cation is threatened by any broad program of financing school construction through the purchase of school district bonds by the Federal Government.

Every State, regardless of financial ability, should get a certain amount of Federal support under a grant program. Such a program should not be limited to relief for the poorer States, but should be designed to give a general boost to education throughout the country. The States like New York, which have spent a high proportion of their income on public education, should not be penalized under such a bill.

In conclusion, it is my opinion that there must be some Federal support for the Nation's schools. The administration's plan for school aid is merely a gesture of intent. It actually provides an expensive plan for piling up future interest charges, while giving a very modest amount of aid for construction. The administration proposal fails to meet the Federal Government's real responsibilities toward our schools.

Mr. THOMPSON. The Chair wishes to thank the gentleman for a fine statement. I note with some interest the statement on page 3 of this testimony, in which it is pointed out that small communities scattered throughout the suburban New York area, in these communities the largest share of the local tax money goes to support public schools. Is it your opinion that, in many instances, these suburban areas have, in fact, zoned themselves out of ratables by excluding industrial development, and therefore eliminating ratables which they might otherwise get.

Mr. EDELMAN. Mr. Chairman, might I say at the outset that any statements that I may make are to be considered as reflecting my own opinion, and not those of Comptroller Levitt. The point that you have raised is a very important one, and one that we have given quite a bit of attention to.

The Governor's Committee on the Marketing of School Bonds considered the problem of the purely residential suburbs on Long Island, for example, which are, in many cases, zoned against industry. There have been some suggestions made by certain financial experts that it would be desirable to create different types of districts in those suburban areas, for example in Long Island, and to include industrial sites and industrial plants in those districts.

A great deal of attention has been given to that problem, but nobody has really worked it out.

Mr. THOMPSON. It does seem to me, recognizing of course that the shortage of classrooms exists everywhere, from my personal point of view I have infinitely less sympathy for the person who likes that tree-lined street and a big backyard so well that he wants no factory near it. He pays the penalty of having to fight his way into his job in the city during the day on woefully inadequate commuter systems, something that is bothering all of us in the metropolitan area, and he pays the penalty usually in the form of having to buy a second automobile, and pay higher ad valorem taxes. This is a problem that is not exclusive to New York. We have it in New Jersey, and I think surrounding any of our great cities are these areas where people want suburbia so much that they have invited financial disaster. The rate of taxation in New Jersey on real estate is, I think,

the second or third highest in the Nation. It is unbearable on many of these bedroom communities that we have because they don't want industry, and they are going to have to pay the price.

Mr. EDELMAN. A recent study that I read of the Long Island counties gave this indication on this problem: That is, that where apartments have been constructed in those areas of Nassau County closer in to New York City, apartment dwellers or apartment construction has contributed a great deal to the tax base, because the studies found that few children live in the apartments.

The largely childless families live there, or families with children that have grown up or are away to college or something of the sort, and the resultant work that is now going forward at a considerable pace in Nassau County will help the tax base situation.

Mr. THOMPSON. That is good to hear. It is no doubt a leveling factor.

Does the gentleman from Pennsylvania have any questions?

Mr. KEARNS. This is very enlightening to have a statement like this. You are looking at figures rather than anything else, as I get from your statement.

Mr. EDELMAN. That is right.

Mr. KEARNS. Do you feel that in the construction approach to building schoolhouses that we have exhausted the bond picture like the administration's bill presents?

Mr. EDLEMAN. I would like to give you a few of my thoughts on the administration bill. That is H.R. 4268.

Mr. KEARNS. It is a financial bill, definitely a financial bill.

Mr. EDELMAN. It is a bill that creates some problems. One of the peculiar problems created by the bill or would be created by the bill if enacted, is that in making a favored new class of school bonds, a favored class of school bonds which would be guaranteed, so to speak, 50 percent by the Federal Government and 50 percent by the State treasury, it would take the double A, an "A" rated school bond that we have now and put them at the bottom of the pile. In other words, you would have something like the public housing guaranteed bonds. For example, I am looking at an advertisement of the $34,860,000 of new public housing authority bonds that were advertised in the Daily Bond Buyer of February 27, 1959. There were two large housing issues advertised on that day. One of the purchasing syndicates, and this is the smaller of the two issues, was purchased by a smaller syndicate. These housing bonds involved projects of housing authorities in places as far separated as Hawaii and Baltimore, they are the two first names, and Frederick, Md., and Greensboro, N.C., and LaCrosse, Wis., and Athens, Ga., and Macon City, Miss., and Asbury Park, N.J., and Steubenville, Ohio, and Brian, Tex., and South Norfolk, Va.

