all years, an additional competitor would have led to a reduction in net interest costs on new revenue bond issues of 2.0 basis points. Over-all, if the number of bidders on revenue issues were increased to the number on general obligations, the level of net interest costs on revenue issues would have been lowered 3.3 basis points.

The results obtained from the analysis of all issues for all years are confirmed by the analysis of the issues by rating and by year.

Analysis of all issues for all years. --According to the regression results, an increase in size of issue, average maturity of issue, and the Bond Buyer's Index led to an increase net interest cost. Both rating and the number of bidders inversely affected net interest cost.

For general obligations alone, an additional bidder would have reduced net interest cost by 1.0 basis point. Turning to revenue issues, an additional bidder would have reduced net interest cost by 2.0 basis points. The effect of additional bidder on net interest cost for revenue issues was

statistically significant. Assuming that the number of bidders on revenue issues would increase to the level on GOs during the 1964 to 1966 period (1.64 higher) the net interest cost for revenue issues would fall by 3.3 basis points. (See Table VI-2).

Analy s by year.--The extreme tightness of the

money markets in 1966 is still painfully familiar. The nature and magnitude of the stresses on the money markets in 1966 might lead one to expect that the market for underwriting municipal bonds in 1966 was in continual

disequilibrium.

In turn, one would anticipate somewhat different determinants

a

In basis points.

of the rates paid by State and local governments on new municipal bond issues in 1966 than in 1964 or 1965 when the money markets were under less

stress.

The extent of competition for particular municipal bond issues, nevertheless, affected the rates paid on municipal bonds in 1966, as was true in 1964 and 1965. That is, such severe stresses on the money markets as were experienced in 1966 did not eliminate the benefits of greater competition for the underwriting of municipal bond issues. On general obligation issues, an additional bidder led to a lowering of 1.3 basis points in net interest cost. Again, the benefits to municipal authorities of added competition in bidding for revenue issues were greater by 2.2 basis points in net interest cost for each additional bidder. This reduction of 3.5 basis points in net interest cost on revenue bonds per extra bidder would give a total reduction in NIC of 5.3 basis points if the number of bidders on these issues had been comparable to those on GOS (1.53 higher). This constituted almost one-third of the difference in net interest cost between revenue issues and GOs, a very impressive portion considering the effect of the much longer maturity of revenue issues on NIC.

In 1965 the level of interest costs paid by State and local governments was again affected by the number of bidders and, as well, by maturity, rating, and money market conditions. In this case, one additional bidder on GOS would have been associated with a reduction in net interest costs of .7 basis points. While the coefficient for revenue issues was .2 basis

points greater (amounting to 1.7 basis points if the number of bidders were as great on revenue issues), it proved not to be statistically signi

ficant.

The affect of an additional bidder on the net interest cost of

The

revenue issues in 1964 was somewhat less than for all years together. statistical analysis indicates that an additional bidder on 1964 revenue issues would have reduced net interest cost by 1.6 basis points. By comparison, an additional bidder would have reduced net interest cost on general obligations by 1.1 basis points. If the number of bidders for revenue bonds had been as great as for GOs (.68 higher), net interest cost ⚫ on revenue issues would have been 1.1 basis points lower.

Analyses by rating. --The significant determinants of variations in

net interest cost on Aa issues for the period studied were maturity of issue, the level of the Bond Buyer Index, and, for GOs, the number of bidders.

Even so,

an additional bidder on a general obligation issue would have reduced net interest cost by only .4 basis points. Each additional bidder on revenue issues would have reduced net interest costs by .6 basis points; however, the regression coefficient was not statistically significant.

About one-half of all issues studied were A-rated.

Therefore, the

regression results for this group are of special importance for possible confirmation of the results obtained for all issues. An additional bidder on A-rated general obligations would have reduced net interest cost by 1.1 basis points. The introduction of an additional bidder would have reduced

59-068 O 71 pt. 2 25

net interest cost on revenue issues by 2.7 basis points. The effect of added bidders on the NIC on revenue bonds was statistically significant. If the same number of bids were tendered on A-rated revenue issues as on

like rated GOs (1.56 higher), the net interest costs on revenue issues would have been 4.2 basis points lower.

For Baa-rated general obligations alone, an additional bidder would have reduced net interest cost by 2.7 basis points. Turning to revenue issues, the benefit of additional bidder was less--2.4 basis points. If the number of bidders on revenue issues increased by .59 to the prevailing level for GOs, net interest cost on Baa revenue issues would be 1.4 basis points lower.

Net interest cost: summary. --The vital importance of competition in revenue bond underwriting is evident from our statistical analysis of the municipal bond issues studied for each rating category separately, for each 41 year separately, and for all issues of all three years. The effect of an additional bidder ranged from 1.6 basis points for 1964 issues to 3.5 basis points for 1966 issues. The analysis of the issues for 1966 and for A and Baa rating categories suggest that the benefits of an additional bidder on revenue issues were greater than the 2.0 basis points found for all issues for all years. All in all, the regressions explained a reassuringly large portion of the variations in net interest cost--ranging from 75 percent to

4

For 1965 and Aa-rated issues, the calculated benefits from an additional bidder on revenue issues were not statistically significant at the five percent level.