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FEDERAL RESERVE BANK OF SAN FRANCISCO M O N T H L Y R I V I E IN W THIS ISSUE Help for Housing? Home Away from Home Growth and Muni Bonds JULY 1967 Help for Housing? . .. Herewith, a summary of proposals designed to reduce housing's vulnerability to a recurrence of the 1966 experience. Home A w a y from Home ...T ra ve lle rs spend about $1.5 billion a year at W e ste rn lod ging places, as tourism and convention business flourish. Growth and Muni Bonds . . . G overnm ental units in the W e s t expanded their borrow ing at a greater-than-national pace over the past half-decade. Editor: W illiam Burke July 1967 M O N TH LY REVIEW Help for Housing? the housing slump is still far gage market. In fact, the recent improve from over, a number of recent devel ment has been accompanied by a vigorous opments indicate that an upturn is in the examination of proposals — some old, some making. Three years of fairly steady decline new — designed to give special assistance to brought U.S. housing starts last year to a one sector or another of the housing industry, level barely three-quarters of that reached and thereby to reduce the vulnerability of during the recent high of 1963. During the housing to a recurrence of the difficulties which beset it last year. first five months of 1967, however, starts in the nation averaged 24 percent above the T hese p ro p o sa ls ru n th e gam ut from annual rate attained during 1966’s final quar entirely new arrangements — such as direct ter — and in the West, where the level of public subsidies to home buyers — through activity last year was almost 60 percent below extensions of earlier reforms, to slight modi that of the pre-slump period, the construction fications of existing policies or institutional pace early this year was 28 percent ahead practices. Proposed reforms include the de of the late-1966 figure. Contract awards, velopment of a broadened secondary market building permits, and the flow of savings into for mortgages, an administrative “rollback” mortgage-lending institutions also picked up, of interest-rate ceilings on time and savings and (a t least tem porarily) mortgage rates deposits, greater flexibility (if not the elimi declined and non-price lending terms eased. n a tio n ) of ra te ceilings on governm entNevertheless, the turnabout has been nei insured mortgages, and diversified lending ther so great, nor so far removed from the powers for heretofore specialized mortgage “crunch” of 1966, as to dispel memories of last year’s traum atic experience in the m ort institutions. http://fraser.stlouisfed.org/ A lth o u g h Federal Reserve Bank of St. Louis FEDERAL RESERVE BANK Central mortgage bank? Several of the most widely discussed mea sures to help housing would achieve this objective indirectly, by improving the mort gage market. One such proposal would trans form the Federal National Mortgage Asso ciation into a central mortgage bank, with a trading desk whose function it would be to buy and sell, co n tin u o u sly , governmentbacked mortgages and possibly conventional mortgages as well. A related proposal, orig inally advanced by the American Bankers Association several years ago, would estab lish Federally chartered private corporations to insure conventional mortgages and to buy and sell loans in secondary market opera tions. By acting as a clearing house of informa tion with ready bids and quotes, the trading desk would bring prospective buyers and sellers together and would thus enable mort gages to be traded more like corporate, mu nicipal and Treasury obligations. This, in turn, should result in lower marketing costs and, hence, lower costs to the borrower. OF SAN FRANCISCO borrower, the description and appraisal of the property, and a host of factors influenced by individual state laws. (Legislation of this type deals with ceilings on rates and fees, limits on loan-to-value ratios, maturities, me chanics liens and even docum entation.) C onsequently, a g u a ra n te e p ro v isio n should substantially enhance the m arketabil ity of the mortgage, simply by making it un necessary for the investor to evaluate each individual loan in his portfolio. However, the provision of such a risk-eliminating guar antee presumably would have to carry a fee if it were not to involve an implicit element of subsidy. Most observers foresee formidable obsta cles which could hamper FN M A purchases and sales of conventional mortgages, because of the wide variation in state laws and the lack of uniformity in the conventional m ort gage. Overcoming these obstacles would re quire a considerable expansion of FN M A of fices and staff to handle the screening and processing of the expanded loan volume. Be sides, more FN M A resources for the pur chase of conventional loans could m ean less Full guarantees? FN M A resources for the purchase of FHA and VA loans, to the detriment of the lower Federal Reserve Governor Maisel’s sug income and lower down-payment homebuygestion that investors be allowed full recourse ers who rely so heavily upon these types of against FN M A for any mortgages purchased financing. Beyond that, there remains the from it — in effect, a government guarantee of whether a government agency — also should enhance the marketability question of should properly deal at all in non-government mortgages, and thereby should contribute to backed mortgages. a greater supply of available funds and help reduce the cost of borrowing. In fact, a guar Com pete with