). 6 In addition to analyzing the qualitative aspects affecting interest rates on public obligations, Chapter V analyzes the quantitative factors affecting these interest rates by utilizing correlation techniques. In addition to this statistical comparison, the interest rates applicable to revenue bonds and general obligation bonds are further analyzed by holding some factors con- stant by the selection of specific instances of bond sales. It is beyond the scope of this study to make recommendations concerning the extension or contraction of the public sector of the economy. This study points up the merits and demerits of revenue bond financing as opposed to general obligation financing under the assumption that society has made the political decision that the function should be undertaken by governmental units. Further, the scope of this study is limited to economic considerations that are, to a large extent, peculiar to the financing of government projects by means of revenue bonds. By nature, rather than by intent, the analysis of revenue bond financing is primarily concerned with state and local finance. As noted in subsequent sec- tions, however, the federal government is tending to show increasing interest in this type of public credit instrument. 7 Sources Information for this study has been secured largely from materials published by highly Specialized organizations. These include such publications as the Bond Buyer, Moody's hanual of Governments and hunicipals, Ira Haupt and Company's Revenue mend Service, and the Statistical Bulletin of the Investment Bankers Associa- tion of America. In addition, the various publications of the United States bureau of the Census contain useful statistics pertaining to guaranteed and nonguaranteed debt of various governmental units. Personal conferences with and information received by letters from investment bankers and public finance officials have also provided the basis for much of the material in this study, par- ticularly in Chapter IV. Def’nition The term "revenue bond" does not have a defi- nite, universally recognized meaning. That the concept is either vaguely defined or without uniform definition is understandable in the light of the historical evolu- tion of the securities commonly included in this cate- gory. Security dealers have been inclined to include in the revenue bond statistics all governmental bond issues that contain the word "revenue" in their title. Also contributing to tne ambiguity of the concept is the 8 peripheral nature of this type of financing, being very closely associated with the financing practices found in private enterprise and yet applied to the flflaflCl‘fi a 01 improvement projects in the public sector of the economy. Another reason that the concept is so indefinite is that revenue bond securities contain so many diver- gent features. State statutes auht MP1 ing revenue bond issues are quite varied with respect to many features of revenue bond issues. Professor Ratchford has stated that the broad H . ~. 1 . includes all bonds meaning of the term revenue bond issued under the special fund coctrine."S In this study, true revenue bonds are defined as all lon -term bonds which are is ued by governmental units or their agenCies, payable, both as to principal and interest, solely from the net earnings obtained from non—tax revenues received from the sale of goons and/or ser- vices produced by the faCility that is acquired with the proceeds of the bond 18 ms e. 5,. d. U. datehford, American dtat« Debts (Lurham, north Carolina: Luke Universit' Press,19hl), p. h97. The special fund doctrine refers to obli ations secured solely from new sources of funds derived fr om a s; ecial source which the courts have often ruled do not consti- tute "debt" since there does ot exist an unconditional promise to pay. This doctrine is discussed in greater detail in Chapter III. 9 nevenue bonds that conform to this definition SITE, in this study, termed "true revenue bonds' as Oi tin ‘ Hi h ed not only from veneral obligation bonds, U) but also fr~m the many variations of bonds that are commonly classified as revenue bonds. List inguishing Characteristics A principal nisti: iguisnin; feature of true revenue bonds is that they are not guaranteed by the I.“ issu ng governmental unit. Revenue bond obligations have no claim upon the weneral taxi n: power of the borrowing governmental unit. Owners of revenue bonds may expect payment only if the project that is fi ' anced by the bonds produces goods and services of ffic nt value to cover average COSt of the enterprise plus a sufficient surplus to cover debt amortization. Thus y'in in the definition the r... H CF?) tile neces s : sit“ ‘4 u for Spec ll words "payable solely from the net earnings. General obligation bonds, on the oth r hand, are legally binding securities of a goverzu went 1 unit and re secured by Q) the full taxing power of that politica unit. These obligations are usually payable from taxes and oth:e general revenues. General obligation bonds are some- times referred to as "tax-secured” bonds in contrast wit (D Q; revenue bond obligations which are occasionallv referr to as"price-supported” or "revenue-secured" bonds. 10 Another major distinguisnina feature of true (_I rexnmiue bond issues is that the enterprise fir l ’l . 6 , , a of a "proprietary' nature. Revenue oones issued b’r political units are often referred to as of a "self- liquidating" nature. The self-liquidating feature of revenue bonds results from the sale of goods and ser- vices that are produced bv tp d .s CD revenue bond financed project. True revenue bonds are issued only for pro- jects that yield goods or services that may be conven- iently metered and distributed by the price syst r. In the above definition, the words "sale of goods and/or services" emphasize that revenue bonds are secured by revenues received from the purchaser of these goods or services much as private businesses obtain funds to discharge their debt obligations. Special assessment bonds are differentiated from revenue bonds because of the non-preprietary nature of the facilities that are usually firanced by snecial assessment bonds. Furthermore, special assessment bonds are payable from a Special tax levy rather than by user charges. Special assessment bonds and revenue The term "proprietary" is used here to refer to an enterprise which produces and distributes goods and/or services by prices that are determined by impersonal relations between buyers a d sellers such as occurs in he case of a private business concern. T .L ll bonds do, however, possess the common characteristic of affording, at least theoretically, limited liability to he issuing government. Pledging user charges as the security for govern- mental obligations distinguishes revenue bond obliga- tions from other government bonds payable from earmarked "special tax bonds." revenues, often referred to as These Special tax bond issues are not usually secured by the full faith and credit of the issuing governmental unit and in this respect they resemble revenue bonds. Special tax bonds and revenue bonds also are alike in that bond payment is made from revenue that is closely related to the public project financed. however, the revenue that is obtained from revenue bond financed pro- jects accrues from payments for goods and services that re more precisely metered to the individual purchaser. For example, a toll is a payment that is directly associated with the service yielded by a revenue bond financed highway. Khereas, special tax bonds issued to finance highway construction are financed by a tax on gasoline and placed in a special fund to be used in pay- ment of these bonds. An individual paying the gasoline tax may never use the particular highway financed with th (D proceeds of special tax bonds; and even if he should, th CD payment varies with the consumption of gasoline and not with the cons mption of services yielded by the 12 highway. True revenue bonds are issued only for public enterprises that yield goods and services to the buyer who, of course, receives direct benefits from the pur— chased commodities. Individuals in the economy choosing not to purchase products or services of the public enter- prise receive no direct benefits. True revenue bonds, as defined in this study, exclude these securities issued to finance a facility even though the revenue pledged as security for the obligations may be partially derived from the financed facility. It is essential that the products and ser- vices produced by the revenue bond financed project be sold to the consumer in metered quantities. This requirement of a true revenue bond excludes securities secured by excise taxes. For example, the services emanating from highways financed by gasoline taxes are not metered; consequently, obligations issued to finance highways secured by a tax on gasoline cannot be included in the revenue bond category. Specifying that revenue bonds must be "long term" distinguishes this type of financing from govern- ment obligations that are variously known as "revenue" or "revenue anticipation" bonds, which are short term and of little resemblance to the revenue bonds which form the subject of this study. It is unreasonable to include short term obligations within the revenue bond 13 catecory. Only in rare ins ences would a public enter- prise be acquired by bond issues, and the bonds subse- quently retired within a period of one year. Short term obligations issued by the various nousin5 authoritie throu5hout the United States resemble revenue bon s in many respects. Such temporary financin5 methods should be excluded from the revenue bond classification. It is axiomatic that revenue bonds be "issued by H governmental units or their agencies. However, revenue bond financing by pol1ti cal units resembles private financing practices in many respects. In fact, the types of public enterprises financed by revenue bonds 1 c sectors of H- frequently coexist in the private and pu C the economy. Municipal utilities are examples of such enterprises. Of the nine toll bridges across the Rio Grande River, which separates the State of Texas from Mexico, only three are publicly owned. The other six are privately owned and operated. Many other similar examples could be cited. Of course, the "tax-exempt" status of revenue bonds is of cons ide ratle economic si5r ificance in distinguish1.5 public financin5 from private financing.7 7The term "tax- exenpt" is used to refer to the tax status of interest derived from state and municipal obli5ations. Interest incore derived from these obli- Lations is exempt from t1 e federal income tax. See Chapter III for a more detailed di-cus sion of ,his aspect of certain governmen t obli5ation.. 11+ Our revenue bond definition includes the word "agency" for the purpose of clarifying and makin5 more explicit a broad interpretation of 5overnmental units. Any study dealing with governmental financin5 by means of revenue bonds must give consideration, not only to the more common units of government such as municipal- ties, states, and counties, but also to the many H- branches or a5encies of these 5overnments. These agen- cies of government include such units as special dis- tricts, statutory authorities, boards, and commissions. This broad meaning of governmental units follows the definition used by the Bureau of Census in their recent . Q stud1es of government structure.L m1“ T ‘ n p o 1" o '1 o ‘ ‘5‘ v w 1ne were acquired 18 used 1L the revenue oond definition to refer to the procuring of publicly owned wealth, whether by outri5ht purchase, by construction, by improvement, or by extension. From the above discussion it can be seen that long term obli5ations of political units cannot be neatly classified into separate easily distinguishable classes. At one end of the spectrum are 5eneral 8U. 8., Bureau of the Census, Local Egygrggent Structure in the United States. State and Local Govern- ment Special Studies, 10. 3h Thashirgton: Government Erintin5 Office, lQSh), pp. 1-3. obligation bonds that are is.—red to finance nu lic enter;ri.sees which_§iuuhice 'oods enui services ifiu“t eenrot ’_J. b~ distributed by the firice systev e_tter for technical or equity considerations. 4PUG revenue bends occupy a nosition at tne ct or end oi t*e Spectrum. *7»! Betweer general obli ation bends and tree revenue bonds ,xis t all shades cf lonr term oe1i5at ions 8 hybrid nature--so e teini more closely related to general obligation bonds, while others have fCPG of tie characteristics of trre revenue bends. In this study, ‘ ~- V o I: 1 5 ‘ U. o 1 V .9 H a 7 o - hybrid LOECS of t;1s line are helpful to cless1;i as .' L L1 H 3 'Y 0 A 9 1 ,_ " nseni do- revo ue" b~nas or cunei—revenue' cones. Iseudo-Veveiue 70nds Pseudo-revenue bonds exist primarily as a result of the extension of tte special fund doctrine. This type of bond includes securities conteirirg the word "revenue" and often held be the courts as not constitutirv debt of the issuin“ political unit. As previously indicatsi, they are ultimately serviced IJ. the nolitice1.1utit. lnclrded n w -. the pseudo-revenue bond cateyory are oonrs weed to C q finance r ublic facilitie sby pleceinff eerwar"ee tax receipts. 16 Also included in the pseudo-“even e bor d category are those arra everts whereby an agency, either public 51 .J or private, constructs a aacilitf for use by a governner— tal body. An agreement between the two parties, the .—f t, is reached prior to Ho a5ency an; the 5overnnen1al un construction of the facility or to issuance of the bonds. The duration of the lease and rental price is fixed in such a manner as to previde for the retire- ment of the principal and inte est on the outsta ncxinp bonds. Lease- -rer tal a5reements of this kind usually provide that the facility n15y be purc:ased b; the H d m C1. {:1 a (D h 0 H: in governmental body for a token paym (D V l sreci_ficd nu ber of yr—ars. Bonds issued in this ma :1 :75 0 *3 [—4 “J ,3.) (0 CD I are often referred to as rental revenue bords . -‘ rental charges are gener ll; paid from the 5eneral fund \4 Cl the taxin5 unit. Lease-rental arrauremerts are usually entered into in order to circumvent debt limitations. An example of arrangements of this nature is found in Pennsylvania which has enacted permissive le5islation authoriz1n5 any of its local units of onernnert to H . o . . . create an autnor1ty.' Tnese authorities may be for such 9n eutr orities--Pro and Con," prepared by Pennsyl- I7‘conorfy Lea ue, Inc., Pitts M11r5h, Pennsylvania, a _ 2- h_. CUndated” ruuee05raphed.) 17 a wide range of purposes as sewage plants, swimming pools, school buildings, waterworks, and airports. Revenue bonds have financed nest of the capital improve- ment projects of these authorities. fiany of these autLorities have been created sine y because revenue bonds do not constitute debt within the limitations of the laws of that state. The Sole characteristic common to both pseudo— revenue bonds and true revenue bonds is the almost uni- versal rulin5 of the courts that these obligfitions do not represent debt of the issuind governmental unit. Pseudo-revenue bonds are issued primarily as a means of evading the legal deht limitations and would perhaps be H ed as quasi—general 051i- (‘3' m re appropriately design (:0 bonds. Pseudo—reverue bond payments re from tax reve- CD nues. These bonds are not issued to finance enterprises of a proprietary nature. Despite the absence of revenue bond characteristics, however, the? are frequently l 10 Q: ate ’4' in the statistics pertaining to revenue bonds. lOFor example, the Statistical Bulletin of the Investment Bankers Association and the various compila- tions of the Bond Buyer pertaining to revenue bonds contain bonds of 5overnnental units that are serviced from specific taxes, although the forner erranization has established a separate subdivision for "revenue bonds" of this type. 18 Quasi-Revenue Bonds ' is used in this The term "quasi-revenue bonds' study to refer to that portion of public project bond iSS‘BS of a preprietary nature rrich, for some reason, do not meet the test of the market. The narket test 1.: U1 met whenever investors are willing to invest in the facility to be financed and are willing to accept the net earnings of he enterprise as sole security. In mane bond issues, the governnental unit pledges the net earnings of the public enterprise that s to be finance,~ l"° insufficient to prevent default, public tax money would be used to the extent necessary to prevent default on the bonds. These are sometimes referred to as "combi- I W nation revenue bonds,’ or bonds with "double-earreled security." In some instances th market test may not be met because the issuing governmental unit apprOpriates a portion of the funds that are needed to finance the public enterprise. This governmental aid to the enter- prise may not take the form of a money appropriation. In many instances the supplemental aid may be in the form of utilities such a heat, water, or electricity provided to the public enterprise without charre. 19 In 0 o o eypically, uIivchitv cornito s are fi uncec oy revenue bones; but supplemental aid to this type of f i ity i received not only for the necessary utilitieg for salaries of t e Cb-mltOL sunerVisers. Other hyarid bonds paradinw t.nder the revenue- bonu classification can be cited. The revenue bond issues of the many authoric;,s do not alwa s meet the n I‘ A‘ w r“. '5 V“ f’ ‘ '1' ' ‘1 . ‘. ‘-. ‘y . 3 (N 'c‘ ‘, "a '1 1 7" ) , A , ‘ - V. ; A test 01 tne maiaet. nutnonities ireeuently glee e the A _ v 7 0 I .. . v r 3 0 earnings not only of the speCiiic facility that is to ‘ ) - ‘ ‘ 1 '1 _ r‘ f“ ’1 _ _ : - Q ‘ r‘ . _: «fl . I ‘I '»‘.’ _‘ V oe iinanced, out also ui enistin" faCilit_ss w icu nay or may not have been financed by revenue bonds and which may or may not be free of debt. ?inancinx by the fort \ fl 0 of new York Authority is a peed exanple of this type of practice. Practically all of the outstanding bonds of the Port of New York Authority are secured "equally and ratably" by the net revenues of all the f Cilities operated by the Iort. ll Qtlisations of this kind tend to and more facilities are pl;dged as security for a new acquisition. Thus all of the revenue—prohucino assets 0 0i an authority are pledged as security for outstanding llFre R deri d< L. Bird, a Study of tne Port of ll'ew York Autiority (1ew Iork: Dun a eradstreet, Inc., l9h9), P- 52- 2O obligations much as tax revenues derived from the tax sources of an? governmental unit are U (‘1’) :CJO C3 (’3 <2 “(.3 H \D Q 'ged. Even tnou the revenue bond calipauions L’A..L ed by overc*ental uni s such as the Port 0 Ho 81‘) {5 *r l 1 ° ‘1 ~ r. . . 1W° 11 - Iorg nataorit: tend to resemble -ancral ooii-atior U \ , o H ,3 v. H ~~r1~ " fl I n ,. “I or takinp power h1iCh may be used as a means oi ° .. J. N - FL. 1 a PalSISQ revenue to sugyo b \e-eral Oulikaulon oonus. Quasi-revenue bonds, as they are defined in this study, must be issued to finance a procrietary enter- prise of a governmental unit and mus rely primarily upon the earnings of the finaiiced enterprise as secu- rity for the outstanding ooli aJion s. Obligations in this category are distinguisned fr’m true revenue bonds in that revenues pledged as sole security for quasi- ‘ 1 f 1 ‘ I \.’~ p" ‘ “'1' . ”r 1.,- ’1‘ '- . f7. ,— -. revenue bonds do not ema1ate entirely a,c speCiiically fl , V in .r 0 , {may ")1 7 ..° 1 ‘_ . 1 - .. _“’ iron tne enterprise iina10ec wita tie bond proeeetg. 1 ‘I ‘i ‘ o o ’ 1‘. “a" ' ‘~ devenue cones are iurtner dlStlh“nleu&31G om provisions of the trust indenture or other similar docu- \D :3 C1,. L. O L: O ontnins the agreement between the issuer and tb e bon fl: older. This trust agreehent usually M.cc ozm; anies the offerin: circulars or :rospe ectuse s of the revenue bonds that are to sold. 4 wrotection of the ested artie *5 1'1 -' J. of description .; aéreemcnt 1 "V 0 tie bonds A O — £’ D 4.0]:1 bile and contains such that are to be :1 issued, maturity senedule, grovision ior registrations, call feature, cou on interest rate, bond securitg, 5nd various 0 of ther protective covenan t 7Y0 -$V covenants in the contract d order in wfiich O 08 C‘._ A.- , " J" q .1 I I“ ates t” l” 1‘ r 5" 1‘” udilCu) , risk Covenants or t e eti ‘0 "J I” l, (1 D 'x» V .L TUE. ’36 09,111le V '9 SQPVlCQS It is not unusual for tn reement t" regs ity provision 4.", :- tne bones are secured by ‘1 *7.) derived from the c; bond“ {-3 (‘3 S llxz-ioni; 0 their thi :1 ;_iS : .(3 I I I A 1. (D may gations of the .ledLe of the net l2flint‘nrOp S (New York ‘ C1V'fi' . r‘ Q Lia. Jln, [3. . o O D T‘T ‘IY re'nuurx h '. A - '14 LA 1'. .-«l O L‘ $ - m th,L-3arney 8: Co., 195 Infreo uently revenue bonds are -quit onally secured by (j 1. .. - ~ 2 —° . — 4‘ 4-‘1. ~ ne a reement gerta n n; to tuC use oi one end pr ceeds is for the purpose of protecting t e bunvAULQ r F H 9 {3; H. La 1.: U) (D 0 H0 e s . :3 Q C O ' l C 5:) 1 0 p4 ). C) ' 3 f O ‘ . naturally desire Cf“ C .J H ,A i assurances tna the bond groceees will be $303 wits tne uneualii ad approval of tue CUHSJltiJg engi- nis SCCtiJ n of tne a; reement usually reocires the political unit to segregate bogl-procced money from r e;;ce:ssi‘a_t_1ics to a con: 1‘. K ‘1 ~ ‘V 1.‘N . "i ‘ : ’. ‘ 'W - fl . ".‘ - . ‘* lne bone purcnaser cesires a lle understa lGlh (i—b i S. H H. d. [—4 (.0 Cf J (~J ”D ,0 1 f...’ (.0 ED DJ as to new revenue from tne .‘ ,3 o "W ,~ f% (‘1, V' ,_ fl 4.. _ p . m 4,. ‘ A. ., aid; in valet cmmler. ifltIV3LQs'9, t_1> tr-l)t s vau e.d:;sag w 1 0 $- " _ _ , V (Ev-i 7. pwr tr rt ‘Y‘r. -' .nhr- Own “woman (3." Ln?) mm «at 8J"‘.J\J .L c sitl 00-4.“ 11.100; 61-) ‘J (.stu Czts sthL .J-AL~}"/--LJ(.JQ “ C; Q ‘ C0 *0 O” O H. "O Ho 0 DJ cf- :3) 21" (1— C’— (D "i (D <: (J {:0 C‘ " J (1 p (D FD C‘— 'D ’ S *3 [—Jo r 1 ”J CJ 0 if H) H. '25 U) Cf d. O O 0 OJ Cf P C '3 ) 1.L‘4—jo ..| ‘j . (\{fl 1:) Y ‘n‘l‘. l" , ~"1 i J’ _‘ («4‘ nth/F: "\.Y31.V‘In. lULlsij 0‘5 1;; D10 «his/(J. lL;\/€-; CD LU}. *nljcpeCIU L'Lliki 2......stl- pal will not be avilable unless the iacilitv is a Q *3 *5 (7) D1 Cr (D F? :3 U) C} c. L ’T) 2:) d 5 _.. F3 CI \3 C) '—-+ (D } 3 s H. C.) G) [—10 d- O H (C O; m H 13See Chapter III for a discussion of the aSpects of tne rMort i of QOVGthaflt property. 23 successfully meet all debt obligations. Basically, the enterprise must be economically sound. Legal pro- visions in the trust agreement pertaining to the order of application of revenues can never transform an unsound venture into a sound one. hext in order may be the application of reve- nues to the retirement of principal due in the case of serial maturities or the creation of a sinking fund for retirement of term maturities. Additional revenues are commonly designated for a reserve fund in order to pre- vent default in case revenues should be less than anticipated. The trust agreement may require addi- tional reserve funds such as for operation and.main- . J tenance eXpenses and, in some cases, taxes.l4 After these provisions, any balance may be used for the general improvement of the enterprise; and, in rare instances, excess earnings may be applied to any pur- pose of the issuer.19 11+Requiring reserve revenues of the revenue bond financed enterprise to be pledged for the payment of taxes provides a method by which the issuing unit may obtain funds from the revenue arising from the operation of the enterprise. After debt retirement, these excess funds would ultimately become usable assets of the issuing unit even with at a reserve fund provision. 15Curvin, on. Cit. Eros; ective bondholders generally re dire a rate 0 _~ ._ _ , I" :1 u _7 __ L 0 “ f‘ o __ covenant cbli sting the manaper Cl 649 GLCQF‘lee to ill ,rices of the goods and services of tee revenue bond financ:d facility at a lgvel sufficient to provide reve- (D "I w-‘l - 1‘ -“ fir “ ‘3‘ ~'-, a ‘ nues ior eneenses and dect srrt;c€:.1ncce Ur_ces er * 3". ”V irequently required to at lines at a level 11 aCCUYu- .‘ .,- 1'.» -1. - .,- 3 - 7:1 - . .2 .- _- .fi ance thu the rechnencatiuns cl t1e ccnsvltlgy en lucers neve nt e bond idce :tures vary considerably with reagect to the 1POV1"30. for the future iss7ancc of additional herds. Of course, the L dr3:olders may, if they so desire W~r77~it t7“e is Hence of additional bouts . \1 U , IA; \. ‘-._‘. 1..»4 L.JL-' g2.17s.- '\..' .L A 4.4.. sskJ. w )sy‘s.) 7P1 ‘—~’ ~w‘.". ,‘ ~r7 . .“ .-.1 -1 ‘L, .1 7.." 4.. 7 even tsoufln contrary to the in1enttre. In men: cases, additiontl financing allows tde public entervrise bein“ a - .1 *- 1. 1 -- -. 1 1:1 .. 1, —. - —,u 111a ced to exp d and frovlce bani; fleecec Lp-Uo-cate . O . f \" Y1r‘ o 1 '_ ‘-—-.- ‘_ J “V . _- 0 fi.’ u 0 V“ p equipmmhrt nicn.rmn, actually IVMLICG the gmmnyioilitu of default. Future Conu is QLCS are customaril to existing obli ations unless the issuin: political {-1 .L.’ unit reserves t1’1e rigyz'1t to :ssue aha-i 1110:7131 revenue 1_;xcnds on a par it* with earlier issu d [l BoniE olde re .eczies usually consist vi the right to ap>Coint a receiver If rate covenants have not been I - A ubordina e bond issue is secured '3 reve- 7 r“ +- '1 s u if“ s l nues of the f he v after tne servici “ of i other or tstandznr oel l-) \I l 2 d peifcm in accords rxrce with the provisions of the agree— ment, the bondholder mav anp eal to the courts for an ~ ulfill the oClinations specified *5 order to the issuer to in the trust agreement. As stated previously, the bone— holders may include in the arreement the right to fore- k— close. Hort; gas on puClic faCilities are Cocoxriing a rarity; however, since bondholders are primarilv con- ‘ cer"ed with methods of out: 15 re enues above eXpenses, _) H. H F-Jo n foreclosure often does little to aid the situation. The trust agreement usually requires that liabilit“ and other p opriate ii urance Ce carried to ~ the ma: :imurn allowable or as recommended Cy the consulting engineers. Bondholders desire insurance that will pro- tect their investment in the event of loss or daua the facility to be financed. In certain instances the cost of insurance may be proniCitive. Therefore, investors con'wz only limit the insurance covera;e to that "reasonaCly obtainaole." Typically, the bond agreement requires tnat the financed facilitv snall be insured The attractiveness of revenue oond issues is d increase if the issuinr political unit agrees to limit (_) conpetition of the enterprise beine financed. For exe ample, a raunicipality desiring to finance a toll bridge may agree that additional competinl bridges will not be constructed within the municipality until the preposed tcnlfll brii5e debt t b1e1 iquioatcd. T-e issuir5 Ipcxlri.fi cal unit could possiol; C1rcup rmt tLis provision tc: :Limit competition by creatin5 an 2g hoc district or aéje:?rjcy to finance the conpctirg fuc1llt“ nless t e Another prov1.1on sometimes found in a revenue bc>3~;,ci.indenture is an a5reenent that the bondholders will be} _i?urniSned1:it11op-retin5 reports of the financed er: 1:;63rprise. These inuepenflext such t reports statin5 tYlASB .fiscal condition of the project, help keep the soundness of his investment. 0 n xLJU iIE—‘J' -st01nlormed as to the Of course, the covenants in the revenue bond Afiilernture vary from issue to issue. State law may in the bond U) a W determine msLy of the prov c'on f‘ - ~~ 1 g) v U Alabama the (.3 cf (D F43 Ci.'-'""Tl"egment. 1’01" exr‘lrlple, in the St 0 r ~ 0 0 d o o '1 1 €3‘JEEnues of an ex1st1n5 1ec1l1ty may not be pleo5ed for JJ b \. ‘ o r) o '1 (911(13 lssu lor the exten81on or nrovc.ent of the e fac ility.18 \ l7:or exumole a.mu Mic pality may e5ree to I‘C3frr’ein from constructin5 a orio5 e- in a certain c n— rmibity altnough it may create an Mtioritv which may tHen be free to ouild a competin5 abrid5e 7'1 18 (:1, ”T11 Lawrence 1:. 'xermek, “no L211 shi 1~'ton' Lational Institute of nunicipel L h ers, 19;L), p. llo. of Revenue Bonds CHAPTER II DEVELOPMELT AND USE BY GOVEdthLTAL UNITS Oriain The origin of revenue bond financing is lost in tltL (qurities for government debt has been practiced for (:63:r35turies. The revenue financing of roads, a toll road <3<2>1143tructed by the Assyrians and connecting Syria and Babylon, occurred as early as 1500 B.C.l Other early ezxiéarnples of pledging revenue as security for loans iilil<33J1de the Venetian loan of 1187 and the City of Flor- e’r1<:€a loan of 1307 pledging salt and seigniorage as SEECurity.2 As early as 1515 France pledged customs beCleipts in exchange for a loan.3 A very definite undertaking of revenue financ— 1:15; is found in the history of England in 1663 when \ lGeorge McKelvey, Jr., "A Glance at T011 and Free Roads of the Last MOOO Years," Dailv Bond Bu er (Special Convention Issue, November 29, 19LH5, p. 9K. 2Laurence S. Knappen, Revenue Bonds and the InVestor (New York: Prentice-Hall, Inc., 1939), pp. 3113101., p. 11. 27 28 r; Agggaziliament gave counties permission to levy tolls on game of the main highways to raise funds for repairs and maintenance. A century later (1760) England began the prac- 1:166 of pledging tolls to finance roads.}+ Private companies were chartered and permitted to borrow money for the construction of roads. The debts incurred were tc> ‘IDe retired by the total proceeds of the toll collec- t1; one; afterwards, the roads were to become toll free. Toll bridges became common in England after I 1725 and were operated sometimes by existing municipal cCDI‘porations, sometimes by private speculators, and ”matinee by a public body of commissioners created for tflang ‘specific purpose.5 Harbor authorities were among the earliest and Inc3531; successful users of revenue bonds.6 The Harbor or Dundee Commission in Scotland, created in 1815, had the power to borrow money; but it did not have the ”901219;. to levy or collect taxes. This governmental a"Chhority was the result of the corruption which accom- p.3‘ntl.ed the custom of granting favored boroughs or “filthy land owners along the coast the right to hMcKelvey, op. cit., p. 95. sKnappen, op. cit., p. 5 . 6John F. Fowler, Jr., Revenue Bonds (New York: ' Aer 8: Brothers, 1938), p. 19 . .q-4 v.” v1 I—dw 29 collect charges for the use of ports on the condition that the borough or owner would maintain the port in a satisfactory manner. As a result a harbor commission was created and was required to apply revenues to the retire- ment of port debt and maintenance. The Leith Dock Commission and the Clyde naviga- tion Trust are other examples of early harbor authori- ties. In 1809 the Clyde havigation Trust was organized as a municipal corporation to manage the Glasgow harbor, and.in 1825 was granted additional power, giving it a sendmindependent status.7 The Port of London Authority, established in 119(36 and later serving as a model for the Port of New Ytpxik Authority, is perhaps the best known of the many p<>rrt and harbor commissions in Great Britain.8 In 1817 the first municipal gas works in Eng- lallél was established at Salford, which at that time was PaJPt: of Manchester.9 The original cost of the gas works Wars Iaaid by taxation, but subsequent authority was Crarited to incur indebtedness secured by revenues of the gzas works. Birmingham, England, issued annuities 7Knappen, op. cit., p. 6. C 0 — . Eowler, on. 01t., p. 195. 9Adolph h. Zwerner, "Indiana Municipal Revenue 3321a Financing," Indiana Law Journal, 111 (1936-37). p- ‘i‘j‘i y} 30 in 1875, constituting a first lien on the revenues of its gas and water systems, payable out of 5eneral taxes I O ’3 D I 1 1n event of 1nsu1f1c1ent revenuesrO ddinbur5h and Glasgow purchased private companies located in their townships in 1888 and issued securities which consti- tuted special liens on revenues received from the sale of 5as and its by-products. Most writers agree that the financing of the Spokane, Washin5ton, waterworks in 1828 is the first American project for which bond issues were payable ll scilely from its revenues. Isolated instances of the acmoption of some of the principles of revenue bond .fiiaancing, however, occurred some years earlier. In 0111‘ own country, the American colonists pled5ed Inexrenues as security for the first closed turnpike stzaarted in 1794 reaching from Philadelphia to Lan- Q 12 3 ’ 3— /.' .' ~ 1 cansizer. This was the beginning of the vast number 01‘ ssimilar projects in the new count y. In 1835 EW113_adelphia authorized construction of a gas plant 13 to toe owned jointly by the City and private investors. DONLIS were sold in the name of the 5as company secured lCFOWleP, 29. Cito, po 135. llhnappen, op. cit., p. 8 ldI-Lcl‘lelvey, op. cit., p. 9h. l3Fowler, op. cit., p. 18 31 by the revenues and pledged with the building and equipment. Later the city acquired sole ownership and additional financing was supported by general obligation bonds. .Another instance occurred in 1851 when the citizens of Lebanon, Kentucky, secured legislative authority to construct a cistern for public use in the courthouse yard.11L Fines and penalties collected by the city were earmarked to pay for the cost of con- struction. The New York Legislature authorized issuance of’ revenue certificates in 1851 to be paid solely by thus revenues from the Erie, Tennessee Valley, and Black River Canals.15 The New York court subsequently held this act invalid and thereby prevented the issuance of the bonds.16 During the latter half of the nineteenth cen- tury, rapidly expanding urban centers were faced with thee xsressing problem of water supply. Private owner- Ship) of water facilities had proved unsatisfactory due 'to lack of ability or desire to improve health —‘ lulbid. 15E. H. Foley, Jr., "Revenue Financing of Public EmterTIPises," Michigan Law Review, xxxv (1936), p. 20. 16Neweii v. Peo 1e, 7 N.Y. 9 (1852). . - — r . a r. . 1 ., r. . L ‘A f. '- l . A A »‘ f, - ‘ . A _ 1 ,— ‘fi .- - . _ , v J- V , . o x 1 ’7‘ '1 1- : 1' 1 7,1 A " ,v‘ 7 fl ‘ g A ~ ~ , , s. w w r“ fl fl. -. .1 l" * P" c. »\ - v , . fl -— _. \J _ .‘ . 1 > 1 - _ , - ‘ -. 1 _. x . v: r\ 1 v - : ‘1 ’3 1’ ., r +‘ ' ‘ '. r '3 » . 1‘. .- r ' “ : ' 7 ‘I’ -~‘ 3 .a,,. V- . _ va / .\ _' __ .2 o _ u \‘ v , r s l r - - I » 1‘1 was “ 1-— J n 1—. » - - ~. --._ . 1’ l. 1 ( .,, I .n, ‘1' kl , .1 IL A. a o ‘ ' v ‘ 1 - I v '5 _ ‘ K . (V " 'l . ' - ‘- r\' ’i- , - 1' v ’V -_ '- . ‘ > on - 'w L J A \. I ,_ U , L. J J \J L‘ ’ ‘1 - "*1 common r' 1 ’ t c " " ' i ‘ 1 ' " 1 ’ / ' ‘ - I 1 v A- _ ‘ u o e .. .. . e ‘ . . n - -/~ A , r . ,. ,7 -. r. 'v . . . 1 - .4. , 1 . ~ I _. \, -p-'— .,,~. r. .1 714,—. :— — ~~ - - z ; ._ 1. 1 ~ ' . ~ 1.) -_ ' \J ’U ‘ A '_/ _ _ 1 k}. u ’ d '5 x a g . . I . _ . _‘ * 4 * '1 F. *3 73 1 ,c‘ o . '5 '1 r1 ' j . z‘ “-1 I1 1 "x _ 1 \J. '4. 4., , - \_. .11 . .L \' \/-_ 12.1. _l A. - ~ '7 - _o __ o 1 o A . .. . . ‘1 \ . 1 5 l. . _ a r‘ - '1 -1 _-. - , V . a . _ -_ o1 1. _.. . \ 1 A .. - ~_. ‘ . 1 ’ ‘8 ’ '1 J _ ' Lx ~ , . V . . p ‘ ‘ ' ' "n ’7 ' “ ' ‘ ’ " " “ ~¢ - . ~‘ ._ 1- .1 . - .J A J 1 , f V) L3.) .1 ' ‘ > ‘ ‘ ‘ ' y ,3 o 1 t ’ ‘ . . —- ~. " ‘M A A“ ,. r 'l j ’ h ,1 , ‘ "1 " I - 1 ,.. i \J \..- K. . . \J ‘ . - . 1 U 1 r\ r‘\ r} J“ . 'L‘ ‘1 4 - L‘ ‘. ( 'l q -' h ‘ f \ ”‘ _ F“ a ‘ ' - - A L -‘ ' t 1 \J .1. K1 . \c/ , \- .1 .1 ' 0 5 1 J. < a u 1 - ~ 1 ‘1 o n W I ‘r‘. , (a :1 .- z: W W ,1 A, ‘ 1 V I , I ’ 1 C 4. V4 . a, V x. a \J 1 , ,1 - - o o -. o v . o ‘5 - ‘. A. h 1 , . -‘ v, -, m , , n ‘ . ~ »‘ . J- ‘ - — ~ ’ he ~1, (.1... » ,’ , .: \ 1 u t a; to .1. 9’ J -, A . _ I" n -. o - " ~ ~ - ' . fi-w A .1- V ‘ ,., ,, r 1, ‘1 .5 a? 1-1. . 1 1.1 ( v ‘ ~—‘ - .1. - . , . v \_z \1 \. , ‘1 ”" ;- K n, 3 »-. .-. 3 ‘ . 3. “ / ‘ r‘ ‘ '1‘ M. , x '- _' '7 .-. -" .1 -'~ ‘ »\ “ “ ' .- ‘ , u 9 1 a . . v . 1 i _ ‘. ‘ o “ ’ n o . < ~ ~ ”tr- 71- J- ., , , . 1. , r, ,. , — K. ,. a , . \yfl ‘— 5’ - . 1 - \4 ~ '1‘ _ 1 r \o. . 1 .. .1 . r. 5 ‘ 71 fl 0 a . - . '~ . l 1 r ‘. ‘1 (s - rs ~. .’ - -~ ~,—‘ , . 3', ~« »— - ,- - I», 1 .' _., ~ .... \Jn ‘-- 1 ‘ - '\_,'.~ .. U - ’ 1 1 a - u h '7 r o —- 1 ~ .1 , '2". n -1 '1 P - U .- . , Kv’ O x) o , I .— . O M - * ’\ '3 ‘ l I I5 . V- — . —. ‘“ J (I, A“) ’ ' T fl.‘: " 1‘ L1“ . ‘ 1 - A. >? r \ h I‘ : '1 *»~ n11 o ._ , J_‘ 1 i ./ ,. ' _ _, - 8 O ,‘ ‘- 1} ’ \ . ’ ‘ F7 ‘ ~ 1' I . ‘— ‘ 1‘ — ‘ \ L ‘ “Fl -‘-_ 1 ‘q ‘7 ’VI‘ 8 ' \ . — . 8 r 4 r I 4 ‘ 4 — .— _ -4 v «L _ o o . ‘- - - .1 uv n U U o ’ , ‘ l I , , r- q. ,_‘ a . g .h l— . .1 A .L- 1: _ - 1,, _L. .,‘,.._ 1, .‘ 4 g, : : f L.“ , 1/ ‘ . —-. .. v - . v L - '51 i ( 1 U o . J " n - o ' n 4 . . . _ .1 1. ’1'- 1. a a n w j 3.“ r y ,‘ ‘-’7 ' " ‘ ’1 7 “ 1 Jr rx -‘3 - ’ 1 ‘4 A 1 . , ~ g t ,5 ._, . ‘ ‘_ _1_ _ . ‘4“... 33 of state and local ovepeucgts to diversifv tgeir revenue SOLII’CBS o dearth Revenue bond financed governuent pr0" become increasingly peculer since tee 1230's. Only isolated instazce s of ravvq,c bond Lil-a ;icic” can be 0 Q C cit ec prior t “Peat Depression. The federal 40V- t, ernmen seeking to stimvlate public Nor;- w- ‘riné this j”r-od correctcrized b; a mign level of LLZGiplOJfieflt, excodrd ed leriulccivc revenxie ooid le is- leztion. The desire of officials of tue federal overn- l-v-it to stimtlate <°lf~liq4idstidg projects resulted in tile? enactment cl 3 TCJHHCOHS volume of Pevc H110 bond "‘ . . a . ‘v- >' I: r: ~ D 'L‘(' q I ‘ V" 113; islation cMCinQ tie dCCQMC oi tie 1730's. 3V0 “ (v. o J— , J__ ‘- o o : ‘1 _" o w 7“ o o .- cxt‘ite eic”;3 edictcd 1n1t-al rcgtissive 1c islotlon or n~_ 21'; ~ A a. . .1 '— 4.‘ 0—-c_loec lbs Onlotlng r‘vcnde bond sc - I ('10 . ”.1 .. [3. > r“Y. , >_ r‘ - 1’) > (1 —\ , . wp . r F.1“Q ‘\KJ~A L7 Lt (W ‘ ...LA. \4 . kuLl rmnr'l ‘ —~-p: ‘ . ~J-mrn: 4“. w ~ -UwJ-W. -..U\AQJH \. . u k, _ ,U _ J ‘v. o ‘ {-3 1 . fl L m , 1 w -‘ ,' . \I K, ‘. .3. (1.. ,-- xv ‘qw- ‘ . . ‘ '1 m m n '. Y ‘K‘ 3 4 - —‘n _‘ ,_ V‘_ A. . L- ‘r ‘ - .. 7—,. ~ ‘ ~— , V- ,., .j q T V T ...L- — . x4, x' -_ .. _. ‘1 'U .... - \ -< V rw ‘1 ~ \ ,V', |fi" - - ~7— ‘\4\’ I . x A \, . I“ _. _ - .1-» ~ ~ ~T-w" — X L ‘ . K; JV . . . _, 1’ (-1" ’ w r‘,”'|. \‘ - ‘ \-'- a V w 1' ‘ av) , ~v‘ L "'1 .- ‘1 -1 Al ‘_ - \r\ ‘ , . _ A ‘ v 4 \~ , 1 — , -- 1 mar ‘ ~ /_ —-l - , (‘0 - ‘f‘\“/‘\ A_ .N'“ (a ah ‘ \l. \J - on ‘ ‘ H x} L t .3, _ ,‘ ’7‘ \ “flu — — - -- ,‘ k4 . v. , U I ~ 0 c 0000.... , “nvzp'W , 7-. 1--v‘a, — r. \_l v. ‘ \41 _ r Fflh ‘ I r 1 v- _ - -.-.- . ' ”fa A 1‘7A\' — V, «a a. “r 1' fl 1 . LA 0“; * ' '1‘ r\ “ -~.q [I I‘ -' .Fx‘} . ,' D “:1“ A - . v Au... k4-..“ ‘ ‘1‘ A v Au. U' \I \1' u! \_.- U. ~-.' I «L A . , _ , .J . ~-__ -J.,;_p,.. A” .2 , .. .1 ..__:,._J—,_\ .1 r \ V4 _, an . _ U A ~. g h. ‘ ' q j —___.._ -—.._——_— —— —_ c— .— *H_ .———-._ \ I ’ I , ‘ -. ‘ r , O I I ‘ a o l 1 . - ww wwij~ 1 ~- .1-. . ~ .- «nu w —- ‘ .. . . g . __ L.) , LA - .4 ; ‘~.' ‘ L . , L“ A . . u ‘- ‘ O O \ ‘ 1 J . . ~ ‘ "17A,”? ' n~ 1‘ ,‘1 "hp D , I N. n ". ‘1 w r~<‘~n nu A -'n - p' / -'\ rd 1.. ‘4\./ I .«L'LLA‘A ‘ ‘, ' - ' LA.‘L- A _' t, L\ - g .‘ --¢k1_‘ . , Aw: I. _‘ n‘ _ . ' —..) 91' «v. "-1 '. -‘. 1 r” :L: :upw, n ~ , (“w-n ,_ 7- ~'.‘..L .;. ._ . . , 4.- U .1..L \J. . L; ‘ \J V ‘ . U A ‘ r ,_. 1 I... A ‘ b-L .l . r‘ "J-- ‘VY' ’- rw l'r‘ —- -’» L‘. ': I ,I‘. ,1,‘ \v; . . u . r n ”1 ‘ u 3,.“ mm ‘ ~ n A \ 1..., - » a ‘1 - Iv ~~_/L. >1 _ 4 .2 .< J. \J. L ‘.' - A «k. k; ., \. , A_ ‘ - u "\ «L- xx ~ "x V; . .1 ‘ fl 0 r ’\ 'f‘ -' '- “ “ — A .. : - . x.‘ .. M1“ ‘ a g» C . U . ~1_ a- 1 , ,~\ , ,. .9 A L n_i‘_/ .th ~ ‘.4 kl...‘~_L- L‘ . -.'J Lax '. U—L _‘ - .. .