lished to make schools available for use by communities on a rental basis. III. Federal grants, matched by the States, to help provide schools for local school districts which lack sufficient economic resources to qualify fully for financing under titles I or II. IV. Federal grants, matched by the States, to meet the administrative costs to State-wide programs to overcome obstacles to local financing of new schools. Title I of S. 968 carries out the President's first recommendationfor Federal purchases of school district bonds. Some school districts can borrow money to build schools only at high rates of interest. Over a period of years, this adds greatly to the cost of new buildings. As a consequence, many districts may be prevented from obtaining new schools. Many of these are districts with unexplored credit_standings— generally small districts with low assessed valuations. Some are districts with limited economic resources-where families have lower than average incomes or where property values are low. Others are rapidly growing areas where sudden expansion of population has required public expenditure and debt to increase faster than the increase in assessed valuation of property in the district. Some are subject to financial uncertainties created by shifts in population or local industry. Another group includes the communities which have reached the legal limit on their borrowing power, and seek new schools on a rental basis through local public agencies created for that purpose. Under title I, the Federal Government would help these various districts to finance their needed schools. The districts would be able to sell their bonds at reasonable interest rates to the Federal Government. The bonds bought by the Federal Government from these districts would range from 50 percent of the construction cost in the State of highest per capita income to 80 percent in the State of lowest per capita income. S. 968 would authorize $750 million for Federal bond purchases under title I over the next three years. Senator SMITH. Mrs. Hobby, how is that amount calculated? Did you make a study of the districts? Secretary HOBBY. Mr. Chairman, may Assistant Secretary Perkins answer that? Senator SMITH. I don't know if you want to be interrupted here. Mr. PERKINS. The figure has already been brought out which represents the approximate amount of face value of bonds which were sold at above what, for the purposes of this bill, would be termed a reasonable interest rate, namely, in the neighborhood of 75 million. Now, in arriving at an authorization figure, and after all the authorization is a ceiling, the Secretary decided that the first factor to take into account was the number of bonds which might not have been offered at all, but would have been offered had there been a ready market assured. The purpose of title I is to assure ready markets for bonds, so that if you were to assume that an equal number of bonds might have been offered but had not been sold, or that perhaps tentative inquiries had been made and found that they would sell at too high an interest rate so that the district had decided not to go forward-if you were to assume there would be an equal number of bonds in that category-you would arrive at a figure of 150 million. The next factor that has to be taken into account is the assumed tremendous increase and impetus in school construction generally, which is underway and which will obviously increase in the next couple of years, with a greater awareness of needs and with the increasing enroll ments. And if you do assume that there would be a general level of construction rising over the next 3 years to perhaps twice the current rate, doubling the 150 million, you would arrive at a ceiling of perhaps $300 million a year, and that of course for a 3-year program would bring you up to $900 million. Then you would have to take into account the Federal percentage of the total construction cost, and making the assumption that these would be in the generally lower income States, and applying the Federal percentages as stated in the bill, you could come down to a figure of close to 700 million, a little over 700 million, and the authorization is stated as 750 million. One factor to consider is that under the terms of the bill if the Federal Government buys bonds and then resells them, that money would not be available for repurchase, so that the ceiling had to be high in order to take care of that situation. Now there is another important factor, and that is the extent to which local authority bonds could be purchased. Local authority bonds may be purchased under title I, as well as other types of school district bonds, and it is hard to judge what kinds of increases in that type of bond there might be. Chairman HILL. What distinction do you draw between districtissued bonds and local bonds? Mr. PERKINS. Title I draws no distinction. Senator DOUGLAS. Mr. Chairman. Chairman HILL. Yes. Senator DOUGLAS. Now that we have opened this subject up, might I follow this matter up? Chairman HILL. Yes. Senator DOUGLAS. In other words, this figure of estimated $300 million per year is a conjectural figure which is roughly four times the amounts which have actually been floated at a rate in