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(The document above referred to is as follows:)

COUNCIL OF CHIEF STATE SCHOOL OFFICERS

An Independent Organization

WASHINGTON, D. C.

This is a study of the inherent "leveling" effect of the Federal tax system. We have compiled table I on the basis of Federal statistics for use in connection with the bills to provide Federal assistance for school construction soon to be introduced. No similar data, so far as I know, has previously been used in connection with such legislation.

Table I shows what each State paid in Federal taxes for each billion dollars collected under the tax laws of fiscal year 1952, and what each State would receive for school construction on the basis of the population 5-17 years old in each State as of July 1, 1952.

The State payments of Federal taxes in colum (A) are computed on the basis of what the inhabitants of each State actually pay in Federal taxes, rather than on the basis of where the taxes are actually collected. For instance, the huge cigarette excise taxes collected in North Carolina are distributed among all States. Similar allocations have been made of all important Federal taxes, including corporate income and profits, individual income, Federal insurance contributions, railroad employment and insurance, unemployment insurance, estates and gifts, alcohol, tobacco, gasoline and oil, automobiles and parts, electrical energy, manufacturers' and retailers' excises, telephone and other communications, transportations of persons and property, and amusements.

A glance at table I will show that the wealthy States pay larger amounts of. Federal taxes and would receive back smaller amounts of construction aid for each child 5-17 years of age than the average State. Conversely, States of comparatively low income and wealth pay relatively less in Federal taxes, and would receive larger amounts in school-construction aid for each child 5-17 years of age. This is proof that there is much "leveling" inherent in the present Federal tax system when Federal funds are distributed to the States according to the number of children 5-17 years of age.

TABLE I.-Effect of Federal tax system on the respective States in relation to allocation of Federal funds for school construction on basis of population 5-17 years of age

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1 Mushkin, Selma, and Crowther, Beatrice. Federal Taxes and the Measurement of State Capacity, Department of Health, Education, and Welfare, May 1954.

2 Based on U. S. Census Bureau estimates (Series P-25, No. 106).

Figures have been rounded off independently by States so total for all States varies somewhat from $1 billion.

4 As a practical matter, there would have to be an adjustment of these data to provide for Puerto Rico and any Territories or island dependencies which might be included in the law.

Mr. FULLER. I would like also to enter here a four-page legal opinion prepared by Dr. Remmlein which goes into the constitutional law and the cases which were referred to by the New York attorneys employed by the Department of Health, Education, and Welfare. It comes out with a totally different opinion, and we believe upon the basis of much sounder reasoning.

Chairman HILL. Without objection, it is so ordered. (The document above referred to is as follows:)

LEGALITY OF STATE PUBLIC-SCHOOL BUILDING AUTHORITIES FOR THE RECORD Four State public-school building authorities have been put on the statute books. They are in Georgia, Indiana, Maine, and Pennsylvania. The Indiana law is now in the courts to ascertain its validity. The other three laws have been declared constitutional in their respective States. This does not mean, however, that public building authorities generally are to be considered valid. Special conditions underlay the decisions in Georgia, Maine, and Pennsylvania.

When the Maine Public-School Authority Act was under consideration by the legislature in 1951, the assembly asked the supreme court for an opinion as to its constitutionality. There was, in addition to the authority bill, a proposal to amend the constitution so as to exempt authority bonds from the debt limit-5

percent of assessed valuation. The court said that if the constitutional amendment were adopted, there would, of course, be no question of the invalidity of the authority act on grounds that it permitted municipalities to exceed the debt limit. If the constitution were not so amended, said the court, the authority law would be constitutional only so long as it did not create indebtedness in excess of legal limits. In this case the court warned that the contract in a particular instance would be void if a municipality exceeded its debt limit.

On December 26, 1951, the Maine constitution was amended exempting publicschool building authority bonds from the 5 percent debt limit. In September 1954 the voters adopted another constitutional amendment, repealing the 5-percent limit and substituting 7 percent. In the new language for this section, however, the exemption for public-school building authority bonds was not mentioned. For this reason, the court on February 2, 1955, declared in an opinion of the justices, not yet published, that the exemption applied only on the 5-percent limit that was repealed. The authority could complete projects under contract between 1951 and September 1954 but could not constitutionally enter into new contracts that would exceed the debt limit unless the constitution were again amended. A bill is now in the 1955 legislature which, if enacted, will be voted upon by the electors in the fall of 1955 and if adopted by the people will again put the exemption of authority bonds back into the constitution.