private lenders? antee of this sort, whether made by FNM A A n o th e r p ro p o sa l would have housing or even by private firms, might be essential agencies augment the supply of funds avail to the development of a broad and active able for mortgage financing by issuing their secondary m arket for c o n v en tio n al m ort own securities, specifically tailored to meet gages, which account for three-quarters of all the needs of special categories of investors, mortgages outstanding. Conventional mort such as individuals and pension funds. (A t gages are not characterized by the same de the present time pension funds have only gree of uniformity as F H A ’s and VA’s but about $6 billion of their $160 billion invested vary rather considerably, depending upon 140 the location and credit rating of the individual in mortgages.) In fact, both FN M A and the July 1967 M O N TH LY REVIEW Upturn begins, but housing still has far to go on recovery road T h o u i Q u d * o f D v t l l i n g U n it s Federal Home Loan Bank Board already have the authority to m arket long-term obli gations. Some observers argue that a greater exercise of this authority — by FN M A to raise more money with which to purchase FH A mortgages, and by the FHLB to in crease its advances to member S&L’s for expansion purposes— would do more to iron out sharp fluctuations in the availability of mortgage funds than would the creation of a central mortgage bank. The U.S. Savings and Loan League, for example, contends that a central mortgage bank could hamper home finance by drawing funds away from the thrift institutions which are engaged in mortgage lending — S&L’s, mutual savings banks and commercial banks. Actually, FN M A ’s increased volume of openmarket offerings last year did help to push up interest rates, and to some extent prob ably diverted savings from thrift institutions. The mortgage bank, it is argued, apart from offering added competition to other mortgage institutions in bidding for the sup ply of loanable funds, might well accumulate a substantial volume of funds during periods Digitized forof FRASER monetary ease, but might still find it diffi cult during tight-money periods to attract enough money at interest rates that builders and borrowers could live with. Even so, a properly functioning mortgage bank by defi nition would not contribute to overbuilding during periods of ease because it would be careful not to flood the m arket with low-cost loanable funds. If it were to float longer-term obligations during such periods it could then make the funds available to borrowers on fa vorable terms during periods of general credit restraint and higher interest rates. G reater flexibility in rates — But while housing analysts disagree about the need for special mortgage facilities to im prove viability of secondary markets, they agree almost unanimously about the need for greater flexibility in FH A and VA interestrate ceilings, so as to avoid the heavy dis counts which characterized last year’s m ort gage market. Three successive increases in the FH A ceilings in 1966, from 5 lA to 6 per cent, failed to keep pace with rising market yields generally, and consequently failed to attract the funds of private investors, so that discounts around the country averaged close to 10 points in some areas last fall. Discounts— which are the means by which the m arket adjusts to administered rates — under some state laws must be computed as part of the interest rate subject to rate ceil ings, even if they are paid by the builder or seller. This constraint, of course, further im pedes the flow of funds into mortgages. Just what the reaction of the market would be to a “freeing” of administered rates at a time when market rates are rising and discounts on mortgages are deepening, however, is somewhat uncertain. The supply of housing might increase as sellers are relieved of the burden of absorb ing discounts. If buyers are themselves eager, of course, mortgage rates may rise even in a situation of relative ease in the housing market. At the same time, if buyers are re- FEDERAL RESERVE BANK luctant and resist a shifting of discounts from the seller, rates themselves might even soften. As the president of the Mortgage Bankers Association has pointed out, if administered rates had been free to move higher in 1966, borrowers at least would have had a greater opportunity to borrow mortgage funds. — and flexible rates on outstandings Another proposal would tie the rates on outstanding mortgage loans to some other market rate, or index of rates. As interest rates rose, the cost of the homebuyer’s pre viously borrowed funds would rise, and as market rates declined, the cost of his m ort gage loan conversely would be reduced. The adjustment could be made in the loan m atur ity rather than in the monthly payment. Supporters of this approach argue that a flexible rate would preclude home buyers from “holding off” at a time of high yields generally, because they would know that they could also “benefit” from a future decline in rates. Mortgage demand and housing activity would then be smoothed out over the cycle, and the mortgage lender happily would not find himself in an earnings squeeze during periods of general credit restraint and rising yields. M o r t g a g e flows slowed in '66 despite heavy F N M A purchases B i l l i o n * of D o l l o r * 1967 OF SAN FRANCISCO However, the evidence suggests that the enthusiasm of the home buying public for such an arrangement is minimal. Efforts by a few S&L’s last