‘ u) V4. I J \‘1 A u a .; ‘0, ~~, 1 *"’~ n*0 .no " “‘ fin '7 ‘ "”(‘,’3 ‘ ‘- A .J- .4 ”A- '_ _ ; a I" _ ‘ —. v.9 ‘. In in 1 ~‘ u -. 7 -.-.’1 ,, .— :- n ‘4- .f -\ m n #3.: ‘2? ,v‘-’y'-~ .z "U'~-—L.I .L _., .L 'L/\\ \J L'~ ‘ gn UH —" ”- - ‘fi (x.',4‘(\~nn‘w‘.'? or; 3 r“ ‘ ‘3 1' ° . LA A 1.- 7' a A ~’-‘ -/\ _v_ ‘ ‘ _ k5 .,.- » _‘, a. - .J..\_, . \J ' .. k,’ \ '.'\ >fi‘ . ¥ _ . — d’l n,“ - ‘ .J _ . 1*“1 */,z'-“ '3 Alf—’m ‘\ A .h,’~‘v’ filrxl‘ “‘l _ I, ...I u... r‘! F’: 1.:3 I AI 1i'n *Ii.\g ‘ .‘ Trllter ‘ 1 1-‘-,. 1.,1'" *l' . ‘ i P- ..I. ‘3 le'J} 7hr?“ ...,V; 1‘ w _ 55‘1“) *IV‘KJ Ci" Ln (\f-r'fl-‘i _ _ ~24 f . g If "1. - ‘ T . ‘7‘ A ‘7 -. -H .:-L.‘J “H” “p“; . ....L; .L. , ‘ v,“ r 1 T ~ ‘ 1‘ w . "r7" ‘\ __J. -‘J¢_~v ‘v-- \J— __.. .-_ - .- A ' -- .A v 4 ‘. “ '7' :T‘7 T " ."-_“ 77' ‘ T ‘ ‘ f; \‘ ...- ;;-'_.Lu -.‘_ V“ U .... .' J A“.-. -- ,_ an.) o 1 1 .o 5. fi >1 ‘_ _ ". ~ \ P1 l“ ,« A 1* , I (-..'...- gun. u +IU___ / * 'w ' 'fi . _ 7 U , - ) . r. Y Y"'x -« 9 W ‘ i!” -A ..J_. 1-; 7A.; ~ ~ - _ V J _ L V“, >~ (“v ’1 r -' '7- '" '17". A “1 ~. 7.1 . -kJ‘.« ._. L' .1_.‘ .m ‘ . 77’ 5‘1””? ‘1' ,«v '3 --1 ’7'3 f. ".‘u’ 2:1 I ...:L—., «4:!»— ‘~/ r— ‘J R a- ’ 1' . a , i/ /' a" ’ ”"“ . - PJ rip/Kw '1 1" r, .7 .J’(‘ r, I“ 7N /: , /'/ J J , I I "' "" . I I L'" ,‘. kr‘q r‘ " ‘3 1.47 “’7 v"’"‘ ‘fl/«v haw) ,- q (xv-7p: I‘ ~’] " r~'\,»-‘ ,\ (a . ,. ‘« , , . .z:t—I\« ‘——:/.’ s2» L—t— I fi- ‘ q j “(‘11 r‘ F‘( |. f .. f/N -’ ’ h” ' a I" , I‘ - *III 1’ (\flr" r‘. H. (x C fi‘ ’1 r‘ I} L.) ,' //' L.’ M.-. 1,. V“. L“,- c chm m. t fi' A 1 ‘ L“, / I "' L.__, . ‘ x. / / _.,\J r\ qu‘ - ‘n / ~ W ‘ ‘t *1 f A . i I P‘ ,a‘ l w L, // f, 4., U .4 y“‘ ‘.» .4— . -“ I‘f“!' 1" r - ,\:(~ fl q 1;; .L,L.q.‘4 , ,«J \ _‘_ ("‘1 p r- '1 C ’ A '3 rm” Ll; / x..'_1.(/ I“, L..,’ ”1 A 1, m) a: n «.1. ‘ , I .‘ [.._-.. ' [x L_. . __ _/ .. "/N ". r"f\ "‘ ""f 'N’j a» u “1‘1” 4/ ._; ,..‘- {Jr—v A ‘. "1(\. /~ r“) 7 ~‘ 2 a v) {1 z / l —— l 1 "t’fifu '1 '1 1‘ ”V r\ f r .L. Li... .1. g... .¢L_ _, \I 3 5 / ,‘.,U .l_’_'...‘. ~,,\, 4."- 1 (N ’\ (\ ‘rfi " 1 q H 7" - -‘ .1."— l I 1'. _.. .1...A_k “—L n. r‘ ft!’ 1 I“) v-f‘A q 74-, 1 "\ . ‘ . ,- _A_ , UL / .._ , . -..',, _-- __L.. 2 { _ .1 _ 1 _‘_ A '1 f) V " _> >¥__ ‘ _ ‘ O fI {'1_ _l'\ . o . ‘ {I r 1 r‘ J»». '~ A: :fi’N/N ‘W‘f'~ . ‘ .1V- ~ ~ - n1 v c... \J‘ ..I- ' .A. .. \JJKA ~ '.-‘ l . 'zk/ ._. - J -_ U42- ' P UV. .1.) » ‘1‘» r} W V,,,(\‘__,. [V '7 “ ‘A‘ ’ '01 (“ ‘L‘Tp r‘ ,5- ." Y _ ~-7- ”a, - A17 - 7v\_ “_ _ Kr 4L1 . , I .. . . V ' . .‘ \.;.\ ’ , - s A 1_;, . . z; « a - p. ’ ' - ~ }‘ -\ ,x . ~, ’1 , - - ‘rj :‘1 -; ,r— ‘ [j ‘ 1 '\ ‘. " ‘ " '1 -~(\‘«TCJ.A'-LIV wk) 1' ' I. AN . -‘r‘ “.Ltu.(.‘ 1"” ”:1' I I r: t 1"- -"\ ., r, 1\- '~ '1‘: 1i r‘: "fi‘ ‘ V): “L‘f 7 *“ -fi ‘v‘ ]-'\JC .1. I.»L‘K¢t"‘ ‘ - -.L.‘ U. ' 'L, ._L/; ,..'. "-, .1 ‘ ‘7 «a, -\‘ .9 CplLflP Vuliwo uf . ~. 1 SET-1C5]. f" :00 per cent greater tfa: the léfl7-léh9 ‘ M , Lt- ., M '—4, 7" '-°,, .. . '\.‘ -", dbl? Liv (134.13 SELJAQ : lebk L): Ll."e’ L-€\1ii 3.: Clix/S 0L L) Ofirl. Pt. ~' ‘,~.—«r» “a ‘ Y)”. “Kg/"RN ‘7‘ ' -33-, If; -. (.11 cnt \ 19d lU;1 UU..lCQ L *CA ' v _, -4. ‘4‘, U:1\,;e OUIIC S . " 1— -1? ., “Cb Ofl¢3 are t enterprlsns .1 .) U] .) n 1'11” mid _' \k .. Q -— ‘ . r‘ r.‘r.’,7\ ry (, C \J; .L; (-x strain,” 3 d ‘1) H J TD < CL) 9 7 l I O H 1 ('7‘ .x _;_ K. 39 a o ‘1”,Vflvr . , u 4—‘77 ~w--3~ no .0"? _, 3" dry"! r '\ “ g11,od.;od s 1 01'6 1?: to 9 t- 0; x J K}; o-_td ,,;l,,t,tt,,va . :13 ,, -. .~ 1 4—1 , v - '1 _- ”1’? r’ m r - m (”:z’d “ CU.. \C‘rer‘, ‘4' .1. vi... I’lgi 3’7Cxxl to...v ‘L‘ ',C'~' ),(3 ‘/C 1‘; l I’VVJ‘ h,,\J ,‘\."\ A f‘ A\',' r‘ .x’ ()FA 26) "pix: " L. ’N r o _ 'PI “1. h -.. _ I ,gub,Uow,L ? 1' l~,a ‘H;o UL -],r1oo \' Vt 0“ 1n - . , ,. " - V- G , - LA ‘ V 4.x rcvcrpué bonc ~~|o o If 31mfl( or (xx, 3*r: : , bMC _. - +7 - ,, , ,- , r. o .. 2 .- . 4—1 Eifli lon lJ tue overr;z :7 0 Li WJox isono oust 'r - II " rr- 1’. ' r\ ' A " Y " ,l v \ d . " “ 1 4- Vurlxeo fTUA an SVCFQ:U loh o- gH+O,LOo oar lQoLC bO a H. ) fl ') VJ H C‘O‘fle ~)LIVV . Flix*rntfr“ the large and more 1....1. —‘~1 . 'C UngP, Ufirjoo stor3040 revenue c rohronogt xoro M ". ———..~.~.—o—-m.——— O- 3“ T“ "\ . fl 0 v“. ‘— .~'~. Vr-‘GT‘ d _1_f‘.‘712",’.-' 1‘1 T???" 7 ‘m. w r‘m’lr‘w' 7‘“ ( .‘IQ ‘7 ‘ _. , . V . . . . - H . “A __ “V . _V ,_-_. . ‘0‘.“ ,‘ O 7'1 1 - v ~ ' f‘ T g P, '37— «-» A. .- 3 .‘.-. " r1"? = “H ant-:7 r1 ‘ -.‘ at. 7‘7 . u‘jC/hlxlr), 1-....L/fiJUJ V“ ' \z’O.‘.J_':n‘-.LU' ’ U k.“.»-d‘i pt), 3, //’~.’ ’ IN b-n ( . "‘ "Why ‘ ,—~ I: ’ ‘ *4147400r‘.* zloc .) \ ’W V j” th. C7Bhe term "utilitv revoppe ton 5”,’*3—C ‘nstence is define? bv the Invo ‘Qoifii ion of A erica as oonés scrvlco “dile, the frocecds ugoc # 10 PCVGP: 0t??? yTojocts normigly 4.° ..1 .‘ ~> x U103, auJ tol; r nos, pr r C H.) H. t J , A . s+rnh H"fi_FPS #33001 e vletin, no. 1 (Sotober, l n nan,e wotor, sever, o 58" as stmont E. 5 frox no consije ligos, and ation of n:A v u. “Ix/kg], i}. A‘ A 'Jr '6‘ r V-ur- 'm "on... Q... to. "'-.‘. 'w o- a -. -* up O s - .-- ‘ a- l‘ .0 . ‘ "i‘ u- ...- I’Y ‘i‘ ‘1 “ ‘ . V'. ~/ \J ,' '1 A}, p 1 r"‘ ‘ \ V- , ..- /’ .. / ... w - - ' *P-n V ., z a K -. “, .... L/L Ju’ U ‘4.“ "“r\ f"/‘- V. fl'fi" U- .,» x- , . - v “.71... \ - .»~.~-+-t v . ‘. ‘ a 4 ¥ V . A. - L’ L _ l./ - .3 '1 3 J.- .' -\ a L .. _ ‘_ _ L. / I L‘ t ‘7‘. ., .1 'l . ‘4' j , .. —\)... -, ..- . . _‘ 7 “‘Va' \ n‘ ' ., - q A ‘ Lv-Vv‘._? ( v’ - '1 J_ N ‘w - n r n- - n J . fir; ‘ ' - ..- . \J;,x._._v-'\.-_.x4 . vx .. J. \.M ‘ -. .' _ A \-‘. ~ ,. ..-; > (J. r! r: ‘fl‘.__ . : '. W W 'I L .1 ,. ‘ ‘ , +1: V) 4 .-.d ’ u-.. .1 L/ ’ _. ... V *- "3*” qrr.:lj.-"" \5"'}". ‘ 1 '1 A ‘1 . -‘ 1' ‘ A I ,_ Loajgfi “H '- ‘ u ’ .~ .’ ’NQ‘J ‘2‘.-. " ‘0 , ‘1‘! _ .., i- ‘ V n ‘ (V 'I ~ . ‘ .‘ _ V qu77 * '. ’ t‘-( ...W. ... V ’ .. .‘ --r ~)‘_A . r . . ‘ *“ l‘hj 1‘ ‘ 'v r‘ N ‘ 1 “I - - .... ' ...ut - ‘- . .. - V'K-L 7‘ L‘ '. “A \rln'vld ‘5 KS " :n -\, -2 .‘ _ m. ~- kl ‘p " "’3 I If“ U... _. "a 4 -3 “K 1 .. 4 ‘3 .1- _ ,. .d “37'" “‘4 P\ t, '—L . t '1 n H , H1 ‘ " x r1 . . T m“ v ~ ~71 - . . \,' .‘ v, - - -u- 7 ‘ rt +1‘n “mo \_ _ ‘\J_,.-I '1 _-1 4.- ‘-_.I\.\.....\A.JV ~.' ~ \"'1 r" \_/. . a ‘ - '\ {‘WV ~ 1 3- rvr—K T 7 ”W 4 7 . A .. ,4 ‘4 J - - '1 v - ‘ T V .. 3 -| r‘ r-JrJ .u— s A VJ.“_ ,. 4. _>_ I 1‘ .1, w 1 ' wn ** ’ v ‘ ‘ ‘ . .V l, 4 . .. - . . --. V, . . A- . T v " AMOL'NTS ., - x, -1, - -.. -.‘ \. . x, w”... » , ' Y _- .,\ nY‘I I“ Q ‘1’ 4 l '1 ,, N I a A J ‘. A“-.. . 1 ' _._ ,3 1- 1- ’- ‘1 ‘... .L.\J.o v. ,9 .. A 4...- - U- yd.-. U-) ~ a ‘ r .1'-'-' ' ,'\ "1'; ‘ - 1' A j - ‘ ' r. 3 . , __ . . _ x.» _-\J J - ‘ V. ‘ , —.-......t....v._...... -..... " .. 1 \ 4' ‘-1. ‘5: - "-'—.. *n .\ 1)...- \,_.__ ..z‘-j’ "NC fio... ~ , , , .i,, g ,_ 1 at w -— iirancco ‘POJeCtS as is Sguhd in zert i. “CVQULC bond financed electric systcns ra~a scoond with 3L per ceét followed tr toll bridges with l? yer cent. '7 n 1' 'J 4:, . - 1 i V,‘ as oi once 30, 1955, we tote] io.;-tcl¢ 1c”— ;uarentced debt Oltstirdirg of all \oveiwmehttl units was “11,700,OQG,CKC.L Chsrt 5 s ows that tle states‘ 4—- - 0 J—‘-. 1 Lb ' , -.-, v‘ v\(- \ri '" formgion oi tgis toeil 18 L2 yer cc t com :rr Rub“ i H c 1%n‘ cent for all local UHltS.’O Lore thin $0 per cent ‘w- . '3 a -* a P ‘ 1 '- r .7 v \ \ ‘ I " 2: 1"” of tx.is hon—rasrzhteco local cebt has re_receutec ca J—-/‘ J— .. f" ,\ In -‘ \ '-‘ . s ‘ 1 ' v x . . ‘ mi? oui,ste :01 inb loAL-tcrr Lcll(&thfiS 0P ”LHJClpallthS mui special cistricts. i‘c(€erwil 1,. 0 V, ' A - ‘0 7 . D - - 0 W Tee acti*e interest oi fecerrl LiflClClu 1h Inwuxjtin; revenue bond rinancit; durinQ the Great 28~ o to 1952. Revenue b nOt ii CludO (l t7 ”‘5 ". r1 ti£= ever'a:c> o: ‘tne TJOQIHB frmyn 1.9 149 r- 'w. V. wr’r '\ n o i less than 9 Qc,OOo E-PC . .‘ . , , a w 1‘ j- .A. .- ern non- tarante c tect as t_e to g is " F‘ J— 1: w \‘ ’~ ' I. ' Ioo ;Jteljes in resmi c J - t ti ole ely from pled cc f n .. 77 1 'CO‘ V v J— n vvt Iicyaole :901 ource .L F?“ . - , . V,, -, . - - V V - 87t“ ~zargiu s revenqo yrocuciu; ecti J 128 (MU V0?- 1 ‘r _ “ . . v o 1 ‘ ' a l J calm colleLC dorgitorics, toll hi aways ego trl& Ga: 5‘ ectr‘ic 1301481“ 0 1.eCt T"JbllCCi“-7.3-1C:. I’M“ C“1d S 3'00]. 01'". L “I ‘ go o J 3 to.), or iron Lon, then,’ rseudo—rev k4 A. 30The federal rovernment has a trivial am unt eVGEnue bones outstanding is éiscnssed in the 53]. section of this chapter. (D "g Q. 0 7C Depression has bugn rem oos 1v noted. Some recent pro- txpsels by federal officiels indicate a continued interest p. 1 Q cf : 3‘ Ho ‘2 *1 O C D C H to H. D 9) Fa ). 4 ’3 (T) o D Q ‘ :3 CD 53 IT) «1 1.7,) I} (J ,, 4 I) “ff 7‘1 " _ O .4-(71J...}Jl~l" F15..€37I ’, J r4 d- o;id.finencing was suhuésted by Freeioest Dwig L—J ‘-‘."- ' (—0 WIN Yp 7“ :(3 .' 0x" :3 lC-rJA n vyup 0}» (V p f'-? .t: '1'. C . 7‘ r “ Q€1;--.OI'4;I" OLA. L GDI’tu’lIUJ -5, ‘,-).J, MS a 1..» 1.; {Q OJ. “*rLC£A.- 1.1.le sczgicail oniloines./ 10 proposal v.' oulo give feoerel “is cf. [0 C‘— d. (D U) 9 p - O O H I P. }_l {L *Jo I S r 3 C9 , 3 (3 H :3 U) 0 "5 L1 (“P O H J H' ”D {a \ 4 }_Jo x-) C] - 'v‘ 1’ 1"‘ rr‘ :- N 1 N" r“ A . E311:;'2”1 tee sux-ool lflflfims ixamiec l“, loc J_ c0121111t ac3c3csro1n; to the yrorossl, woo 6 receive rental waymcn s Iresiient Eiseumorer has also reoa;steo that 7" " " n 'w' .r. --V - “-1 ,,. . 1 V .0- ., tzbs Tennessee valley nutlority be emgcwereo to lislnce n . we luture neecs ~- J—‘v, ’ ~. . -A - v ‘ 7 .. OJ uAG issueece of revenue oohcs. The ¢GTHHEBSSGC Valley Autho rit has already 1"sen permitted rf’ C W P. If 9" :3 O O \O Q ...: , w 1,. ° H g 1 ° 1.— tem;o rsr oa31s, entitions or ulten- ‘ Sicnués from its revenues. tuponvr tue authority to 4 I V C C . *SSIAEB revenue bones 15031 d Simply extend txis yr1Vilcge Ll: allC7 vi 1*.» 11717711“ rpfr CY‘n as to “CO 1 ]-O(?\,0f: €10 SQC‘J‘xr’itz’T ~O , ~ V,‘ I I7 Elr‘f oonis issued. 7 nu“ - 33-1 oodjf' 5‘45} 1 CI‘flCILt) 3 p ‘ v w w nm‘ "r”{fiivn10 of (p i C. ALL/L, LIUJ. .. \4.U¢.\.-.:.a.‘u._.\7 I/’ "5 ' T -3 -‘ - .L. ‘ 7 ,. I F. .l. A 1 ’ 3. ~ ~ ' — . V J- .. s V I ‘ ‘. ... , t ' . .1. x . . - u 7 _ ( V . ‘. ‘ ‘- _J_ ‘ K . g ‘ _‘ , ~ -‘ ,1‘ ‘ —, .‘ ‘1 ‘ ‘ ,‘1‘ . .L U u. « LIKJ I _ A b “J I -~ - \J- _ t -_ . . . 4 - a r .« —-”,~,., s ‘1 n ,-.4 ”A. . , . . j a w 7 , ..-- -) I.‘ ._ 1 _ -4 V. , . . - Vi. -I'U-_.4-- , u ., ...‘. \_. k 4 ’N ’3 "_ ,7 m; .’\ a .- 1‘ fl .2 ,‘ r 4 .1 N {-I 1' 'V A ~) _\ r~ L . ‘ X . 1 '1 ~-’ .. _. U . . - 1, ‘ .‘ V-» — A .. . 0 y - 1 A, *1 u - ‘A an ’\ '1 1 - 7 1 A , 1 ,-\ , ,f ‘ \ IN . — '. -¥ w » A. _. x v - v . - LI 1 ~ . '1 l “ - I I ’ I I O " ’1 1‘ In ‘ " 'i " 1 ‘r A ' ‘ ' ‘7 ‘ '7 P7 - i ’7‘ . , \1 _. -, _. .. - x J \J ._ _- _ g, - k_.—/ ‘- 'i L J- . ' n . 1 . '\" ,jfx-e —\ r“ (’1 r ,5 "A "\,. '3’) -»\ L. '- 1 , \/ J A V. n) O A 0 .«J. T,,..y.‘,\,n‘,~ '1__.~,~ ‘ l -.A . V 4. -~ < -\ n -- n ' P v r, w w . _ '7 , ', . (-3 ~ ~ v 1‘ 1 13 \ , A. r ... .. ..~ \I ¢. . \1 l ’ l V s ,_/ l - l - — 1 ’3 “If“, I. r,” I .7 u I - - V « --.’ , ~ . .7 J - ~ *v - 7 ¢ ., a 0 1 . V A . - .L A . n _ T . A 1 . 0 _1‘ n - , 7; . , ~ 1"” f7 J F - . J. _ v __ .L I \ 2., ‘ '1 v to v - . . 1 - a ‘1 ~ — —. F- :. .14 L!“ ,V H ,\ . 1 ,3 .7 3. ,_ 1 V _ 1‘ J. l - 1, - u . , I: . . _ 1- \ x_. k, > V , J 'v 1- n 4 J- - - , 1 A '4 3 J I. ' " , ‘ _ J- ‘7 w - f‘ 1" V1 F . ’. , . ~ < r j ‘ w , (A N ¢ A l . _- V 1 i . L _ r— .. 7 ' I__‘ _ c _‘ A. > ‘I 1 _ _‘ > L. .1 G _ 7‘ 7 ~ .. I' V . \l f. '7 1 (~ 1 I , . - II ) ’ x r J \J I _ '1 7 L I '7 ‘ v _ 7 ..i V . , ‘ ~ 'i '7 /- 1‘ ‘» (‘x ’ "‘ ,3 b " f‘ 1'.‘ 1’\ ”1' “ ‘ 7‘ r V" * "y ‘ ' (‘ ' r ‘7 ) - . - , ' _ < » 1 ~ . L: A u 0 + v L, .~ : 7 5‘ *- r ‘ :3. A 7 - “I I ‘7 ‘ ‘ . ‘ .— 7 4 - A - A w r -'- ' - ’ - . I - \.r A ‘ \z . \v - __ V \J L. v t _ K.) _ v V ~,- _ a 1 w . . _v_ v V w . w I o < a .’ . {‘1 Jr- A '\ : p I) - J- 1 ‘ r‘ «v Y 1 -; - ’I A. ... ‘ ‘ n ~ ‘ "‘ » , J k, . - s4 « - k. I ' x, v . 7 H. _'_ l- 1, c U A. ‘. RA 7-. .SI 7‘ 7 r O J 1 _, -1 ‘ 1 . V“ ,‘ 7|» : r d ~ 4 - ._ a r) 4 “a N 7‘ J_ r‘ L .4 ‘ V . _. \j L \J ‘ _ v ... . 1 x,‘ / - < 1 ‘,fi , - - I o ‘I I ' . ‘ ,‘ A ; L . 1 e r» y~ - n n ~ - , l A ~ r . n r‘ ‘ __ kl J ' U - l I _ ‘ \ . ' -- A.) , ‘\/ 'v’ , . \/ r» ~ ~, . . . av) ' “7 d )r- I‘ ‘~ ~ a 'i‘ f“ "' '1 (“.3 ‘ j ' f‘ - F“ "‘ I‘ /"v ’ - \. ... k - I ‘I \1 .4. » u' . _ - . -. \J , v ' ' ' ‘ ., u ’ l N. K -—.— -— '\ /‘ "’ ‘ "A s o ‘ ‘ ~ 0 J L" 'r ~ ‘. 4 .1 M’ <.1-’- ' “L "\ -.. I“ N -, A '1— .-~ a ’3 Jr - o \1 ~ I; . v «I a — - ~ I. ‘ ~ \, _ . ‘ ~J\_. . ~ - A _--. j -l s x j r“ , ‘ .‘- c n 'w .0 _ 'v "‘ h’ .’ \ _ ' 3 ‘ - , if, , - . ‘ ~~ , -;~ r (w '- .3 7’3 ' .' -. 3 “ 7] i . _ y A v‘\ , L . ‘ _ k) < . U - ~ '- _/ L.‘ ‘ x h _ > \, _ , ’ . ‘ I ’ . . '2 of which shall not at any one time exceej glOS,OOO,OOO.'3 The obligations of the corporation shall bear interest at: a rate approximately equal to be"crr1ent everage ruaize on carient me r eta ble obliQatiors of the United 31:51tes of ccm3aratle maturities" as deterrined by the n e 3h Scrczzetarj OL the JPCCSHTT.“‘ The bonds of the Saint Laurence Seaway Develop- raee:1fit Corporation would be eligible to be clasrified es tléijxs revenue bonds, as defined in this study, except fk3:r‘ tleir issue nc: to the Secretary of the Treasury I‘S timer than in the money narbet. As notes above, the iquteerest rate is not detesnine d di rec tly by the market, tlet 'by the Secretary of tbe Treasury. In otbcr respects, tuatqerver, these bonds may :M ter -ed true revenue bonds. Section 12 of the law indicated the self- li—itiiiatinx nature of the enterrrise by providing tbet t cc>si:s of opera ti_ng ans naintaininfi the Vor“s under tbe ad¢4iitistration of the Corroration, inclfiein: fiepre- Ciat‘ion, peptent of interest on tire oblirations of" the ~ 3,“ . .. _ . . , J3since tge enectrent op t*1s leeislation, tie -L:l£L_l:§Teet JO rnal of Jrly 3, 1927, has rerorted the Fasi3€xic b7 ConI rcss of K.?. E27n w"1jcb increoses tho “xvi“cnairg authorit7 of the va nt LcIrence “evelonment s a Corporation to a total of 130 000, 000 in“ ~ . °e~ 3rfugllc Law 3FC, 93d Concress, Chapter 291, 2d *‘SIICDn, S. 2150, eprroved Ia" 13,195; V '3." *- .- oreoratiOA -‘ VI L L17 0P0 (1 J { ,- H + Gl‘fli;ellu J A 1 v0 19 i t weral QCL (‘N ’3 J .'.K n 1, J. . it by '0 .1‘N- ‘A \, \ ..1‘. O O J». Li (W A. \ 'Il t" u ;-Ct hijr Control furt‘ne r ttion ererise is f‘ , - A. Corv10r 1,11 ‘5 opt 800‘ IGHCJ, .4 [L 8 ze~ .141» ran gove ’) l IND, 1. iscnt of anott Y A CO orpora— -ounee lCCS ,, V O J ?u"' a uC?‘ 1ired to con- L (i Corroretio; <1- {5 A. l "over;ment L-‘ ‘r‘ .(A 13 J. he cost o U 01.. ion Oi +p L:ei.(3 U 'lC‘Y x (‘y ‘u- q_ in rt .0 -\. .r Peimx e;;3e;1 he qa.‘ Constructi(n an t e 0, ‘A 1’} J— a weflll n1 «‘r A lize on a ..~ Y) .L exe 'und ') _‘. T‘.‘ 4‘ w ~ . 1 ,1, .7 -—.-‘-.. ‘ 0 r 1 ' . \.-‘ 1 a -'- r' 1 ’3 {-w ._, _. i, - 4 1,: _ O ‘1 ”‘1 i u _ i . '7— fl '. «A F , ... ‘u , A 1 ‘ ‘ _L A U . I.” .1; ,Vi‘ » \_x ' “(-3. 6" J- . I ‘1 fi 0 , I» '1 I” ‘1‘ ‘ “ 1 , , ,- K j ,1, . J- a 1 , r \ a v 3.. .. - A, ‘ A - - 1 1 ' 1 - . 1 . V: ' K) —L \J 1 ’1 ‘ . A _ 7 7 J. 4 . ,I k__, 1 ’ ‘ J— . U _. ._1. ,4 . ~ - L ., K4 . 1, f‘. 4“ J- J 1 J, _ ‘ "o 7 I1 _' - 7 — - ., - fi r:- “").‘3‘ “ 7 A “v ' H a - ‘ «1 L. .L A, k. \z .- __ o - - g o _ v ..- .4. ’ I l O . ‘ 1 . O n I .‘ 7‘ — '3 1 n J‘ ‘ — .’ ‘j' _ W r. J" ( . ( ,1 1‘; ’ ‘1 y N ’. '1 ."~ . fl. . . o; * . A1 . -' u k! \-- - L v‘. , 1 . . s. . 1 - 'V — . '\. o L“ r_ ‘1‘ J— r“ l I". ' "| "i ‘ J‘ ‘. ‘ " I“ ,1 1" .I 1 " ' " " “V ' 1 ‘..I V 'V . \_ . K. A -. 1 ~ , k ’3. 1" ., , . . . 1- ‘5 “J- .L; 4 1- ,1 (1.7.1 M: ‘1 ‘j . ”.7 4'1 _‘ ,. 1.’ u. ; \_/ ‘ kl ‘ O v v i“, . . . . . w 1- r ‘ . '1 A 1 '1 ‘1 j ‘ ’1 "'1 r - - 4 1 r‘. {‘1 1‘) L {‘1 '1 " L 1 ‘ « , L/ L \1 LI k 1 , -I - \ 1, . , ._ l , ,7 , ', ... '.L‘ f It , 1" ,.> -"‘ _ . 7 - ." L— _? 7 "I r 3 A“ ‘1 I. (x 1‘ 3 > _ . . _ . ‘ ‘ K/ \4 \J . ~ “ 1 1 -1 , ‘ . '1 J. ' 1 ‘ 7L4 ‘ , , — t — fl ‘ * V ‘ f ' \ r 1 'r ‘ ‘ ' V j 1.. u k -1 1 . - t 4.. L, K 1 : .7 f ‘\ ~. J_ :1 r 3 o g V n N , j (N ' ~ 1 1 V ‘ r 3 , ’2 If —. , - .r \1 .1 LJ '. ‘ o ~ j ~_, 11‘ \ ; J - 3 A 'T n 1 1 i 4 'v r ‘- “ " ~ A «. fl , -'1 J- 1 -. \cj . __ _ \- ... i \_/ _» ' . .7" 1A- I" ’ '1 1'..-“ fi' - ‘ V“: ' '6 r j V A ‘ . 3 ’t "1 . L -. 1. A ' ‘~ '3 JJ .1 .1. O v - Ll .L ~_' U 3 w _ I _ '1 - . —, J. - 2 ‘- . '1 ‘ 1.7 , _ 7._ n 1 - s . *1 1 r‘» 1 x —. ~ '_ r7 - - . 1 i. ' . ., K J -. . u \.. - o 1 . 1 . . . - i .1. .1, g . _' ., L 1’ 11‘- .1 Y .1 _ -. (A 1 . _ ~14 .1 __ ‘. \/ ... 4 . .1 —~ —~ ! . rs .- .3 1n _. J‘ A. " ,_ H. A 1 r ‘Y - 1~ -- n ‘3 ‘1 ' ‘7 " r r” ‘7 . L . - J \x L’ - -_ m 7 “v — x.» K; . . \_, o O u - 1 u 1 u w - y 0 '1 v - “1 , 1 ‘— ,. ' ‘ ’ \) ‘ ‘1 *1 ‘ ""34 i. ' N . .1 .1 - \_‘ - . L. 1 \, \J .L ‘1 . o o -w w n a v n Y', —- - -‘ “ “I ‘1 A “ 1“ ».- 7 ”a . ‘ ' __‘ .. 1 .’ . \J ‘y/ .1 \, _‘. \.J - ‘._, ' . , - Q, b *v I ' " rv j'){‘.1 . J'I‘ -" J“ '7' 1". r. 1‘ {“‘7‘ "- L-? 3‘ 3) ‘ ‘17:» ;‘fi '1 1» L.) 1, 1.- .. ~ .-- LA .' .' AV . «1 n1 1 .. '. '11 \J A , \/ 1 -L \x ’ u L \A J. _>‘.~y.—'-.-.—.I -- 1» z" -— - — /’ J“) r {‘1‘n‘r1 rlr‘ *“(qu m. (13‘. . 7 " f‘ ,, A ‘. J \ ‘ ~ .‘ " § -. v . ‘_L ‘ ' 3.. 1' . L '. _ , A . v v .. ... tolls collected. 3,1. .chelee EDQJLJS ci u A? cczncci:;11_ui cediuca “ii- (i ' '~ ’1‘1‘ I‘ " 7v " . r. IV“ .\ .a, «x L‘ ‘f‘ “7:1 ' “in Us Oi cctcuer, 1953, were 14 ie ificauc ci y;),OOO,LJO, :2. r‘ r~ T)- - V» wif‘n ~ ~» . I“ gain—izirc-au3e ii J.L_,CA_ VI Y H p .1— ,¢ (1' ongreo; ’ A“ “1 ‘W ULAK‘J '-\)L~- only* two Ervd O _ +7 9 1r::d..:n v-1 , -» . ~ | Luv 039 pf I tw‘wp r‘ na, ‘.L V Q U HI U) CD ( D (- Ci. 0 CL . C) H l 50 \nrr ’ost L*iiCG wag in cgarge of txe plaguinw of fiftg-one urcy-eibnt were aopruvec Ly C0flgfi>33 a;d of More Jubglttc; fqr bias with uni; one big to tue QOVOQu rzt. T36 to erql Sérviccs ) v Q ‘1‘ n r ‘n n D 1‘ n A r‘ *1 1"]! ‘N A 3 \ L‘.’ A J...“ 1. p-- k1,). : .V I“ (‘ UL-‘ ' L 1 uh '- p-L-n m. “ ”rnnnd'fi 2 A4 V» .1"? "n r~ 00’ ,‘31 3 41"? JUQ u.-Q l. '.4_ J -.L Kllrl‘-d' C .3.'\/ x. \I. \II, Vk- ~ 6 w--\). .,_ \ no V x ‘ j - .\ _ u CwLSQ¢U€ACC 4 tde rlthCSS u-g uj.vi‘a- L p ‘3! 1 r: ‘. 'w 'a' n ‘1 ' . 4- V') 4 P. n . r1 5"?er Ll-..J .‘._4_..L\ ‘L_.(' v.4 K} A. gun, ‘4 7 -HKUKV’AL. L l. v\ .L‘J.» vL‘I-) .,’ _ ‘ — ~ . -1 . 1 - o _ - V n 1 _-1 ‘ mml r-wl fins—n» u- -\‘n. n v1 ‘57 r KN-.. a La. .L C.) u 14.1.1 “’“l'fi a J 59C v_.i_1_ QQL_.b; DO P' -3- ~ »n~nnv L - '1‘: .m 1 1m :* J-l'A\oLII.(./lll (\‘J ‘ UV _‘ I) \J 1. ‘l*:‘._AL. O K- AC LUCKi-‘o j r" '“7 .- mn‘w: v~ WA VY" 11" ‘\ 7 MO 3‘; ‘:'~"‘>'1 ‘H J...) ud lo M; g 1 4. ’_4 .'. LVL l\-Q. 1)UJ.LC.D «‘10 3’] (“J r a 1 '7' r\ v L we‘fov ‘10 -. “fir“. ‘ r‘, f'V 4"”,(3 ‘J, .121 v.1. \AILACJ (are ilk; U V- ‘J :1; \J ‘g‘d-.‘-I;‘I.L‘ , LL...) (1 ‘v m (‘1' 1~.' 1 (“'6‘ t1 ('3 1 A” 'r 77' ’\"’ '1 (L Q .1 .k U , v;1L.O-'JO A» 0.x(J - A .L. . JC‘ ‘.-J L. . u ‘5 ‘0 :.r [i‘ _fl CVHSUr‘ctluv a u,1lvlgg Q; a QOVOPHKQHt \ ‘,-~' ' 1 atjx'x '1 [:4 4- ruvllclj QHJCL, VJ Hug I" r (\1‘7 0 V j- CJLQVLU . - U 51 distributed by the price mechanism.u'O Obligations issued to finance government buildings such as dis- cussed in this section are, therefore, classified as pseudo-revenue bonds. An enterprise such as a post office, however, would be eligible for true revenue txxnd financing were it possible to allocate costs and Iwaceipts to the particular facility so financed. Interstate There exist a few interstate governmental 'uILits empowered to finance certain activities by issu- iJngg revenue bonds. These include the Cairo Bridge Ccnnmission (Illinois and Kentucky); Dubuque Bridge Ccnnmission (Illinois and Iowa); Maine-New Hampshire Iriterstate Bridge Authority (Maine and New Hampshire); ILalce Champlain Bridge Commission (New York and Vermont); Iert of New York Authority (New Jersey and New York); Ikilaware River Joint Toll Bridge Commission (New Jersey arui Pennsylvania); and Delaware River Port Authority (New Jersey and Pennsylvania).ul lLO ' The manner in which prices are set does not aff¥3ct the method of finance. For example, those in Charge of college dormitories may administer prices in SONHB degree just as many businesses sometimes do in the Pri‘late sector of the economy. The significant feature or Iwevenue bond financed projects is the production of gOOCis and/or services that are conveniently meterable. ulMoody's, op. cit., 1957. P. a-23. In addition to 1Ilterstate authorities such as listed in this section, t eIWB exist several revenue bond financed authorities of 52 j') A‘v-‘ r—r . a \ "A 'l .A. w . a u m :L on). . w a K (J _ 4 x, Uta Iql. .l\J ‘AL« . \ _ ‘,' 7' ~ ., \_.1 v ‘ r . . . r' 1 . I“: .._ fi"*/)-rn {-7' ‘1 ' ms 1" C I ‘ 'V L' \J i . 1 . . r" 7 - . V K/ J- _ - . A 1 ’- n J,- , mam-1n . ’ \1 - .l. U. ..L.‘ .3; 0.- . .. L,’ . r“ ‘ '4 r‘fi .. (Y. x— ‘ _ V ‘ "\ \_ x . ‘ A \. 4 ‘ § ‘ n. f 3 a. - 7“ " _ (\. ‘A _‘ —‘ \J ‘ >"\. K a 3 j K" 4“. ‘ \_; L.‘ k ‘. if? F. r~ '1 .. ““ ’ a _ ‘! - ~ r , I l 1 \J’ ., .. , i *J .g a U. .. x/ -. n J'— | K»! K] ,J. ,‘V -4- x. .. _ 9 ,l -..”...a 3 - IN IA -' .. V , . ‘ V 1‘ r. -'- p K. *1 "A ’\ f'\ I) ' "' "x \l‘ y m w * k,‘ - J \4 .L . ~ 0 r‘ > v (1 r» '3 _- Kl , a i ‘1 1 (1‘!) ‘J ~ ‘ ,-~ . n "v I . ‘i , ~- A 1 ,' (x . . A ; V > . ‘A - ,~ r ; " ‘ .fl , r ., . “ k .. ‘ L" A 1“ J‘ ‘ I“ . -—« n 4.-- +- L- ,, -‘- "i T “ < ‘T‘ . -u ‘ f r" A ...._.._‘ -.x \.'A . . - f . .. . K . ' ~ ‘7 1 r. r ’ v-l; ’ ‘ . ..M x, v - -. i .. , _ / ' I I I - Q ' -1 ~ \ .l . .Y '1 y .1 a 3,1,. \_ H. -i._ xx... \J_. x... _. ~ I "V .j —- .- —v—e—I~ w ,7 A - ~_/ V ,. ' if “H...” .....- ----—.~~--~—.——. m .. rv“ f‘ - e. ~ ‘3 “a ““v .1 ‘ ‘ 1 ,’ , ‘ A ,v (“7 ._ _,A .i- ... ‘-~ .. . _ (J ‘ ..i Y « ~ - g . ,5, - t- 1- .: 1 A ,. (i 3,, r /_ — n _. .A , ,u. a , e .A x, _ L a " ’\ ,’ ru~ . A v- ' . 2. w. ‘ *‘ v (1 .. \' A, .. o' \ \ ._ a V ‘ x; , .; _ _ . A . I . . v y ' r; ‘1 W (V .’ \ v ' (N ,‘3 ~ 7 L . l -. _,—» _- V. —" V - - ., r , ' , - . , ,4 \4’ ~ 7 L} \ . ' .1- ‘ ~ ' 3 -\ _ l ’3 IV "' .. ‘J- ‘: _ u. V W. U0.) . » . ,. w n 3 ~ rt.- 1. g -. V ”.2 "r' 4 \ .* 3 . i I ‘r' 4 ‘1‘ L) A" i ‘ "i V" F '1 l“ V ' ”\31 .4 . L --\. ,\_/L ._ - 1 \ , . 1.4, , ,i\ _..A./. . .;.s,../ -3 ' ‘ ~ "7 - w o .74 O f) , - - _‘ , . .1 . . 7"") - _ » . A 1 ")*‘r‘ \_v _ u .L ... ‘u ', n. .. .. r O .l‘ J' ~41 ‘ ' an “ .. VJ.‘ t , \A t. u _. ’V. ._: '1 "‘. -- . , V'T‘fvr) ., - 1‘ ‘3‘ r1 “. ' ("\V' rt fi/""T"\ ~x-f\ :’ .,. a U . V . . A A A J4 v-ffl “ : ‘g 4. .1.‘ A,“ o~n—~"’-‘.~'—-§ l in .u ' . a. \J. av _ H t. *g V‘ .“ " D", ‘1‘ ‘J.-,., .- .'_._3‘ ..n A- A J I - \JA , L _ ..‘AVU .— ‘ ' ’7 _V D ‘ ‘ g - - - r -\ I‘ , . rxl (‘ ’ I , - a . r . ’\ fi , a n r i ‘ , V . o .. , V - \J ., . U U A ~ , ~ ~. - I w ' * . v3 "‘ ‘ A ('\ - " "’ "a N. ' P ' - p. ‘ . 1w '1 L' ‘1 1 A l . , - » ii 3, 4 . x/ _ u A _ L . ‘1 o ' " Lx 'fi - "\"‘\u‘ I - A "x ‘ L- ‘-. ' n, *1 fi;\f\' . , _ U _ ‘J 4 .. , ‘.' - \u y . ~ ~ ,, ‘ ~~ .. 'W 1 1 ‘ n \ 3 fl ‘ r. »': ' v‘ ’ 4 1. I r, r“ ,‘ f) r. _ g V _ R" p I , . 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'3 3:. . 4“,“ ‘7" 1 . .- - '1’ _‘ ZflD per cent cl tie define} cegitai ifcw tic iuuiic en‘s gagiinistrstion sac sold figO,fOO,UCO of turniike cones tC) the Ecleral ReCQgstrwction Einance Corporation. i?1i.s issue of bonds, hectic; a cogpcm rate c (31‘ 3 3/; yer cent, was Jriccd to tlléljj M per cegt. In l?43 a ctler 91,500,000 issue was sasil.c.to cover final cons,rficticn costs 0 Ci in le6 an aucitional 91,900,000 in cones was 5.535314cm1. In lQQCD bonds vmiue a Qjfil Sclc, .:1;jcrt to ' ° "Lfi: . _. . ..‘ H '3 n ._ __ x , ,. . , K ..o 4-‘ .. h V - ° 3,- J... .,._. ' I‘C3C4tsCMu OLJL tflAClJLH thhiMyNLJPCS en mi? ULL_Ilh€l. ulrgfl alici iyartly to finance a lOl-mile extexsion. V D s ‘ . 4' , -. f.) ) ,V‘, - ' [71‘ ‘ .,4. ° - -t1JQ11 o- tge entire cost U; ti. lenwsulvcuia icriyile. ,P ’~”dmx~ . - 4 ° ..rin .LNV 1'1 -‘ -n» 7 0% ‘ ~~JL- tne nanuiacturin_ ui atiumocilcs has resuhei ELUCP “CDTTld.Har II, the lac? of adequa,e Hi;hr93 facilities ‘3C333ne somerset. Public wor s constructiun, in general, , ‘nfi30- la Led behind darinj tie war, and use“ states lacked is to meet all of tiese neecs and to build costly fl- -__-.'_,__~ 1 o 1 no 1 . ‘ 3‘sfiiways. Toll mi aways finagcec by revenue bonus Q Offn V n L.”; ._ . « <2red a means oi meetin¢ tie financial prcolem. AS 8‘1. ‘ . I o ‘ -, [1 ~ 0 n c ‘ llldicatlon of tne QPQW‘A Oi tais type 0: flnaflClL" \ ,—J [J >)_1_E_bid. , . w \R Sélbid., p. 7. ““‘TP -u u-r :3 u. C .1 - _ ‘ j o ‘ ( ‘ 1 ‘ ‘ Q 3' r‘ 3 I r‘ ‘ :1 /" a oi zigiLazs, outstegeihp toll Pogo Jones iicrciseo it u w"! n r\ . p) r’ 4,. 1 ( m N n (\ f: 7 . I v \— ’ \ ' A . ' / Q/L,OCO,UVO in l;%; to ffl,l,u ,,J O 11 l;/l. ml“ 1 *. 1y i . I! ‘1 '1 \‘ (1 fl . \ -ie otate oi lain “ut‘oriieo t.c construction 1‘ ‘ __ ‘ J— .r M 9 ~ ' 0 ‘fi 3-. ‘ ‘ r ‘ I ‘ Lfi. toe second turn 136 1“ lel; lLt, Lee who o .cllc , ,— W' ~ 0 ~— 1 0 lair 'i, tie probect V’S post o ed. Ir ions t‘c helm: “,— (1 r l r: r “- f: I“ . -.'\ t‘- r“ ‘ m \‘h‘ 4.‘ ‘ "I ..ng . (Ill {.1 j .l .1” LLUACI «.1. L1 (1‘; le length between Kitoery and South Tort- '4 o \n CD \1 J "isinw construction costs neCGSsitatzo the A. ,vx. I...» W S of an adoitional {5,6C0,0QO. This section H D) m S n: ' < o m n( s ooened in 19t7. A 63—mile extension was aojed in “GIVE open-d between Iovembor, 1951, one January, 1952, 1 rom Lew York ano Iew En;- c F— 6) < ‘c o . lahii to points South aid Host.5’ In 1933 tflis toll ) tJan all the other H. C I: « . ‘ o o r - -- V - ‘ To‘ ’7ougo buzon, million R. nctallum, one Tnomns R ' ‘1 ‘ 1 U ‘ ' . ‘ A‘ ‘5 V C u ‘ . 1%;O&A, "Recent Tregos in oi¢uuav mono leaHCluQ," fiuclic ‘ ‘9 “ '."‘;v‘v \ I’ll) ~ ' u—————-—— “‘:£ii: AHVII (October, IQLC), ;. Q. r’r- or .~ 9 ilio. r q . 29imnise Ikacurgnyt 137, gya. Cit., 13. 8. 61-1 .L ....LCQ (”xv-)nr" .1 i,:'. f O .1' F." mu 8 \I V. ADV 1j'-'1 7 r' 1' v {1‘1 0 . Cw 71°C :11!" ”v! 1", 111 G S -..‘ ° 9’? 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J- .ql-.‘w‘....,-‘n 1“ L: A 1-1.1“ 4 - . ~11 . -. 1 k), 1 .1 0 L ' "‘ “ 0 -1 W D "‘ ’1 ‘1 ’ "A '. ’\ * 1" p x '1- ‘,-\ ‘ >7. ’ 1 ‘1 1 *- v - .. . : » . , J .. " -'-‘7~ ‘ ' . . . 1:‘ inf --. "0 . - 1-. f" {: 1.\(n 11! \r“ ’3 ,/\ \ ,'\ 1 _ ‘1 (‘2‘ I ‘1) ."\ 1 , . . ‘ _. ' _ r b_ A / 1 .1. ‘7‘7 ~ _. he 1- . . ‘ r» ‘1 ,‘, V *4. .. m 41.3 . ms ‘ v”... q r \1’ .' VI- . 1. V 1 _11 . __ . ‘. . _-’ L '. " ~ w - . —~ . . - 17,: r; , ,. ...1, 5,. .. , A”. - - *m ’mx‘ - * "J ~ ‘ . v .-1 ~ . . ‘ c o .. . g g . I - . -.‘ .7 . . . ,., L , 7-. j . ‘ «A, . 1 : 1 ,. '1 , . 1 ,\ .2 \i .L ._ ..- , V_ 1_1 \4 J. _ ... \_ . n 'x. ... o ; ,7 1._ .—~ .3 a J_ _,. 3 1’ . 3 ,_ ‘ ‘._ ‘ r1 .1 .4 . 1 1—1 m} p m ' - «L ' \J V- “ Q 1 ‘ v v) . .A . u , 1 , ’ ’ .\ m j ‘v . '\ ' v 1 I . . . n ' ' ‘- J ‘1’: Ix ‘ ‘ "1. \ 1 m 7' . . yr ' '1' ’\ n ’ " 1 ‘ — o. ",I. v, . ’4 >1 u.. _. J d . ‘ — v - . o , x, .1 V , P‘ _ v. .. 1 . 1v- -, . . 1’ . 1 .. _, ,r. n. ,.,, 1. I. 1 '11 .-., fl . .. ,. .... ‘ L -- u' .A'V- , .....L --:1._L . \- A.. ’ . - / ”.1 ."1 ,. . ..Jw. -. 1mm» 7. .‘ 1. - ~ ~ cot“ ‘ 1 - 11 11+: ~1 ‘ 4.. _._. “pa- . ..- . L ' A, s. 1. .- 2..) 1 .-..x.» . Q ‘1 - - _. . .. . . . 1. .2 ' ’. 1 1 , . '. ,_ A J. '-, \ -~ c111»... _ .. ,p 1. _ . V . ‘- ‘ - __.__._ ... _ . 1 . m .1. , . . .. . o o ‘ J - T‘- f'\ .1 W " fx ‘-‘ r 1") 'C’.7'3 ‘ — '1 — 1 3‘: 4 1 , 1 .o - \.1 . l- _ _. ’ .. I.) \l . Q ""7 _ " ‘1 ,- ‘ 1 X . 1‘) u 7 1‘ '1 1 r‘ 11- .1 3-3 '* . ' 1 A . -- , . .1 _. .. - -. . ’ V \ \ K. . \) -_. ’ w A ‘4 / I . ‘ ‘“ -' _, ’. ‘. .1 ' 3" f‘ 1" "in" f‘. -’\ ‘ ”V n 'x ~ vum 1 r" fi‘ K"... ' - ’ .. 1.; . ._ (. u 1 ' . "u f! { '5‘ , “ 1—. ' -' (‘I ’\ '— - ‘ ~ A '11 — r\ I- -‘ 1 A. , so - . a . _ ., 1- J v! \_. 1 , ' J ’ -4»- . (’\ ..1 . l r‘.’ \‘ r—’ / T3 _. (j '1 “V I -.. . Q , - o 7 O - . l I ‘ ‘ . .. ' \ f L. 1 'j. _: 1 f‘ -..v'tt n-| .. Q ... 4 A .' I , - l ’ k/ 0 LI . , g ', -— - 66 ‘1 1 “Why-‘2 1 t ‘5. ‘LA ‘3 ,..l C ILA—L -- A V , '\ ,_1 AL~J J»... u [\10 /\ ”11’3“ , , , _ /,., 1 .H ... 9 U; .1- ‘4 ‘J,v JQC‘ \ "I _ .f. 5141AKJ..\ ‘-.‘ .‘ci 1 AL ”,0 J. Q t; 1 ‘e ‘p 69 _“ 1-100 ‘. ~t" la.& ’5 . _~ 3. r. r. '1 u 4‘ V7! (V f.,- 1 I .4. 1““ n.‘ ULLM i . d 7""? {31 (3' C‘ K 3 13h VI C) 7. 8. tolls 00:1 1w . ‘ fro. oonds , THUG r ,g jALKJ 1“ 1 ,1 /v\. ._.I .r-‘{_ C_. 7") L I t o ‘1 51,110 L21; Pantee .. (VA .‘ . ‘1‘ ‘_.‘ \J S {1 ,ooo,ooo O J- (J I,_ ~ 6% 59» 67 although the toll revenues are expected to be adequate to pay all interest charges and retire all bonds. Addi- tional funds may be derived from motor fuels and, if necessary, a property tax may be levied. The New York State Thruway Authority has issued an equal amount of revenue bonds guaranteed by the state and revenue bonds secured solely by fees, rentals, and tolls of the Thruway. Practically all of the toll roads are in the eerstern half of the United States with the majority of mileage located in the northeastern states where popu- lation is more heavily concentrated. As of January, 1955, 1,14,61 miles of toll roads were complete; 1,398 miles under construction; 3,368 authorized; and 2,253 m1 1 e s actively prOposed. 7O 19;]. Bri dge s Toll bridges were prevalent in the early days Of the Republic because many state governments lacked the necessary funds for construction of the bridges. Fri‘rate companies built the greater portion of toll bI‘iciges. In 1927 out of two hundred thirty-three toll bI’i dges in operation, only forty-two were publicly owns d. 71 Although private toll bridges still exist, \ 70House Document 139, Op. cit., p. 18. 8b 7lFinla Goff Crawford, Readings in American Gov- \nmgni (New York: F. s. Crofts & Co., 1937). p. LL03. . , , . . "z x '« ‘ - r m 1 "‘_ 'r‘. ‘J' * . . . .1 *3 I": ‘ A "'1 m n " fi F .‘ - Jr . x, - a ' i u . . i .. o . v - i I - o ' * a o ’ p. 7‘ J- ' ‘1‘ f‘ r“. I'_ ‘ ' ’\ r ‘1 J‘ ' 1 K, r ’\ . ‘ v V ’5 '1 ‘ : fi 1. " ‘< ., > . A _ , - \. ’ — ’ 4—7 3-: +4 ,- r‘ A . ‘,\»—l » ,‘ «L .1 -. r. _ - f r‘\ ‘ H .L. I _ , > . _ » K \‘1 ,— - . ., .. w . I -‘ r‘: ‘ - ' U": 'V . '1 I. \J ..~ . ' v \ y w ‘ . o 1 .. _ - a - 4— A ~ . ~/7 -. 'v r. -- ‘ .' v. .r‘ -‘ ~ I. x 7 - q ‘ \4 x4 ... . ' - u v . k1 _, ' o - n -‘ o u " '1 ‘x ‘ . ,‘."\ " rv'] ‘n 'l .‘ ‘A L' j ‘ . ‘1 '3 r~‘.i ‘\ K- 7‘ ) .r“ ‘1 ’ < V '... - .. _ . \. -1 _. ‘. . . ’ . L \ A- . .. 9.; 4 k V 4A 0 ‘ '1‘ v '1‘ h ‘r‘ . ‘1 -‘ r‘ ‘ " r1 - ’ _.- J" U .- -k . .. o .. J \.,»A ~ \J... V ., o —‘ . , l ‘ —, . -V - a W ~- A ‘ # r" Y) c 1 ~ * ' n ' A '/‘. * , v v ... . L , . I i , -, _ » _‘ A _ . - . ' ’ ' f! v'\ r- r' :1 -‘ A j . . 7 i ‘1 ‘ ’ ‘ .1. \ ‘k _ . . ~ . K./ K, .. ‘ . _- A A ~ 3 x. 1 1 ‘1 '1' “ V t ’ ‘ '9 ‘ ‘,.‘ 4‘ r " '- " .~ ‘1 . ’ ' - .U. ... x, ',,_U . v W w" \,'- - ‘. J A . x r, .!_‘.~— ,».-I'r— {J :. lr‘ .s 1 .§ 4., .3 1. .. . ‘ ,0 ,~ ,‘ ,_. 1 V , , r ’ ’ 7 ‘ ' '— w ‘ ‘ _ _ > , a ‘ , - \ :_ ‘n ' L , "a r ‘ ~ ,, _ , V - F, . A . ‘ . . , . -r r L (, .1. l. "T‘ '1 ' .‘ __ , - , ,\ , f -. .z T w ,- q > f‘ z-V o v ‘1 1 /, \ /'\ /\ 1 24 C .4 -. _ .1 \, - .v s 1 ,1 \4 i 3 J 7' x; K, A ». v1 , .4“ ‘ ,\ ' r ‘N . u 4 1" _ u ‘ -.' J. . .3 .z. .1... , A I. g, |\/ g ‘ \, v, . -\ U. - - . . . . . . . V - , _ -. . . a, j 2 4.: r. ..2 o i a ,3 L a . ..L b - \.1 . 1., _ I _/ L”, H 1. .7 o 1.- _._ a a ‘ - 2 r - ,. ,i L. W 7 s 1-‘ . \/ x, \7- ~_/ _ \,J l \J L I o 1 * - ' O 1 n rv j ‘ / ‘fi ‘ .fi . - fl r-V - * ,"\ A 1 N A [1 " , \.J ‘ k.) — - _ - W. L, - K.» _ - - ‘ 4’ , . A o ‘1 v 1 Q -‘~ , o n M r A «r, . r‘ - (~_ - r\ -» I‘. ,w A v) n n. 9 ~ 3‘) A . \J. . ‘\4 L. - ' ' ' .. \J ‘v . , w L - ‘ ‘ 2 _ ~ . -, ‘ - ‘ a . a , n w ., A -: : , r * i r g r 7 i . - - ._,. « V a ‘ - _ -7 - C — ‘ . ~ , — ‘ I O I . u .v _ 7 , if «L- [\V q - - , r\ V 1 ‘1 ‘- A r‘ rv r~ * ‘.-c v \_/ ‘- q — ' ‘4 < » v \-a l U -... \ '1 - q o . O ‘ < n g‘ r 1‘ D “ , 1‘. 7 ' w ’L‘ r< ‘1 ‘N 1 n w '7 \ .. o \4 ml. VJ , .~ _. 1 i . U... ‘__ . '7 L 1 .n , ‘ , ‘ a “ ‘fix1m- ‘ ‘ “ w .L-n .2. . 9 _ ‘J V . . A A x ._ V ' o .' . , ¢ _' . \' ... . . \1 ,4. ... ,i a .,,.' r - . . - ‘ ,7 a - s-‘ a x. “ I ' ‘~ A . ' g} __ n. 7. ._ .4 - - L. r . .- .. .kJ . g .» k, 4. .-. r— A {L— -. \ .2 J & AV .1. ._: \J . — , _ v I' , dv-. ---“ ’ " ‘ L-i . '7 W ~— . ‘ ../ 1 ‘—, -‘ I .._ .3 .L ... m L) , ti: . a * -- M_-_..— 69 m3?,500,000 which were additionally augmented by the sale of 96,000,000 of bridge revenue bonds in 19h9, providing funds to construct the Chesapeake Bay Bridge. The Chesapeake Bay Bridge was opened to traffic in 1952. In l95h the Commission sold $180,000,000 of bridge and tunnel revenue bonds to finance the con- stxruction of the Patapsco Tunnel across the Patapsco Rixver in Baltimore Harbor and to refund the p3h,000,000 Maryland Bridge revenue bonds which were payable of‘ :frwam the net revenues of the Chesapeake Bay—Potomac rtixrer and Sus uehanna diver dridces. The bonds issued 0 111 .l95h-are payable from the net revenues of the pre- 8>Ci£sting bridges and of the projected Patapsco Tunnel Selieaduled to be completed sometime before 1958. Another example of state revenue bond financing 0f 1:011 bridges is provided by the California T011 Eh?i.éige Authority which is authorized to manage, in the nain‘a of the State, toll bridges and other toll highway QPCDEssings, including approaches, and to issue revenue borlCis of the Authority payable in each case from the Ine\’E3nues of the particular bridge or bridges for which t 1 _ 3 . . rle’ ‘bonds are issued. The authority 18 empowered to f . F o 1 ~ 0 1 ~ lJ\- toll rates as prov1ded 1n tne bond agreement. iie q , . ‘TEBJiues 01 each bridge do not have to be accounted for 70 o A, r'nr‘n.('\‘r3(‘ \ ’1, ‘ 1,1 J- \L. . w T‘,, V‘U\1’ it e rm AA- - 1r. ... ".0 1.- ...a’..' ...-.. o 1—1 1". C CH ‘ .ga a) \., /../ l V, 1. A ., '41.; r (4.- a. I. ,‘T, r 3 1.44.. . ~ K». L‘ 7 1 if Uri :. A“ a J- a \Jt- L1 "' 'f)‘ ‘ (‘- x, A. .'.| (" .kl ..l. t ‘ u O M. Q . \a , f1 «1 w. n. A. mu m. . t .0. 1 . T... ...I. .1 ...... . . an. 0. a C C a. . . _ VIA V . t ., t. it s . .3. .1 C c . .1 .... A... P. i- f‘ r‘ .L’L. he o .‘ .x‘r, k; . \ ex J . I‘ t \..\ cc 0 ‘5 to r .A V r‘«.\'\-~ 3‘ . - I_.ls. .-U-.a~..d ...Vu l 4’." “..-. ..‘I .7. t E? .L. . ‘1‘ .. rs L, L; La. +1 in -? L; L/ ., ‘tk‘. . ,I f» 'n». - , .'. K. 71 70113 1- r3» . V'; C; - 37‘ la. Ot't'r E“ 1'. 5.1”; C O J.- u G t 3. S .1 KC”- e Improv _ l. a e .L L; v i). ‘_' ...Q 7 the “v i r x h. 01 revenue bonds swurce . ‘-, l U .. Y)+'A"“'\t £13,, 7.101 - contr {3 i . , (x Intu- U ' 0 0:. .- la); 111‘ ‘ ‘ ’3 C occ portion HOtiOD v1; A .L..('. at o ./ L-’ 3 ’1 C r- - 1&1- t all}? esoe01 U._’J (1 f1; 4.: -. s 1 evernxa con 5 I” - 2‘) 1.. A .- 1 . . , - i. . , , n l . , . a ‘ u r‘ n ‘ ’3 V ‘ . r v f 1 1 m \4 A U ‘- {A ' . ’ , I- x., 1 . . I . ‘ \_, i ' . , , .- J ' 4" -: ‘ ~ r‘ d ‘7 ’. LJ I" f V - e. " '7 ~ .— _ 4 -' H’ >7 \ n v 1 H ‘ - ' * A h ‘a‘ I“ '\ i . _ . u._,' t , - J _~ , _ L a ‘ fijr‘%‘\ {J ' ,,_.‘.- J. “r “fif"“ -. 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A A l ’ A . d L" . ¥ vi: 'I".A. .' {.qlwn .' . \l 78 Elli—{T 7 LOLC-TERH NOS-GUARAITTED I; UUTSTLYDIIG OF VKRIOUS LOCAL GUVLRLAILTAL ULIT$ "\ -~ : r H H 4 , jib UL? JJJV.:J 30’ 19)!)5: County Special Listrict (311 ions of Dollars) *Calculated from: U. S. Department of CORJCPCG, Bureau of the Census, Summary of Governxental Finance in 1955 (Jashington: U. 3. Government Printing Office), Table 17, p. 32. ‘_7‘—‘_— 3‘ ~'.‘.~c-.-a' -~~~ -~.-o. .... .~--. I \ t. -.m.-.-~...-..“¢ fin- .... "-' ¢-,. . _ , ,'fi -.....- |. p ‘ ’. ‘ .- .I-. . ~~ - ‘- .mu'u’oa— ‘* v." ' “It-'0'” 0‘" ’ n ., .... I. . ,... «._ --.. a or- - Q n 9,. . . . ..." .... .r_. ‘-~."... .. \‘ fi. 1 _-I _~ . .4 . . I , _ u n-.- . u 0- ‘0‘ .. ~ ‘. .... __. _ . ‘ t . V- a. ».-w v - - .-“,--~ .” ... , 4-- ... . - . A .. . o —' V p. . . ~os»-v--... v3.- \.-. -.. ..—..-Q .~. . .o . ... -0: .. - ...-u... ,. ~_. ...... P. LCLG-TBRA ‘LBT LSD OF FISCAL 13V SILZL‘ 01" OVULATILX* ’" 'TgCE LL“'TOTAL) CIWY GUVSRLK a CcTSTAKDIKG 193;; a” ,7 ,.,v,‘r . \yrnjq ;. , (i. 0-. "JU .1351. 1,1. .11; A a Total of All Cities Cities over 1,000,000 Cities of 500,000 to 1,000,000 Cities of 25,000 to 250,000 20 30 *Calculated from: U. :31. Defiartment Of COi‘fl'iGPCt‘, 1" ’ thC CENSUS COW’LYFPI‘ldiUdTl Of Citv Covenzmnt 1 .1 ’ in 195' (Washington: Govern“ Bureau of ”inancos U. d. “went Printing In .143“ 3‘er‘jnj (I’fi‘r‘fiiuf‘fi‘ unjw’rxrj 2 -, r: . ,flu"fi". .../// t_ ..2 .KA‘. -L.'-'-. 2t- - '4--.- V Amp- A ~.— ,1ox-,=1fi?1rvt90c3 deli: 393;:tizvs to ‘~ n -ukbumfi; Uf‘t: sgp~ total long-term debt outstiadit5. igproxigitélj 030— t11r£ oi‘4‘r: Spacicd. fistnict.14JWJ-t"°‘ rVY t v": i; . .l—‘l h +. p t . I- . i. l , ' _ , ... 7 +. 1 ’ i- vHv-. A, 1‘ 5\- z . ,3 , (j r‘r‘l '7‘ 7 ‘nrw ~ \ A! ‘I‘ l LbJ-A. L—l "\JI‘ CP-lU kl-fi ..rj 1.1. 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Although the use of revenue bond financing for this purpose has been recent, local governmental attempts to influence industry location were practiced more than a century ago. During the railroad building era, competitive grants by municipal- ities were common. The City of Topeka offered a $100,000 bond issue in 187u as a donation to a private company to aid in the establishment of an ironworks in that city.102 Only a few years earlier, a town in Maine offered to lend public money to lure a sawmill and box factory to the community.103 Many communities have established development credit corporations which continuously seek to entice industry to their locality by various methods, including advertising, exemption from.certain tax levies, and financial aid in varying degrees. These development corporations, however, are not financed by revenue bonds and, therefore, are beyond the limits of this study.10u 102D. C. Foley, Jr., "Industrial Aid Bonds- Special Points of Current Interest," Municipal Finance, (August, 1951), p. #8. m 103Ibid., p. 1. 10”These corporations are financed in various ways. For example, one organization netted a total of $600,000 by placing lunch pails at strategic points around the town into which interested citizens dropped their coins. Another community received $60,000 annually from the Chamber of Commerce. 98 ”:9 ('1 -H' x--. ‘- . s 3 03‘. .7... ./ \J -... 'v 4““ 7W: "I ‘4.» A V -f\ 1" ,"U..)' .L 171" L- O. '1 1031 C); t 0", A. -. \ n "O u v I n a (3 L14 «L‘. .. .I\ ,‘D CV - J ’30 ,‘Q ‘ .A- vil~ .... “a ‘-1 )buL A J ’3 0.1 o 1‘ I) VLV a ‘ffilu (7 f3 - . x; n _. \JC -.- A\. 0 not to 'r" r.-«'\-q tr" al';u%J-A D , .1. .k. I.) "2 0P 4. .J. 0:”? I“ I q 1,!) a ‘. 1 .V I '- V - U 4i L AL 1} t” _: 5‘ 7"" Q C} ‘) v4.3 v 1 J. 1 Va- r O W .‘_A.4~,L.;I.LL/ -'-. . r1 0"!” r1” . '_/.L ..-J . _. .r V ‘72 n— V Xi. 11.9 J J va 1.. -. I ~ 3 ~../ 9.4 I"! .‘A no. i v r. 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'. .3 ..;:. _. -L 132 is the permissive legislation in the majority of states which permit their subdivisions to issue revenue bonds for the purpose of acquiring or constructing utility systems, supplemented by more recent statutes permitting revenue bond financed projects such as off-street parking, port and terminal facilities, airports, and industrial building. Statutes relating to revenue bond financing do not usually grant to the local units complete freedom in the provision of the contract with the bondholder. The permissive statutes usually place restrictions on such things as bond security, negotiability, refunding, and the submission of the bond proposal to the electorate. The permissive statute may require that revenue bonds be secured only by net revenues of the acquired project, stating that expenses of Operation and main- tenance represent a prior claim on the gross revenues of the enterprise. The pledging of revenues of one enterprise for the bonds issued to finance another shmilar or dissimilar enterprise may be prohibited by the state law. (1950), pp. h9-55. New York subdivisions have some reve- nue bonds outstanding due to the issuance of such bonds prior to the adoption in 1939 of the constitution which prohibits such issues. Too, the legislature may, by special act, create an authority empowered to issue revenue bonds. 