Those are the public housing authorities involved in this $34,860,000 of housing authority bonds that were purchased at public bidding by one of the syndicates, headed by Blythe & Co. Those bonds, of course, are secured, as is stated in the advertisement, by the United States solemnly pledging the faith of the United States. It would be similar to the contracts mentioned in H.R. 4268. The bonds are, also, as stated in the advertisement, exempt in the opinion of counsel to the underwriters from Federal income taxes by the provisions of the U.S. Housing Authority Act of 1937.

So you have a combination of a tax-exempt bond plus a Federal guaranteed obligation, which means that you have a better bond literally from a tax standpoint than a U.S. Government bond, and from a credit standpoint it certainly is as good as almost any State bond and better by far than most municipal bonds from a credit standpoint.

Now, the housing authority bonds, of course, the legislation providing for that annual contribution, filled a dividend need. There were no public housing authority bonds being issued before the Public Housing Authority Act of 1937 and the amendments. It is not the problem we have with the school districts. It brought a new class of bonds, of a new type of public body into the market and really made a new market situation. But with the school districts you already have more than $2 billion a year of school district bonds that are finding a market. If you put a Federal guarantee plus a State guarantee on $600 million of those bonds each year for 5 years, you are taking a certain proportion of those school district bonds and putting them at the top of the school district list, but you are also putting them ahead of most of the other municipal bonds, and most of the village bonds and county bonds.

Mr. THOMPSON. Is this because of the Federal guarantee?
Mr. EDELMAN. Yes; plus the State guarantee.

Mr. THOMPSON. And the tax exemption feature?

Mr. EDELMAN. That is a triple A bond State in New York, and that State guarantee means, in New York State it will sell at a much higher level than the other bonds issued by the municipalities in that State.

Mr. THOMPSON. These school bonds would be tax exempt, too. Mr. EDELMAN. The bonds would be fully tax exempt, and in addition the market would find a tremendous shift of bonds. Today school district bonds are sold to a great extent on a regional basis. We would find, I think, if H.R. 4268 were enacted, that we would have perhaps bonds selling of the type that is envisaged by the Housing Authority advertisement that I referred to. In other words, perhaps Mississippi bonds and Arkansas bonds and California school district bonds and New York school district bonds would all be sold in a lump perhaps in the New York market instead of the present situation, where the Texas school district bonds are sold in certain areas and California in certain other areas, and New York is foremost in the New York area. You would have a complete reshuffling of the situation, because these new bonds which H.R. 4268 provides for would be, practically speaking, top dog in the bond market.

Mr. THOMPSON. What is your estimate of the effect of the shifting of selling areas?

Mr. EDELMAN. Well, for one thing, it would make it difficult for many school districts who now market their bonds successfully in many town and villages and counties and cities who now market their bonds successfully, and some of the States, to do as well in the bond market as they do at present.

In other words, by helping the lower grade of school district obligations you may hurt very severely other school districts, a majority of the school districts, plus a majority perhaps of the towns and villages and counties and water districts and other types of public bodies.

Mr. BAILEY. Mr. Chairman, may I ask a question at that point?

This so-called carryback provision in the administration's bill, I call it a Shylock clause, that allows the Federal Government to freeze 50 percent of the bonding capacity of those districts after the maturity of the bonds, after voting a 25-year bond-wouldn't the Government stand possibly in many instances to recover more money than they have paid into the bond during the life of them, due to the fact that a valuation now might after 25 years be four or five times as high a valuation as it is at the present time and yet they are freezing 50 percent of those bonds for a period of 10 years after maturity?

They are requiring the school board to leave a certain amount of their bonding capacity and return it to the U.S. Treasury. It is a sort of a last-pound-of-flesh approach. What is your reaction to that?