year to involve the fine print “escalation clause” in their mortgage con tracts elicited a sufficiently negative response on the part of their borrowers to force a retreat. This of course was a one-way esca lation adverse to the borrower; without a firm contractual system for downward rate adjustments in periods of easier money, the desired inducement for sustained mortgage borrowing during h ig h -in te re st periods is lacking. Implicit and explicit subsidies Closely related to the problem of adminis tered rates is the issue of whether rates on g o v e rn m en t-in su red mortgages should be lower than those which the market would provide. The issue essentially boils down to the d e sirab ility , on economic and social grounds, of loan programs which involve an implicit or explicit element of subsidy. Those who argue in the affirmative, with the weight of Congressional opinion behind them, point out that lower-than-market rates on government-backed mortgages are often needed to encourage homebuying by lower-and-middle income families, which means that some special-support operation w ith p u b lic fu n d s becomes necessary. Some critics oppose sub sidies per se, while others m aintain that even if an element of subsidy is desirable, it might better be extended by direct means, such as loans or grants directly to the home buyer to cover part of the interest cost or purchase price of a home, rather than through often times self-defeating efforts to segment the structure of market yields. Still, explicit subsidies could create new problems. The proposal for the Federal Gov ernm ent to make direct rental payments to low-income families has already run into snags. Treasury Secretary Fowler, viewing the alternative of direct government loans, July 1967 M O N TH LY REVIEW has concluded that these should only supple ment, not substitute for, private financing. It is conceivable, for example, that direct gov ernment lending could become so large in some areas as to preclude private financing, because of such factors as the increase in unit overhead costs which private lenders would face in administering a smaller volume of loans. Beyond that, there remains the problem of establishing eligibility criteria for any such subsidies — size of income, size of family, “need,” or whatever. Furtherm ore, an in variant application of these criteria conceiv ably might accentuate economic fluctuations at the very time when economic conditions call for monetary, fiscal and credit policies of a contra-cyclical nature. Insulate the mortgage market? Still another proposal would go even fur ther in an attempt to insulate housing from fluctuations in the nation’s capital market. As advanced by the Departm ent of Housing and Urban Development, this insulation would be achieved through massive Federal Reserve purchases of FNM A and FH LB debentures, the proceeds of which would then be used to finance FN M A mortgage acquisitions and FH LB advances to member S&L’s. (These advances would then be used by the S&L’s to expand their mortgage lending over and above any increase in their savings flows and repayment flows.) By exerting a downward pressure on yields, Federal Reserve o p e n -m a rk et p u rch ases could, it is argued, result in the elimination of discounts. But as last year’s experience indicated, any such downward pressure on mortgage yields could cause a shift of pri vate funds out of mortgages if other market yields were rising at the same time. And since overall credit conditions during a tight-money period call for open-market sales rather than purchases of the instruments in which trans are made, either the Federal Reserve actions would sell some FN M A and FH LB obliga tions along with the usual Treasury securities — thus increasing their yields— or the special Federal Reserve support of mortgages would necessitate still further sales of other instru ments, generating upward pressures on their yields. Under these circumstances, the m ar ket might witness a re-emergence of discounts on mortgages, a drying-up of private m ort gage funds, and an accelerating reliance on the Federal Reserve to provide the nation’s mortgage funds. Rolling back savings rates Another possible means of easing the pol icy impact on the mortgage market would be a “rollback” in the interest-rate ceilings which thrift institutions may pay on their time-andsavings deposits. A forced reduction in the cost of these funds is necessary to the thrift institutions (so the argument goes) if the price at which these funds are then made available to mortgage borrowers is to be re duced. The problem, of course, is that an administered rollback in the rates paid to depositors might prove to be self-defeating if the yields on the other instruments which compete for investors’ funds should rise. The funds would roll out of the thrift institutions (and fail to roll in) and the ability of these institutions to make mortgage loans would tend to evaporate. There remains, too, the problem of just what rate ceilings should be applied to the various types of thrift institutions. Until re cently, for example, S&L’s in certain Western states were allowed to pay higher rates than their counterparts elsewhere, the differential being based on the grounds that these states are fast-growing capital-deficit areas with a relatively greater “need” for long-term funds. Yet no such regional or local differential is allowed com m ercial banks in these same, states, notwithstanding the fact that they have traditionally maintained