This story is proof that authorities are subject to constitutional debt limits unless special conditions obtain. Such special conditions may be found in Georgia and Pennsylvania.

The Georgia authority was declared constitutional because the State constitution empowers the State and its subdivisions to contract with each other for the use of facilities. The Pennsylvania authority was declared constitutional, but like the Georgia decision, because of a specific point-at the end of the lease title remains in the State authority. Rentals are payable largely from State aid to the districts and therefore no indebtedness is placed on the school district.3

As against these three decisions, all of which avoid legal debt limits because of specific and peculiar circumstances, a number of cases could be cited in which the courts have declared somewhat similar arrangements invalid because they permitted the creation of a debt in excess of the legal limits. The question the court must determine in these cases is whether the contract is a lease or an agreement to purchase on the instalment plan. The most recent decision was rendered in 1954 by the Wisconsin court which held that the three isolated occurrences-construction, lease, and conveyance of title-must be considered one transaction, with the result that a debt is created by the mortgage. Therefore the Wisconsin statute authorized school districts to become indebted in a manner contrary to the constitution.*

Most of the building authority cases have been concerned with nonschool State or municipal buildings. When the New Jersey Legislature attempted to construct a State office building by means of an authority, the court said that although the payments took the form of rentals-"they are in substance and effect the purchase price of the property, for they are to be sufficient in amount to defray the authority's operating expenses and in the end to liquidate the principal of the bonds and the interest accruing thereon. Were this not so, the authority would be unable to function, for it would have no other source of revenue adequate to retire the bonds." 5 In the same case the court reprimanded the legislature in words that would be applicable also if the debtor were a school district: "The legislature proceeds upon the hypothesis that the fulfillment of the project will not bind the State with a debt liability within the constitutional sense. But in this the accent is on the external appearance rather than the substance. The label is unimportant; constitutional limitations may not be set at naught by indirection." Ohio attempted to avoid this difficulty by placing a declaration on the face of the bonds to the effect that they did not constitute an indebtedness, but the court said a debt nevertheless would have been created because it would leave other operating costs to be paid from other revenue."

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The holding company idea, so far as school buildings are concerned, appears to have originated in Kentucky, and although the procedure was upheld when the

1 Opinion of the Justices, 80 A. (2d) 869 (Maine, 1951).

2 Sheffield v. State School Building Authority (68 S. E. (2d), 590 (Ga. 1952)).

3 Greenhalgh v. Woolworth (64 A (2d) 659 (Pa. 1949)).

4 State ex rel. Rogers v. Mulligan (66 N. W. (2d) 326 (Wis. 1954)).

5 McCutcheon v. State Building Authority (97 A. (2d) 663 (N. J. 1953)).

State ex rel. Public Institutional Building Authority v. Neffner (30 N. E. (2d) 705 (Ohio, 1940)).

leases were for 1-year periods only, the court pointed out difficulties if the rent is so high that it exceeds the district's unencumbered annual income. Even if the statute declares that the rental and other payments shall be deemed current operating costs, the Maine court held that the constitutional debt limits remain and are not thus set aside."

In considering the constitutionality of any legislation a court must consider what may or might happen. A default may never occur, but it is not beyond the realm of possibility. If a default occurs, the subdivision might be deprived of the use of the property, as was pointed out by the Ohio and Wisconsin courts in the cases cited above. And the bondholders would have no right of suit against the State in case of default."

There are other reasons sometimes given to support a declaration of invalidity of public building authority laws. The Florida court said that when the constitution provides the ways and means for accomplishing a purpose, the means provided is exclusive of every other means even those attempted by the legislature. Also, one legislature cannot obligate future legislatures to make appropriations." Thus there is no assurance that funds will continue to flow to support the construction program.

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It seems reasonable to conclude that the legality of legislation that would provide school-building authorities in the States that do not now have them (and this is 44) would necessarily be a matter of litigation, requiring at least a year for determination, and that in many States the decision would be made that the proposed authority violates the State constitution because it creates a debt and permits school districts to exceed their legal debt limits.