133 7‘ $390“ A .1 “’1 ,— _ n .../.‘< .7“ . . a. z r ‘. f. \I A I .1-.-1_ “J— L.’ k,a VJ. » 3 _. / . i ._ p b : —.\ .s 1‘ ‘Hllflv On! ,. ID A. ., a L 5 2 .1 J .11. ‘fx ‘1‘?“ .09 J V ‘7‘, -1110 _l ./ Pry ... V; {7‘ {(1 ‘v .1 -.J' ...* 5.. .( \ .. ‘ .’ DAA . '3 4.3- 9"? \J" 1 3 lL-un -... (\. r“ -' .’.\ .1 U (D ‘ . ,1 _- A. .g :_ g V, - ‘~ ,L° ‘1 : I . A ‘ r\ 4 I j . \M . h u ' 3 u _ \J , ‘. . 1 ‘ . Wn'.‘1 w * ’\ new “xv ‘m .. r1 1"“ . _ ’ ‘J - V ‘5 “,L/ “ . » ~1-1 , .- v~_A.. .4 _Uk-. _ ‘4, * -‘d. .' U I A" .1,- _“ F. A. H . . 1 - Jo p‘i -g ...h‘.. 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Thus the decisions rendered in the two cases are not inconsistent, according to the Wisconsin Supreme Court73 since the bonds of the New Jersey State Building Authority may not represent legally enforceable obliga- tions, although a liability may exist as a consequence of the issuance of the bonds. An unusual leasing arrangement was enacted by the General Assembly of Kentucky in 1954.74 This legis- lation provided for the transfer of certain state highways from the Department of Highways to the Kentucky State Highway Authority. Revenue bonds issued by the authority were to be paid from lease payments obtained from the Department of Highways in return for the improved roads built with the revenue bond proceeds. The Court of Appeals affirmed a lower court decision hOlding the lease payments to be unconstitutional indebtedness.7S In spite of the fact that the Kentucky Constitution earmarks monies arising from motor vehicle licenses and fuel taxes, the court objected to this \ 73Ib1d. _ 71JrGibson Downing, "Constitutional Debt Limita- 'tlons--Are Highway Authority Obligations 'Debts' of the State?" Kentucky Law Journal, XLIV, No. 2 (winter, 1956) , pp. 227-33. 7SCurlin v. Wetherby, 27S S.W.2d 93h (1955). ... J 7.. lh8 method of circumventing the constitutional debt limita- tions. The decision in the Curlin case implies that Kentucky does not subscribe to the special fund doctrine whenever tax money is involved.76 The disparity in the decisions arising in the various jurisdictions is pointed up in the upholding of the General State Authority Act77 and the Pennsylvania State Public School Buildinfi Authority Act78 by the Supreme Court of Pennsylvania. In the former case the Pennsylvania Supreme Court declared the law unconstitu- tional, but on a rehearing the court held that the pro- jects were self-liquidating and, therefore, constitu- tional. In the latter case the court held the act valid and that the source of revenues for a self-liquidating project was not significant in determining the constitu- tionali tyo ¥ 76The diversity of state supreme court decisions .is demonstrated in the case of State ex rel Roddgy v. éizrneSLHCovernor et al, 66 S.E.2d 33 (1951). In this (wise it was held that bonds to finance a school program (kid not constitute debt. This decision was reached by tkie court despite the fact that the issued obligations TA”are secured by the revenue derived from a newly enacted gxaneral retail sales and use tax. According to this Cc>urt, obligations do not create debts of the state or ifts political subdivisions even though the full faith alld credit and taxing powers of the state or its sub- (ifl.visions are pledged, provided the revenues are r‘easonably sufficient to pay principal and interest on tl’le obligations. 77Kelley v. Earle, 190 A. lhO (1937). 78Greenholfih v. Woolworth, 6h A.2d 659 (1949). M9 Federal Taxation of Bond Interest79 The Sixteenth Amendment gives Congress the power to tax income "from whatever source derived."80 There exists no general agreement, however, that this amendment removed the immunity from federal income taxation of interest derived from municipal bonds.81 Municipal bond interest is exempt from federal taxation by reason of a congressional provision accompanying the first and all succeeding income tax acts following the passage of the Sixteenth Amendment in 1913. _; 79This study is concerned with tax treatment peculiar to revenue bond securities. Chapter II pointed out that only a trivial dollar volume of revenue bonds has been issued by the federal government, all of which are of the quasi or pseudo variety. States and their Subdivisions which impose a personal income tax make no distinction with regard to interest income on general Obligation bonds and revenue bonds. 80A complete treatment of the cases and legisla- ‘tion dealing with tax immunity is beyond the scope of 'Unis study. A detailed historical treatment of this SLiject is available in Thomas Reed Powell's two aJPticles, "The Waning of Governmental Tax Immunities," Pharvard Law Review, LVIII (May, 1945), pp. 633-74; and {Phe Remnant of Governmental Tax Immunities," Harvard Igaw Review, LVIII (July, l9h5), pp. 757-805. A history (If the tax exemption of bond interest from income taxa- ‘tion is narrated in Lucile Derrick's "Exemptions of ESecurity Interest from Income Taxes in the United States," The Journal of Business of the University of Chicago, XIX (October, 19h67, pp. 6-15. 81The term "municipal bonds" includes the obli- Eiations issued by state and local governments including ad.hoc units. In addition to revenue bonds the term ilicludes general obligation bonds and special assessment 'bonds issued by all governmental units except the federal government and its agencies. The bonds of the United States and its agencies are commonly referred to as u w government bonds." 0‘ use. .- ..s n r ‘- ‘ J 150 In addition to this statutory exemption there remains the possibility that the United States Supreme Court might prohibit the federal taxing of municipal ‘bonds. In the case of Pollock v. Farmers' Loan and ‘TPHSt Company82 the United States Supreme Court ruled that a tax on municipal bond interest would, in effect, 'be a.tax upon the borrowing power of a governmental body amid an undue burden upon the political unit. The more Iwecent cases of Graves v. New York ex rel. O'Keefe,83 said New York v. United Statesau indicate that the Court Inay now permit the nondiscriminatory federal taxation of iiiterest income derived from municipal securities. Some of the special attributes of revenue bonds, Iwesulting partially from state and federal court deci- =Sions, bestow upon this type of public credit instrument 8~ special significance with respect to immunity from Ikederal income taxation. The more precarious tax exempt status of revenue thonds is indicated by various legislative proposals that kuave been made which are designed to discourage the utilizationof certain types of revenue bonds.85 \ 82157 U.S. 429 (1895) and 158 U.S. 601 (1895). 83306 U.S. use (1939). 8”326 U.S. 572 (l9h6). 85In l95h the Committee on Ways and Means voted ‘to tax interest on housing agency bonds since they are J - - -— A? -7,. 151 Legislation to curb the use of these industrial aid revenue bonds has been proposed. A bill was intro- duced in the House of Representatives during the First Session of the 85th Congress to amend the Internal Revenue Code of l95uo This bill provides that the .interest on certain revenue bonds be subject to the :federal income tax if "such obligation is issued in con- Iiection with the acquisition, construction, equipment, (I? other development of property which is to be operated tn; one or more nonpublic enterprises, and such obliga- ticmlis not secured by the general credit of the gyovernmental unit issuing it."86 This is not the first time that such a bill has txeen suggested.87 The United States House of Repre- senntatives of the 83rd Congress approved a bill forbid- Ciing the lessees of revenue bond constructed buildings ffi?om deducting rental payments that were made to pC>litical units as a business expense in computing their ftederal income tax return.88 Of course, the legislation, secured by a federal agency and interest of federal gov- eanent bonds are subject to the federal income tax. 86H. R. 801 introduced in the House of Repre- Sentatives, 85th Congress, lst Session, 1957. 87B. U. Ratchford, "Revenue Bonds and Tax In'tmunity," National Tax Journal (Karch, l95h), pp. h5-h7. 88 Ibid. 152 had it become law, would have been applicable only to future arrangements between political units and private concerns. Even though tax exemption of revenue bond interest is less firmly established, court decisions seem to indicate that the interest on these securities, like the interest on other types of state and local cfioligations, is "tax-exempt." This exemption appears “to be based primarily upon the expressed exemption con- ‘tained in the various revenue acts. The special zrttributes of revenue bonds which jeopardize their "tax- «exempt" status are the "non-debt" nature of revenue bonds as narrated in the "special fund doctrine" section of this chapter and the uncertain governmental status of Inany ad hoc units which utilize revenue bonds.89 This study is concerned with those aspects of tax immunity :from.federal income taxation which are peculiar to Iwevenue bond financing. Tax Exemption and "Non-Debt" Obligations As previously pointed out in the "special fund CiC>ctrine" section of this chapter, state supreme courts \ 89Revenue bonds have been used extensively in 'tkle financing of public enterprises of a proprietary rlature. The tax treatment of these proprietary enter- ERI‘ises has been subjected to litigation in several lIlstances. The taxation of these activities, however, d-<>es not hinge on the type of obligations utilized in tile financing of the proprietary enterprise. 153 have generally held that revenue bond obligations do not represent "debt" of the issuing unit within the meaning of state constitutional restriction on debt limitations. Litigation involving the question of applicability of the federal income tax to interest received on municipal obligations, however, is a federal issue litigated in :federal courts. In any case it appears inconsistent to contend that the interest derived from a municipal bond :is exempt from the federal income tax while, at the same tine, contending that such obligations do not represent (debt of the issuing governmental unit. Court cases involving the question of whether or rust the bond is an obligation of the issuing unit have (often involved Special assessment bonds. The debtor- creditor relationship between an issuing political unit and.its bondholders is similar in the case of Special assessment bonds and revenue bonds.90 Special assess- Inent bonds have been ruled tax exempt if the issuing tuuit has even a remote contingent liability.91 In the 90Due to the limited liability feature common to hthh revenue bonds and special assessment bonds, the lJatter obligations are sometimes included within the {fiieaning of the revenue bond term. For example, see ‘L’- B. Goldberg, Tax Immunity and the Revenue Bond, a IDemnphlet distributed by the Conference on State Defense, 1~11.Eighth Avenue, New York, New York (undated), pp. 10.13. 91Commissioner v. Carey-Reed Company, 101 F.2d Euoz (1939); Commissioner v. Pontarelli, 97 F.2d 793 (31948); and Bryant v. Commissioner, 111 F.2d 9 (1940). 15h cases of Commissioner v. Careyrfieed Company, Commis- sioner v. Pontarelli, and Bryant v. Commissioner, the bonds were of the special assessment type.92 In each case the federal court ruled that the cities were obli- gated, albeit from a special fund. The bonds, according to the court, were obligations of the political subdivi- sions. Apparently the federal courts view special assessment bonds as obligations of the issuing unit even though that obligation be nothing more than an obliga- tion to collect the funds that are to be used to pay the interest and principal on the outstanding bonds. The United States Board of Tax Appeals has attempted to distinguish special assessment bonds on the basis of whether a valid debtor-creditor relationship exists between the issuing governmental unit and the bondholder.93 In 1937 the Board held that special assessment bonds of the cities of Kansas City and Saint Immlis were not "exempt” since the benefited property mdners were indebted to the contractor making the iInprovements. The charter of each of these two cities, uIllike political units whose bond interest was held 'taxable, stated that the city was not obligated. The \ 92lbid. 93coldberg, op. cit. 155 only recourse of the bondholder was a foreclosure on the benefited property. Despite the efforts of the United States Board of Tax Appeals to distinguish between obligations repre- senting some degree of liability to the issuing govern- mental unit and obligations totally lacking such liability, the Circuit Court of Appeals has reversed practically every case in which the United States Board of Tax Appeals held the interest income taxable. This was unmistakably demonstrated in a case involving the special assessment bonds that were issued under a 1911 California Act.9h In 1938 the United States Board of Tax Appeals held the interest on these special assessment bonds taxable by reason of the nonexistence Of a pledge of funds by the issuing municipalities. The Contractor was issued warrants giving him authority to (Kallect directly from benefited property owners on a IpIPorated basis.95 In case a property owner failed to IDay within thirty days, the contractor was issued a bond “fliich represented a lien upon the specific parcel of IIroperty. In the event of default, the bondholder could require the city treasurer to sell the delinquent owner's Property with the proceeds to be applied to bond ‘ 9u§§51g§_v. Commissioner, 38 B.T.A. 60h (1938). 95Goldberg, op. cit. 156 payment. The city, by contract with the bondholder, was expressly free from any monetary obligation whatsoever. On appeal to the Ninth Circuit Court of Appeals, the decision of the United States Board of Tax Appeals was reversed.96 The Court held that the special assessment bonds were "tax-exempt" and cited the Bryant case as precedent.97 In the Bryant case, a taxpayer sought tax exemp- tion on interest derived from special assessment bonds which were issued to obtain funds for street improvements in the City of Los Angeles and in the County of Los Angeles. In reversing the United States Board of Tax Appeals, the court declared that the bonds were "public, inot private" and were issued in the performance of an essential governmental function.98 The court also felt tfliat the tax exemption enacted in 1913 by Congress was iritended to apply to the interest on the many "hundreds (XE millions of dollars" of special assessment bonds then Olltstanding. \ 96Avery v. Commissioner, 111 F.2d 19 (19u0)0 97Bryant v. Commissioner, 111 F.2d 9 (l9hO). 98Ibid. It is interesting to note that the Court expressly disavowed that a similar conclusion would have been reached in the case of "bonds to repay money borrowed to create works of a proprietary char- acter from whose income for services rendered the bond principal and interest are paid." The improvement of streets and roads in California is a governmental rather than a proprietary capacity. 15 7 In a case dealing directly with revenue bonds, the court ruled that revenue or other bonds payable from a special fund, even if the political unit expressly disclaims any liability with respect to taxing power or credit, are "obligations of a state or political subdi- vision and interest thereon is tax free."99 The court cited at length cases involving revenue bonds which had been declared by the courts as being "tax-exempt."loO That the court might have felt that the Bureau of Internal Revenue was at least partially responsible for the "tax-exemption" of this type of government financing is found in the court's noting a letter from the Bureau to the Alabama Bridge Commission. {Bais letter dated January 28, 1937, with reference to revenue bonds issued by the commission, stated The bonds will be payable solely from the revenue derived from the toll bridge and when the revenues shall have liquidated the bonds, the bridge will cease to be a toll bridge and will become free. It is held that your commission is in effect an instrumentality of the State of Alabama and that bonds issued by your commission are in effect bonds of the State, issued in the exercise of the borrowing power of the state. Accordingly, the interest on such bonds is exempt from Federal income tax. . . 101 99First National Bank of Birmingham v. United States, 59 F. Supp. u9_Tl9uh). lOOIbid. lOlIbid. 158 The above: opinion was rendered by the Bureau's letter despite the recital on the face of the bonds that ". . . the bond and interest thereon does not constitute an indebtedness of the state or any municipality, county or political subdivision of the state within the meaning of any con- stitutional or statutory provision of the laws of the state."102 Tax Exemption and the Governmental Status of Ad Hoc Units Utilizing Revenue Bonds The governmental status of ad hoc units utilizing revenue bonds has been questioned because of the non-tax nature of funds that are pledged to service these securities. Court decisions which have turned more or less on the governmental status of ad hoc units have ‘been decided only by inferior courts. These court decisions have exempted the interest on revenue bonds of tile Port of New York Authority103 and the Triborough .Brfidge Authority.lou On appeal the Second Circuit Court (if Appeals affirmed the decision of the Tax Court. ifacit approval was given to the Circuit Court's deci- Sions when in l9h5 the United States Supreme Court ‘ 102Ibid. 103Commissioner v. Shamberg}s Estate, lhh F.2d 998 (1944). lOLLCommissioner v. Nhite's Estate, 14h F.2d 1019 (l9uu). ..... 159 refused to review the case.105 In the Shamberg and White cases the ruling of the court hinged on the ques- tion of the governmental status of the Port of Kew York 106 Authority and Triborough Bridge Authority. It was held that the former was a political subdivision "fully owned" by the States of New York and New Jersey and the 1 f latter a political subdivision of the State of New York. As precedent the court cited earlier cases involving Special assessment bonds107 and two cases having little 108 relation to revenue bonds. The Circuit Court's deci- Sion in the Shamberg and White cases, however, was based largely on pertinent portions of the Treasury Regula- tions. The Treasury Regulations give immunity to bonds issued "on behalf of" the state as well as to bonds issued "by" the state.109 The court's decision is ¥ l05323 U.S. 792 (19MB). 106Officials of the Port of Row York Authority, 1Tearing that the exemption of state and local securities firom the registration requirement of the Securities Act ()f 1933 would not Specifically apply to the Authority's (Dbligations, was instrumental in having the exemption Eipply to the "political instrumentalities” of the state 51s a safeguard that the Authority would not be covered ‘by'the words "political subdivisions" of the state. Chemak, OE. Cite, pp. 191’92. 107Bryant v. Commissioner, 111 F.2d 9 (l9h0). 108Brush v. ggmmissioner, 300 U.S. 352 (1937) and Helvering V. Criffitfig, 318 U.S. 371 (19M3). 109 . . . . - OppOSlng the exemption in the case, the Com- missioner argued rather convincingly that the compensa- tion received by the employees of the Port of New York 160 ffiirther strengthened by the Treasury's broad interpre- ‘tsition of the term "political subdivision." The term.is chefined, in part, as ". . . any division of the state . . . which has been delegated the right to exercise Ewart of the sovereign power of the state."110 Further, inie definition provides that political subdivisions r. iilclude ".'. . Special assessment districts so created Siich.as road districts, sewer, gas, light, reclamation, druainage, irrigation, levee, school, harbor, port inqprovements, and Similar districts and divisions of a S tate or Territory. "111 Negotiability The marketability of a bond is generally con- sixiered to be enhanced if it is negotiable.112 Revenue bcnad obligations have implications that are somewhat péeculiar to this type of governmental finance because the isssuing unit does not pledge its full faith and credit. Sheetion l of the Negotiable Instruments Law states that filrthority had previously been held taxable because . . . employees of the Port Authority are not employees (If the state or a political subdivision. . . ." See iielvering v. Gerhardt, 30h U.S. #05, #23 (1938). 110Bryant v. Commissioner, 111 F.2d 9 (1990). llllbid. 112Joseph W. McGovern, "The Nonnegotiable fievenue Bond," New York State Bar Association Bulletin, AxII (February, 1950), pp.“H9-55o 161 311 instrument to be negotiable ". . . must contain an uunconditional promise or order to pay. ."113 Sec- txion 3 provides further that ". . . the promise to pay iAS unconditional though coupled with an indication of tile particular account to be debited, but an order or Ixronfise to pay out of a particular fund iS not uncondi- ti onal. "1114. The negotiability of revenue bonds depends upon thus court's interpretation of "an unconditional promise tc> pay." The conditional nature of the true revenue bcnnd does not render it nonnegotiable provided a statute ercists expressly permitting the political unit to issue Ideggotiable bonds.115 In other words true revenue bonds nuiy'be made negotiable by legislation expressly stating neugotiability or may be accomplished by contract written orl the face of the bond.116 In the absence of either express statutory allthority or recital on the face of the bond, negotia- biility is determined by the Negotiable Instruments Law. \ _ 113Frank P. Smeal, "Some Aspects of the Negotia- 'bllity of Municipal Bonds," Intramural Law Review, VIII, No. 1 (November, 1952), p. 3b. Mme. 115Citizens Trust and Guaranty Company v. Hals, 180 S.W. 811 (1915); northern Trust v. Wilmette, 77 N.E. 169 (1906). 116Smeal, Op. cit., p. 39. 162 Under these circumstances revenue bonds would not ordi- narily be negotiable. Quasi-revenue bonds, as defined in this study, would be negotiable if a legal contingent liability remains with the issuing unit in the event that pledged revenues from the financed project are insufficient. Eligibility for Investment by Fiduciary Institutions State and national statutes have differentiated between revenue bonds and general obligation bonds with respect to the eligibility of the various fiduciary institutions to underwrite and/or invest in these secur- ities. National banks and state member banks must distinguish between revenue bonds and full faith and credit obligations of political units in accordance with Section 5136 of the Revised Statutes of the United States, as amended. The differentiation of revenue bonds is extended by state statutes regulating other fiduciary institutions with regard to legal requirements or Securities purchasable for their investment port- fOlio. National Banks Section 5136 of the Revised Statutes of the United States, as amended, prohibits national banks frOm underwriting revenue bonds. Presently there is ‘.t“ run . f‘ 163 considerable agitation to ease this restriction.117 Much of the concern of this limitation on commercial banks stems from the trend toward an increasing reliance of governments on revenue bonds. Not only are commercial banks prohibited from underwriting true revenue bonds but the restriction apparently applies to quasi-revenue bonds° Section 5136 of the Revised Statutes states that commercial banks may underwrite and deal only in "general obligation" secur- ities. General obligation securities are those obliga- tions pledging the full faith and credit of the issuing unit. Bonds in the "special fund doctrine" category are legal since the full faith and credit of the issuing unit is pledged as security for these obligations. It is significant that Section 5136 has been amended several times since the adoption of the 1933 Banking Act. These.amendments have given commercial banks more latitude with respect to underwriting federal EOVeImment agency securities. As amended, Section 5136 Imflvnits commercial banks to underwrite bonds of the International Bank for Reconstruction and Development, the Federal Home Loan Banks, the Central Bank for Cooperatives. Also permitted are the bonds of the Various local public housing authorities. Bonds of these K ll7$ee Appendix II. l6u local public housing authorities, however, must be sup- ported by annual payments from the Public Housing Administration. Other Fiduciary Institutions Securities eligible for the investment portfolio of non-Federal Reserve member state banks, insurance companies, and trust companies are also regulated by state statutes. Many factors are given consideration in the determination of the eligibility of a government security for the investment portfolio of fiduciary insti- tutions. Much variation exists among the statutes of the various states and in the application of these statutes to different types of financial institutions. Some of the pertinent aSpects of the legislation of the more stringent states, such as New York and other New England states, as applied to savings banks are dis- cussed in this study to illustrate the treatment given I’e‘venue bonds as contrasted with general obligation bands. The strategic importance of the eastern states in the field of finance may have a significant influence 3h1 the marketability of securities and hence on the rate Of interest. State regulations vary considerably as to inVestment legality for savings banks within their juris- diction. These state regulations usually specifically 165 prohibit savings banks from investing in bonds unless the governmental unit pledges its full faith and credit. However, authority to invest in revenue bonds may be incorporated in the special acts creating authorities. Of course, no state can prescribe that bonds shall be legal investments for savings banks other than their own. Recent investment legislation pertaining to the legality of revenue bonds in some states may be an indi- cation of the growing importance of revenue bond financing as well as a greater confidence in this type of financing.118 New York, Massachusetts, and Connect- icut have all passed legislation since 1953 pertaining to the eligibility of revenue bonds as legal investment for savings banks.119 The New York law makes eligible for investment, Obligations of governmental units that are payable out Of the revenues of a public utility system providing Water, electricity, gas, or sewerage service. If the PUblic utility system is located outside New York State, hOWeyer, it must serve an area with at least 100,000 inhabitants. The law further provides that the issuing governmental unit shall be either legally obligated or K 118"State and Municipal Bonds Legal for Savings Banks," a pamphlet distributed by The Bond Buyer, New York, New York (Revised 1956), pp. 23—25. 119Ibid. 166 empowered to fix rates at levels that will provide net revenues sufficient to meet maturing interest, principal, and sinking fund payments. The New York statutes also require that the public officers of an eligible revenue bond financed enterprise shall not be permitted to dis- pose of any of the facilities of the enterprise unless certain provisions are made for the continuance of interest, principal, and sinking fund payments. Thus all indications point up the more stringent investment requirements of revenue bonds as compared with general obligation bonds. As stringent as these provisions are, they represent a trend toward a more liberal attitude, reflecting a greater confidence in revenue bond financing. Summary Revenue bond financing is utilized in the fringe area separating the public and private sectors of the eConomy. Thus it is only natural for this type of Public financing to be challenged in the courts on the grounds of being beyond the proper scope of government and/or representing the giving of special aid to private entities. The decisions rendered by the supreme court in most states indicate an acceptance as a prOper public Purpose those functions or projects which receive an 167 affirmative vote of the majority of eligible voters of a political unit. In some instances the courts have ruled that a taXpayer has no valid reason to contest the issuance of these "non-tax" bonds even if the revenue bond issue has not received the approval of eligible voters. Revenue bonds may thus provide the financial means of extending the government sector of the economy or of providing aid to private entities. In either case, revenue bonds are available only to those enterprises that may charge for services rendered just as is done in the private sector. In contrast to general obligation bond financing revenue bonds may be utilized because the funds obtained for the repayment of the latter type of obligations are not tax revenues. Permissive revenue bond legislation varies from State to state. In some states the issuance of revenue bonds is prohibited unless specifically authorized by Special statutes for a particular purpose. In other States, local governmental units may be granted wide latitude in the issuance of revenue bonds.‘ As a precau- tionary measure, most revenue bond issues are subjected to a vote of the electorate, although voter approval is not always required by pertinent state statutes because I 0f the "non-tax" nature of bond retirement funds. In 168 addition to complying with state statutes in the issuance of revenue bonds a local subdivision must also meet any self-imposed legal requirement that may exist in its charter or by-laws. True revenue bonds are not usually included as "debt" of the issuing unit according to state court decisions. The legal debt status of revenue bonds depends to a considerable extent upon the court‘s deter- mination of whether or not the bonds may possibly burden the taXpayer, currently or in the future. Quasi- or pseudo-revenue bonds may occasionally be judged by the court to represent debt of the issuing governmental unit by reason of the existence of a conditional pledge of tax money to service the bonds. The creation of ad hoc units has not always met with the approval of the courts in attempts to evade legal debt restrictions if these units do not, in fact, operate revenue producing enter- prises. ‘ The "non-debt" legal status of revenue bonds as well as the governmental status of some revenue bond financed enterprises is of special significance with PSSpect to federal income taxation of revenue bond interest. In addition, there have been objections to the use of revenue bonds to finance factory buildings. This use of revenue bonds has provided the stimulus for 169 proposed legislation to subject the interest income derived from revenue bonds to the federal income tax. 6 The conditional nature of the pledge securing revenue bonds sets this public credit instrument apart from general obligation bonds with respect to negotia- bility. Revenue bonds may be rendered negotiable, how- ever, by appropriate legislation or recital on the face of the bond expressly stating the bond to be negotiable. Revenue bonds are more restricted than are general obligation bonds with respect to eligibility for the underwriting and/or investing by certain fiduciary institutions. These legal restrictions reduce the demand, and therefore the price, for this type of security. These more or less unique legal aspects of revenue bonds as narrated in this chapter impart to this type of public credit instrument peculiarities which may affect their economic appraisal. The following chapters focus attention on certain characteristics of revenue bonds which can best be interpreted in the light of these peculiar legal aSpects of revenue bonds. CHAPTER IV DEFAULTS Instances of revenue bond default must be analyzed in order to properly evaluate revenue bonds as a.mode of government finance. The economic condi- tions and financial arrangements associated with instances of default, as well as the eventual settlement or "cure," are relevant to an economic appraisal of revenue bond financing as compared to the alternatives that may be available to the various governmental units. Comparisons of the financial arrangements associated with defaults on revenue bonds and other types of public obligations may aid in evaluating the revenue bond as a public credit instrument. The purpose of this chapter is to describe and analyze those instances of financial difficulty associated with revenue bond financed projects. Definitions In a sense revenue bonds that fail to meet the scheduled payments of interest and/or principal do not represent defaults of the issuing unit since the "full faith and credit" of the unit is not pledged. Instances of default on revenue bonds which are issued with the 170 171 understanding that the net revenues of the financed pro- ject are the sole security pledged to the payment of interest and/or principal may be more aptly described as simply a case of an uneconomic investment.l Theoret- ically, the credit of the issuing government would not be jeopardized as a result of the failure of revenue bonds to meet scheduled payments since the nonpayment of revenue bonds would not affect the solvency status of the issuing governmental unit. "Technical defaults" are defined as instances of delay in payment of overdue interest and/or principal due to legal reasons.2 Technical defaults and other temporary or minor defaults which are not due to uneco- nomic investments are not pertinent to the economic appraisal of revenue bonds. Of primary concern, there- fore, are those instances of financial difficulty arising from uneconomic investments which include defaults or near failure of revenue bond financed pro- jects and the accompanying refundings or other financial arrangements resulting from such difficulty. In addition to the use of the term "default" to refer to the nonpayment of interest and/or principal lAn uneconomic investment may be defined as investment in an enterprise the earnings of which fail to cover average costs including debt service expenses. 2A. M. Hillhouse, Municipal Bonds, A Century of Experiengg (New York: Prentice-Hall, Inc., 1936), p. 1h. 172 according to schedule, the revenue bond contract may specify that the failure of the management of a facility to perform covenants according to the bond agreement constitutes default. For example, the trust agreement of the Oklahoma Turnpike Authority (Northeastern Turn- pike) defines events of default to include "failure to carry out with reasonable diSpatch the construction of the turnpike, material damage to any substantial part of the turnpike which is not promptly repaired, failure for thirty days after notice to perform the covenants con- tained in the trust agreement and, under certain condi- tions, failure to pay any final money judgment after entry thereof, the appointment of a receiver of the turnpike or the revenues thereof and the institution of certain proceedings for the benefit of creditors."3 In conformity with the usual custom, however, the term "default" is used in this study in its broad meaning to refer to instances of financial difficulty accompanied by failure to pay interest and/or principal when due. This does not mean that bondholders suffer loss, however, since in many cases the political unit may subsequently pay all claims of the bondholders including accumulated interest. 3Official statement of the First Boston Corpora- tion pertaining to the Oklahoma Turnpike Authority (Northeastern Turnpike) dated December 8, l95h, p. 13. 173 Remedies In the event of default, holders of revenue bonds have several courses of action which may be pursued. These actions are usually referred to as "remedies," although such actions may not prevent financial loss to the bondholder. Of course, any remedy available to the bondholders must not be eXpressly pro- hibited by pertinent revenue bond statutes. Usually the bond agreement will "spell out" the remedies that are available to the bondholders. Perhaps the most common remedy available to bondholders is the appointment of a receiver to operate the revenue bond financed project. For example, the receivers or trustees selected by the bondholders may take possession and control of the enterprise of the political unit and proceed to operate same and to col- lect and receive the income therefrom so long as may be necessary to restore all payments of interest and prin- cipal on the outstanding obligations to a current status.)Jr This is a recurring privilege that may occur from time to time as often as the occasion may arise. The appointment of a receiver is a pOpular remedy because the project maintains its "public" status and ”Lawrence E. Chermak, The Law of Revenue Bonds (Washington, D. 0.: National Institute of Municipal Law Officers, l95u), pp. 185-86. 17h thus enjoys tax, regulation, and franchise advantages not available to the project if it Operates in the pri- vate sector of the economy. Also, the appointment of a receiver does not destroy the "non-debt" status of the obligations as may occur in the case of the mortgage remedy.S Mandamus and injunction are other legal remedies available to bondholders. The former is a legal order to perform in accordance with the bond agreement, and the latter is a legal order to refrain from acts injurious to the financial interest of the bondholders. There are no remedies, however, that can protect the revenue bondholder's investment from losses due to economically unsound ventures. For example, if revenue bonds are issued to finance a water system in a comp munity in Which it later develops that the water supply is no longer present, legal remedies in such cases are of little value. Of course, pseudo-revenue bonds may be issued that bind the issuing political unit to a conditional pledge of tax monies in the event earnings of the financed enterprise prove deficient. Rate covenants may be effective in preventing loss to the bondholder depending upon the alternatives 5The legal aspects of the mortgage remedy are discussed in detail in Chapter III. 175 that are available to consumers.6 For example, a rate covenant may require that the charges for the goods or services emanating from a revenue bond financed enter- prise shall be such as to produce revenues sufficient to provide for operations, maintenance and repairs, bond principal, interest, and reserves for various purposes. It is not always possible, however, to set prices that will produce a certain dollar amount of gross or net revenues. The existence of financial stress may be an indication that the price is above the level that would produce maximum profit. If higher rates will produce a greater amount of net revenues, then the rate covenant may be an effective remedy in preventing default. Thus the effectiveness of the rate covenant in preventing default depends, to a great extent, upon the elasticity of demand for the commodity or service supplied by the revenue bond financed enterprise. Defaults Prior to 1949 Prior to the depression of the 1930's, the num- ber of revenue bond issues outstanding was relatively insignificant. For this reason, a valid comparison of the default record of the revenue bond with that of the 6Rate covenants refer to the various sections of the bond agreement pertaining to rates that shall be charged under various levels of earnings of the enter- prise. 