more customary and more reasonable requirement that the appropriate health planning agency certify the need for such a facility in the area. This is the same requirement that is presently used in the case of nursing homes and hospitals, and therefore, would be consistent with present policy. We support the concept of S. 2269, particularly the fact that it applies to both for-profit and non-profit medical practice facilities. The vast majority of group practices in the United States are for-profit organizations and if a physical plant needs to modernize, we should encourage that rehabilitation. In addition, physicians who do not wish to be employees of a non-profit organization may be encouraged to become partners in a for-profit prepaid group practice plan. Finally, we urge the amendment of the definition of group practice or medical practice to include proprietary organizations in order to permit sound health planning. Many proprietary hospitals and medical clinics are located on the same site. If the hospital is eligible for mortgage insurance and the clinic is not, then the owners may expand the more costly facility instead of the less costly outpatient facility even though sound health planning may call for expansion in the opposite manner. We believe that there will be no danger of excessive construction, expansion or modernization under these proposed amendments because sponsors will be required to obtain a certificate of need. Mr. Chairman, we thank you for this opportunity to comment on pending Housing legislation and hope that our recommendations will be helpful to the subcommittee. 1971 HOUSING AND URBAN DEVELOPMENT LEGISLATION WEDNESDAY, SEPTEMBER 22, 1971 U.S. SENATE, COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS, SUBCOMMITTEE ON HOUSING AND URBAN AFFAIRS, Washington, D.C. The subcommittee met, pursuant to recess, at 10 a.m., in room 5302, W New Senate Office Building, Senator John Sparkman, chairman of the committee presiding. Present: Senators Sparkman, Williams, Tower, and Brock. Senator Williams has a statement. STATEMENT OF HARRISON A. WILLIAMS, JR., A U.S. SENATOR Senator WILLIAMS. Thank you Mr. Chairman. I am most gratified that the Subcommittee on Housing and Urban Affairs is today focusing its attention on S. 2261, the State and Metropolitan Development Agency Act of 1971. This legislation which would authorize the Department of Housing and Urban Development to guarantee State housing and development bonds in the amount of $2 billion shows the deep commitment which now exists in the Senate to assist the States in originating and operating meaningful community development programs. Eleven States including Delaware, Illinois, Massachusetts, Michigan, New Jersey, and New York have already initiated low- and moderate-income housing under the sponsorship of State housing finance agencies. Under these programs, the construction of over 90,000 units has already begun. In seven other States enabling legislation has been passed creating State housing agencies and seven more have similar bills pending before their respective legislatures. In my opinion, the Federal Government has an obligation to encourage and assist these State agencies whose sole purpose is to provide additional low- and moderate-income housing, sound neighborhood growth and development and the creation of new job opportunities. The Federal aid provided under title VIII of last year's Housing Act for new communities should most certainly be extended to existing urban areas. These newly created State and metropolitan development agencies will all be issuing bonds to finance the construction of low- and moderate income housing units. The income from these bonds should not be exempt from Federal taxation. They should not be a tax shelter for the very rich. Therefore, to encourage the issuance of these bonds at the lowest possible cost to State and Federal governments, my bill provides for interest differential payments. These payments as well as the Federal guarantee would only be made available when the income from the bonds is subject to Federal taxation. Under the differential payments, grants would be made to the State agencies to make up the difference between the interest paid on the actual bonds and the interest which is paid on similar obligations which are tax exempt. Decent, safe, and sanitary low- and moderate-income housing is one of our Nation's major needs. It can revitalize our ailing cities. Through its construction slums can be revitalized and blighted urban neighborhoods can be rehabilitated. New job opportunities for the unemployed and underemployed can be created. State or metropolitan development agencies should be urged to work toward the fulfillment of these objectives. The bill before us today would commit the Federal Government to assisting the States in the development of these programs which contain social benefits for so many of our Nation's citizens. The CHAIRMAN. Thank you, Senator Williams. Is Mr. Eisman here! (No response.) Is Mr. Kearney here? Mr. KEARNEY. Yes. The CHAIRMAN. Please come around, Mr. Kearney. Mr. Daniel P. Kearney, executive director of the Illinois Housing Devlopment Authority. Mr. Kearney, we are very glad to have you with us. We have a copy of your statement, and, as you probably know, that will be printed in full in the record. You may proceed as you see fit. STATEMENT OF DANIEL P. KEARNEY, EXECUTIVE DIRECTOR, ILLINOIS HOUSING DEVELOPMENT AUTHORITY Mr. KEARNEY. Thank you, Senator. Mr. Chairman and members of the subcommittee, I welcome your invitation to present my views on the Senate bill 2261. This legislation, I believe, is designed to accomplish two purposes: 1. To encourage the creation of State and metropolitan development agencies having powers similar to those reposited in the New York State Urban Development Corp.; and 2. To encourage these newly created State and metropolitan development agencies to issue taxable debt, rather than tax-exempt obligations, in order to reduce the revenue drain on the U.S. Treasury. My analysis of this legislation leads me to conclude that it is inadequate to accomplish these purposes. I would recommend the expansion of the definition of qualified entities to include State housing finance agencies. And the incentives to participate in the guarantees should be strengthend, so as to increase the number of participating agencies and thereby decreasing