Chairman HILL. Senator Allott advises me he has some questions. I thought if this were agreeable; do you have much more testimony, Doctor? You are about at the end?

Mr. FULLER. Very little more.

Chairman HILL. Is it agreeable to you now, Senator Allott, if we recess? The Senate is now in session. Could you get back this afternoon at 2 o'clock?

Mr. FULLER. Yes. I shall then take a very short time because there are three chief State school officers waiting to testify for their respective States.

Chairman HILL. Is that agreeable to you, Senator Allott and Senator Goldwater?

Then we will stand in recess until 2 o'clock and Dr. Remmlein and you will come back to the stand at that time.

(Whereupon, at 12:15 p. m. a recess was taken until 2 p. m. of the same date.)

AFTERNOON SESSION

Chairman HILL. The committee will kindly come to order.

Dr. Fuller, you were kind enough to say you would come back this afternoon. You have Dr. Remmlein here with you. We would like to have you continue, but we have a colleague, Senator Payne here, and if you don't mind, we will let Senator Payne come forth and you will follow immediately after if that is agreeable.

Mr. FULLER. Fine.

Chairman HILL. Senator Payne.

I believe you have with you Mr. Frank Hoy, who is a member of the Maine School Building Authority and the Maine Board of Eduction.

We are delighted to have you with us, and you may proceed in your

own way.

7 Scott County Board of Education v. McMillen (109 S. W. (2d) 1201 (Ky., 1937)). 8 Opinion of the Justices (80 A. (2d) 869 (Maine, 1951)).

Keller v. State Board of Education of Alabama (183 So. 291 (Ala., 1938)).

10 State v. Volusia County School Building Authority (60 So. (2d) 761 (Fla., 1952)). 11 McCutcheon v. State Building Authority (97 A. (2d) 663 (N. J., 1953)).

STATEMENT OF HON. FREDERICK G. PAYNE, A UNITED STATES SENATOR FROM THE STATE OF MAINE, ACCOMPANIED BY FRANK HOY, LEWISTON, MAINE, MEMBER, MAINE SCHOOL BUILDING AUTHORITY AND MAINE BOARD OF EDUCATION

Senator PAYNE. Thank you, Mr. Chairman.

Members of the committee, I want you to know it is an honor to be afforded an opportunity to appear before this distinguished committee in support of S. 968, a bill to implement the President's emergency school construction program, which was introduced by the senior Senator from New Jersey and which it is my privilege to cosponsor.

Anyone who has followed the previous hearings of this committee on emergency school construction bills must be acutely aware of the Nation's serious need for classrooms. I, for one, agree with a witness who appeared here and told the committee that there had been enough fact-finding, that it was now time for fact-facing.

S. 968 faces the facts. It would make possible up to $7 billion of construction through Federal-State cooperation. Some persons who favor large, direct grants to the States do not think the administration's bill goes far enough. I believe it goes much further toward meeting the long-term school construction needs of the Nation than the direct-grant proposals.

I think the Christian Science Monitor in an editorial on February 14, 1955, best answered the critics of the bill. That highly respected newspaper said that there were certain values which must be preserved, such as maintaining the maximum of initiative, responsibility and control by the States and local communities. The Federal Government should supplement, not preempt, the role of the States in providing classrooms.

The editorial goes on to say that Federal aid should not be dealt out on the basis of geography, political weight or even on a share for everyone. Rather it should be apportioned according to volume of local need and of local resources.

The administration bill would meet the need for classrooms through three types of Federal assistance to the States, while maintaining the traditional concept of local control of education.

This afternoon I should like to limit my remarks to title II of the bill, which would authorize Federal support, with State participation, of obligations issued by State school building authorities established to finance the construction of school facilities for rental to and eventual ownership by local educational agencies. I know from my own personal experience that such State authorities, even on their own, can do the job. With Federal assistance, I am convinced that they could operate even more effectively.

Maine, as you may know, ranks about 34th in the Nation in terms of her financial ability to meet her educational needs. When I was Governor of Maine, we had to face squarely up to the classroom shortage. We set up a school building authority in 1951 to help alleviate that shortage. In a letter to me dated February 14, 1955, Dr. Herbert Espy, Maine commissioner of Education, summarized the results of that program as follows:

The Main School Building Authority has facilitated the construction of many school buildings which would otherwise not have been constructed.

60357-55-16

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