176 general obligation bond is not permi331ble. The Great Depression of the 1930's is the only time period, how— ever, in which revenue bonds have been subjected to the stresses of low economic activity. Water Systems Among the earliest revenue bonds were those issued to finance municipal water systems. Consequently, the Great Depression subjected more of this type of revenue bond to the test of low economic activity. One of the first instances of default involved the Q300,000, six per cent revenue bonds issued in 1913 by Centralia, Washington, which were contested in the courts because of the below par sale price; however, the hashington Supreme Court finally validated the bonds.7 The earnings of the water system were sufficient to meet debt requirements; therefore, this was not a case of uneconomic investment.8 After the legality of the issue was established by the Hashington Supreme Court, the bondholders were paid in full as per the bond agreement. The City of herrin, Illinois, issued $6h0,000 of . a . 9 r. revenue bonds in 1925. Three years later, the net John F. Fowler, Jr., Revenue Bonds (New York: Harper & Brothers, 1938), p. 21. Laurence S. hnappen, Revenue Bonds and the Investor (New York: Prentice—Hall, Inc., 19397, p. 115. 91bid., p. 119. 177 earnings pledged as security for the bonds were barely sufficient to service the outstanding bonds. Actual default did not occur until 1932; however, the financial difficulty was apparent in 1928 when the city leased the water system to a non-profit organization representing the bondholders for $1.00 per year. From 1936 to 1938, the water system was operated by court-appointed ' receivers.10 Deepite the rate covenants contained in the bond contract, the water system failed to yield sufficient net revenues to meet debt requirements. Sub- sequent financial arrangements and refundings resulted in considerable financial loss to bondholders. In 1930 the City of Portvue, Pennsylvania, eXperienced a default on revenue bonds issued to finance a water system,11 As in the case of Herrin, Illinois, default occurred as a result of insufficient earnings of the enterprise. The court ruled that bondholders would be allowed to foreclose as per the bond agreement if the city failed to establish a sinking fund and pay about th,OOO in accrued interest.12 Principal and interest payments were eventually made without loss to the bond- holders. 10Ibid., pp. 119-20. llIbid. 12Moody's Government and Municipals (1935), Po lhol. 178 Three early defaults in water revenue bonds occurred in Texas-~all involved the failure of a dam financed by revenue bonds. In December, 1929, Cross Plains, Texas, issued $67,000 of water and sewer bonds to construct a new reservoir and dam.13 In 193M the dam gave way and the city sought to nullify the revenue bond issue, claiming the bonds were issued illegally because an election was not held as required by law. The city lost in District Court but was upheld in the Court of Civil Appeals and again by the Commission of Civil Appeals. The court held the bonds were void since a majority vote of the people is necessary according to pertinent Texas statutes in the case of bonds issued for improvements for amounts larger than $5,000.1M The court did not rule on the right of bondholders to reclaim the reservoir and pipelines. The decision of the Commission of Civil Appeals was adopted by the Texas Supreme Court. Another case of default involving complete loss to bondholders occurred in Hamlin, Texas. Prior to 1929 the citizens of Hamlin had retired the general obliga- tion bonds which were originally issued to finance their l3Knappen, op. cit., p. 116. 1uRadford v. City of Cross Plains, 86 S.W.2d 20h (1935). 179 water system.15 In 1929 the city issued more than $100,000 of revenue bonds to finance the construction of a new dam, pumping station, and other equipment necessary to utilize the new water supply. These bonds were secured by revenues from the entire system. As in the case of Cross Plains, the new dam financed with the proceeds of the revenue bonds failed with the first rain. The court declared the bonds to be "invalid and unenforceable" by reason of their issuance without a vote of the people as required by Texas statutes.16 Corpus Christi was the third Texas city to have the misfortune of dam failure in connection with revenue bond financed water systems. In 1927 Corpus Christi issued $2,000,000 of revenue bonds subsequently supple- mented by a $725,000 subordinate issue to finance the construction of a dam.17 In 1930 the dam was partially destroyed. An attempt was made to make the project sound by repairing the dam with the proceeds of a $500,000 Reconstruction Finance Corporation loan after obtaining permission from bondholders to make the loan senior to bonds then outstanding. In the meantime, a taxpayer challenged the validity of the revenue bond 15Cityof Hamlin, Texas v. Brown and Crummer Investment Company, 93 F.2d 680 (1937). lélbido, Pp. 68143-850 17Knappen, op. cit., pp. 122-28. 180 issue. Corpus Christi and the bondholders' committee Challenged the validity of the bond issue in the courts ;for'several years until on April 20, l9h0, the United Estates District Court of Appeals in New Orleans, revers- irug a lower court decision, ruled that the bond issue vuas void.18 The United States Supreme Court refused to Iwyview the case. The litigation did not end here, how- evrxr. The bondholders' committee then sought in court tx> recover from the city on the basis of benefits received by Corpus Christi from the bond proceeds. Idttigation continued until 19h? when a suit against Corfidus Christi for the recovery of properties purchased Witfli the revenue bond proceeds was decided in favor of the: bondholders. In this case the Court of Civil ‘Aprmeals held that the bondholders were entitled to cer- tain property or $1,833,558, the estimated value of that PIVJperty.19 On appeal the Texas Supreme Court denied the petition of the city for a writ of error. In this filial ruling of the Civil Appeals Court, bondholders 0btained a judgment in the form of a general obligation deibt, payable from ad valorem taxes or water revenues. Final settlement was made with bondholders on September 3, 19u8. At that time $352,033,000 of bonds \ 18Moody's Government and Municipals (1997): p. 1129. 116 19Moody's Government and Municipals (19h9), p. 9. 181 were outstanding in addition to interest on this amount of principal since February, 1937.20 Bondholders even- tually received slightly more than $700 for each $1000 bond after deducting the expenses of the bondholders' committee. Educational Facilities During the 1930's at least ten instances of default occurred involving revenue bonds issued to finance college and university dormitories.21 Three of these defaults occurred in 1932, two in 1933, one each in 193h and 1935, and three in 1938. The latter three bond issues were purchased by the lending agencies of the United States Government. The financial difficulties of revenue bonds issued to finance facilities of educational institutions during the 1930's were due to a decline in the demand for the services of the facility. Two of the ten, how- ever, were partially attributed to failure of pledged money to materialize. In each instance the bonds were issued prior to the financial collapse of 1929. Conse- quently, lower enrollment and more intense competition Ibid. 21Source of the material for this section is from the publication, Debt Financing of Plant Additions for State Colleges and Universities, by Robert Bruce Stewart and Roy Lyon, published by Purdue Research Foundation, West Lafayette, Indiana (l9h8), Part V. The names of the educational institutions involved in financial difficulty are not given in this publication. 182 in the student housing market caused revenues to decline below expectations which were based upon a period of prosperity. Of the ten defaults, not a single case involved failure to pay principal and in only one case did bond- holders sacrifice interest. In most instances defaults were temporary and were subsequently "cured." In the majority of these refundings, however, bondholders received new bonds with a lower coupon rate of interest. In addition to refundings providing, in some instances, for lower coupon rates and a lengthening of the maturity date in others, there were a few instances of the application of tax money to the payment of the revenue bond debt. In one instance tax money was applied directly; and in two others, both involving athletic plants, the issuing institution agreed to lease the plant for one year periods and to pay a fixed sum for services rendered to the institution. This lease arrangement was a legal maneuver that permitted the university to apply tax money to debts originally secured only by revenues from the athletic plants. In effect the educational institution was both lessee and lessor. Evidently the legality of this stratagem.was strengthened by the one-year lease provision. It was understood, however, that successor ‘0 183 officers would renew the lease until all bonds were retired even though they were not legally bound to do so. There was no instance of a default on educational facilities attributable to the failure of public officials to perform bond covenants. In fact, as illus- trated by the application of tax monies to the payment of bonds, public officials may have been guilty of failure to protect the interest of the taXpayer. Other Types of Enterprise The first known revenue bond issue to finance city street transportation was issued by Seattle, Wash- ington, in 1918.22 A long controversy among the private owner, city officials, and citizens of Seattle preceded the purchase of the transportation system for tls,ooo,ooo.23 Principal and interest on the bonds issued to the private owners represented a first lien on the gross earnings of the system. The city also agreed to purchase from the private seller the electric power necessary to operate the transportation system at one cent per kilowatt. 68 22Moodyts Government and Municipals (19h1): P- 13 0 23Paul H. Douglas, "The Seattle Municipal Street Railway Systems," Journal of Political Economy, XXIX (J1me, 1921), p..).LBTQ 18h Rising labor costs and the increasing use of automobiles contributed to the inability of the system to meet debt service requirements. Although sometimes hampered by political disagreements, there appears to have been a sincere effort to Operate the system.effi- ciently and profitably. For example, the city restricted taxi service, eliminated low revenue yielding transit routes, and raised fares. Final settlement was made in 1939 when the transit system received a loan of $10,200,000 from.the Reconstruction Finance Corporation. The proceeds were to be used to pay outstanding indebted- ness and rehabilitations.2u According to the provisions of this plan, the original private company received $3,250,000 in payment of its holdings of $8,336,000 principal and accrued interest.25 The Alabama State Bridge Corporation, created for the purpose of constructing bridges in Alabama, experienced financial difficulty during the 1930's.26 The $5,000,000 six per cent coupon bonds issued in 1929 were more than the income of the corporation could ser- vice. Scheduled bond principal payments were not made on maturing bonds after December 1, l93h, and several 24Moody's Government and Municipals (19h0), p. 1302. 25Ibid. 26Ratchford, o . cit., p. 519. 185 years thereafter. In the subsequent refunding which occurred in 1936 bondholders accepted lengthened maturity bonds with lower coupon rates which were secured by a pledge of lease payments to be received from the Alabama State Highway Department.27 Tolls on the bridges were subsequently abolished, and the State Highway Department paid rentals sufficient to service the bonds from the proceeds of a two cent gas tax which was initially pledged to the securing of other state highway bonds.28 In 1937 the Federal Government also contributed Agriculture Department funds to the state under an act designed to encourage the conversion of toll bridges into free bridges.29 The municipal electric system of Wagoner, Okla- homa, was involved in financial difficulties following the issuance of obligations in 1927. The obligations were issued to finance the purchase of diesel engines and other electric generating equipment replacing an older city-owned generating system.30 These obliga- tions, amounting to more than $55,000, were unusual in that the purchase price of the new generating equipment 27Moody's 19h1, op. cit., p. 109. 28Ibid. 29Ratchford, op. cit. 3OFairbanksLMorse and Company v. City of Wagpneg, Oklahoma, 81 F.2d 209, 211—(1936). 186 was payable in monthly installments from savings attrib- utable to the new equipment. Savings were to be computed by comparing the cost of producing electricity of the new system with the average cost of production in the fiscal year, 1926-1927, the last full year of pro- duction using the older-type generating equipment. The savings thus incurred, or portions thereof, were to be applied to the payment of the issued obligations. It was expressly agreed that "monthly installments shall be paid only from said savings . . . and from no other fund, money, property, or assets of the city. ."31 On March 16, 1928, the city began operation of the new generating equipment. Two months later, how- ever, a newly-elected light and water commissioner replaced the engineer, who originally operated the elec- tric generating equipment, with an inexperienced and incompetent man. It was alleged that the commissioner did this deliberately for the purpose of "creating the impression upon the inhabitants of the city that the diesel engines were inefficient, expensive to operate, and not capable of carrying the rated capacity load specified in the contract."32 It was also alleged that the commissioner's objective was to ruin the engine so 311bid., pp. 212-13. 32Ibid., p. 213. 187 that the city would then be free to purchase electric energy from the Public Service Company of Oklahoma, a private utility. Despite severe abuse, the engines continued to Operate until October, 1930. During the ensuing litigation, the city pur- chased electric energy from.the Public Service Company of Oklahoma. The cost per kilowatt ranged from a minimum.of .h of a cent to a maximum of l.h cents, which was more than the previous average cost to the city.33 The court ultimately directed that Fairbanks, Morse and Company, bondholder and seller of the equip- ment, was entitled to make the necessary repairs and to operate and retain earnings of the power plant until all obligations were liquidated in accordance with the original agreement. The surprising feature of this case is the basic soundness of the electric enterprise. Following the installation of the new equipment, earnings were satis- factory to meet debt requirements despite attempts to purposively sabotage the electric generating equipment. It should also be noted that the obligations were secured by a pledge of only a portion of net earnings since the 33Ibid., p. 21h. 188 previous system was paying its way and, in addition, contributing to the general revenues of the city. The state capitol building of Montana was financed with bonds pledging income from land grants.3u During the depression the land income declined to such an extent that interest on these pseudo-revenue bonds could not be paid as scheduled. The outstanding obli- gations were held by a state trust fund which, according to the state constitution, required the state to guaran- tee all investments.3S Accordingly, in 1939 these bonds plus accumulated interest were refunded into "full faith and credit" obligations. In 1931 the Port of New York Authority barely averted default on revenue bonds issued to finance the Staten Island bridges.36 The States of New York and New ' Jersey gave aid to the Authority by transferring the Holland Tunnel to the Authority in return for revenue bonds. The additional revenue arising from the Tunnel was sufficient to meet the scheduled payments on out- standing revenue bonds. BuRatchford, o . cit., p. 520. 351bid. 361bid. I89 Defaults Since 1911037 Although defaults have been relatively rare during the past sixteen years, there have been a few instances Of financial difficulty on general obligation bonds as well as on revenue bonds. Revenue bond defaults have occurred in connection with practically all types of public enterprises although defaults on revenue bond financed toll bridges appear to be signifi- cantly greater than for other types. Toll Bridges There have been several recent instances of default on revenue bonds issued to finance toll bridges. In some instances it is too early to predict the final outcome Of these bond issues. Two Nebraska Bridges Prior to World War II the State of Nebraska authorized the Burt County Bridge Commission to con- struct, operate, and.maintain a toll bridge across the Missouri River in the vicinity of Decatur, Nebraska.38 The Decatur Bridge was to bisect the approximately 100 mile distance between two existing bridges across the 37Much of the material for this section was Obtained by letters from investment bankers, state and municipal Officials. For more detail, see Appendix III. 38"The Decatur Bridge," a statement by Shield & Company, appearing in the Daily Bond Buyer, February 19, 1956. pp. 532-33 and EMS. 190 Missouri River. The planning for this bridge was inter- rupted by World War II, and it was not until 1950 that the Bridge Commission completed plans and Obtained a certificate from the Chief of Engineers of the Department for War authorizing the construction of the bridge at a particular site. In the meantime the Missouri River had broken out of its original channel and moved eastward of the proposed bridge site. Alternative sites were then considered, but rejected since the army intended to return the unpredictable river to its Original channel. Soon after obtaining the authorizing certificate the Bridge Commission sold $1,970,000 of bonds with a coupon of 3 3/h per cent maturing in thirty years. Using these proceeds the Bridge Commission was able to complete the construction in the fall of 1951. The "dry land" bridge could not be opened to traffic, how- ever, due to the fact that the Missouri River had now moved even farther to the east of the bridge site. The river had not been put back under the bridge as origi- nally planned. After considerable lobbying by the underwriters and investors, Congress finally approved a $2,000,000 appropriation in l95h for the purpose of reconstruction of the banks along the Missouri River. The river was finally flowing under the bridge by the latter part of 1955; but for the lack of a toll booth, tolls were not begun until early in 1956. 191 In the meantime, interest was paid on the out- standing obligations from a Special fund until April, 1952.39 Subsequently, the bridge bonds lapsed into default and the bondholders attempted to retrieve their money from the underwriters. The underwriters refused to buy back the bonds but did offer $250 for each $1000 bond as an option to buy each bond for an additional $750 within a period of five years. The meandering of the Missouri River may not have constituted the sole reason for financial diffi- culty with this bridge. During the early life Of the bridge traffic was only about one-third as great as had been estimated by traffic engineers. Revenues have since been bolstered, however, by an agreement with a pipeline company to rent Space for tubes on the bridge crossing for an annual payment of $8000. It is too early to predict the final outcome of this project. During 1956 the bonds were selling at about 60 per cent of par. Another unusual case is the Bellevue, Nebraska, Toll Bridge. This bridge, sometimes referred to as the "approachless bridge," was completed in 1952. The Bellevue Bridge Commission of Nebraska had issued $2,800,000 of bonds with a coupon Of h per cent maturing 39Ira Haupt and Company's Revenue Bond Service. 192 in thirty years. These bonds defaulted in May, l95h, primarily because of a lack of access roads. The bridge has been described by one public official as being "acceSsible only by helicopter."80 The approach on the Nebraska side consisted of a gravel road, and on the Iowa side the bridge led into a corn field. In an effort to improve the revenue position Of the toll bridge, the underwriters paid $223,000 to pave a five-mile length of road connecting the bridge with an interstate highway. As of the latter part of 1956, plans for other access roads had not been completed. In June, 1956, after approximately four years of operation, the toll bridge traffic amounted to slightly more than 5,000 vehicles for the entire month, which is approxi- mately 15 per cent as much as the original estimate by the bridge engineers. Market value of the bonds during 1956 fluctuated around no per cent of par, which is an indication that this bridge may be in for more financial difficulties than the Decatur Bridge. Two West Virginia Bridges Revenue bonds issued to finance the construction Of the Dunbar-South Charleston Toll Bridge and the Memorial Toll Bridge at Parkersburg, West Virginia, have howall Street Journal, July at, 1956, cited by Ira Haupt. 193 recently defaulted. In both instances toll revenues have not materialized as had been expected prior to con- struction. The Dunbar Bridge was financed by revenue bonds in the amount of ph,200,000 which were issued in 1952 at h per cent payable in 1992. The paying agent has stated that interest due August, 1956, was not available because of insufficient revenues. In early 1957, however, the paying agent announced that sufficient funds were then on hand for the past-due August, 1956, coupon. There were no provisions, however, for payment of coupons due February, 1957. The Parkersburg Bridge revenue bonds were issued in 1953 in the amount of $6,500,000 and defaulted in January, 1956, because traffic and revenues failed to measure up to engineer's estimates. Bridge access improvements are still being made and traffic volume may increase as these access roads are improved. Prior to construction the toll bridge was estimated to average 6,h00 vehicles daily, but actually has experienced a daily traffic volume of only about l,h00 vehicles. The city-Owned Memorial Toll Bridge competes with the state- owned Parkersburg-Belpre free bridge. It is too early to predict the eventual outcome of this project. There has been some speculation that 191+ an authority might be created to Operate both the Memorial Bridge and the Parkersburg—Belpre Bridge as toll bridges, pledging all revenues to the liquidation of the revenue bonds outstanding.“l Other Toll Bridges At least four other toll bridge projects have experienced financial difficulty. These include the Fernandina Port Authority Bridge (Florida), the Thousand Islands Bridge (New York), the Dade County Causeway (Florida), and the Toll Bridge of Nebraska City (Nebraska). On November 1, 1951, the Fernandina Port Author- ity in Florida defaulted on interest payments on the outstanding bonds of an original issue in the amount of $h,600,000.82 A refunding plan was initiated at the thme of default in which a new issue of the Ocean High- way and Port Authority replaced the then outstanding revenue bonds. A reduced interest rate and increased security distinguished the refunding bonds from the original issue. The interest on the refunding bonds was secured by a pledge of gross tolls from the bridge. In addition a sinking fund was established which receives ”llra Haupt, Op. cit. 42Wylie Kilpatrick, Revenue and Debt of Florida Municipalities and Overlyinngovernments (Gainesville: University of Florida, 1953), p. 102. 195 $h0,000 annually from the gasoline excise tax accruing to Nassau and Duval Counties. The sinking fund also receives funds from the net tolls of the enterprise. Should the sinking fund fail to accumulate sufficient revenue to retire the debt and finance maintenance costs, the state is then liable for any balance that may be needed to meet these expenses payable from the state gasoline taX. Holders of the original bonds accepted the refunding plan; and as Of June 30, 1955, more than $h,500,000 of the original bonds had been exchanged for the refunding, leaving some $h0,000 of bonds outstanding unexchanged. Interest is current on the new issue. The Thousand Islands Bridge Authority exper- ienced a reduction in traffic during World War II which resulted in default on interest due September 1, 19h3, through September, l9h6.L|'3 Traffic was reduced due to gas rationing during the war with the result that toll revenues declined more than 35 per cent between 19h0 and 19141;.811L The bonds were refunded in 19h6 with a new issue of $3,560,000 of 2 per cent revenue bonds. These refunding bonds were for the purpose of retiring the more than $3,000,000 of h l/h per cent bonds which were u3MOOdy'S Government and Municipals (19h6), Po 729. qubid., p. 719. 196 still outstanding at the time Of refunding. A portion of the proceeds of the refunding bonds was for the pur- pose of making payment on the overdue, unpaid interest. The bridge bonds of Nebraska City, Nebraska, barely averted default by a refunding operation. AS in the case with the Thousand Islands Bridge, travel restric- tions during World War II reduced revenues to such an extent that in June, 1943, the city adopted a resolution to refund $846,000 of revenue bonds to prevent default on principal payment due January 1, 1944."45 Under the new refunding plan the 2 3/4 per cent revenue bonds pay- able serially to January 1, 1957, were extended to January 1, 1962.24-6 Bondholders agreed to accept the new bonds in exchange for their holdings, and the City Council approved the new issue dated July 1, 1943. The Dade County Causeway in Florida eXperienced minor financial difficulty due to inability to complete the causeway according to schedule. World War II restrictions on the use of building materials delayed the project for several years. The first $4,000,000 issue of revenue bonds was issued in 1941. In 1946 another $1,500,000 issue was necessary to complete the uSIbid., p. 625. uéHandbook of Public Revenue Bonds, unpaged handbook of Tripp & Company, Inc., 40 Wall Street, New York, New York (1946). 197 construction of the causeway. Income immediately after opening was not sufficient to meet interest payments, but the bondholders did not insist upon full payment of interest due March 1, 1948. Funds have since become available, and the project is presently meeting scheduled interest payments. As of the end of 1956, at least six other bridges either were barely earning revenue equal to interest charges or were using cash reserves supple- mented by earnings to prevent default. Water Systems There have been a few minor defaults on water revenue bonds, all involving communities with a popula- tion of less than 10,000.47 Two small issues, one in Arkansas and one in Tennessee, experienced financial difficulties due to water supply failure. The wells supplying water to the communities went dry because of the drought. A community in Kentucky has a small issue H7Information pertaining to these instances was revealed in letters to the writer. The writer prefers not to identify these small governmental units which have been involved in financial difficulties. The identification of governmental units previously cited as having experienced financial difficulties are dif- ferentiated from those cited in this section in that those cited previously either were well-known to municipal bond dealers or had been recorded in earlier publications. The reasons for the defaults, which are of most significance, are preserved in this study. 198 of revenue bonds outstanding; and reports indicate that city officials used the income from the water system, which should have gone into a sinking fund, to build more extensions. Consequently, the remaining revenues were insufficient to service the debt. A small com- munity in Michigan experienced difficulty in making payment on an issue of water revenue bonds. Evidently the debt service on the bonds was simply more than the enterprise earnings could support. A receiver was appointed in 1949, and the system is still being operated by same. Other Types Of Enterprises Revenue bonds issued to finance a college dormi- tory in the State of Idaho defaulted in 1952. The 1951 state legislature failed to appropriate money for the Operation of the college; consequently, it was forced to cease operations in the fall Of 1951. The institution, formerly known as the Northern Idaho College of Educa- tion, reOpened in the fall of 1955 as the Lewis-Clark Normal School. The state was reported to be considering making an appropriation for the payment of matured Obligations."8 At least two revenue bond financed parking facilities were earning revenues that were barely l*BMoody's Government and Municipals (1957): Po 418- 199 sufficient to meet interest payments as of the end of 1956. In fact, one of these, the Kansas City, Missouri, Auditorium Plaza Garage, was able to avoid default only because the city assumed a portion of the Operating eXpenses. The Philadelphia Parking Authority, although not in default as of the end of 1956, was having diffi- culty meeting its financial commitments. The earnings of at least six turnpikes were barely sufficient to meet bond interest. These include the Indiana Turnpike, the Kansas Turnpike, the Kentucky Turnpike, the Maine Turnpike, the Ohio Turnpike, and the West Virginia Turnpike. Modest turnpike earnings may be attributed to the recentness of the projects. A Slight decline in traffic, however, could result in an alarming amount Of default for this type of public enterprise. Although not actually in default, the West Vir- ginia Turnpike, as of April, 1957, is earning only a little over half of the bond interest requirements; and the payment of interest due June 1, 1958, appears doubtful. The state legislature has indicated that the state may appropriate tax money to aid in the payment of the bonds. The 1957 legislature adjourned without passing an appropriation bill to aid the turnpike; how- ever, the Senate did pass and send to the House a reso- lution recommending a complete study of the methods that the state could pursue to prevent default. 200 The Natural Gas System Of Lexington, North Carolina, which was financed by revenue bonds, averted severe financial difficulties by application of surplus monies emanating from other city-owned utilities. Two other natural gas systems, one in Alabama and one in Tennessee, are marginal, although default had not occurred as of the end of 1956.)Jrg Comparison of Default Record by Type of Credit Instrument During the depression Of the 1930's there were some known instances of political units maintaining payments on revenue bonds although general Obligation bonds lapsed into default. For example, Mobile, Ala- bama, and Asheville, North Carolina, successfully serviced revenue bond Obligations while the general Obligation bonds of these cities were in default.50 The revenue bonds of these cities, however, were secured by a pledge of earnings plus a collateral pledge of tax funds. Lakeland, Florida, defaulted on both general obligation bonds and special assessment bonds during the 1930's although electric and water revenue bonds continued to earn sufficient revenues for debt uglra Haupt, op. cit. SOKnappen, OE. Cite, p0 1310 201 service.51 In fact, debt service requirements on Lake- land's revenue bonds were earned more than five times in the same years that general Obligation bonds were experiencing financial difficulty. Another example of revenue bonds faring better than general obligation bonds during the financial diffi- culties of the 1930's is the street railway bonds of Detroit.52 Other governmental units eXperiencing greater financial difficulty during the 1930's with general Obligation bonds than with revenue bonds include Eastland, Stamford, and Brownsville, Texas; Royal Oak, Michigan; and Port Townsend, Washington.S3 O'Fallon, Illinois, experienced financial difficulty with special assessment debts, whereas its water revenue bonds con- tinued to maintain earnings sufficient to pay debt service requirements. A different conclusion appears justified in the case of the defaults on revenue bonds that were issued to finance educational facilities. These revenue bonds would not likely have defaulted had the facility been financed with the proceeds of general Obligation bonds. In fact, as is pointed out in an earlier section Of this chapter, several of the financial difficulties 511bid., pp. 131-32. 52Ibid., pp. 122-32. 53Ibid., pp. 132-37. 202 pertaining to revenue bond financed facilities were eventually cured by the application of tax funds. Available evidence suggests that revenue bonds may fare better during periods of low economic activity, whereas general Obligation bonds fare better during prosperity. Although both may be subjected to financial stresses due to acts of God or other unpredictable happenings, revenue bonds tend to be subject to addi- tional risk factors. For example, during periods of full employment the nonpayment of principal and/or interest on outstanding general obligation bonds or revenue bonds may arise due to the occurrence of a catastrophe similar to those eXperienced by some cities on rare occasions. A flood or a hurricane may destroy large portions of a community and, of course, its tax- paying ability. In addition the nonpayment of revenue bonds may also occur-~as the eXperiences of some com- munities have shown--because of mishaps of a less severe nature such as drought or failure of a dam. Of course, the Obligations of one-industry communities may be poor risks; but this would be true regardless of the type of credit instrument utilized by the community. It cannot be accurately determined whether the defaults and near-defaults that have occurred since the 1940's in connection with revenue bond financed enter- prises would have defaulted had they been financed with 203 "full faith and credit" obligations. The instances of default occurring in connection with enterprises such as the Decatur and Bellevue, Nebraska, toll bridges might have defaulted simply because of the sheer weight of the debt. This seems plausible especially if the obliga- tions had been issued by a small community with low tax- paying ability. In other instances it would seem reasonable to assume that "full faith and credit" Obligations would have successfully met the scheduled debt payments even if forced to curtail governmental services. Summary Defaults have occurred more frequently during depressions; however, the conspicuous feature of defaults is the reckless public borrowing that precedes the period of low economic activity. Prior to the 1930's, a sub- stantial portion of the proceeds of public borrowing was devoted to projects of a commercial or semi-commercial nature. Revenue bonds and Special assessment bonds, although issued as a limited liability of a governmental unit, have often resulted in "full faith and credit" Obligations when subjected to financial strains. Revenue bond defaults during the depression were generally caused by a lessening Of demand. Several 204 Texas cities issued revenue bonds that were ruled invalid by the courts, although it seems plausible that this would not have occurred.had the projects not suffered physical damage which rendered them less able to meet debt service requirements. Generally, rate covenants that ordinarily accompany revenue bond issues have not provided an effective means of averting default. If the enterprise is not economically sound, the rate covenant remedy seems to afford little protection from financial loss. During the period of high level economic activity since 1940 there have occurred few instances Of default although bondholders generally have suffered very little loss. In a large portion of the instances involving default or near-default, the issuing political unit has applied tax money, or has used other less con- spicuous means of providing aid, in attempting to avert defa'lllte CHAPTER V COMPARATIVE ANALYSIS OF INTEREST RA”E The importance of interest rates as a conside- ration in government finance is demonstrated by the additional burden arising from a small increase in the effective interest rate. Assuming a repayment schedule of twenty equal yearly payments, an increase of one per cent in the interest rate will cost the borrowing govern- ment an amount equal to 10.5 per cent of the principal or face amount of a bond issue. Over the twenty-year period on an issue of $1,000,000, this one per cent difference in the interest rate would amount to a total interest cost of p105,000. Increasing debt service costs may force the curtailment of outlays for urgently needed governmental activities. Further, the burden of these fixed costs may become so great as to threaten the very existence of a necessary political unit. This is especially true Of state and local units of government, the area in Which revenue bonds have been utilized to the greatest extent. 205 206 Price and Yield Municipal bonds are usually issued in pl,000 denominations. Unlike corporate bonds, municipals are more Often quoted on a yield basis rather than a dollar price of SO much per p100 of par value.1 The trading Of municipals on a yield basis is essentially another way of quoting the price of a bond to an investor in terms of a percentage. The yield varies inversely with the price. Given a certain coupon rate of interest, the higher the price of the bond the lower the yield. Knowledge of any three of the four factors--price or cost, nominal or coupon rate, maturity schedule, and yield-~makes possible the solution for the remaining unknown fourth factor. The purchaser of a municipal bond is buying the present value of the face of the bond in addition to the present value of a series of semi-annual interest pay- ments. If municipal bonds were always purchased at par, that is at 100, the yield would be equal to the coupon rate regardless of maturity. In most cases, municipal bonds are purchased either at a discount, below 100, or at a premium, above 100. If a municipal bond is pur- chased at a discount, the maturity value of pl,000 is lMunicipal dealers often compare the yield on municipal securities in terms Of "basis points." A "basis point" is one hundredth of one per cent of the yield. 