Mr. EDELMAN. Well, let me make a remark first about another effect of that last-pound-of-flesh clause. By freezing the 50 percent until after the bonds are paid you are really establishing a situation where the debt limit or, rather, the balance sheet of that school district that has had that 50 percent freeze becomes uncertain. In other words, supposing that additional bonds are voted by the district in later years, and they desire to sell bonds in the general market. Their debt statement has to reflect, of course, that freezing. Yet the statement in the act with regard to the freezing makes it uncertain whether that freezing is a permanent freeze or whether it may be lifted.

Mr. KEARNS. Whether it has a dateline on it, you mean?

Mr. EDELMAN. I am not referring to the dateline, but the fact that if the district continues to have a distress tax situation, then the impression is given that the money may not be repaid. I mean there is an uncertainty created for a great many districts who would participate under the act, as to whether their debt limit was permanently frozen until their debt to the Federal Government was repaid, or whether they might perhaps be relieved from part of that if they remained in a distressed situation.

I think that that is a problem.

There is also another factor there, and that is if the Federal Government makes these commitments to the extent of $2 billion or to $3 billion of bonds, and those bonds are out, weighing down the market and pushing down prices on other bonds, I think that the pressure would be so severe that it will be necessary to find some remedy for the other bonds.

You could have potentially a weakening of bond prices, municipal bonds that have been tucked away in trust funds and portfolios, and insurance company accounts, for example, New York State has retirement funds of the State and local employees which will amount to $1,250 million and a large percentage of that money is invested in school district bonds of high quality.

The value of those bonds might deteriorate if $3 billion of Federal and State guaranteed bonds came out on the market.

I think the Federal Government would have to do something perhaps in the future to meet that situation.

Mr. BAILEY. You can conceivably agree with me, if we take as an illustration a school district that had a $2 million valuation and they want to vote $300,000 of bonds to build an elementary school, the life of the bonds is 25 years-it is just possible that in that district by the bringing in of industrial or the installation of a Federal facility

of some kind that the valuation at the time the bonds are matured might be $100 million as against $20 million when they were voted. Mr. EDELMAN. That is right.

Mr. BAILEY. The Government still has a freeze on 5 percent of their bonding ability, and any bond that is out now will be matured and paid off before the one underwritten by the Government. So that district will be in a position to help itself except that it is being crippled by the fact that 50 percent of its bonding capacity has to be paid to the Treasury of the United States for 10 additional years beyond the maturity date of the bond.

Mr. KEARNS. Will you yield a moment there? It is quite important what you have brought up here, and today we are in a phenomenal situation with the stock market. Supposing that lucrative capital which is being put into stocks today could be diverted to the bond market, which it will be inside of 6 months or a year, and how is that going to affect the overall potential of the bond market?

Regardless of the Government underwriting it, it is going to be a secure investment and, let us put it this way, I don't think that the Government has to underwrite everything to make it secure, do you?

Mr. EDELMAN. Well, clearly the bond market is disposing of a lot of bonds without government underwriting them. The municipal bond market took approximately $7 billion of new issues last year, and it has been able to handle larger volumes of municipal issues in recent years than ever before.

What the future of the bond market is going to be, of course, would take somebody with a fine crystal ball. That is hard to tell.

Mr. KEARNS. But you honestly feel that the administration approach to this bonding program to build schools is not feasible?

Mr. EDELMAN. I honestly feel that way, and so do quite a few other people in Wall Street.

Mr. KEARNS. You do not particularly buy the Murray-Metcalf bill approach?

Mr. EDELMAN. I feel that I am most helpful in analyzing this bonding feature, and I can give you my impression of that bill. I think it would hurt State and municipal bonds and State and municipal credits.

Mr. KEARNS. I think it is fine that you came up here and testified. The whole thing to me, the bond isn't worth anything except for the local that has the capital investment in the bond, isn't that correct? Mr. EDELMAN. I do not quite get your question there.

Mr. KEARNS. Well, any town in America that is going to build a schoolhouse and they issue bonds, the integrity or the collateral of the bond is where it was issued.

Mr. EDELMAN. That is right, except that we have situations in some of the States where the States are already contributing certain amounts toward the capital construction costs, and that can change the picture.

Mr. KEARNS. Oh, yes, I agree with that.

Mr. EDELMAN. There are certain school districts in New York State, for example, where 80 to 90 percent of the capital construction costs of the marginal districts are being paid, in the case of the central school districts, by the State. So the percentage of bonds that has to come out to cover the capital construction costs is small.