the impact on Treasury revenues. I commend the block allocation of interest subsidy funds under section 235 and 236 of the National Housing Act for your consideration as an appropriately responsive incentive. I. THE NEED FOR AN EXPANDED DEFINITION With regard to the impetus for the creation of metropolitan and State development agencies, the definition of powers and purposes required by these agencies to qualify for assistance under this act rather clearly covers only one existing agency-the Urban Development Corporation of New York. No other jurisdiction has an agency equipped with all of the powers specified in section V of the bill. In order to promote the creation of comparable agencies in other States, the legislation should recognize the evolutionary response of all States, including New York, to the housing problem and not expect jurisdictions to adopt such legislation without having pursued other less controversial solutions to the problem. A brief history of New York experience is instructive. New York adopted the legislation only after a long history of legislative attempts to solve the housing problem. In 1926, the State enacted a limited dividend housing company law designed to encourage private investment into housing. Later, in the postwar period, it became apparent that private resources were inadequate; therefore, the State of New York allocated $100 million of State resources to housing. In 1960, New York created a housing finance agency and empowered it to issue tax-exempt revenue bonds to finance mortgages for housing construction. This agency was empowered to issue tax-exempt debt, thus generating loan funds which could be made available to private developers. The agency made the loan at the tax-exempt rate and for a longer loan term; thus, the developer realized a lower interest cost than he could obtain from conventional lending sources. The resident received the benefit of the saving achieved in the form of a lower monthly payment. The New York HFA was an instant success. The legislature has expanded the bonding authority to $2 billion at present. Following the success of New York HFA, Illinois, as well as Michigan, Massachusetts, and New Jersey enacted HFA-type legislation in 1966 and 1967. These States modeled their programs after the New York HFA and presently have active programs for providing mortgage financing for low, moderate, and middle-income families. Eight other States have enacted similar legislation, while an additional 20 are actively considering the issue. Thus, in 1968 when the State of New York took the further ambitious step of creating the Urban Development Corporation, it had an extensive experience with housing finance and the other ambitious attempts to forge an effective response to the housing problem. Many States are considering legislation creating UDC-type agencies; but it is my judgment that enactment of such legislation will occur in those jurisdictions which have first tried the HFA device and found it wanting. This bill should seek to buttress this evolutionary process by extending its guarantees and incentives, not only to urban development orporations but to those States which have taken the step of creating housing finance agencies. Were the definition not to encompass these housing finance agencies, he revenue loss to the Treasury would continue to be extensive. The lebt authorization of the HFA's of New York, Massachusetts, Michi gan, and Illinois combined are approximately $5 billion. New Jersey HFA has no debt limit. Thus, one of the basic goals of the legislation would be stifled if they were not to be covered. II. NECESSITY TO STRENGTHEN INCENTIVES Now let me turn to the incentives. The legislation holds out a Federal guarantee for the securities of those agencies qualifying under the legislation. For those States which already have active housing agencies, the guarantee will be of marginal value and in all probability not worth the effort to secure, since the agency has extensive market experience and since much of its interest costs are subsidized under section 236. Yet these are the very instrumentalities which are contributing most to the Treasury's revenue drain. It would, therefore, be advisable to increase the incentive. The single most powerful incentive conceivable in my judgment is the allocation of interest subsidy payments under sections 235 and 236 of the 1968 Housing Act. It is clear that the interest subsidy provisions are the single most important factor in achieving lower monthly payments for renters and buyers. The attainment of these payments would be a powerful inducement for the participation of State and metropolitan agencies in these guarantee provisions. The importance of interest subsidies as an incentive has increased in recent years as tax-exempt interest rates have increased, absolutely, and while the margin between conventional and tax-exempt rates has narrowed. In January of 1967 the Bond Buyer Index, a widely used index of municipal tax-exempt rates, stood at 3.40 percent. In May of 1970, the index stood at 7.12 percent. Assuming a dwelling unit development cost of approximately $20,000 and assuming that the monthly payment-or rent for an apartment increases by 3.50 per month for each quarter percent rise in interest rate, this increase in interest costs alone has driven rents up by approximately $50 a month. The interest subsidy provided by HUD, however, covers the difference between 1 percent and the actual interest rate, thus absorbing the increase in municipal bond rates and making the same two-bedroom unit available for approximately $160 per month. We're talking about Chicago prices here. The suggestions made herein are embodied in the legislation proposed by Representative Patman in House bill 9688. Title VII of that bill is almost identical to the legislation introduced by Senator Williams. Title V of House bill 9688 prescribes the allocation of Federal housing assistance moneys to State and metropolitan housing agencies for redistribution. However, as presently drafted, Representative Patman's bill has different definitions for qualifying State and metropolitan develop ment agencies. Title V provides for allocation of assistance moneys to State or metropolitan housing agencies which are those instrumentalities empowered under State law to (A) establish housing needs and objectives throughout the metropolitan area involved; and |