207 greater than the purchase price. The difference is treated as additional interest accruing during the life of the bond, in which case the yield is greater than the coupon rate of interest. On the other hand, a municipal bond sold at a premium will yield something less than the coupon rate of interest. The computation of the net interest rate2 is complicated somewhat in the case of an entire issue of serial bond issues.3 The underwriter of a serial bond issue is usually permitted to name multiple or "split coupon" rates of interest. Bonds within a serial issue then may contain several different coupon rates which apply to particular bonds within the issue. Serial issues containing a multiple coupon arrangement compli- cate the computation of net interest rate on such issues but do not change the concept. The net interest rate, in any case, is a single percentage which reflects the true interest return on an investment if held to maturity considering coupon interest payments adjusted 2The term "yield" is equivalent to the term "net interest rate." The former term, however, is usually used in connection with the percentage return to the bond purchaser; whereas, the latter term refers to the cost of money to the borrower eXpressed as a percentage. 3A serial bond issue has maturities scheduled each year over a period of years in varying numbers; whereas, in the case of term bonds, the entire issue has a single maturity. 208 for premium or discount. The net interest rate is an average rate of return on the entire serial issue. In awarding bids to municipal bond dealers, it is the usual custom to compare bids on the basis of the "net interest cost." The net interest cost is calcu- lated simply by determining the amount of interest eXpense incurred by the governmental unit during the life of the bond issue. Of course, the determination Of interest expense necessitates the addition of any discount to, or the subtraction of any premium from, the total amount of interest payable as computed from the application of coupon rates to the face amount of the bonds. The net interest rate and the net interest cost expressed as a percentage are not equivalent. The ratio of the net interest cost to the total number Of bond years expressed as a percentage, however, gives a rough approximation to the net interest rate.u The net interest rate gives consideration to the time period in which interest dollars are received. 0n the other hand, the net interest cost treats a dollar of interest received in a near period the same as a dollar of interest received in a more distant period. Of course, uThe number Of bond years is calculated by multiplying the number of bonds in the issue times the respective number of years these bonds remain outstand- ing and totaling the results. For example, suppose an 209 a dollar of interest received in a more distant period should be discounted more than a dollar received in a near period. For this reason municipal bond dealers quite commonly specify higher coupon rates on the earlier maturing bonds of a serial issue. A bidder may be "low bidder" by concentrating on the total interest cost on an issue and arranging coupon rates such as to receive interest dollars during the early life of the bond issue. Thus a bidder may be the low bidder as measured by net interest cost even though a competitor may submit a losing bid with a lower net interest rate. Theoretically, coupon rates could be arranged so as to receive the entire interest payment in the first few maturity periods. In such a case only principal payments remain outstanding in the following time periods. Bonds maturing during the latter period of the life of the bonds would then carry a zero rate of issue contains 100 bonds to mature serially over a period of Six years as follows: Years to Number of Bond Number Maturity Bonds Bond Years 1-10 1 10 10 11-20 2 10 20 21-30 3 10 30 31-50 '4 20 80 51-75 5 25 125 76-100 6 25 1'0 100 l The issue in this illustration has a total number of bond years of 415 and average life (bond years divided by number of bonds) of 4.15 years. 210 interest. As a matter of practice the bidder cannot reduce the coupon rate on the longer maturities to a zero or near-zero level without endangering the market- ability of the issue. Factors Affecting Municipal Interest Rates The most important and basic factor determining the yield or net interest rate on municipal bonds is the supply and demand of loanable funds. These factors are determined by the money market and usually are not affected by the actions of an individual state or local unit of government. Taken together, however, state and local governments continue to play an increasing role in the demand for loanable funds. These political units are confronted with the problem of financing more capital improvement projects such as hospitals, highways, and school buildings to meet the demands of an increasing population. The urgency of many of these public improve- ment projects tends to make this portion of the demand for loanable funds somewhat inelastic. This inelasticity of demand has been quite vividly demonstrated during the recent 1956 period of "tight money."S During this 5"Tight money" is a term commonly used to refer to a market condition in which the demand for loanable funds exceeds the supply at interest rates which are con- sidered typical or normal. An "easy money" market is an antonymous situation. 211 period, governments generally continued their financing plans much as they would have done at lower interest rates. There were some municipal bond offerings with- drawn from the market, but in most cases these were 6 postponed for a period of nine months or less. This inelasticity of demand for funds is also demonstrated by governments' borrowing being seemingly unaffected by the various phases of the business cycle. Tax Exemption The most important distinguishing feature of state and local government bond issues is that the interest income is not subjected to the federal income tax. Municipal bond interest is also quite frequently exempt from state income taxation. The exemption of municipal bond interest from federal taxation is of considerable importance, the advantage varying directly with the applicable federal income tax rate schedule. For example, a municipal bond yielding 3 per cent is equivalent to a taxable bond yielding h per cent for the individual in a 25 per cent marginal tax rate bracket. For an individual in a 90 per cent marginal tax rate bracket, a 3 per cent tax-exempt municipal is equiva- lent to a taxable bond yielding 30 per cent. See statements in Investment Bankers Associa- tion Statistical Bulletin, ho. 3TApril, 1957), pp. 2-4. 212 The effect of tax exemption upon the magnitude of municipal interest rates is not easily determined. Some studies have indicated that the net interest rates on tax-exempt securities may average approximately one per cent less than the net interest rates on comparable taxable securities.7 Considerable variation appears to exist in this difference from one time period to another. Changes in the level of federal income tax structures account for some of this variation. All types of municipal securities, including revenue bonds, are treated similarly with respect to tax exemption. The net interest rates applicable to the various types of municipals, therefore, should not be affected differently because of tax exemption. There remains the rather remote possibility that the uncer- tainty associated with the more precarious tax-exempt status of revenue bonds, as discussed in Chapter II, may result in higher interest rates on this type of security. 7Lucile Derrick, "Exemption of Security Interest from Income Taxes in the United States," The Journal of Business of the University of Chicago, XIX (October, 1946), p. MO; Lyle C. Fitch, Taxing Municipal Bond Income (Berkeley, California: University of California Press, 1950), pp. 6-28; and John D. Long and Arthur M. Weimer, Financing of College and University Student Permanent Housing (Washington, D. 0.: American Council on Education, 1957), pp. 197—203. 213 In addition to the supply and demand of loanable funds and the "tax-exempt" status, the net interest rate applicable to a revenue bond issue depends upon many other factors. If it were not for the "tax-exempt" status of revenue bonds the interest rate applicable to this type of governmental security would more nearly resemble the interest rate on corporate bonds. This resemblance is demonstrated by the similarity of the criteria used in appraising the credit risk involved in various revenue bond securities and corporate bonds. For example, among the most essential information in appraising a revenue bond financed enterprise are such items as coverage, revenue lien, maintenance of ade— quate insurance, disposition of surplus revenues, management of the enterprise, and the elasticity of demand for the goods or services emanating from the enterprise.8 These foregoing criteria would also be given consideration in appraising the credit risk involved in connection with corporate securities. Coverage The most important consideration in evaluating a revenue bond is the ability of the financed enterprise to produce net revenues, which is commonly referred to Guide for Municipal Bond Credit Files, undated publication of the American Bankers Association, pp. 12- 20. 21h as "coverage." "Coverage" is the ratio of net earnings available for debt service to the average annual debt service requirement. For example, a revenue bond issue requiring an annual average principal and interest pay- ment of p100,000 secured by a pledge of net earnings which have been or are eXpected to be p175,000 annually is said to have a coverage of 1.75 times. Net earnings may refer to either estimated earnings in the case of an enterprise not yet in operation or historical earnings in the case of an established enterprise. Of course, historical earnings are more significant in the evalua- tion of a revenue bond issue. Coverage may also be measured in relation to the maximum principal and interest requirements rather than to the average annual principal and interest requirements. The amount of coverage considered adequate by investment dealers varies with such things as type of enterprise and reserve funds available for debt service. As a general rule, however, a mandatory coverage of less than 1.25 times is considered unacceptable.9 Revenue Lien The "revenue lien" refers to the restrictions on the obligor in the issuance of additional bonds on a 9William C. Whittemore, "Considerations in the Selection of Revenue Bonds," The Daily Bond Buyer, November 28, 1955, p. 98. 215 parity with the original issue. Typically, the bond indenture requires a minimum coverage for a certain period of time prior to any issuance of additional bonds on a parity with the original issue. For example, the bond indenture may state that the issuing agency shall not issue additional revenue bonds on a parity with the original issue unless a minimum coverage of 1.5 times occurred in the two preceding years. Revenue bonds subordinated to the original issue may be issued without consent of bondholders and regardless of the extent of coverage. Insufficient coverage may result either in the inability of a revenue bond issue to attract bidders or in bids reflecting a higher net interest rate. Other non-Quantitative Factors Other things being equal, the credit risk of a revenue bond financed project would be greater should the obligor not agree to maintain adequate insurance as is usually carried by similar private companies. If the project were of such a nature that it could not be insured, such risk would also be reflected in a higher interest cost. Advertising the sale of the bond issue and pro- viding facts pertinent to a proper evaluation of the issue are other factors that may affect the price of the bond issue. Distributing a bond prospectus or other 216 descriptive circulars may interest a few more under- writers and thus tend to raise the price of the bonds. Closely related to advertising is the effect of a favorable rating on bonds that are to be offered for sale. Financial reporting services are necessarily con- servative and will underrate a bond simply because of insufficient information. The provision of up-to-date information to such rating agencies as Dun and Brad- street, Standard and Poor's, and Moody's may earn a political unit a higher quality rating and a higher price for its obligations. The date of bond sale may make a significant difference in the effective interest rate that a govern— ment pays on its borrowings. For example, if several issues are scheduled to be sold on the same day in a market area, bond underwriters may be forced to omit bids on some of these issues due to their inability to properly investigate and evaluate all issues that are being marketed on that date. Higher interest rates may result; therefore, either because of fewer bids or because the bidder, not having sufficient time to investigate the issue, bids less (higher yield) in order to hedge against uncertainties. Other factors that may affect the effective interest rate include the quality of the management of 217 the financed enterprise, reserve funds available, credit promotion, character of the area serviced by the revenue bond financed enterprise, and even the reputation of the legal firm employed to set up and pass on the legality of the bond issue. Effect of Size and Length of Time to Maturity A portion of the interest rate differential occurring among similar types of municipal bonds may be attributed to the difference in the dollar size and the length of time to maturity of the issue.10 A determina- tion of the effect of these measurable variables facilitates a more precise comparison of the different types of bond issues with respect to the net interest rate to the issuing government. 10Other studies have analyzed the effect of size and/or length of time to maturity upon the net interest rate although none, as faJr as can be determined, have used the method employed in this study. The effect of maturity length is analyzed in the studies by Long and Weimer and by Derrick referenced in footnote 7. An analysis of the effect of size on the net interest rate of municipals is contained in "The Size Characteristics of Municipal Bond Issues," Investment Bankers Associa- tion Statistical Bulletin (January, 1957), pp. l-h. The study by the Investment Bankers Association analyzed the effect of size upon the net interest rate on unlimited general obligation bonds issued in September, 1956. This study is based upon a total of forty-five issues, eighteen of which were rated "Aa" (Moody's) and twenty- seven were rated "A." Issues selected for comparison were sold in September, 1956, and with average matur- ities of from eight to sixteen years. This study con- cluded that the sample analyzed revealed no significant relationship between the net interest rate and the size of issue. 218 Me tho d In an attempt to determine the effect of size and length of time to maturity, municipal bond sales occurring throughout the United States during the third quarter of 1955 were selected because this time period represented a recent period of no unusual activity in the municipal bond market.11 Data pertaining to both the net interest rate and average maturity is available on only a portion of the total United States municipal bond sales.12 This necessitated the selection of only those issues on which the average maturity years and the net interest rate were given simultaneously. After eliminating third quarter refunding, school district, and other issues for which there was insufficient data, there remained eighty-two general obligation bond issues, twenty-four revenue bond issues, and eighteen special assessment bond issues. The twenty- four revenue bond issues and the eighty-two general obligation bond issues are estimated to constitute approximately 10 per cent of the total number of 11Data were taken from The Bond Buyer, Monthly Sales Supplement of August, September, and October, 1955. Data are given in Appendix IV. 2Average maturity is used in this study as a measure of the length of time a bond issue is scheduled to remain outstanding. Average maturity is the ratio of total number of bond years to the number of bonds issued. 219 non-school obligations issued throughout the United States during the third quarter of 1955.13 Seventy of the eighty-two general obligation bond issues are obligations of a city. The remaining issues were divided between counties and special dis- tricts with eight being obligations of the former and four being obligations of Special districts. Half of the eighty-two general obligation issues were for the purpose of financing water and/or sewer projects, twenty-five for financing street improvements, and five for financing hospitals. The proceeds of the remaining issues were for financing miscellaneous pro- jects such as park equipment, swimming pools, and fire stations. It was not possible to determine whether the general obligation bond issues were secured by a limited or unlimited tax rate.u‘L Of the twenty-four third quarter revenue bond issues, all but four are obligations of cities. The 13The available data is not sufficient to esti- mate the proportion of the total special assessment issues comprised by the eighteen special assessment issues. Indeed, the limitations of the data make the revenue bond and general obligation bond estimates very approximate. luA limited tax issue refers to those bond issues that represent ”full faith and credit" of the issuing unit but pledging only revenues from a limited tax rate. An unlimited tax issue is secured by the taxing power of the issuing unit regardless of the rate that may have to be levied to raise the revenue required for the retirement of the outstanding bonds. 220 remaining four were obligations of ad hoc districts--two water districts, one bridge authority, and one turnpike authority. The proceeds of eighteen of the twenty-four revenue bond issues were for the purpose of financing utility systems, thirteen of which were water and/or sewer systems. Of the remaining six, half were issued to finance parking systems, one to finance a toll bridge, one to finance a turnpike, and one unknown. These revenue bond issues were obligations of governmental units in sixteen different states. Four states--Florida, Iowa, Michigan, and Virginia--each had three issues. All of the special assessment bonds were obliga- tions of municipalities. Nine were issued to finance street improvements, eight to finance sewer systems, and one to finance a community building. Of the eighteen special assessment bond issues, fourteen were issued in Ohio and the other four in Michigan. Interest rates on municipal bond sales in the United States consummated during the fourth quarter of 1956 were also analyzed.15 This time period was extremely atypical in that municipal interest rates reached a post—war high resulting in many issues being withdrawn from the market. For analvzinv the effect of u D 15Data for the fourth quarter of 1956 was taken from the files of the Investment Bankers Association, Washington, D. C. 221 various factors on interest rates during a "tight" money market, the fourth quarter of 1956 was a most appro- priate time. Pertinent data was available for forty-four revenue bond issues and sixty general obligation bond issues; of the latter group twenty-nine were limited tax issues, and thirty-one were unlimited tax issues. There were only two sales of special assessment issues during this period--too few to yield any useful results. Of the forty-four revenue bonds issued during the fourth quarter eight were obligations of governmen- tal units located in Texas. Florida, Illinois, Indiana, Iowa, and Ohio issues numbered from three to five each. Governmental units in ten other states were the issuers of at least one issue. Thirty-seven of the forty-four revenue bond issues were obligations of cities and five were obligations of ad hoc districts. The issuer of the remaining two issues was not determinable. All of the bonds were issued to finance utility systems-- thirty-four for water and/or sewer and the other ten for electric systems. About half of the twenty-nine limited general obligation bonds were issued by school districts, ten by municipalities, and four by special districts. The pur- pose of the remaining issues could not be determined. Approximately half of the twenty-nine limited general 222 obligation bonds were issued to finance primary and secondary educational buildings. The proceeds of seven issues were for the purpose of financing roads, five for the purpose of financing sewer systems, and one for the purpose of financing a water system. Fifteen issues were obligations of school districts; twelve were issued by municipalities; and two are county issues. Geograph- ically, the issuers of the limited general obligation bonds were concentrated in the three states of Michigan, Ohio, and Pennsylvania. These three states accounted for twenty-seven of the twenty-nine issues with the gov- ernmental units of Texas and Louisiana each issuing one. Of the thirty-one unlimited general obligation bond issues, seven were the obligations of governmental units located in California; four were the_obligations of governmental units located in Minnesota; three were the obligations of governmental units located in Ohio; and the remaining seventeen were.issued by governmental units geographically diapersed throughout the United States. Of the thirty-one, fifteen were issued to finance education, ten to finance water and/or sewer systems, two to finance roads, and four to finance other types of improvements. The proceeds of the unlimited general obligation bonds were used to finance education, sewer systems, 223 water systems, and roads. Fifteen of the issues were obligations of school districts, ten were obligations of cities, four were obligations of counties, and two were obligations of special districts. Interest rate data for both the third quarter of 1955 and the fourth quarter of 1956 which are analyzed in this chapter are not entirely representative with respect to geographical location, purpose of issue, or type of issuer. The shortcomings of the data are most noticeable with respect to the lack of state issued obligations; the absence of revenue bonds issued to finance college and university dormitories; and the geo- graphic concentration of issues in the Midwest and, to a lesser extent, in the South. These limitations of the data should not significantly affect the comparisons of net interest rates for the various types of public credit instruments. It is recognized, however, that any atypical aspect of an issue may also affect its net interest rate. The limitations of these data arise primarily because of the nonrandomness of the issues selected. As a practical matter, data pertaining to net interest rates on past, present, and future issues can never be selected at random. This limitation is inherent with data which is available over a period of time. 221; Generalizations to other than the data analyzed in this chapter should, therefore, be made with caution.16 Multiple correlation analysis is applied to these data to facilitate the comparison of the magnitude of net interest rates applicable to the various types of municipal obligations. A determination of the effect of the quantitative factors--size of issue and average length of time to maturity--on the net interest rates of the various types of credit instruments permits more precise comparisons. Multiple correlation analysis allows a comparison of the average net interest rates effective on the various types of credit instruments with size and average maturity length held constant. Multiple correlation analysis is employed to measure the relationship between the net interest rate (dependent variable) and the dollar size of bond issues (independent variable) and between the net interest rate and the average length of time to maturity of bond issues (independent variable). The functional rela- tionship existing between either of the independent variables and the net interest rate is not readily 16The measures of reliability presented in Appendix IV are based on the assumption of randomly selected variables, which is unrealistic in the case of these data. For this reason, caution should be exer- cised in the strict application of probabilities that are normally associated with the measures of reliability presented in the Appendix. 225 discernible. The true relationship is masked because of the correlation existing between the two independent variables. Experimentation with the data indicates that a linear relationship exists between the net interest rate and average length of time to maturity. In particular, a curvilinear relationship as depicted by the square root of average length of time to maturity fails to account for as much variation in interest rates as a linear relationship. The relationship between the net interest rate and the dollar size of issue appears to be negative but at a declining rate. In order to facilitate the measurement of this curvilinear relationship, therefore, the dollar size of issue is converted to common loga- rithms. As previouSly discussed, there are many non- quantitative factors in addition to size of issue and length of time to maturity which affect municipal interest rates. The averaging process can be expected to cancel, at least partially, these non-quantitative factors.17 For example, individual issues within each category may be issued by governmental units with either an impressive or unimpressive past payment record. It 17In a subsequent section of this chapter revenue bond and general obligation bond interest rates are analyzed with some non-quantitative factors con- trolled. 226 does not seem reasonable, however, that the degree of favorableness of the past payment record of a political unit would be closely associated with the type of credit instrument utilized. Thus as long as a particular attribute which may affect the magnitude of the net interest rate of an issue is not uniquely associated with a particular type of credit instrument, the aver- aging process may be expected to yield more reliable comparisons. Prior to the application of multiple correlation analysis to these data the net interest rate applicable to each issue is expressed as a ratio of Moody's weekly 18 Aaa municipal bond index of the week immediately pre- ceding the date of the sale. For example, an issue sold on September 19, 1955, at a net interest rate of 3.h38. 18 The Aaa rating by Moody's Investors Service refers to the degree of financial risk that is asso- ciated with a municipal issue. This rating is assigned to bonds which are considered to be of the highest quality. The general obligation Aaa index is an average of five of these tax-exempt securities. The components of the average are reviewed and changed periodically if an oversupply or other factors are evident which would not truly reflect the Aaa rating. The yields are adjusted to a twenty-year maturity basis. The compo- nents used as of the fourth quarter of 1956 are: Connecticut - 20 year maturity and 2% coupon Maryland - 15 year maturity and 2% coupon Illinois — 16 year maturity and l 3/hfi coupon New York State - 25 year maturity and 2 l/2fi coupon Cincinnati School , District, Ohio - 2h year maturity and 2% coupon 227 hoody's Aaa index for the week ending September 17, 1955, was 2.32.19 The resulting ratio of the net interest rate to Moody's Aaa index is l.h8 which is the value utilized to represent this particular issue. All other issues are treated in a similar manner. Moody's Aaa municipal bond index was selected as being the best available index of a "pure" or "riskless" interest rate that prevails in the fully tax-exempt market.2O Adjusting the net interest rate applicable to any particular issue by dividing it by Moody's Aaa index for the corresponding date should provide a measurement free of certain money market factors. These market forces which the index attempts to remove apply gen- erally to the whole tax-exempt market rather than a particular issue. These money market factors include such things as the supply and demand of tax-exempt securities, federal income tax structures, anticipated changes in federal reserve monetary policies, expecta- tions regarding changes in federal income tax structure, 19Prior week indexes of Moody's Aaa municipal issues were used rather than the next following weekly index because of the practice among underwriters of using existing yield indexes as a basis in arriving at bids. 20Yields on treasury issues may more nearly represent a "pure" or "riskless" interest rate although an index of treasury issue yields is less useful in this study because the interest derived from these issues is subject to the federal income tax. 228 and the many disturbances caused by political crises. In other words, the adjustment should remove, admittedly somewhat imperfectly, certain market variations which apply to all municipal securities irrespective of the merits of a particular issue. The resulting ratio of effective interest rate to Moody's Aaa bond index should provide a more meaningful comparison from one time period to another. Findings Usinnghird Quarter 1955 Data TABLE 11 AlmflAGES OF VARIABLES Third Quarter 1955 Type of Bond Issue N X1 X2 X3 General Obligation 82 1.12 150 96 Revenue 2h 1.uc h55 197 Special Assessment 18 1.28 56 75 N = Number of bond sales in each group. K = Arithmetic mean of the ratio of net interest rate to Moody's Aaa municipal bond index. X' = Arithmetic mean of the size of issue, in thousands of dollars. X3 = Arithmetic mean of the average number of months to maturity. 229 Table 11 shows the difference among the averages (arithmetic means) of the three variables for the three types of bond issues. This table shows that revenue bonds are sold to yield a higher interest rate than the other two categories. Revenue bond issues are also for larger amounts and mature over a longer period of time. A more revealing comparison can be made by adjusting the net interest rate (X1) for dollar size of issue (X2) and average number of months to maturity (X3).21 This is accomplished by adjusting he three types of issues to twelve years as a typical length of time to maturity and $250,000 as a typical size of a bond issue. The resulting adjusted net interest rates and the adjusting coefficients are shown in Table 12. The net regression coefficients in Table 12 denote the relationship between the dependent variable (net interest rate) and the independent variables (size and maturity period). These regression coefficients are used to adjust the net interest rate figures to the same size and average maturity. In the case of revenue bonds, the effect of the dollar size of issue is more than counterbalanced by the effect of length of time to maturity, thereby reducing 21In this section and the section following, the ratio of the net interest rate to Moody's Aaa municipal bond index is referred to simply as the "net interest rate" or symbolically, X1. 230 the adjusted net interest rate from 1.h6 as shown in Table 11 to 1.38 as shown in Table 12. The effective interest rate of the other two groups is increased after TABLE 12 ADJUSTED NET IETLREST RATES AND ADJUSTING COEFFICIEATsa Third Quarter 1955 Adjusted . Type of Bond Issue N X1 b12.3 bl3.2 General Obligation 82 1.23 -.17 .003 Revenue 2h 1.38 -.32 .003 Special Assessment 18 1.51 -.07 .00h N = Number of bond sales in each group. Adjusted.ii = Average net interest rate adjusted to dollar size issue of 8250,000 and to average maturity of 12 years. b12 = Net regression coefficient which indi- cates the effect of size of issue (X2) on net interest rate (X1) with average length of time to maturity (X3) held constant. bl = Het regression coefficient which indi- cates the gfgect of average length of time (in months) to maturity (X ) on net interest rate (X1) with size of issue (X2) held constant. aFor example, in the case of general obligation bonds an increase in size of issue from Q10,000 to #100,000, which would be an increase of one logarithm, is assumed to decrease the effective interest rate by .17 per cent; and an increase of one month in average time to maturity is assumed to increase effective interest rate by .003 basis points. t 231 adjustment because the average leng h of time to maturity, which varies directly with the net interest rate, outweighs the average dollar size of issue, which varies inversely with the net interest rate. Adjusting the average net interest rate for maturity length and size of issue as indicated in Table 12 reveals that general obligation bonds were sold at the highest price (lowest interest rate) followed by revenue bonds and special assessment bonds in that order.22 The difference in the net interest rate of general obligation bonds and revenue bonds, then, is not as great as originally shown in Table 11. Before adjusting the different types of bond issues for length of maturity and size, special assessment bonds appear to yield a lower net interest rate than revenue bonds. Whenever length of maturity and size of issue are taken into consideration, however, special assessment bonds yield a higher net interest rate than do either revenue bonds or general obligation bonds. Table 13 portrays the relative net interest rate assuming that size and length of time to maturity affect all types of issues in the same manner. This is 22Adjustments in Table 12 assume that the regression coefficients calculated for each type of public credit instrument correctly portrays the true underlying relationship that exists between the inde- pendent variables and the dependent variable. 232 TABLE 13 AVERAGE INTEREST COST ADJUSTED TO EQUAL SIZE (@250,000) AND EQUAL LENGTI OF TIME TO MATURITY (12 YEARS) Third Quarter 1955 -Admgggd Type of Bond Issue X1 General Obligation 1.23 Revenue 1.35 Special Assessment 1.38 Adjusted X1 = Average net interest rate adjusted to dollar size issue of @250,000 and to average maturity of 12 years, using constant coefficients (b12.g = -.17 and bl3 = .003) for all three groups in accordance with values applicable to general obligation bonds. accomplished by adjusting the net interest rate of each type of bond issues by an equal b12.3 and b13.2 factor of -.17 and .003, respectively, the values computed for 23 general obligation bonds. 23These estimates of the regression coefficients in Table 13 and in other instances throughout this chap- ter are used as an indication of the typical effect of the independent variables upon the dependent variable. There is some evidence that these are the best estimates of the true underlying relationship that exists between these variables. The magnitude of the net regression coefficient indicating the effect of average length of time to maturity on net interest rate (bl3.2) is fairly consistent for the three categories. There exists no such consistence among the three categories with respect to the effect of size. The magnitude of the net regres- sion coefficient relating size of issue to the net interest rate (b12.3) pertaining to general obligation 233 The average net interest rate on Special assess- ment bonds, according to Table 13, is now higher than the average net interest rate on the other two categories. If the adjusting factors which are used in these calcu- lations are reliable, the apparent difference in the net interest rate on general obligation bonds and revenue bonds is not nearly as great as first appearances indi- cate. A comparison of the dispersion in the net interest rates that exists among the three categories is shown in Table 14. The special assessment bonds vary more on the average than the general obligation bonds, even though geographical area is somewhat less restricted. The larger amount of diSpersion present in revenue bond interest rates reflects the greater amount of variation that exists in the risk associated with revenue bond obligations as well as variation due to the greater range in size and length of time to maturity. Table 15 shows the proportion of the total var- iation in net interest rates that is explained by size and length of time to maturity. Only in the case of special assessment bonds is the amount of variation bonds is intermediate in size between the b12.3 values for revenue bonds and special assessment bonds. General obligation bond regression coefficients are also based upon a greater number of issues. The net regression coefficients for general obligation bonds tend to be more reliable. See measures of reliability in Appendix IV. 23h TABLE 1A VARIATION IN NET INTEREST RATES Third Quarter 1955 Type of Bond Issue N Variancea General Obligation 82 .051 Revenue 24 .092 Special Assessment 18 .068 N = Number of issues in each group. aVariance is a statistical term that is used to measure the scatter of the data about the arithmetic mean. The larger the variance the smaller the uni- formity in net interest rates within a given category and vice versa. Variance is the square of the standard deViatiOno TABLE 15 COEFFICIENTS OF MULTIPLE DETERMINATION Third Quarter 1955 2 Type of Bond Issue N 121.23 General Obligation 82 .u3 Revenue 2h .ub .Special Assessment 18 .21 N = Number of issues in each group. RE 2 = Coefficient of multiple determination which denotes the proportion of the total variation in the net interest rates that is accounted for by size and length of time to maturity. 235 accounted for by size and maturity relatively insig- nificant. The other two groups show a high degree of consistency. In each of these groups, size and length of time to maturity account for almost half of the variation present in net interest rates in the case of issues analyzed in this study. Table 16 tends to establish that the relation- ship between interest rate and size of issue is not as great as the relationship between interest rate and TABLE 16 RELATIVE IMPORTANCE OF SIZE OF ISSUE AND AVEdAGE LENGTH OF TIME TO MATUHITY ON THE NET INTEREST RATE Third Quarter 1955 2 2 Type of Bond Issue d12.3 d13.2 Bg B3 I'l2.3 r13.2 General Obligation .07 .36 -.M3 .69 . -.h6 .65 Revenue .11 .35 -.70 .86 -.60 .67 Special Assessment .03 .18 -.12 .M1 -.13 .A1 d52.3 and d§3.2 = Coefficients of separate determination, which are the proportion of the total variation that is explained by the dependent variables, X2 and X3, respectively. B2 and B = Beta coefficients, which are the regression coefficients transposed to standard, compar- able units 0 r12,3 and r13.2 = Partial or net correlation coefficients, which are the relative counterparts of the net regression coefficients. 