excess of 31 percent in the past year. Mr. PERKINS. Yes, conjectural-based on certain assumptions which we think are reasonable. Senator DOUGLAS. Am I correct in understanding that the total amount of bonds issued for calendar '54 was approximately $2 billion for these purposes? Mr. PERKINS. That was the school construction figure. Mr. PERKINS. I don't know how much of that was by the issuance of bonds. Senator DOUGLAS. Well, let us say these are the totals for school construction, so that on the basis of past figures only about four percent of the school bonds were floated at a rate in excess of 31% percent. Mr. PERKINS. I haven't figured that out, but I assume that is right. Senator DOUGLAS. It is relatively simple, slightly less than 4 percent. Do you know what the average rate of interest on school construction bonds was? Mr. PERKINS. No, sir; but Senator DOUGLAS. Do you think the Wall Street Journal was correct in its issue of February 8 when it said that the average rate for municipals last year was 2.42 percent? Mr. PERKINS. Surely, I assume that would be a correct figure; yes, sir. Senator DOUGLAS. That is a quotation. So that therefore the point which you fix is seven-tenths of 1 percent in excess of the average, or roughly on a relative basis 30 percent higher than the average municipal rate? Mr. PERKINS. Well, in figuring what an average is, one must consider the fact that it is composed of lots of bond sales which were way above, and lots way below. Senator DOUGLAS. That is correct. Mr. PERKINS. And this would fix a point at which the districts which are having difficulty selling bonds, because of their lack of known credit, or because of their weak credit, could find a ready market for the bonds. Senator DOUGLAS. What I am trying to bring out is this: That based on past records, this would apply to only about 4 percent of the actual cost of school construction, and that the interest rate test is approximately almost one-third higher than the average rate at which school bonds have been floated. Mr. PERKINS. Sir, based on past experience you are correct. Senator DOUGLAS. That's right, and in addition to the going rate of interest of Federal bonds, not on local bonds which would be 3% percent at present, the obligations the locality is to pay is one half of 1 percent in addition, is that true, under section 103 (a) (1) on page 5? Mr. PERKINS. The localities which can find financing in the private market at less than three and one-eighth would continue to do so. Senator DOUGLAS. No, no; the localities which have their bonds purchased under title I will pay not only the going rate on Federal bonds, which is 31%, or appreciably higher than the average-That is the average of the former 31/4s and the new 3s would be 31. Mr. PERKINS. No, 25% is the going rate on Federal bonds. Senator DOUGLAS. Two and five-eighths? Mr. PERKINS. Yes. Senator DOUGLAS. Oh, you are not taking Secretary Humphrey's new 31%? Mr. PERKINS. We are taking the average rate on Federal bondsSenator DOUGLAS. Long time or short time? Mr. PERKINS. As it is stated in the bill, it is those bonds which have maturities over 15 years hence. Senator DOUGLAS. Is that the average now, 25%? Mr. PERKINS. Yes, sir; that is a figure which we have had certified to us by the Secretary of the Treasury as the rate that would be applied under this bill as of the moment. Chairman HILL. Then you have a half of 1 percent added to that, too. Mr. PERKINS. Yes, sir; that is the peg at which, if districts are finding difficulty in selling their bonds at a reasonable interest rate, the Federal Government would buy their bonds. Senator LEHMAN. You propose under this bill to purchase with respect to the unsalable bonds-that is bonds that can't be sold at better than 3 percent, you propose to purchase from fifty to eighty percent-depending on certain conditions set forth in the bill. Now, supposing you buy 60 percent of these bonds, what happens to the remaining 40 percent? How is that financed? Mr. PERKINS. The remaining 40 percent would be purchased either by the public or by, as there are in some States, the lending programs under which the States would purchase them. Senator LEIMAN. Sir, does that mean that you have got to sell these bonds in 2 different places under 2 different conditions? Mr. PERKINS. No, it can all be done at a single sale. Senator LEHMAN. I don't see how-if the Government takes 60 percent of the bonds and the remaining 40 percent of the cost of construction is still to be raised-I don't see how any public issue can be made on that, how the money can be provided except by grants from States. Mr. PERKINS. I am sure you are much more aware than I am, generally speaking, on a bond issue there may well be many purchasers who simultaneously take portions of the total issue. Under this plan the Federal Government would have flexibility as to which serials and which maturities it would take, so that you would have in all probability under the mechanics a simultaneous sale under which the Federal Government would be taking certain maturities, and the public, local banks or otherwise, would be taking other maturities. Senator LEHMAN. Well, it seems to me that you have got three operations in this thing. In the first