236 the length of time to maturity. It is significant that the maturity length is more closely related to the net interest rate than is the size of issue in every instance. Findings Usinngourth Quarter 1956 Data The relative high interest rates prevailing during the fourth quarter of 1956 apparently lessened the effect of size and length of time to maturity on net interest rates as is shown in Table 17. The proportion of the total variation in the net interest rates that is explained by size and maturity was smaller in all three groups of the fourth quarter of 1956 than for any of the third quarter of 1955 groups with the exception of Special assessment bonds. A possible explanation of why the fourth quarter of 1956 data produced different magnitudes of relation- ships than were computed for the third quarter of 1955 lies in the "tight" money market. Whenever interest rates are at a high level, the supplier of loanable funds does not incur the same risks associated with the uncertainty of the money market as are incurred during a period characterized by a low level of interest rates. If interest rates are at a high level when bonds are purchased the investor feels more confident that such an investment will yield as much, if not more, than could 237 be obtained by waiting to make the investment at some future time. Thus the purchaser of municipal bonds during a period of low bond prices (high interest rates) TABLE 17 VARIANCES, REGWESSION COEFFICIENTS, AND COEFFICIENTS OF MULTIPLE DETERMINATION Fourth Quarter 1956 Type of Bond Issue N Variance bl2.3 b13.2 R§.23 Revenue AA .031 -.11 .001 .23 Limited General Obligation 29 .037 -.08 .001 .07 Unlimited General Obligation 31 .021 -.10 .001 .lh N = Number of issues in each group. Variance is a statistical term that is used to measure the scatter of the data about the arithmetic mean. The larger the variance the smaller the uni- formity and vice versa. Variance is the square of the standard deviation. bl2.3 = Net regression coefficient which indi- cates that the effect of size of issue (X2) on net interest rate (X1) with average length of time to maturity (X3) held constant. b13.2 = Net regression coefficient which indi- cates the effect of average length of time to maturity (X ) on net interest rate (X1) with size of issue (X2) he d constant. RE 2 = Coefficient of multiple determination which denote; the proportion of the total variation in the net interest rates that is accounted for by size and length of time to maturity. 238 does not include in his bid price an amount to cover the risks associated with a possible rise in future interest rates because interest rates are already at a high level. Bidders would be most conscious of the length of time to maturity during a period of low interest rates in order to have some hedge against the possibility of an increase in interest rates on future issues. Another explanation for the reduced strength of the relationships in the fourth quarter of 1956 as com- pared with the third quarter of 1955 may lie in the withdrawal from the market of issues that were unaccept- able to the issuer. The issuer may be primarily con- cerned with the absolute magnitude of the net interest rate as the measure of an acceptable bid. If the bid seems relatively high or "costly," the issuer may with- draw the issue without giving consideration to such factors as the length of time to maturity. This eXpla- nation seems plausible in view of the larger average size of issue for the fourth quarter of 1956 as shown in Table 17 compared with the third quarter of 1955 as shown in Table 11. The size of revenue bond issues, for example, averaged better than §750,000 in the fourth quarter of 1956 compared with approximately hh50,000 in the third quarter of 1955. This larger average size of issue in the fourth quarter of 1956 is not accompanied 239 by a longer length of maturity that is normally asso- ciated with larger size of issues. The greater uniformity in net interest rates of the fourth quarter of 1956 as reflected in the size of the variances shown in Table 17 compared with variances of the third quarter of 1955 shown in Table lu also indicates a selection of issues, perhaps by a combina- tion of bidders choosing the better quality bonds and issuers rejecting the higher bids. TABLE 18 AVERAGES OF VARIABLES Fourth Quarter 1956 Type of Bond Issue N fl X2 is Revenue uh l.hh 759 187 Limited General Obligation 29 1.26 202 96 Unlimited General Obligation 31 1.35 193 137 N = Number of issues in each group. E1 = Arithmetic mean of the ratio of net interest rate to Moody's Aaa municipal bond index. K2 = Arithmetic mean of the size of issue, in thousands of dollars. X = Arithmetic mean of the average number of months to maturity. _; 2&0 Table 18 shows the averages of the net interest rate, the size of issues in thousands of dollars, and the average maturity periods for the fourth quarter 1956 data. Revenue bonds again exhibit a higher average net interest rate as well as a much larger average dollar size and length of maturity. Contrary to expectations, the average net interest rate on limited general obliga- tion bonds is lower than the average net interest rate applicable to unlimited general obligation bonds. Table 19 shows the difference in the average net interest rate for the fourth quarter 1956 data after all three groups have been adjusted to a size of $250,000 and a length of maturity of twelve years, and assuming the same relationships between the net interest rates and the independent variables of size and maturity as TABLE 19 UNADJUSTED AND ADJUSTED NET INTEREST RATES Fourth Quarter 1956 Type of Unadjusted Average Adjusted Average Bond Issue Interest Rate Interest Rate Revenue l.uu 1.39 Limited General Obligation 1.26 1.37 Unlimited General Obligation 1.35 1.35 2111 computed for third quarter 1955 general obligation bonds. After adjusting with these coefficients, revenue bonds demanded the highest interest rate and unlimited general obligation bonds were marketed at the lowest interest rate. Limited general obligation bonds, which appeared as the most favorable type of credit instrument before adjustment, are intermediate in magnitude after adjust- ing for size and length of maturity. A comparison of the net interest rate applicable to revenue bonds in the third quarter of 1955 and the fourth quarter of 1956 is shown in Table 20. These results reveal that a higher net interest rate prevailed in the "tight" money period after adjustment for size and length of maturity. TABLE 20 COMPARISON OF NET IATEREST RATES ON REVENUE BONDS BEFORE AND AFTER ADJUSTMENT FOR DOLLAR SIZE ARD AVERAGE LENGTH OF TIME TO MATURITY Third Quarter 1955 and Fourth Quarter 1956 Unadjusted Average Adjusted Average Time Period Net Interest Rate Net Interest Ratea Third Quarter 1955 l.u6 1.35 Fourth Quarter 1956 l.uh 1.39 aAdjusted average net interest rate computed by applying b12.3 and b13.2 regression coefficients of -.17 and .003, respectively. 21;,2 Summarizing the findings pertaining to the effect of size and average length of maturity, it is concluded that the evidence is overwhelming that munic- ipal bond interest rates are affected positively by a lengthening of time to maturity and negatively by the size of issue. It is significant that the multiple correlation analysis revealed similar relationships to exist between size of issue and the net interest rate and between average length of time to maturity and the net interest rate for every group of bond issues in both the third quarter 1955 and fourth quarter 1956. Although it is not possible to state precisely the magnitude of the relationships, the positive relation- ship found to exist between interest rates and length of time to maturity and the negative relationship found to exist between interest rates and size of issue has been substantiated. Charts 9 and 10 portray these rela— tionships although perhaps not the precise magnitudes that may exist in all time periods. Comparison of Interest Rates with Some External Factors Controlled Another means of comparing the net interest rate on.general obligation bonds and revenue bonds is by eliminating the effects of the time of sale and the issuing governmental unit by selecting instances of bond sales consummated on the same day by the same governmental 2&3 CBflT9 RELATIONSHIP OF NE” INTEREST RATE TO THE SIZE OF ISSUE Third Quarter 1955 X1 = Net Interest Ratea 1.2 - 1.1 "’ 1.0 P 09" or, 1 1411111. L l lllLlll 10 so 100 500 ' X2 = Amount of Issue in Thousands of Dollars aNet interest rate, as the term is used here, is the ratio of the actual net interest rate to Moody's Aaa municipal bond index. 2th CHART 10 RELATIONSHIP OF NET INTEREST RATE TO AVERAGE LENGTH OF YEARS TO MATURITY Third Quarter 1955 X1 = Net Interest Ratea 1.6— 1.2“ 1.1 L... 0 CW] 1 L I l l l l l l 1 3 u 5 6 7 8 9 10 11 12 13 X3 = Average Maturity Years aNet interest rate, as the term is used here, is the ratio of the actual net interest rate to Moody's Aaa municipal bond index. 2&5 unit. In addition, each pair of issues for which perti- nent data are listed in Table 21 was appraised by the same law firm. The first comparison in Table 21 consists of a revenue bond issue and a general obligation bond issue of the City of Monahans, Texas. Monahans issued a revenue bond issue in the amount of $350,000 with an average length of maturity of fourteen years and a general obligation bond issue in the amount of $50,000 with an average length of maturity of seven years. In this case the revenue bond issue was sold at net interest rate of 3.869, and the general obligation bond issue was sold at a net interest rate of 3.105. Adjust- ing the interest rates for size and length of maturity according to estimates derived from thflxiquarter 1955 data results in a lessening of the -apparent difference in the net interest rate to approximately one—half of its original magnitude.2u After adjustment for size and average length of time to maturity, the net interest 2”Throughout this section adjustments of the net interest rate for the quantitative variables of size of issue and maturity length assume the basic underlying relationship between these variables and the net interest rate as was indicated to exist in the case of third quarter 1955 general obligation bonds. If this assumption does not hold for the issues analyzed in this section, then the analysis presented here would be altered, but not significantly, unless the effect of size and maturity length is considerably different from the magnitudes used in this analysis. 2A6 TABLE 21 TEXAS MUNICIPALITIES SELLING TWO SEPARATE BOND ISSUES ON THE SAAB DATE 19563 Type Net Average of b Interest Moody's Maturity City Bond Rate Rating Size Years 3.3. 3.869 -- w 350,000 in Monahans G.O. 3.105 -- 50,000 7 R.B. 3.228 Baa S 750,000 8 Odessa G.O. 3.107 A 150,000 9 R.B. 2.515 Aa pl,250,000 11 Austin 0.0. 2.659 A 320,000 11 3.3. 3.555 -- R 350,000 18 Grand Prairie 0.0. 3.u95 Baa 250,000 19 Pampa G.O. 3.135 A 1,000,000 13 R.B. 3.9u2 -- S 500,000 10 Brownsfield R.B. 3.977 -- 270,000 11 aSources: Texas Bond Reporter, various 1956 weekly issues (published by Municipal Advisory Council of Texas, Austin, Texas); Moody's Bond Record (April 5, 1957). bR.B. denotes revenue bond issues and G.O. denotes general obligation bond issues. 2M7 rate on the revenue bonds issued by Monahans, Texas, is still greater than the net interest rate on its general obligation bonds. Another case similar to the issues of Monahans is the pair of issues of the City of Odessa, Texas. The revenue bond issue in the amount of S750,000 with an average length of maturity of eight years has a Baa Moody rating and sold at a net interest rate of 3.228. The general obligation bond issue in the amount of $150,000 with an average length of maturity of nine years has an A Moody rating and sold at a net interest rate of 3.107. The difference in net interest rate is again lessened after being adjusted for size and maturity although the interest rate on the revenue bond issue remains preceptibly higher than the interest rate on the general obligation bond issue. Austin, Texas, sold a general obligation bond issue in the amount of S320,000 at a net interest rate of 2.659 and a revenue bond issue in the amount of $1,250,000 at a net interest rate of 2.515. Both issues had an average maturity period of eleven years. In this case after adjusting for size of issue, the interest rate on general obligation bonds is approximately the same as in the case of the revenue bonds. This instance is the first evidence of a lower interest rate for a revenue bond issue either before or after adjustment for 2118 size and length of time to maturity. It is reasonable to assume that the lower interest rate on these revenue bonds issued by Austin, Texas, is explained by the better quality of this issue as indicated by the Aa Moody rating. Grand Prairie, Texas, sold both a general obli- gation bond issue and a revenue bond issue with only a slight difference in the net interest rate applicable to the two issues. The higher interest on the revenue bond issue conforms with previous findings. In this instance the slightly greater average maturity of the general obligation bond issue is compensated by the slightly larger size of the revenue bond issue. The Pampa, Texas, pair of issues is similar to the previous comparison. A portion of the difference in net interest rates of these two issues may be attributed to the small one-year difference intheunmaturity period. The siZGSof the two Pampa issues are practically equal. These data again indicate a higher net interest rate on the revenue bond issue. The data concerning the Brownsfield, Texas, issues is a comparison between two issues of revenue bonds. This comparison reveals a small difference in the net interest rates which may be explained by the difference in size and average length of time to maturity. Of course, some of the interest rate differential may be 249 attributable to "coverage" or other factors which may affect interest rates as discussed at the beginning of this chapter. Summary and Conclusions There is every indication that, on the average, he net interest rate on revenue bond issues is somewhat higher than the net interest rate on general obligation bond issues. The advantage of general obligation bond issues, however, is not as great as first appearances . may indicate. Adjusting the net interest rates for the negative effect of size and the positive effect of length of maturity tends to reduce the differential that exists in the interest rates of the original data. These same adjustments applied to special assessment bond issues resulted in a higher net interest rate than for either general obligation bond issues or revenue bond issues. The analysis of the default record of revenue bond issues in the previous chapter of this study as well as a comparison of the ratings of revenue bonds with general obligation bonds25 suggests that the 25Moody's Bond Record of April 5, 1957, listed fifty-eight governmental units with a single rating on both general obligation bond issues and revenue bond issues. Of these fifty-eight units, fifty-two had identical ratings on both types of issues, five units were given a rating immediately superior on general obligation bond issues, and one unit was given a rating two "notches" higher on its revenue bond issues. 250 differential in the net interest rate on these two types of public credit instruments may be at least partially attributable to the legal restrictions that discriminate against revenue bonds in primary and secondary markets.2b 9 . . o o 'i 1 ‘éLegal restrictions pertaining to the under- writing and investing of funds in revenue bonds are discussed in Chapter III. CHAPTER VI ECONOMIC ASPECTS In the previous chapter of this study it was shown that revenue bonds are typically a more expensive means of borrowing money as compared with general obli- gation bonds. In order to justify the use of revenue bonds as a means of providing immediate funds, as dis-. tinguished from revenues that must ultimately be raised in liquidating the debt thus created, there must exist counterbalancing advantages of this type of credit instrument. This chapter is concerned with an evalua- tion of the advantages of financing government projects by the issuance of revenue bonds as compared with other types of public credit instruments.1 This study is not concerned with the circumstances which justify govern- ment borrowing rather than a pay-as-you-go policy since the criteria for making such a determination are not peculiar to the type of credit instrument employed. Pricing Policies Revenue bond financing demands that charges for goods and/or services produced by the financed enterprise 1The analysis in this chapter, unless otherwise stated, refers to true revenue bonds as the term is defined in Chapter I. 251 252 be priced at a level sufficient to pay all costs including debt service.2 General obligation bond financing, on the other hand, permits charging or cover- ing costs by taxation. The minimum price striven for in the case of commercial products emanating from revenue bond financed enterprises is the average cost of produc- tion.3 It is a minimum price striven for because there are usually provisions in the revenue bond contract for reserve funds as an added safety measure for the bond- holder. Of course, demand conditions may, in rare instances, prohibit average cost pricing, and thus default occurs. 2The term "costs" is used here to include all contractual payments to factor owners. In addition to debt service payments, it includes administrative, operational, and.maintenance costs. A revenue bond financed enterprise does not involve implicit costs since all money capital is borrowed. To the extent that principal payments are greater than depreciation actually incurred, contractual payments would be greater than the actual costs incurred by the enterprise. A revenue bond financed enterprise would not, in most circumstances, be amortized over a longer period of time than its actual life. 3The enterprise might possibly be able to charge different prices to various buyers. Revenue bond financed enterprises do charge different prices such as the higher charges for trucks than for passenger cars on toll highways. The nature of the products emanating from revenue bond financed enterprises, how- ever, make segregation of the market difficult. In any case, the minimum price (the weighted average of all prices) strived for must equal the average cost of operating the enterprise. 253 It is evident, then, that the price charged to the purchaser of gOOQS and/or services emanating from a revenue bond financed enterprise shall be at least equal to average cost.14 Thus revenue bond financing forces average cost pricing of government produced goods and/or services emanating from the revenue bond financed enter— prise. Justification for the deficit financing of a particular project by revenue bonds, then, must at the same time justify the charging of a minimum price equal to average cost. If marginal cost pricing produces a more desirable distribution of goods and services than averare costs at the point of intersection of the mar- K-) ginal cost and average revenue curves, then revenue U 5 bond financing produces undesirable pricing policies. If the costs of a revenue bond financed enterprise are such that the intersection of the marginal cost and uIn fact the revenue bond covenant usually Specifies that prices shall be set at levels to produce revenue sufficient to meet all expenses including debt service. To the extent that a revenue bond financed project is amortized over a shorter period of time than the actual life of the project, the price charged would necessarily be above average cost. 5The argument for marginal cost pricing-~a price which equates the marginal cost of production with demand--is based upon the theory that optimum utiliza- tion of resources occurs only when the cost of produc- tion of an additional unit is equal to price. The production of any smaller quantity, according to the argument, is not desirable since the production of additional units adds less real cost to the economy than the price charged. 25h average revenue curves occurs above the average cost curve then the pricing policies followed by a revenue bond financed enterprise are not necessarily in conflict with.marginal cost pricing as advocated by some econo- mists.6 In all probability, however, the point of inter- section of the marginal cost and average revenue curves would occur below the average cost curve in the case of revenue bond financed projects. Revenue bond financed projects typically are concerns with relatively high fixed costs as compared with total costs. Variable 6The general controversy regarding the merits of marginal cost versus average cost pricing is merely touched on here as a detailed discussion is beyond the scope of this study. A complete discussion of all eco- nomic aspects of this subject would be a study in itself. Here it is sufficient to point out the contro- versial nature of the average cost-marginal cost pricing argument. If the arguments favoring marginal cost pric- ing were complete, then revenue bond financing could not ordinarily result in the most desirable distribution of the products emanating from commercial type public enterprises. See Robert W. Harbeson, "A Critique of Marginal Cost Pricing," Land Economics, XXXI (February, 1955), pp. Sh-7u and "Marginal-Cost Versus Full-Cost Pricing by Governmental Business Enterprises," Proceed- ings of the Forty-Eighth Annual Conference on Taxation, ed. Ronald B. Welch (Sacramento, California: National Tax Association, 1956), pp. 157-67; I. M. D. Little, A Critique of Welfare Economicg (Oxford: Oxford Univer- sity Press, 1950), Chapter XI; J. E. Meade, "Price and Output Policy of State Enterprises," Economic Journal, LIV (December, 19hh), pp. 321-28; N. Ruggles, flS'I‘he Wel- fare Basis of the Marginal Cost Pricing Principles," and "Recent Developments in the Theory of Marginal Cost Pricing," Review of Economic Studies, XVIII, Issues I and II (19h9-Sfifipp. 29-u6 and 107-26; William Vickrey, "Some Objections to Marginal Cost Pricing," Journal of Politigal Economy, LVI (June, l9h8), pp. 218-38 and "Some Implications of Marginal Cost Pricing for Public Utilities," Proceedings of the American Economic Asso- ciation, XLV—(May, 19557, p. 619. 255 costs are a relatively minor portion of such revenue bond financed projects as bridges, highways, the St. Lawrence Seaway, water, sewer, and electric systems, college dormitories, and airports. Thus it appears that if marginal cost pricing is pursued, a deficit would not only result, but would likely be predictable before the project is initiated, a situation that is not compatible with revenue bond financing. Marginal cost, according to the argument, is best because any higher price unnecessarily restricts demand and hence the total product would be reduced solely by reason of the price exceeding the cost of pro- ducing an additional unit. If there is no additional cost connected with the production of another unit of the good or service, total product is reduced if a price is charged, thereby restricting consumption. Marginal cost pricing is considered by many economists to be most appropriate in the setting of government prices for the commercial activities of government.7 Indeed, the argument for marginal cost pricing of the goods and/or services is strengthened by the absence of any significant amount of additional social costs accompanying such production. In fact, it would appear that there is a greater probability of 71b1d. 256 attending indirect social benefits. Certainly in the case of college and university dormitories there are additional social benefits attending government activity that fosters education. There are, however, several valid reasons that may justify average cost pricing of the products of revenue bond financed projects. Perhaps the most damaging argument against marginal cost pricing is the non-existence of marginal cost pricing in the private sector of the economy. Our economy consists largely of firms with high fixed costs in relation to total costs operating in markets characterized by some degree of monopolistic competition. Under these conditions mar- ginal cost pricing in the private sector of the economy will likely result in losses which the private entre- preneur will attempt to avoid if the demand schedule permits. Average cost then becomes the minimum long-run price in the private sector of the economy. Marginal cost pricing in the public sector and the higher average cost pricing in the private sector results in propor- tionately more resources being devoted to the public sector. This distribution of resouéces between the pri- vate and public sectors of the economy could be improved by transferring resources from the public sector to the private sector. If average cost pricing occurs in the 257 private sector, there is less justification for the lower marginal cost pricing in the public sector. The logic of marginal cost pricing is further made less justifiable to revenue bond financed projects because of the assumption that deficits incurred can be met by levying a tax that does not influence other resource allocation. It is, indeed, most unrealistic to assume that such a tax is either possible or desir- able. If it is not desired to alter the allocation of resources, there is no reason for the tax. In the case of a tax levy to finance a deficit incurred by a govern- ment enterprise, therefore, any reduction of the income or savings would result in reduced expenditures and fewer resources devoted to other enterprises. The rates that are charged for the products of a revenue bond financed enterprise are not usually subject to public regulation. The non-regulation of these public enterprises combined with the customary revenue bond covenant requiring the issuing governmental unit to refrain from the construction of competing facilities makes possible the charging of prices much higher than the average cost of production. The high prices charged for the products of a publicly owned revenue bond financed project, however, are recouped by the govern- mental unit. This tends to lessen the inequities 258 accompanying the exorbitant prices. Although the bene- ficiaries of these recouped charges may not be identical with those making the higher payments, the burden tends to be more equitably distributed than if the surplus charges had remained at the disposal of a private monop- olist. Effects Upon Resource Allocation The study of revenue bond financing points up the maladjustments that may result from the decisions of governments which may be insensitive to cost-price relationships. If society determines that it is desir- able for a government to perform certain functions which are not of a welfare nature, then a departure from the results that would likely be obtained in the free market may produce undesirable allocation of resources. This is vividly demonstrated in the transportation industry, an area involving a considerable amount of revenue bond financing. The eXperience with toll roads financed with revenue bonds indicates the extent to which the users of free roads are being subsidized by the taxpayer.8 Toll 8 Of course, any particular individual may be a "subsidized" motor vehicle user and at the same time be making other payments to government that are eventually spent to finance roads, etc. Such an individual would not be a subsidized motor vehicle user but such offset- ting payments would not often occur. 2S9 roads constructed in the most desirable locations are having financial difficulty meeting debt service require- ments. Of course, toll roads incur some costs not incurred by "free" roads9 and offer a more superior ser- vice than do most free roads; nevertheless, the location is selected such as to "skim the cream" from the traffic density areas and results in a most favorable construc- tion site pricewise. Even with these advantages, toll- highway enterprises do not always pay such costs as police patrol or make a contribution toward social costs that are incurred due to traffic fatalities. In the ten—year period from l9h5 to l95h the amount of property tax and miscellaneous tax revenues collected for highway and street purposes in the United States amounted to more than 25 per cent of the total revenues collected for such purposes.10 In this same period state highway-user imposts have never exceeded 60 per cent of the total revenues collected for highway and street purposes.ll Local streets and roads receive 9The most obvious costs incurred only in the case of a toll road are the costs associated with the collection of tolls. loWilfred Owen et al, Policies to Combat Depression, a report to the National Bureau of Economic Research published by Princeton University Press, 1956, pp. 261-63. 11More than 10 per cent of total revenues collected for highway and street purposes during the l9h5-l95h period were federal funds derived from undetermined sources. Less than h per cent of the revenues were derived from toll receipts. 260 an even greater proportion of finances derived from property and other general tax revenues.12 The extent of the difference between the amount of taxes collected by New York City from levies asso- ciated with motor vehicle ownership and use13 and the costs of traffic control, roadway, bridge, and tunnel construction and maintenance has been estimated at approximately $25,000,000 annually.lu The city of Baltimore, in 1955. is estimated to have incurred a deficit of pl,500,000 in connection with the excess of eXpenditures that were incurred in the providing automo- bile services and facilities compared with tax revenues derived from Baltimore's motor vehicle users.15 It is true that toll highways do not ordinarily receive any portion of the tax money that is paid by the motor vehicle user such as the excise tax on gaso- line and the property taxes that are levied on the motor 12Owen, op. cit. l3Includes city revenues derived from the motor vehicle use tax; parking meters authority tolls; sales and use taxes on automobiles, accessories, and fuel; and minor amounts received from the State in connection with the arterial highway program. l“Lyle C. Fitch, "Transportation Pricing in a Metropolitan Area," Proceedings of Forty-Eighth Annual Conference on Taxation, ed. Ronald B. Welch (Sacramento, California: National Tax Association, 1956), p. 171. 15E. L. Tennyson, "Taxation and Urban Transit: A Reply," Current Economic Comment (March, 1956), p. 62. 261 vehicle owner. These taxes paid by the passenger auto- mobile user, however, are not equivalent to the amount paid on toll roads which are typically equivalent to a gasoline tax of approximately twenty-eight cents per gallon.16 The subsidizing of the motor vehicle user results in more resources being devoted to the motor vehicle transportation area than would occur if the price system were used as a guide to allocate resources. Subsidizing the automobile user not only results in more resources devoted to streets and highways, but also to goods and services that complement these facilities.17 The greater the subsidy to this portion of the trans- portation industry the greater will be the divergence 16U.S., Congress, House, Progress and Feasibility of Toll Roads and Their Relation to the Federal-Aid Pro- gram, Bhth Congress, lst Session, 1955, House Document 139, p. 22. This document estimated a toll rate for passenger cars of 1.75 cents per vehicle-mile. This is based upon the assumption of a rate of interest, on term revenue bonds issued for a forty year period, of 3.5 per cent. Assuming that a passenger car consumes one gallon of gasoline for every 16 miles traveled, the toll charge of 1.75 cents per vehicle-mile is equivalent to an excise tax of twenty-eight cents per gallon of gasoline. 17It should be noted that the greater social benefit associated with the consumption of a commodity is not sufficient reason, as apparently adjudged by our society, for a government-furnished good or service. For example, automobiles and roads are almost perfect complements. Highways would be of little use without automobiles with which to utilize them. Automobiles yield as much social benefit, therefore, as do highways. The distinguishing feature is that the collecting of a price is technically more difficult in the case of roads than for automobiles. 262 of resources from substitutes such as transit systems and railroads.18 Perhaps the financial problems of some industries could more readily be solved by placing costs upon com- peting industries which benefit from government expendi- tures. The subsidies that are sometimes provided transit systems should not be necessary if other com- peting forms of transportation are bearing the full costs, including all social costs, associated with these competing transportation industries. Thus if motor vehicle users are bearing the full costs, including all social costs, associated with the use of automobiles, then transit companies ought to be allowed to exit from the transportation system. User Charges as a Basis of Raising Governmental Revenues The issuance of revenue bonds, like any other type of public credit instrument, is simply a means of deferring payment. Revenues must eventually be obtained in order to retire these obligations. Unlike other types of public credit instruments, revenue bonds do not 18Transit systems and railroads are used merely as an illustration. These methods of transportation may also be subsidized. If this is true, the method of transportation receiving the greatest relative subsidy would receive the greatest relative share of resources to the detriment of substitute industries and to the benefit of industries that complement the industry receiving the greatest relative amount of subsidy. 263 permit the issuing government alternatives in the raising of revenues to meet these obligations. The instant a revenue bond is issued, the method of payment is determined; namely, by user charges. An appraisal of revenue bonds as a mode of government finance, then, is concerned with the equitableness of user charges as com- pared with taxes. To a large extent, a proper decision regarding the issuance of revenue bonds or general obli- gation bonds turns on whether the enterprise should be financed by user charges or by taxation. A disadvantage of general taxation is the ina- bility to adjust the quantity of government activities in accordance with the individual's scale of preferences. Each individual has a different scale of preferences, and the scale of preferences of any particular individ- ual may differ considerably from the community average. Although indivisibilities make a perfect adjustment impossible, for all practical purposes, revenue bond financed enterprises produce products which permit the individual to purchase quantities of certain goods and/or services in accordance with his own scale of preferences. If society does not intend a governmental func- tion to be subsidized, user charges may be considered as producing the most desirable distribution of the govern- :ment "burden," just as prices produce the most desirable 2a. distribution of the private "burden." The determination of which goods and services, what quantities, what com- bination of resources, and which technical processes to utilize is determined in the operation of the free market much as resources are allocated in the private sector of the economy. It is not possible to set down any set of prin- ciples or tenets that are universally recognized as "best" with respect to the equitable distribution of government costs. Individuals have different views as to what constitutes an equitable distribution of govern- ment. The "fair" distribution of government costs is to a great extent a subjective matter; however, students of public finance have advanced several criteria to aid in the evaluation of the various means of raising govern- mental revenues. Benefits Received by the Purchaser One disadvantage of taxes in the allocation of the tax burden is the inability to measure benefits. This difficulty is avoided with user charges. The bene- fits bestowed on the purchaser of the products of a revenue bond financed enterprise are measurable, just as benefits are measured by prices in the private sector of the economy. Of course, the monopolistic nature of revenue bond financed enterprises may allow prices that 265 are higher than competitive prices although this may also occur in the private sector of the economy in which case the surplus profits accrue to the private monopo- list instead of going into the government till. Even monopoly prices subject the purchaser to no more abuse than may taxes which are levied to extract contributions by means of the coercive power of government. The products of revenue bond financed enter- prises may benefit others, but this occurs throughout the private sector of the economy. It is impossible to give consideration to all of the extra benefits emanat- ing to society simply by reason of government operation. Benefits to other than the users are given no considera- tion in the private operation of enterprises similar to those that are financed by the issuance of revenue bonds. Is it more important for a community with a publicly owned transit or electric system to subsidize the users than for a similarly situated community with a privately owned system? The products of revenue bond financed enter- prises are much more likely to benefit the user and to produce less benefits of a social nature. For example, a "free" highway usually increases property values in the surrounding area although a toll highway with its limited access does not usually confer such secondary 266 benefits. In fact, a toll road cutting across farm lands represents, to the farm owner, an undesirable barrier. It is possible to further isolate the benefits by raising or lowering the prices of products emanating from the revenue bond financed project. For example, benefits that may accrue to a property owner from.the construction of a revenue bond financed water system may be offset by proper pricing policies with respect to connection charges. This charge could surely be such as to cause the owner to pay in accordance with benefits received from the improvement. Benefit only results because of the possible use of that improvement. It is true that it would be difficult to establish a "fair" connection charge, but this difficulty is not lessened by levying a property tax in an attempt to avoid pos- sible inequities. How often, in the administration of property tax, does the assessor place a higher valuation on a vacant lot because of the addition of a water line adjacent to the property?19 19A hybrid of general obligation, special assess- ment, and revenue bonds has been devised by North Dakota municipalities in order to levy a charge for benefits flowing to property owners in addition to users of a commercial type enterprise. This unique financing plan is utilized in connection with the financing of water and sewer systems. Warrants are issued to provide the nec- essary funds to finance the facility. These warrants are payable from various sources. At the time of the 267 True revenue bond financing tends to benefit the future generation at the eXpense of the present genera- tion. Although the bond covenant of a revenue bond financed project may not require a reserve for deprecia- tion, as a matter of practice, the facility usually remains in good operating condition after the revenue bonds have been liquidated. This means that the next generation inherits a facility that is free of debt and capable of producing products that provide utility to the community. The future generation gains whether the products of this facility are distributed with or with- out a charge. As a practical matter, it would be almost issuance of the warrants, not more than one-fifth of the cost of improvement including interest may be paid from a tax on general property within the city. Revenues from the financed utility may be irrevocably pledged to the repayment of the borrowed funds until all principal and interest are liquidated. This amounts to an addi- tional and supplemental security for the bondholder with all the rights of other revenue bonds as previously dis- cussed in this study. The city covenants to establish rates in such a manner as to be sufficient (coupled with the tax) to meet all payments on the obligations. Addi- tionally, the city may place a special levy against properties benefited by the improvement. These special assessments are liens on the benefited property and must be paid along with other general taxes. The property owner may not elect to pay general property taxes with- out paying the special assessments that are due. The special assessment levies may amount to the full pro rata share of the cost of the improvement less the amount to be paid from general property taxes. (See Harold E. Mueller, "A New Method of Financing Water and Sewer Projects in North Dakota," The Bond Buyer, January h, l9u7; and Hugh H. Barber, "North Dakota's Pattern for Financing Sewer and Water Projects," The Bond Buyer, January 10, 1950.) 268 impossible to amortize the debt over the life of the facility. Toll bridges and toll roads, for example, quite commonly are amortized over a period of thirty years. Any longer period of time would mean that the total interest cost paid by society would rise pro- portionately. Considered from the point of view of financing with general obligation bonds as an alterna- tive, however, revenue bonds appear to be preferable in the distribution of costs in relation to benefits received over a period of time. Revenue bonds are amortized over a longer period of time, which more nearly corresponds to the length of the useful life of the project financed. Nonrevenue Considerations Anytime a price is exacted from members of society it is bound to have consequences other than the raising of revenue. Occasionally a tax or government administered price is fixed at a certain level for the specific purpose of encouraging or restricting the con- sumption or production of certain commodities. The administrators of a revenue bond financed enterprise have little latitude in the setting of prices primarily designed to restrict or encourage the consumption of goods and/or services emanating from a revenue bond financed enterprise. 269 The very nature of revenue bond financed pro- jects excludes the administrating of prices to accom- plish extra-revenue goals.20 This is not to say that a revenue bond financed enterprise exists primarily to raise revenue; but rather that in distributing the pro- ducts emanating from the enterprise, the price charged must be determined by the demand schedule. The produc- tion or consumption of revenue bond financed services cannot be either discouraged or encouraged by arbi- trarily setting high or low prices respectively. The obtaining of revenues to retire debt from net revenues is of utmost importance in the operation of the enterprise. Practically all true revenue bond financed projects contain covenants in the bond con- tract specifically requiring rates that will produce the required net revenues to meet the various fund requirements. Of course, in the case of quasi- or pseudo-revenue bond financed enterprises, extra-revenue objectives may be given consideration. Nonfiscal objectives are uppermost in the case of pseudo-revenue bond financed public housing and to a lesser extent in the financing of college and university housing. In 20Many revenue bond financed enterprises barely earn net revenues sufficient to amortize the debt which practically excludes the consideration of nonfiscal objectives in determining the price to be charged for their products. 270 cases involving extra-revenue consideration to any great extent, the enterprise would have to be capable of yielding an extra margin of profit if true revenue bond financing is to be available as a means of providing funds for the project.21 If unmeterable or welfare services are produced jointly to any great extent, and the production of one of these jointly produced services conflicts with the profitable operation of the enterprise, then the project must be profitable in spite of regulations requiring that these jointly produced services not be reduced or placed in secondary or inferior production status. For example, the multiple—purpose nature of the Tennessee Valley Authority may prevent the revenue bond financing of such an enterprise. The flood control, navigation, and recreational aspects of the Tennessee Valley Authority enterprise are not easily meterable services, and their production conflicts with the most profitable Operation of the enterprise in the production of 21For example, true revenue bond financing would be available to finance the construction and operation of state liquor stores. The amount of capital required in this case is relatively small in relation to the sur- plus profit presently obtainable from these operations so that the conflict of extra-revenue considerations is not sufficient to prevent the use of revenue bond financing of these enterprises. The bond covenant which ordinarily accompanies the issuance of revenue bonds (requiring that rates be maintained at a sufficient level to produce net revenues of a certain amount) does not conflict in this case with the revenue objective. 271 electricity. Thus the production of these unmeterable services cannot occur unless the production of elec- tricity is profitable despite their production. Even then the prospective underwriter of a revenue bond issue would not, in all probability, agree to the production of nonrevenue producing services which might cause a reduction in the net revenues of the enterprise. Other Attributes of User Charges User charges are convenient to pay. Payments are usually made in relatively small dollar amounts and involve only as much time and trouble as the purchasing of goods and services from private businesses. In the case of tolls, payment is made at the time of the trans- action with a minimum of delay. User charges do not involve the expense of record keeping as is necessary in the case of income taxes. The average individual probably pays greater lump sum dollar amounts in the case of income and property taxes. Another desirable characteristic of user charges is the tendency of these payments to be less "painful" than other government levies. It is evident that many individuals do not object as much to payments which involve a transfer of goods or services as they object to the payment of a tax. A tax payment, in contrast to user charges, is often viewed as an unnecessary burden 272 and is disassociated with government produced benefits.22 User charges which involve transactions of tangible goods and/or services are more palatable to members of our society. User charges compare favorably with other methods of raising revenue with respect to the criterion of certainty. Whether the charge be for the use of electric energy, college housing, or a toll bridge, the amount of levy is not arbitrary. The amount of the charge is ordinarily made available on request or posted for all to see. Income taxes, property taxes, and most types of business taxes involve a greater degree of uncertainty. It is usually considered desirable to diversify the revenue producing structure of a governmental unit. 22Indicative of the greater willingness to pay user charges is the experience of the Public Service Commission of New York. A l9h5 New York law required the Public Service Commission of that state to refrain from initiating rate reduction proceedings in the case of municipally Operated electric plants unless twenty- five or more active consumers requested such proceedings. The Commission reported that 30 per cent of the munici- palities were earning a rate of more than 20 per cent on the plant in service. A year later only minor requests for rate changes had been initiated by consumers despite the high rate of profit. See Jules Backman and Earnest Kurnow, "Pricing of Government Services," National Tax Journal (June, l95h), p. 133. In contrast to user charges, the complaints against property tax levies are numerous in almost every community. Formal complaints against other tax levies may not be so numerous but it is evident that many individuals object more vigorously to these levies than to other price payments. 273 Complete reliance on one or a few sources of revenue tends to cause an excessive amount of instability in the receipts of a political unit. To the extent that a revenue bond financed enterprise reduces the taxes that would otherwise be necessary, user charges have the desirable feature of diversifying the tax structure of a governmental unit. Revenue bonds have a distinct advantage of pro— viding a financing medium that is easily adaptable to the reorganization of outmoded political units. Several governmental units may combine and finance the perfor- mance of a governmental function particularly if that function is one susceptible to revenue bond financing. The advantage of revenue bond financing is indicated by the extensive use of this type of financing by special districts and authorities. Counter-Cyclical Agpects " revenue Being more or less "depression born, bonds may offer a financial means of stabilizing the cyclical swings of state and local government eXpendi- tures which have heretofore only increased the magnitude of the ups and downs of the cycle. General obligation bonds have always proved to be difficult to issue during periods of depression. In fact, as discussed in Chapter IV, local governmental units are usually under strain to 27h meet outstanding debt during depression periods, much of which is supported by property taxes. In some respects revenue bonds may tend to con- tribute to a greater upswing during periods of prosper- ity. The urgent nature of public expenditures seems not to decrease with a high level of economic activity and revenue bonds offer a financial means of avoiding debt limitation statutes. Also, a high level of economic activity bringing forth a higher standard of living in the private area such as more automobiles, leisure time, electricity, and water using appliances, leads to greater demands for the complements of the products of revenue bond financed enterprises. For example, the recent toll road building era resulted from the postwar traffic congestion that would probably not have occurred during a period of recession. In other words, indi- viduals would not have purchased the large number of automobiles nor had the funds to finance automobile travel as they have had during this unparalleled period of prosperity. low many underwriters would bid for revenue bonds pledging the net revenues from a bridge or highway during a period such as the 1930's or in a period only half as severe? The "coverage" on toll highways and toll bridges is barely sufficient in the present inflationary period. HOSpitals, docks and 27S terminals, and even college dormitories, electric, sewer, and water systems would in all probability experience difficulty in obtaining funds in a period of recession. In fact, if a period of low economic activity appeared eminent, it seems likely that governments would not easily obtain funds to finance the aforementioned projects. Enterprises that produce goods and services that are cheaper substitutes of other goods and services that are purchased freely during a period of prosperity may fare better. For example, a transit system may offer a more economical means (lower cost) of transportation than do private automobiles. The demand for city transit services would, therefore, be utilized to a greater extent during a depression period. In such instances, revenue bond financing may offer a more favorable counter-cyclical financial medium. Public facilities producing goods and services that are less expensive substitutes of other goods and services are, however, in the minority. Another consideration of the effectiveness of revenue bond financed projects in counteracting the swings of the cycle is the effect of the public financing of these projects on private investment. Revenue bond financed enterprises are capable of being successfully 276 operated in both the public and private sectors of the economy. Government eXpansion in this area may possibly discourage private investment. For example, government construction of water or electric systems could con- ceivably discourage private investment. The construc- tion and operation of toll roads or toll bridges, however, is not likely to discourage private investment. In any case, private investment would not be reduced by U ( (u more than the increase ult of the 30 V C 7‘. ,‘ u 2.4- .L m ccruing increase in public expenditures. The monopoly nature of electric, water, and gas systems excludes, for all practical purposes, the construction of more than one such enterprise in each community. Two qualifications need to be stressed in the above statements regarding the inadequateness of revenue bond financing as a means of combating depression. First, revenue bond financing is naturally more sensi- tive to changes in the interest rate. To the extent that interest rates serve in attenuating the business cycle, then revenue bonds also may improve rather than accentuate the magnitude of the cycle. In this connec- tion it should be remembered that, although to some extent revenue bond financing was depression born, much of the revenue bond financing of the 1930's was not financed on the open market but aided by federal funds. 277 In this study, government financial aid given to a pro- ject does not constitute true revenue bond financing. Second, much of the financing parading under the name of revenue bond financing is in reality pseudo- revenue bond financing. A self-liquidating project that does not have to meet the test of the market may, indeed, be easier to finance in periods of low economic activity. For one reason, people seem more willing to authorize a project that does not entail the levying of additional taxes, even though the revenue to finance the enterprise must be obtained from the income of the indi- viduals of the community, but not necessarily in the same amount from each as the tax alternative. A much greater use of revenue bonds (during depression or recession) would in all probability occur only as the issued revenue bonds approach general obli- gation bonds. Pledging revenues of a commercial type enterprise with an additional pledge of the taxing power appears to offer the only type of public credit instru- ment that can reasonably be expected to contribute significantly to the stabilizing of the business cycle. Of course, the purchasing of "revenue bonds" by the federal government may be an effective financial means of combating depression, but the federal government has the financial means of providing such funds without resorting to the purchase of state and local obligations. 278 Limited Liability of the IssuinggGovernment A portion of the interest charge on revenue bonds may be thought of as a payment for limited lia- bility. Other things being equal, it may be desirable for a governmental unit to incur debt of limited lia- bility rather than to pledge all tax revenues from all sources.23 Securing a loan with only a portion of the revenues available to a political unit may aid the unit in avoiding financial ruin. If such a catastrophe is avoided, the unit may be able to continue to provide critically needed community services such as education, police protection, and fire protection. In view of the past experiences with revenue bonds being assumed and paid out of general tax funds, the limited liability feature is a dubious advantage. If a revenue bond is sold with the understanding that the bond principal and interest is to be paid from the net earnings of an enterprise, the bondholder can hardly expect that tax funds be applied to service the bond. In fact, public officials who apply tax money to debt service of revenue bonds may be considered to have misused public funds. There is a reSponsibility to the 23A borrowing political unit may benefit from a conditional pledge just as it may be advantageous for an individual to secure a loan only with a certain asset or the earnings therefrom rather than with all of his assets. 279 taXpayer as well as to the bondholder. Each has a right to expect conformity to the bond contract. Public officials should assume responsibility for the terms of that contract. The responsibility to the bondholder includes the protection of earnings that are to be applied toward debt service. Public officials should exert every effort to promote the efficient operation of the revenue bond financed enterprise so as to make net earnings as large a portion of gross earnings as possible and to comply with other bond covenants. Pub- lic officials should similarly be held accountable to the protection of the taXpayer's interests which means that the terms of the bond contract should not be altered in favor of the bondholder. Chapter IV of this study documented instances of tax money applied to the payment of revenue bonds._ This application of tax money, although usually contrary to the intent of the pertinent state statutes, may occur in many ways. Several instances of the forthright appro- priation of tax money were noted in the previous chapter. In at least one instance the Supreme Court of the state has upheld the application of tax funds to the payment of defaulted college dormitory revenue bonds.24 Court 2LL"Court Upholds Idaho Payment of Defaulted College Bonds," The Bond Buyer, November 12, 1955, p. 3. 280 approval was based upon the fact that the dormitory was owned by the state and that the legislature could pay for the building or "put into effect a plan designed to pay for it."25 Other methods of applying funds to dis- tressed revenue bonds have been more subtle. The plans "designed to pay for it" often include the application of tax monies to the payment of part of the expenses of the enterprises giving the appearance that "net revenues" have thus been increased. Occasionally the issuing unit has created a public corporation and thereby is able to evade the intent of the permissive law by establishing a lease-rental arrangement, although the original financing was of a true revenue bond nature. The case of the Decatur Toll Bridge of the Nebraska Burt County Bridge Commission, as narrated in Chapter IV, appears to be a case of the application of federal funds to "bail out" a public project which failed to work out as planned. Of course, if federal funds in the same amount were intended to be spent irrespective of the financial difficulties that were being encountered by the Bridge Commission, the federal expenditures should not be regarded as an example of the application of tax funds. It may develop, however, that the government and taxpayer may be made "worse off" even if tax money is 25Ibid. 281 not applied in order to avoid default. Credit is val- uable; and if a government is going to pay for limited liability but still be penalized by suffering a loss in credit standing, that government will pay in the form of increased costs on future borrowings. An early Oregon law, for example, required that cities of that state must guarantee payment of their special assessment bonds.26 In extoling the virtues of the law, a public official indicated that it benefited the city through reduced interest costs. He compared the eXperiences of Portland, Oregon, with those of Spokane, Washington. Portland had applied tax money to retire its special assessment bonds, while Spokane had allowed extensive and prolonged defaults to occur on special assessment bonds. The better treatment accorded the obligations of Portland in the market was shown by the sale in late 1926 of new special assessment issues with a coupon rate of 6 per cent. These bonds sold at a premium sufficient to reduce the effective rate to h.h0 per cent. On the other hand, new special assessment bonds issued by Spokane were, according to the official, "almost unsalable except at high interest rates and drastic discounts."27 26A. M. Hillhouse, Municipal Bonds, A Century of Experience (New York: Prentice-Hall, Inc., 1936), p. 10h. 27Ibid. 282 There also appears to be a relationship between the appraised quality of general obligation bonds and revenue bonds of the various units of government as indicated by Moody's ratings. In Chapter V the simi- larity of ratings on general obligation bonds and revenue bonds of the same governmental unit was noted. It seems unrealistic that the profitableness of an enterprise, which is the primary criterion for rating revenue bonds, should vary so directly with taxpaying capacity. This tends to support the thesis that the performance of a governmental unit on its general obli- gation bonds and revenue bonds is considered together. Additional support for the practice of a more or less similar rating on general obligation bonds and revenue bonds is shown by the common practice of bond under- writers giving consideration to the default record of the issuing unit in evaluating the credit quality of either type of bond. In conclusion, the numerous instances involving the application of tax money to the payment of revenue bonds which have experienced financial difficulty indi- cates that the limited liability feature of these bonds is of little real value. Additionally a governmental unit may pay higher interest rates on its general obli- gation bonds if it has experienced financial difficulty 283 on its revenue bonds. If past experience is reliable in an evaluation of the future, it appears safe to conclude that revenue bonds are, in effect, general obligations of the issuing unit. The performance of a political unit with regard to revenue bonds is scrutinized by prOSpective underwriters in their evaluation of the quality of the general obligation bonds of the govern- mental unit. Thus it appears that any increase in the interest payment for the limited liability feature of a revenue bond is not justifiable. Restrictions in the Underwriting of and Investing in Revenue Bonds Chapter III discussed the legal aspects of state and federal statutes which restrict the underwriting of and investing in revenue bonds by certain fiduciary institutions. Of particular interest is the restriction appearing in the seventh paragraph of Section 5136 of the Revised Statutes of the United States. Section 5136 does not prohibit a national bank from "dealing in, underwriting, and purchasing for its own account"28 securities which are obligations of the United States or the general obligations of any state and its 28Another portion of Section 5136 does provide that the Comptroller of the Currency may permit a national bank to "purchase for its own account" certain investment securities prescribed by the Comptroller of the Currency even if such securities are not general obligations of a governmental unit. 28k 29 subdivisions. Bonds not secured by the full faith and credit of a governmental unit are not general obliga- tions and are thus ineligible with reSpect to a national bank's participation as a principal in the marketing of these securities. National banks may not underwrite revenue bonds since these securities do not represent full faith and credit obligations of a governmental unit. The Comp- troller of the Currency may permit a national bank to purchase revenue bonds for its own account subject to certain limitations and restrictions.30 Several arguments have been advanced purporting to show why commercial banks31 should continue to be prohibited from underwriting revenue bonds.32 These 33 arguments are presented and analyzed below. 29Section 9 of the Federal Reserve Act, as amended, subjects state member banks to the same limi- tations and conditions as are applicable to national banks. 30The par value of revenue bonds of any one issuing unit that may be purchased by a bank is limited to 10 per cent of the capital and surplus of the pur— chasing bank. 31Although the present prohibition applies only to national and member banks, various state regulations may also restrict non-member commercial banks. 32"Underwriting and Distribution of Revenue Bonds by Commercial Banks," a memorandum prepared by the Committee for Study of Revenue Bond Financing, uh Wall Street, New York, New York (January 3, 1955). 33The merits and demerits of permitting commer- cial banks to underwrite revenue bonds is considered 285 The first argument is based on the intent of Congress presently and at the time of the enactment of the Glass-Steagall Banking Act of June 16, 1933. It was not then, and is not now, according to those favoring a continuation of the restrictions in the underwriting of revenue bonds, the intent of Congress to permit revenue bonds to be underwritten by commercial banks. The Banking Act of 1933 forbids anyone from engaging in the "issuing, underwriting, selling, or dis- tributing" of securities if at the same time engaging in "the business of receiving deposits subject to check. ."34 Excepted from this prohibition, however, were the "obligations of the United States or general obliga- tions of any States or of any political subdivision thereof. . . ."35 only from a comparative point of View. Section 5136 of the Revised Statutes of the United States presently permits commercial banks to underwrite general obliga- tion bonds. An examination of the merits of this pro- vision of the present law is beyond the scope of this study. Similarly, this study is not concerned with an economic appraisal of the merits and demerits of per- mitting banks to underwrite corporate securities. It would appear that this whole area should be subjected to a critical evaluation. A solution to the problem is complicated by the similarity of the various securities. 3&48 Stat. 189 (1933) as amended h9 Stat. 707 (1935) 12 U.S.C. Section 378. 35h8 Stat. 18h (1933) as amended 12 U.S.C. Section 2h. 286 The aforementioned restrictions on commercial banks arose because of the tendency during the 1920's of some large commercial banks to engage in investment banking which the then Comptroller of the Currency and other banking officials viewed as objectionable. Con- gress sought to safeguard the depositor by separating commercial banking from investment banking. When Con- gress passed the Banking Act of 1933 revenue bond financing was practically non-existent. It has only been since World War II that governmental units have issued, to any great extent, bonds completely disclaim- ing any liability. Many of the relatively small amount of revenue bonds that were issued prior to World War II were secured by a pledge of tax funds and Specific earnings. Commercial banks are permitted to underwrite these pseudo-revenue bonds provided the issuing govern- ment pledges its full faith and credit. It does appear that Congress intended to exclude the special assessment bonds of governmental units due to the financial difficulties that this type of public obligation had encountered during the early part of the Great Depression.36 Whether Congress intentionally excluded revenue bonds or simply failed to include them 36"Commercial Bank Underwriting of Public Revenue Bonds," a memorandum prepared by a group of commercial banks (January 20, 1955), p. 7. (Mimeo- graphed.) 287 because of their minor significance, therefore, cannot be reliably determined. The present intentions of Congress should be ascertainable in the next few years. Two identical Senate bills were introduced during the First Session of the Eighty-Fourth Congress by Senator John w. Bricker, and by Senators Homer A. Capehart and Russell P. Long.37 Both bills would permit commercial banks to underwrite obligations issued by governmental units or their agencies except obligations payable solely from the proceeds of special assessment bonds. The bills were read and referred to the Committee on Banking and Currency of the United States Senate. It appears that Congress will give consideration to this or similar legislation in the near future. Another argument advanced against the practice of permitting commercial banks to underwrite revenue bonds is based upon the riskiness of this type of security. Revenue bonds are similar to corporate securities and, according to this argument, would lower the investment and loan standards of commercial banks. This study has not revealed any weakness in revenue bond issues which can be considered as sufficient grounds to permit the present discrimination against 37s. 2290 and s. 2713 (1955). See Appendix II. 288 revenue bonds.38 There is little evidence that revenue bonds are more risky than general obligation bonds as indicated by the default record narrated in Chapter IV. The default record of revenue bonds compares favorably with general obligation bonds. Any additional risk that may be incurred by a holder of revenue bonds as compared with general obligation bonds during a period of pros- perity is likely to be counterbalanced by a lesser degree of risk on revenue bonds during a period of low economic activity.39 A high degree of risk associated with a bond issue is not peculiar to revenue bond issues, although it is possible to find individual revenue bond issues which contain a large amount of risk. The risk associated with revenue bonds issued by such units as the Port of New York Authority, the City of Los Angeles, and the City of Chicago would appear to compare favorably with the highest quality general obli— gation bond issues. There are many general obligation 38Whether or not there exists weaknesses in special assessment bonds sufficient to discriminate against these bonds is not within the scope of this study. Special assessment bonds are ineligible for bank underwriting in the Glass-Steagall Act and in both S. 2290 and S. 2713. 39Although it is not possible to "prove" a greater or lesser amount of risk associated with revenue bonds as compared with general obligation bonds, there is some evidence that revenue bonds are less risky during a period of low economic activity and vice versa. See Chapter IV for a more complete discussion of the default experience of revenue bonds. 289 bond issues that are of a poor risk quality as shown by ratings assigned to many issues by the various rating agencies. A third argument opposing the underwriting of revenue bonds by commercial banks relates to the trivial amount of such underwriting that would be done by these banks even if given the necessary legal authority. Only a few commercial banks are actively engaged in the underwriting of general obligation bonds, say those opposing permissive legislation. Thus, permitting com- mercial banks to underwrite revenue bonds would result in little increased competition for these securities with a corresponding small reduction in the net interest rate. In the l9u9—l953 period commercial banks were estimated to have underwritten one-third of the total of all general obligation bonds issued by state and local governments.U0 The participation of commercial banks in the underwriting of revenue bonds, if permitted by law, would undoubtedly increase the competition for these obligations. Other things being equal, any increase in the competition for the obligations of a governmental unit is desirable. Even though relatively few commercial uOSpeech of the Honorable Homer E. Capehart of Indiana in the Senate of the United States on June 30, 1955. 290 banks actively engage in the underwriting of municipal securities, it is possible that competition would be increased in localities most deficient of a market for their obligations. Chapter V of this study presents evidence that the smaller dollar size revenue bond issues do not fare as well interest rate wise as the smaller general obli- gation bond issues. This is demonstrated by the larger absolute value of the revenue bond regression coefficient which relates effect of size of revenue bond issues to the net interest Pate.ul The additional competition of a local bank located in a small community would tend to reduce the interest costs of these small governmental units.“L2 LLlThe Third Quarter 1955 data shows that the net interest rate (more precisely the ratio of net interest rate to Moody's Aaa Index) decreased by 32 basis points for every increase of one logarithm in dollar size (in thousands) of issue compared with a decrease of 17 basis points on general obligation bonds. AZStatements by the American Bankers Association indicate that permitting national banks to underwrite revenue bonds would result in a "widening of the market for such revenue bonds, lowering financing costs." The Board of Directors of the Association of Reserve City Bankers expressed a somewhat similar view and recommended that the differentiation between general obligation bonds and revenue bonds be removed. The reason, as given by this group, is as follows: "In recent years so-called revenue bonds and dedicated-tax bonds have become increasingly pOpular with issuing bodies. Such bonds of acceptable investment quality are customarily purchased and held by banks in their investment portfolios, and the restriction against bank underwriting of such bonds 291 In addition to restrictions pertaining to the underwriting of revenue bonds by commercial banks, other fiduciary institutions such as savings banks are not permitted by state law to invest in revenue bonds. As noted in Chapter III some of these state laws have recently been revised making revenue bonds eligible for investment. Of course, this does not make all revenue bonds eligible for investment; but it tends to reduce the discrimination with respect to type of obligation. Revenue bonds are placed on the legal lists of various states as the fiduciary regulatory bodies see fit. Under these conditions each particular bond issue is treated independently. This treatment does not, how- ever, completely remove the discrimination against revenue bonds since general obligation bonds are quite often eligible as a group rather than by the judging of each issue separatelyJ+3 is unrealistic and unnecessary. A wider interest in the underwriting of revenue bonds and increased competition to purchase them will result in lower borrowing costs for issuers." (See Hearings before the Committee on Banking and Currency, United States Senate, Eighty- Fourtg Congress, Second Session, November, 1956, pp. 95 and 9 . uBThe practice of placing revenue bonds on legal lists on the merits of the particular issue is not being criticized here. It does seem that if this practice is desirable because of the risk associated with an issue in the case of revenue bonds, a similar practice should be followed in the case of general obligation bonds. 292 There appears, then, little justification for distinguishing between revenue bonds and general obli- gation bonds in the underwriting of revenue bonds by commercial banks. Any increase in competition for revenue bonds, no matter how small, ought to be insti- tuted unless there is some valid reason against such action. The arguments against the underwriting of revenue bonds by commercial banks, as compared with general obligation bonds, have little, if any, merit.uu Efficiency of Revenue Bond Financed Projects It is not possible, in our present state of technical development, to objectively quantify the degree of efficiency that is attained by public or pri- vate enterprises. The relative efficiency of various enterprises may be approximated by observing the presence or absence of incentives that make for greater efficiency and by observing the results that are obtained such as prices charged, management organization, and techniques employed. The incentive for the efficient operation of revenue bond financed enterprises arises from the uuAdmittedly, the intent of Congress at the time the restriction was placed on the statutes cannot be accurately appraised. The small volume of revenue bonds at that time, however, may account for the wording of the statute. 293 necessity of utilizing every means available to estab- lish a solvent enterprise. This is especially true in the case of a new enterprise in which the governmental unit has no equity, as is the case with true revenue bond financing. The sources that tend to make for greater efficiency arise from the necessity of the issuing governmental unit to explore, with the aid of highly trained consulting engineers, every feasible means of reducing the costs of the enterprise. The issuing governmental unit is naturally interested in discovering ways of demonstrating a high level of net earnings of an enterprise in order that coverage will be sufficiently attractive to prospective underwriters to be willing to underwrite the project. Further, the greater the efficiency that can be demon- strated the more favorable will be the bids of the prospective underwriters and hence result in a lower net interest cost. Marginal enterprises would be especially subject to a thorough inspection in order to insure, as nearly as possible, a profitable project. Protective covenants of the revenue bond resolu- tion may be advantageous. For example, a municipal bond underwriter may not be willing to invest in a project unless a qualified engineer has been employed to estab- lish its feasibility. Furthermore, the underwriter can be expected to be much more thorough in an economic 29h appraisal of a project than would ordinarily be the case if the project is financed with tax money. The requir- ing of regular inspections, periodic certified audits, and the maintenance of insurance are other desirable safeguards. The incentive to see that these safeguards are accomplished or placed in effect is greater in the case of a revenue bond financed project. The National Committee on Governmental Account- ing recommended that a periodic audit by independent accountants be made of governmental units and their agencies.“5 In addition to the advantages of an audit in providing assurances that public funds have been properly accounted for and that public officials have complied with the various legal provisions, an indepen- dent audit may reveal more economical procedures that may be instituted such as the utilization of modern equipment. The agreement between the issuing govern- mental unit and the underwriter that accompanies prac- tically all revenue bond financed projects provides for periodic audits by independent accountants. Financing an enterprise by revenue bonds empha- sizes the economic importance of the time element, uSC. T. Zlatkovich, "Engaging Independent Public Accountants," Proceedings of the First Governmental Accounting and Finance Institute (Institute of Public Affairs, The University of Texas, Austin, Texas, May, 1955): Po 89. 