place you have to establish that the bonds are not available at a rate better than 31/8 percent. That requires some kind of a Mr. PERKINS. That requires an advertisement which is a very simple process, and the school districts are very familiar with that process. Senator LEHMAN. I know they are familiar with it, but it nonetheless requires a public offering. Then the Government comes in and proposes to buy 60 percent, leaving 40 percent still to be financed, and there is no assurance and no provision made for the financing of that remaining 40 percent. Mr. PERKINS. Well, the experience has demonstrated, sir, under an analogous program which was operated by the PWA and the RFC and by the college dormitory lending program and similar programs, that if the Federal Government offers to take a portion of the maturities which may be the longer maturities—in that situation the balance of the bonds in almost all cases is very readily salable, and they are salable, probably, at a rate considerably less than the 3. Senator LEHMAN. As I recall the PWA program of the late thirties and early forties, the Government provided 45 percent, I think it is 45 percent, of the cost of construction as an outright grant. The remaining 55 percent, of course, was provided by the school districts through the sale of bonds or through using current funds, but that was a direct grant. There didn't have to be 3 different proposals made. Mr. PERKINS. As I understand that program-and we do have some experts here, if you would like to go into that further, as to how that program operated-they operated both ways. Now, you do understand, of course, that title III of this bill is designed so as to be used in supplementation, with either of the first two titles, so that in instances of this proved need and lack of local income, you would have an analogous situation in which the Federal Government and the State would be providing a portion of the cost, and the balance would be floated by bonds. Senator. LEHMAN. When it comes to repayment of these bonds, is there any distinction made with regard to the 60 percent of bonds taken by the Government and the 40 percent that is sold to the public? Mr. PERKINS. No distinction-they would not have to be pari passu. The bill is flexible on that, and the Federal Government could take the longer maturities as the bill is written. That is the way it has worked out on these various programs-way the Federal Government has operated in the past-that by taking the longer maturities you have freed up the salability of the remaining bonds so that they are salable at very reasonable rates. Senator LEHMAN. But I don't see why, if the credit of the district is so poor that they couldn't sell the bonds in the first place, there would be any particular incentive for people to buy the 40 percent. They wouldn't be any better bonds. Mr. PERKINS. It isn't that. As I understand it, sir-and again you know this better than I—as I understand it, and we would like to have our experts testify more fully on this-it is never that kind of a black and white matter, that it is a very delicate matter of judgment, and the purpose of the title is to assure a ready market where the judgment of the private bond market is negative or they haven't investigated the credit of the district fully enough, that is, it is an unknown credit. In that situation the Federal Government, by taking most of the bonds, can make the balance of them salable. Senator LEHMAN. I hope that some of the investment experts will enlighten us a little bit more on that subject, which is not at all clear to me. But may I ask the Secretary one question. Of course there is a great opposition to any Federal control over education or any phases of education. Secretary HOBBY. Properly so, I think, Senator. Senator LEHMAN. Very properly so. But as I have read this billI don't say I have read it with the same care as you have, Madam Secretary does not this make mandatory certain Federal controls which would give the Commissioner the right to place in the contract any conditions which he felt necessary to assure that the district was able to pay back the loan? Now, as I read it, that is a fact, and the Secretary will probably explain it. This is on page 7: the school facilities to be constructed with the proceeds from the sale of the obligations are needed for current or reasonably anticipated enrollments, are consistent with any applicable State redistricting plans or policies, and will be undertaken in compliance with applicable State construction laws and standards; and including such additional information as may be necessary to make a showing, satisfactory to the Commissioner that such local educational agency is financially able to pay such obligations as they become due. Now it seems to me that if the paramount consideration is the repayment of this loan by the Government, then conditions are made in the proposal that will make it impossible to really conduct the educational features of the school district in a way that they should be conducted. My associate, the Senator from Illinois, has just drawn my attention to another provision on page 8, "include in any contract or instrument made pursuant to this title such other covenants, condi |