295 particularly during the construction period.u6 The bond underwriter ordinarily requires assurance that the project will be completed by a specified time. If a project is delayed, revenues will not begin according to schedule; and default may result. There occurs this same waste of resources whenever a project is delayed unnecessarily regardless of the method of finance. The utilization of revenue bonds focuses attention on the importance of the time aspect although the same time delay on a general obligation bond financed project may go practically unnoticed. There is some evidence that the management of revenue bond financed projects is superior to the management of general obligation bond financed enter- prises. This is exemplified in the modern techniques that are employed in connection with some revenue bond financed projects. For example, at least six turnpikes make use of modern toll collection and recording devices.u7 Punched card toll ticket dispensing is designed to speed up toll collections and provide a safeguard against revenue loss. 86To the extent that revenue bond financing makes possible projects not available through other means, this type of financing may result in a saving of time of individuals of society. For example, the saving of time on the Michigan Mackinac Bridge compared with the existing ferry is estimated to average approximately two hours for each automobile driver. H7"The Latest in Tolls," American CitX (May, 1957), p- 16?- 296 Revenue bond financed enterprises apparently have instituted other desirable revenue safeguards that are not ordinarily present whenever an enterprise is financed by tax money. For example, covenants in revenue bond financed parking facility contracts sometimes require bonded personnel or other safety precautions to insure that revenues are properly accounted for, thus reducing the chances of embezzlement. Revenue Bonds and Debt Restrictionsu It is sometimes argued that the issuance of revenue bonds permits a political unit to increase the volume of urgently needed services by issuing general obligation bonds to finance those government functions not capable of being financed by the issuance of revenue bonds. According to this argument, the issuance of revenue bonds conserves the general obligation bonded indebtedness that may be incurred in a governmental unit. The conservation of general obligation bond borrowing may be desirable in view of legal restrictions limiting the amount of debt that may be incurred by political units. A political unit does not have a greater debt-paying capacity, however, simply because a portion of its debt consists of the revenue bond type obligation. uaThe legal aspects of constitutional and statu- tory debt restrictions were narrated in Chapter III. 297 Two governmental units could be similarly situated in every respect except for the type of bond issued to finance a publicly owned commercial activity. If one community finances its electric system by the issuance of revenue bonds and the other by general obli- gation bonds, the ability to support a given amount of debt is the same in both instances since all payments must be paid from incomerL9 Revenue bonds ordinarily do permit the issuing unit to avoid legal debt restrictions. Whether this is an advantage or a disadvantage depends upon the desir- ability of the legal restrictions. Legal debt restric- tions are the result of man-made laws and should be repealed or revised if they are objectionable. Historically, legal debt restrictions have been imposed because of the resulting insolvency or near- insolvency of governmental units following periods of reckless borrowing. TaXpayer rebellion against property taxes also has been a stimulus in promoting legal debt restrictions. u9Indeed, a third similar community with a pri- vately owned electric system and consequently entirely free of outstanding public obligations to finance such a system would have no greater debt-servicing ability. The relevant factor is the dollar amount of such pay- ments compared with the income of the taXpayers. All payments, regardless of whether termed taxes, user charges, or prices, must be paid from income. 298 The issuance of true revenue bonds automatically places safeguards on the resulting debt. Additional revenue bond debt does not, at least theoretically, threaten the solvency of the issuing governmental unit and automatically provides for the necessary revenue with which to liquidate the newly issued obligations. In fact, this automatic control which is inherent in revenue bond financing is more effective than statu- tory and constitutional limits upon indebtedness because of the many loopholes in these legal restrictions.50 Revenue bond financing is also effective in providing for the retirement of the revenue bond created debt within the life of the project. These debt-servicing characteristics inherent in revenue bond financing reduce the need for state super- vision of this type of local borrowing. A governmental unit utilizing true revenue bond financing needs no commission to check or investigate its borrowing prac- tices. The natural interests of the bond underwriter and bondholders are sufficient to provide sufficient safeguards on revenue bond debt. On the other hand, quasi- and pseudo-revenue bond financing does not have the same degree of built-in safeguards as does true 50For example, legal restrictions are sometimes avoided by manipulation of assessed property values and by the creation of new overlapping governmental units. \ 299 revenue bond financing. It would seem desirable, there- fore, that debt represented by quasi- and pseudo-revenue bonds should be subjected to the same restrictions deemed to be desirable in the case of general obligation bonds. Summary and Conclusions The preceding portion of this chapter has pre- sented an economic analysis of the attributes which are peculiar to revenue bond financing. The pecularities of revenue bond financing result from court decisions, statutes, public finance practices, or inherent char— acteristics of this type of public credit instrument. The distinguishing features of revenue bonds do not always produce results necessarily different from general obligation bond financing. Rather, results that must occur in the case of revenue bonds may, but do not necessarily, occur in the case of general obligation bond financing. For example, revenue bond financing forces a minimum price equal to average cost while general obligation bond financing results in prices which may or may not equal average cost.51 The very nature of revenue bond financing elimi- nates the possibility of utilizing this type of public SlIf a revenue bond financed project cannot, because of demand conditions, charge prices sufficient to cover average cost, then default occurs. 300 credit instrument to finance many types of public pro- jects. True revenue bond financing is limited to public facilities which are revenue producing enterprises and which produce meterable services. The revenue bond credit instrument is also limited to the financing of these enterprises which produce goods and/or services which society does not deem desirable to distribute with regard to welfare considerations. On the other hand, some of the attributes of revenue bonds permit this type of credit instrument to be utilized to aid private entities. Revenue bonds issued to finance the construction of factory buildings which are subsequently leased to a private manufacturer is a case in point. Such practices are tantamount to the sale of the benefit of the tax-exempt privilege of the issuing political unit. The issuance of these industrial aid bonds provides another reason for sub- jecting municipal bond interest to the federal income tax. The most significant economic implications of revenue bond financing as compared with general obliga- tion bond financing occur with respect to pricing policies, equity considerations in the distribution of payments for the products of public enterprises, resource allocation, and the efficiency of public 301 enterprises. In addition to these aspects which are more or less inherent in the case of revenue bond financing, there exists man-made laws which affect the desirability of this means of public finance. The use of revenue bonds as a means of financing government activities forces the purchaser of the ser- vices emanating from these activities to pay a price equal to average cost. Subsidies do not occur whenever payments are equal to average cost as may occur in the case of general obligation bond financing. Thus revenue bond financing avoids the attendant disadvantages to unsubsidized industries which produce goods and/or ser- vices that are close substitutes of the publicly-owned subsidized industry. Revenue bond financed enterprises are likely to be more efficient than a similar general obligation bond financed enterprise. The issuer of revenue bonds pledges only the net revenues of the facility, thus causing the bond underwriter to check all phases of the project prior to construction. The incentive toward efficiency arises primarily from the bond contract and the necessity for a thorough investigation with respect to the feasibility of the project. The bond contract ordinarily contains provisions which tend to insure low total costs in relation to revenue. Thus in addition 302 to a thorough investigation as to the feasibility by a qualified engineer, bond underwriters naturally insist upon the operation of the facility in accordance with the best available business practices. Although the mere financing by means of revenue bonds does not enhance the debt-paying ability of a political unit, the financing by this type of credit instrument does insure a source of revenue with which to retire the outstanding obligation. This self- liquidating nature of revenue bonds combined with the controls which are ordinarily required by the bond underwriter gives this type of public credit instrument a "built-in" safeguard with respect to excessive indebtedness. The higher interest cost associated with revenue bonds can be justified only if the favorable non- quantitative attributes discussed in this study outweigh the additional interest cost. It is evident that at least a portion of this higher interest cost on revenue bonds is due to the legal restrictions affecting com- mercial bank underwriting of these securities. There may be valid reasons for the prohibition, but any justi- fication ought not be based upon the relative riskiness of revenue bonds as compared with general obligation bonds. The treating of general obligation bonds and 303 revenue bonds in a similar manner would, in all proba- bility, reduce the differential in the net interest rates presently applicable to these two types of secur- ities. In the case of a particular project and in cer- tain periods of time the merits of revenue bond financing may outweigh the higher interest cost asso- ciated with this type of public credit instrument. A quantitative evaluation of the merits and demerits of revenue bond financing as compared with general obliga- tion bond financing which is applicable to every set of circumstances is not possible. APPENDIX I. COPY OF H. R. 31l1* A BILL To add a new section 27h to the Internal Revenue Code of 1954 to provide revenue and eliminate unfair competition by denying a deduction for amounts paid by a private industrial or commercial organization to a State or local government for the use of property acquired or improved by the government by issuing indus- trial development bonds. Be it enacted by the Senate and House of Repre- sentatives of the United States of America in Congress assembled, That the Internal Revenue Code of l95h is amended by adding at the end of section 273 the fol- lowing new section: "SEC. 274. PAYMENTS TO ISSUER OF TAX-EREMPT OBLIGATIORS. "(a) GENERAL RULE.--No deduction shall be allowed for amounts paid or accrued to a State, a Terri- tory, a possession of the United States, or any political subdivision of any of the foregoing, or the District of Columbia, for the use or occupancy of property acquired or improved out of the proceeds of any industrial *Introduced in the House of Representatives, 84th Congress, lst Session, January 26, 1955. 301+ 305 development revenue bond authorized after February 8, 1954. "(b) DEFINITION.--For purposes of subsection (a), the term 'industrial development revenue bond' means any obligation—- "(1) issued (whether before or after the acquisition or improvement of the property concerned) to finance the acquisition or improvement of real property which is to be used to any substantial extent by non—public lessees for manufacturing articles; and "(2) which does not pledge the full faith and credit of the issuing authority for the payment of interest and principal." APPENDIX II. COPY or s. 2290* A BILL 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 govern- ments, and for other purposes. Be it enacted by the Senate and House of Repre- sentatives of the United States of America in Congress assembled, That the last sentence of paragraph "Seventh" of section 5136 of the Revised Statutes of the United States, as amended (12 U. S. C. 2h), is amended to read as follows: "The limitations and restrictions herein contained as to dealing in and underwriting investment securities shall not apply to obligations issued by a State or political subdivision or agency of a State or political subdivision, except obligations payable solely from the proceeds of special benefit assessments, or the International Bank for Reconstruction and Development, or the thirteen banks for cooperatives organized under the Farm Credit Act of 1933, or any of them, which are *Introduced in the Senate of the United States, 84th Congress, lst Session, June 22, 1955. 306 307 at the time eligible for purchase by a national bank for its own account: Provided, That no association shall at any one time hold obligations issued by the Interna- tional Bank for Reconstruction and Development, or the thirteen banks for cooperatives organized under the Farm Credit Act of 1933 or by any one of said thirteen banks for COOperatives, or obligations issued by a State or political subdivision or agency of a State or political subdivision (other than general obligations of a State or political subdivision or such agency) as a result of underwriting, dealing or purchasing for its own account (and for this purpose obligations as to which it is under commitment shall be deemed to be held by it) in a total amount, with respect to any one of such issuers, exceeding 10 per centum of its capital stock actually paid in and unimpaired and 10 per centum of its unim- paired surplus fund." .meesthx III Instances of default occurring since lQhO -were ascertained a; addressing letters of inquiry to .61 individuals in positions to have knowledge 01 such defaults. Accordingly, the letters on the following pages were sent to municipal bond dealers, city off- icials in the larger cities, and state finance officers. These letters were mailed during the latter part of January and early February, 1957; and the bulk of the replies were received during the latter part of Feb- ruary. As a check on the reliability of the answers of city officials, letters of inquiry were also mailed to officials of cities known to have incurred defaults.l The wording of the letters was changed slightly to conform to the information given in Moody's listing of known defaults occurring since 1930. Replies were received from 18 of the 33 cities known to have de- faulted, and only one acknowledged a default. Replies from municipal bond dealers produced more satisfactory results. Out of a total of 106 llioody's Government and Municipals (1956), p. a-3h. 308 309 letters of inquiry, 67 replies were received with 39 reporting at least one instance of default. Increased cenfidence in the answers suoplied by municipal bond dealers is justified since returns from the same geographical area in many cases listed the sine instance of default. Setter replies Jrom band dealers may be partially attributed to their more complete knowledge Replies were received from 36 of the 45 state finance officers. Only 5 of the 36 officers replying reported at least one instance of default, mostly of a minor or technical nature. Two of these defaults involved revenue bonds. Selection of respondents was on a ge gr phic basis. Actually, municipal bond dealers are faniliar with the municipal bond market over wide georraohic 0* I . areas. One New York 113m supplied information on more than half of the total default instances that were ultimately reported. 310 Letters of Inquiry Mailed and Replies Received, by State State City Officials Municipal Bond Dealers Letters Replies Letters Replies Mailed Received Mailed Received Ala. 2 1 1 l Ariz. l O 2 1 Ark. l l 1 l Calif. 8 8 1 1 Colo. l l 2 2 Conn. 4 4 1 0 Del. 1 1 1 l Fla. 1 1 2 1 Ga. 1 1 5 2 Ida. 1 O l 1 Ill. 2 2 5 2 Ind. 5 3 O 0 Iowa 1 1 1 1 Kan. l 1 3 2 Ky. l l 2 1 La. 3 2 2 2 Maine 1 O l l Md . 1 l 1 1 Mass. 6 3 2 O Mich. 3 2 2 l Minn. 5 2 3 3 311 State City Officials Municipal Bond Dealers Letters Replies Letters Replies Mailed Received Mailed Received Miss. 1 O 2 1 Mo. Mont. Neb. Nev. N. H. N. J. I—‘Cfll—‘OCAOM N. M. N. Y. H O N. C. N. D. Ohio Okla. Ore. Penn. R. I. S. C. S. D. Tenn. Texas Utah Ver. (0 +4 l4 c: .b +4 +4 t4 m» +4 to e. +4 l4 0) r4 or +4 l4 +4 +4 to +4 <3 +4 wk on <3 c> :4 on I4 +4 <# c> r4 o: +4 to c> <3 +4 C) i4 +4 +4 to e» no r4 +4 C) c» +4 +4 c» 14 on (n <4 +4 :3 <3 c> C) to CflHMtfiCflHI-‘HOHMtOF-‘Cfl Viro State Wash. W. V. Wis. Wyo. Totals 312 City Officials Letters Replies Mailed Received 2 1 1 o 1 1 ._11 __Q_ 102 69 Municipal Bond Dealers Letters Replies Mailed Received 3 2 1 1 1 1 ._la. ._1_ 106 67 313 BAYLDR UNIVERSITY SCHOOL OF BUSINESS WACD, TEXAS urns: or DIRECTOR or RESEARCH February: 1957 (COpy of letter sent to state finance officers) hire JOhn Doe State Treasurer City, State Dear Mr. Doe: We are doing a study on the subject of "revenue bond financing." we have encountered difficulty in obtaining figures with respect to defaults of revenue bonds. From past experience in situations of this kind, we have found that persons in your position are valuable sources of information pertaining to their state. Perhaps y0u can provide us with answers to the following questions: 1. Does (State) have records pertaining to revenue bonds issued and outstanding for all of its political sub- divisions, such as cities, counties, special districts, etc.? 2. As you know, the number of defaults in recent years is very small. Generally, bondholders have suffered very little, if any, loss even in the few default instances that have occurred. Nevertheless, would you inform us of any defaults, no matter how minor, occurring since l9h0 that have come to your attention? We would be interested in knowing the type of bond (G.O. or revenue), the issuing unit, the project financed with the proceeds of the bond sale, and any description as to cause for the default. We are enclosing a self-addressed, stamped envelope for your convenience in replying. EVen if the data requested is not available, we would appreciate an answer. Any bits of information that you can furnish us will be helpful in our study. Sincerely, W. J. Thomas Director WJT:1r Enclosure 31h BAYLDR UNIVERSITY SCHOOL or BUSINESS WACD, TEXAS OFFICE OF DIRECTOR OF RESEARCH February, 1957 (Copy of letter sent to bond dealers) Mp. JOhn Doe municipal Bond Dealer City, State Dear Mr. Doe: We are doing a study on the subject of "revenue bond financing." We have encountered difficulty in obtaining comparable data with respect to defaults of revenue bonds and G. 0. bonds. As you know, the number of defaults in recent years is very small. Generally, bondholders have suffered very little, if any, loss even in the few default instances that have occurred. Nevertheless, would you inform us of any defaults, no matter how minor, occurring since l9h0 that have come to your attention? We would be interested in knowing the type of bond (G.O. or revenue), the issuing unit, the project financed with the proceeds of the bond sale, and any description as to cause for the default. We are enclosing a self-addressed, stamped enve10pe for your convenience in replying. Even if you know of no defaults in your area, we would be interested in this fact. Any bits of information that you can furnish us will be helpful in our study. Sincerely, W. J. Thomas Director WJszb Enclosure 315 BAYLCIR UNIVERSITY SCHOOL DP BUSINESS WACD, TEXAS OFFICE OF DIRECTOR OF RESEARCH February, 1957 (Copy of letter sent to city finance officers) Mr. John Doe City Treasurer City, State Dear Mr. Doe: We are doing a study on the subject of "revenue bond financing." We have encountered difficulty in obtaining figures with reapect to defaults of revenue bonds. From past experience in situations of this kind, we have found that persons in your position are valuable sources of information pertaining to their locality. As you know, the number of defaults in recent years is very small. Generally, bondholders have suffered very little, if any, loss even in the few default instances that have occurred. Nevertheless, would you inform us of any defaults, no matter how minor, occurring since 19h0 that have come to your attention? We would be interested in knowing the type of bond (G.O. or revenue), the issuing unit, the project financed with the proceeds of the bond sale, and any description as to cause of the default. We are enclosing a self-addressed, stamped envelope for your convenience in replying. Even if you know of no defaults in your area, we would be interested in this fact. Any bits of information that you can furnish us will be helpful in our study. Sincerely, W. . Thomas Director VITJT: 1P Enclosure 3l6 BAYLDR UNIVERSITY SCHOOL OF BUSINESS WACD, TEXAS OIrrICE DF DIRECTOR OF RESEARCH February, 1957 Copy of letter sent to city finance officers of known defaulting cities) Mr. John Doe City Treasurer City, State Deal" I'I'II‘. Doe: We are doing a study on the subject of "revenue bond financing." We have encountered difficulty in obtaining figures with respect to defaults of revenue bonds. From past experience in situations of this kind, we have found that persons in your position are valuable sources of information pertaining to their locality. As you know, the number of defaults in recent years is very small. Generally, bondholders have suffered very little, if any, loss even in the few default instances that have occurred. Nevertheless, would you inform us of any defaults, no matter how minor, occurring since 1930 that have come to your attention? We would be interested in knowing: Type of bond (G.O. or revenue) Issuing unit Project financed with the proceeds of the bond sale Underwriter Date of issue Any description as to cause of the default, ultimate loss or cure We are enclosing a self-addressed, stamped envelOpe for your convenience in replying. We would like to have your reply even if you do not have the information requested above. Any bits of information that you can furnish us will be greatly appreciated. Sincerely, “’0 J o rTYICNTIQ 8 Director WJTzlr Enclosure APPENDIX IV. MULTIPLE CORRELATION ANALYSIS CE NET INTEdEST RATES APPLICABLE TO MUNICIPAL BONDS Chapter V of this study presents an analysis of net interest rates applicable to selected municipal bond issues sold during the third quarter of 1955 and the fourth quarter of 1956. This Appendix presents more complete details of the data and computations used in determining the values of the statistics presented in the body of Chapter V. Data BOND SALES REPORTED DURING THIRD QUARTER 1955 Date Dollar Size Average Net of of Issue Maturit Interest Sale (in Thousands) (Monthsg Rate GENERAL OBLIGATION BONDS 7-25 8 250 1N2 2.13 7-12 50 36 1.76 6-21* 2&9 90 2.18 7-27 310 123 2.u5 6-30* 60 36 1.66 7-27 62 36 2.50 6-28* 132 186 3.h68 317 318 Date Dollar Size Average Net of of Issue Maturity Interest Sale 1 (In Thousands) (Monthsl Rate 7-25 8 20 40 2.403 8-8 200 128 2.54 8-17 338 68 2.21 8-22 35 38 2.74 8-30 280 44 2.20 9-7 17 104 2.755 9-19 40 141 3.438 9-8 27 72 2.864 9-19 60 78 2.50 9-22 365 126 2.517 9-6 50 60 2.56 7-11 84 66 1.99 7-6 100 106 2.69 7-20 50 36 1.96 7-7 500 128 2.338 7-6 120 144. 2.741 7-21 28 74 3.163 7-15 30 72 2.97 7-21 500 124 1.89 7-12 200 72 2.123 7-6 1,050 72 2.08 6-30* 20 w 130 3.13 8-1 75 54 2.03 7-28 3,000 126 2.142 319 Date Dollar Size Average Net of of Issue Maturity Interest Sa1ejt: (In Thousands) (Months) Rate 8-1 8 420 131 2.61 8-24 1,000 80 1.99 8-17 355 112 2.95 9-1 790 66 2.075 8-30 600 129 2.7835 9-27 240 33 2.573 9-19 475 88 2.474 9-19 85 60 2.355 9-26 350 188 2.114 7-11 500 93 2.0534 7-18 75 86 2.409 7-27 586 96 2.205 7-6 225 118 2.367 7-11 36 68 2.50 7-14 909 135 2.24 7-6 193 36 1.861 7-21 58 238 3.17 7-20 630 80 2.228 7-24 92 64 2.19 7-14 338 7O 2.74 7-6 123 18 1.74 7-1 174 70 2.44 6-30* 30 130 2.92 320 ===fiate Dollar Size Average Net SgIe (Injhgizlalzds ) $331113 £31332 8 t___ 8-11 8 575 130 2.44 8-10 750 120 2.366 8-4 25 75 2.49 8-15 190 66 2.86 8-16 45 62 2.42 8-17 250 72 2.35 8-30 280 44 2.20 9-20 56 141 2.515 7-21 4,000 248 3.239 7-25 54 36 1.99 7-21 90 60 1.97 7-6 166 56 1.988 7-27 2:700 204 4.459 7-19 103 136 3.04 7-14 388 51 2.29 7-20 130 84 2.69 7-5 9 70 2.95 7-11 223 140 2.74 8-23 60 150 4.47 8-10 92 105 1.997 8-10 2,000 135 2.1205 8-11 29 72 2.48 8-23 500 80 2.594 321 Date Dollar Size Average Neiz‘ J. (amiss... 82:31:33 1 “iii?“ 8-3 8 63 126 3.484 9-20 70 142 2.539 9-6 30 90 2.786 9-7 25 147 3.14 9-19 276 129 2.19 REVENUE BONDS 7-13 140 178 4.99 7-18 4,000 152 2.589 7-19 550 166 3.11 7-20 198 237 3.43 7-12 23 124 2.744 6-23* 100 138 3.208 7-18 130 273 4.93 6-28* 173 244 3.368 7-6 225 162 2.857 8-1 1,200 255 3.24 8-26 836 180 2.34 8-22 300 188 3.478 8-25 1,000 110 2.493 8-25 500 106 2.66 8-23 100 124 3.39 8-29 1,400 303 4.00 8-9 221 148 3.00 322 Date ‘Sollar Size Average Net SgIe (InoThSSSEZdS) IEEEISEI InESISSt 8-23 8 1,640 258 3.99 8-10 965 178 3.24 9-1h 716 246 3.75 9-14 345 228 3.18 9-2 140 96 3.40 9-28 69,000 480 3.50 9-20 500 154 2.55 SPECIAL ASSESSMENT BONDS 7-26 313 62 2.75 6-29* 178 42 1.74 7-27 11 72 2.42 7-20 167 70 2.185 7-14 36 68 2.5 7-15 17 135 3.46 7-5 33 68 2.59 8-8 27 32 4.00 7-25 83 ' 62 3.25 8-15 60 70 2.48 7-29 42 70 3.209 8-15 33 69 2.874 8-15 9 100 2.98 8-9 48 70 2.208 8-16 52 72 3.36 323 - ..hH .. -..-m“ .. Date Lollar Size Average net of of Issue Laturity Interest Sale (In Thousands) (Months) Rate 9-28 a 261 68 2.78 9-24 63 1N2 u.21 9-26 216 81 2.93 “Third Municipal Send dunicipal bond September were latter part of quarter bond sales were taken from the Sales Supplement of the Daily 30nd Buyer. sales reported during July, August, and occasionally consummated during the the second quarter of 1955 as noted. -—-.A-. w-“ ._. .-——.—-. -_.- ......—.—... _—-—-——.—-- . ....-——.»—.--. -- .—-—.—-— BCXJZJ.3AIICS EKJPCMiTLKD LXLRIil} rova; gtAiTEa 1956 Date Dollar Sizgfi- -.Avefl§§;+*::;flvlet II of of Issue Maturity Interest Sale (In Thousands) ."(Months) Rate RQVTAQLS.SOADS 11-13 w 33 144 M-75 11-19 50 156 3.hd 10-12 98 216 4.00 10-29 150 96 N.31 l2-l9 ISO 240 4.65 11-26 151 156 3.995 10-29 190 228 4.297 ll-27 270 132 3.977 12-5 500 156 4.74 11-29 550 108 4.286 10-3 730 132 3.228 12-4 750 ' 144 4.169 324 Date Dollar Size Average Net .25. 71:58:28.4 was “SEES“ 10-11 8 750 264 4.92 12-11 2,000 132 3.893 12-11 2,275 348 4.395 12-17 2,750 312 4.06 11-13 2,800 108 3.950 11-13 5,000 192 3.73 11-14 7,410 240 3.584 10-30 128 144 3.593 10-29 200 204 4.77 12-4 1,100 192 3.879 11-5 1,575 2&0 4.194 11-27 1,950 312 4.73 10-9 2,655 228 5.03 10-29 2,800 288 4.234 12-12 3,000 180 4.43 10-29 250 216 4.155 10-9 750 96 3.228 11-28 850 216 3.975 10-2 1,147 192 3.389 10-1 1,425 264 4.053 12-13 1,685 240 3.845 10-16 3,197 252 3.587 10-9 100 96 4.470 12-13 150 84 4.00 325 Date Dollar Size” Average net of of Issue Maturity Interest Sale (In Thqusands) (months) date 10-29 9 205 108 3.761 10-1 325 132 3.477 10-24 500 192 4.617 11-27 500 120 3.934 10-9 4,000 132 3.514 12-5 4,500 252 4.415 10-24 7,500 156 3.412 ll-8 13,500 192 3.379 L 111 ’33 D GEN 1511111.- 0 SL I GA TI 01.; 1501.113 10-25 23 72 3.83 10-18 36 120 3.45 10-15 125 60 2.572 10-9 150 132 3.00 10-18 190 84 2.71 11-12 225 168 3.872 10—23 350 120 3.107 11-14 350 120 3.94 11-15 625 144 2.855 11-14 750 120 4.423 12-13 800 144 3.93 12-13 1,350 120 3.8 11-14 3,000 156 3.475 10-2 3,100 48 2.881 326 "'DetE""""Dollar Size ”73235;??I77 Net of . of Issue Maturity Interest Sale (In Thousands) (Months) <=tRate 10-31 8 3,875 168 2.794 12-8 12 84 4.00 11-2 87 144 4.74 12-4 190 84 3.48 12-3 225 24 4.49 12-18 293 72 3.57 12-28 44 72 3.40 11-1 12 48 2.968 12-6 54 84 4.66 10-11 65 72 2.88 11-16 74 84 3.75 12-20 102 72 4.35 12-13 243 ' 72 2.99 11-8 547 108 3.745 11-9 200 144 3.17 UNLIMITED GENERAL OBLIGATION BONDS 12-4 65 84 3.972 12-4 85 108 3.97 12-18 105 180 4.551 12-11 110 132 4.343 12-13 180 168 3.912 12-13 206 144 4.12 11-15 235 168 3.954 327 Date Dollar Size Average Net .21. 71.01.33.222...) was 93:12:“ 10-9 8 235 132 4.716 12-13 246 120 3.90 10-17 445 180 3.78 12-13 500 144 3.893 10-22 530 228 3.784 10-16 685 121 3.67 11-27 700 121 3.36 12-4 1,000 192 3.93 10-10 1,075 192 3.35 12-18 2,500 156 3.891 11-14 10,000 132 3.624 11-5 10 36 3.22 11-29 14 96 4.37 11-27 34 60 3.75 11-20 35 60 3.35 10-22 530 228 3.784 11-20 44 48 3.79 10-22 500 204 3.145 10-2 15 72 4.49 10-2 150 96 3.12 10-31 400' 240 3.65 10—10 800 240 3.520 328 t:— Ln— Date Dollar Size AveTage INet of Issue Maturity Interest Sale (In Thousands) (Months) Rate ll-l 4 84 4.22 11-13 270 72 3.499 Source: Files of the Investment Bankers Asso- ciation of America, 425 Thirteenth Street, N.w., Washington 4, D. C GENERAL OBLIGATION MUNICIPAL BOND YIELDS THIRD QUARTER 1955 AND FOURTH I QUARTER 1956, BY WEEKS Third Quarter Fourth Quarter Week " Aaa Week V Aaa Ending“ Yields Endingw Yields June 18 2.08 Sept. 22 2.63 25 2.09 29 2.62 July 2 2.14 Oct. 6 2.61 9 2.19 13 2.63 16 2.23 20 2.68 23 2.24 27 2.72 30 2.27 NOV. 3 207“- Aug. 6 2.29 10 2.79 13 2.34 17 2.85 27 2.34 DeCo l 3001 Sept. 3 2.34 8 3.02 10 2.34 15 3.04 17 2.32 22 3.05 24 2.27 29 3.05 Oct. 1 2.27 Source: Moody's Investors Service. *Yields are based on Thursday's figures. 329 Explanation of Symbols An estimating or regression equation is computed in order to eXpress the functional relationship between the dependent and independent variables. This equation is: X01.23 = a1.23 + b12.3 X2 + b13.2 X3 where: Xcl 23 = the computed value of the ratio of the net interest rate to Moody's Aaa Municipal Bond Index >< ll Logarithm of the dollar size of issue >< II Average number of months to maturity of the issue The 1.23 subscripts after KC and a indicate that an estimation is made of the X1 (net interest rate) from the variables X2 (size) and X3 (maturity). 81.23 = value of Xcl.23 when X2 = O and X3 = O in the estimating equation b12.3 = net regression coefficient which indi- cates the effect of size of issue (X2) on net interest rate (X1) with average length of time to maturity (X3) held constant bl3.2 = net regression coefficient which indi- cates the effect of average length of 330 time to maturity (X3) on net interest rate (X1) with size of issue (X2) held constant Or, the equation may be put in terms of the original data. Then the equation is: Xcl.23 = W (81.23 + b12.3 log X2 + bl3.2 X3) where: w = Moody's Aaa municipal bond yield And nOW'X2 is the size of issue in dollar amount. In terms of deviations from the means, the normal equations used in solving simultaneously for the esti- mating equation are: 2 lex2 — b12.3 2x2 + bl3.2 2x2x3 --b' +b- 2 lex3 ‘ 12.3 2x2x3 13.2 ZX3 where the original data is expressed in terms of the following symbols: 2 = upper case Greek letter sigma, meaning "take the sum of" x1, x2, x3 = values in the X1, X2, X3 series expressed as deviations from their respective arithmetic means In addition to terms already explained, other terms used in the following computations are: R7023 = coefficient of multiple determination, which denotes the proportion of the 331 total variation in the net interest rates that is accounted for by size and average length of time to maturity $1.23 = standard error of the estimate, which is a measure of dispersion of the data 2 B12.3’ B13.2 r12.3' r13.2 2 2 r12’ r13 about the regression plane , I’ 2 _ d12.3: d13.2 — 23 coefficients of separate deter- mination, the proportion of the total variation that is explained by the dependent variables, X2 and X3, respectively beta coefficients, the regression coefficients transposed to stand- ard, comparable units partial or net correlation coef- ficients, the relative counter- parts of the net regression coefficients = coefficients of determination, the measure of the relative amount of variation in: (1) variable X1 explained by the variation in variable X2; (2) variable X1 explained by the variation in variable X3; and C R1.23 332 (3) variable X2 eXplained by the variation in variable X3 reliability of Rl.23 °b12.3’ Ob13.2 = standard error of R1 23, a measure of = standard error of net regres- sion coefficients, measure of reliability of b d b 12.3 an 13.2 t = in this Appendix, test to determine if par- tial coefficients of correlation are signifi- cantly different from zero F = in this Appendix, test to determine if mul- tiple coefficients of determination are significantly different from zero Computations Third Quarter 1955 The original data for the eighty-two obligation bonds is summarized as follows: 2x1 X1 2 2X1 1.1183 i2 = 2 _ [II-01497 2X2 '- ‘lo7978 2X2X3 = 178.5195 2.1771 26.2494 799.2756 2X3 X3 . 2 2X3 general 7913 96 = 176,096 = 450.0034 333 Making the required substitutions in the two general equations gives: -1,7978 = b12.3 26.2494 + b13.2 799.2756 450.0034 = b12,3 799.2756 + b13.2 176,096 Solving these simultaneous equations gives: b12.3 = -.1698 = .0362) (ob12.3 II b13.2 = .00333 .00044) (ob13.2 Substituting in the following equation: 81.23 = X1 “ b12.3 X2 ‘ b13.2 X3 Gives: 91.23 = 1.1183 - (-.1698)(2.l77l) - (.00333)(96) a1.23 = 1.1669 The estimating equation, then, is: X°1.23 = 1.1669 + (-.l698) log x2 + .00333 x3 Substituting in appropriate formulas, the following values are obtained: b12.3 lex2 + b13.2 lex3 R1.23 ‘ 2x I-‘I'U = .434 2 _ 1 ' R1.23 _ O T - o R1.23 4n - m 068' 334 2 N 2X1 - (b 12 3 2x1 x2 b13°2 22:13.3) = .17 31.23 n - m 12.3 — 2x12. . 2 b 2x x d13.2 = 13.:X2 173 = .361 1 2x5 B12.3 = b12.3 '§;§= "'827 2x2 B13.2 = b13.2 fo = ~685 2 2 R - r .2 3 1312.3 zd 1- 3 2 l = ...ng66 l-I‘l3 r2 (N-m) tr 2 = 12-3 = 4. 68 (significant at I.12.3 1 - rI2.3 .05 level) ' 2 2 R - r 1.2 2 .1351 i3 21 =4. ‘ rl2 r53 2 (N-m) tr2 = ' = 7.52 (significant at 3.2 1 - r§3.2 .05 level) 335 The original data for the twenty-four revenue bonds is summarized as follows: 2x1 = 35.0771 2x2 = 63.7950 2X3 = 4.728 X1 = 1.4615 Xé = 2.6581 23 = 197 2 , 2 2 2x1 = 2.2088 2x2 = 10.6276 2x3 = 161,100 lex2 = -.7327 2x2x3 = 837.3073 lex3 = 245.4215 Making the required substitutions in the two general equations gives: -.7327 = b12.3 10.6276 + b13.2 837.3073 245.4215 bl2.3 837.3073 + b13.2 161,100 Solving these simultaneous equations gives: b12.3 = -.3200 = .0951) (0b12.3 b13.2 = .00319 .0007?) (o b13.2 Substituting in the general equation gives: al.23 = 1.4615 - (-.3200)(2.6581) - (.00319)(l97) a1.23 1'68“3 The estimating equation, then, is: x = 1.6843 + (-.3200) log X2 + .00319 X3 C1.23 336 Substituting in appropriate formulas, the following values are Obtained: R1.23 .460 O = 0118 R1.23 '31.23 “ '24 2 _ dl2.3 "" 0106 2 _ d1302 '- OBSLI' B = -.702 B13.2 = .861 1.12.3 = -.602 tr2 = 3.45 (significant at .05 level) r13.2 = '669 tr2 = 4.13 (significant at .05 level) 13 2 The original data for the eighteen special assessment bonds is summarized as follows: 2x1 = 23.0000 2x2 = 31.4874 2X3 1353 3‘61 75 1.2778 x2 1.7493 xg 337 N 12326 2 2 2 2x1 3.5210 2x3 Exlxz = -.4913 2x2x3 = ~58.5615 lex3 = 54.8467 Making the required substitutions in the two general equations gives: ”OI-L913 bla.3 3.5210 + b13.2(-58.5615) 54.8467 612.3 (-58.5615> + b13.2 12326 Solving these simultaneous equations gives: b12.3 = -.0712 = .1697) (0b12.3 b13¢2 = .00411 (Ob13.2 = 000238) Substituting in the general equation gives: al.23 = 1.2778 - (-.0712)(l.7493) - (.00411)(75) In I - 1.0932 The estimating equation, then, is: X°1.23 = 1.0932 + (-.0712) 16g x2 + .00411 x3 Substituting in appropriate formulas, the following values are Obtained: 1.23 = .212 338 2 F = 2 = 1.03 (not significant at 1 - 81.23 + (N-m) .05 level) 31.23 = ~25 2 d12.3 = .028 2 _ (3.13.2 "" 0183 B12.3 = -0120 1313.2 = .1112 I’ = -0129 r’l3.2 = '80? Fourth Quarter 1956 The original data for the forty-four revenue bonds is summarized as follows: 2x1 2 63.5751 2x2 = 126.7189 2x3 2 8232 ii = 1.4449 22 = 2.8800 X3 = 187 2 _ 2 _ 2 _ lex2 = -l.1173 2x2x3 = 721.3411 lex3 = 133.6764 Making the required substitutions in the two general equations gives: -1.ll73 = b12.3 17.3458 + bl3.2 721.3411 339 133.6764 = b12.3 721.3411 + b13.2 188,444 Solving these simultaneous equations gives: b12.3 = -.1117 = .0417) (Obl2.3 13.2 b = .00114 (obl3 2 = .00040) Substituting in the general equation gives: al 23 = 1.4449 - (-.lll7)(2.8800) - (.00114)(187) a1.23 = 1.5104 The estimating equation, then, is: x01023 = 1.5104 + (-.1117) 16g x2 + .00114 x3 Substituting in appropriate formulas, the following values are obtained: 2 _ R1023 "" 0228 031.23 = .120 31.23 = .16 dia 3 = .093 d73.2 = “136 B12.3 = -.401 B13.2 = '“25 340 I'12.3 = '°”12 tr§2.3 = 2.90 (significant at .05 level) r13.2 = 0430 tr§3.2 = 3.05 (significant at .05 level) The original data for the twenty-nine limited general obligation bonds is summarized as follows: 2x1 = 36.4417 2X2 2 66.8507 2x3 = 2940 i1 = 1.2566 Té = 2.3052 23 = 101 2 _ 2 _ 2 _ 2x1 - 1.0666 2x2 — 12.3124 2x3 — 41929 lex2 = -.6214 Zx2x3 = 313.4081 lex3 = 24.1604 Making the required substitutions in the two general equations gives: -.6214 = b12.3 12.3124 + b13.2 313.4081 24.1604 = b12.3 313.4081 + b13.2 41929 Solving these simultaneous equations gives: bl2.3 = -.0804 (0,012.3 = .0617) bl3.2 = .00118 = .00106) (Ob13.2 341 Substituting in the general equation gives: al.23 = 1.2566 - (-.0804)(2.3052) - (.00118)(101) a1.23 = 1.3227 The estimating equation, then, is: X°1.23 = 1.3227 + (-.0804) log x2 + .00118 x3 Substituting in appropriate formulas, the following values are obtained: 2 _ R1.23 ‘ '074 F = 1.03 (not significant at .05 level) 'Sl.23 = -19 The original data for the thirty-one unlimited general obligation bonds is summarized as follows: 2X1 = 41.9691 2X2 3 70.8684 2X3 = 4260 xi = 1.3538 X5 = 2.2861 X3 = 137 2 2 2x1 = .6574 2x2 16.2859 2x§ 103,058 leXZ = -.7919 2X2X3 839.7110 ZXlX3 = 16.6730 Making the required substitutions in the two general equations gives: -.7919 = b 16.2859 + b 2 839.7110 12.3 13. 342 16.6730 = b 839.7110 + b 2 103,058 12.3 13. Solving these simultaneous equations gives: b12.3 = “.0982 = 9011.62) (Ob12.3 b .00096 (0 .00058) 13.2 b13.2 Substituting in the general equation gives: a1.23 = 1.3538 - (-.0982)(2.286l) - (.00096)(137) The estimating equation, then, is: x01.23 = 1.4462 + (-.0982) log x2 + .00096 x3 Substituting in appropriate formulas, the following values are obtained: R7.23 = .143 F = 2.33 (not significant at .05 level) S1.23 = .14 BIBLIOGRAPHY Books Bellemore, Douglas Hamilton. Investments--Principles Practices and Analysis. new York: 5. C. Forbes and Sons Publishing Co., Inc., 1953. Billington, Ray Allen.' Westward Expansion, A History of the American Frontier. New York: MacMillan CO. , 1924.90 Chermak, Lawrence E. Law of Revenue Bonds. Washington, D. C.: National Institute of Municipal Law Officers, l95u. Clendenin, John C. Introduction to Investments. 2d ed. New York: McCraw-nill book Co., 1955. Committee on Municipal Debt Administration. The Call Feature in Municipal Bonds. 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