a much higher ratio of time-and-savings to total deposits than FEDERAL RESERVE BANK banks elsewhere in the nation, as well as a much higher ratio of real-estate to total loans. Building up liquidity — Yet another proposal, designed to reduce the housing industry’s vulnerability to credit changes by bolstering institutional liquidity, has been advanced by the Home Loan Bank Board and endorsed by the Council of Eco nomic Advisers, the American Bankers Asso ciation, and the Federal Reserve Board of Governors. This proposal would have thrift institutions— most notably the S&L’s— build up a buffer stock of cash and government securities during periods of general monetary and credit ease, sufficient to help finance con tinued mortgage lending during periods of credit restraint. Such a buffer stock of liquidity would not only reduce the S&L’s vulnerability to reduc tions in savings inflows, but would also make them less dependent upon FH LB borrowings. Also, by its very nature, it would reduce lenders’ incentive to make loans of inferior quality during periods of general credit ease. A related proposal would have the S&L’s and mutual savings banks supplement their normal sources of loanable funds by issuing a greater variety of longer-term securities. If issued during periods of credit ease and gen erally low interest rates, the securities not only would provide the institutions with a greater proportion of funds “locked in” at lower rates — thus improving their earnings — but would make them less vulnerable to savings outflows during periods of credit re straint and rising yields. — and diversified lending Finally, there remains a somewhat contro versial proposal that has been advanced not so much to help housing as to help the S&L industry. This is the suggestion that nonbank depositary institutions specializing in m ort gage lending be allowed to diversify their loan 144 and investment portfolios— in effect, making OF SAN FRANCISCO them more like commercial banks. Savings-and-loan men argue that such di versification would not only result in greater competition, to the advantage of the public at large, but would also help to spread the impact of m o n etary policy actio n s more evenly throughout the financial system, and perhaps lessen the need for a system of struc tured rate ceilings on the deposits of the vari ous types of thrift institutions. By increasing the flexibility of S&L’s, diversification also would improve their earnings, and this in turn would make it easier for them to limit savings outflows by adjusting rates paid to savers as yields rise during periods of heavy credit demands. Those opposed to a broadening of the lending powers of heretofore specialized in stitutions maintain that any such diversifica tion would, by its very nature, divert funds to uses other than the financing of mortgages. But there is yet another dimension to the problem — to what extent can nonbank de positary institutions be made more like com mercial banks on the lending or asset side of the ledger, without corresponding adjust ments on the capital and liabilities side as well? Some such adjustment may be desirable so as to achieve a more equitable incidence of taxation, and also to achieve a more effective “incidence” of monetary policy. The poten tial for destabilizing shifts of funds between various types of in stitu tio n s might be in creased if lending powers were more nearly equalized but reserve and liquidity require ments were not — that is, if S&L’s were not required (as their competitors are) to im mobilize a large part of their assets into cash and relatively low-yielding assets out of def erence to reserve and liquidity requirements. As the foregoing pages indicate, all quar ters of the financial world have developed ideas about what went wrong with the m ort gage market in 1966 and what can properly July 1967 M O N TH LY REVIEW M o r t g a g e market hampered by last year's slump in savings inflow B illio n i of D o lla rs be done to cushion the impact of such an experience if it should re-occur. The Board of Governors of the Federal Reserve System, in analyzing this subject, came up with sev eral broad guidelines in a report prepared recently for the Senate Banking and Cur rency C o m m itte e . The guidelines are: — A flexible policy should play a greater part than it did in 1966 in acting, when needed, to restrain aggregate economic activity. Timely reductions in income tax rates earlier in the 1960’s contributed greatly to the sustained economic growth that developed after the 1960-61 reces sion. If, with the added economic stimulus provided by escalation of the Vietnamese war, an income-tax increase had been en acted early in 1966, the burden of restrain ing general economic activity would have fallen less heavily on monetary policy and hence less severely on the residential mortgage market and on housing. — The residential mortgage market— both primary and secondary— should be inte grated closely with the general capital market, not insulated from it. But at the same time, certain institutional changes should be made to enhance the ability of the residential mortgage market to com pete prudently for the limited aggregate supply of available credit. It should be recognized that the result would involve payment of higher rates at certain times for savings funds and for mortgage credit. — If special public measures appear war ranted to ease the impact of tightening general credit conditions on the availa bility or price of residential mortgage credit, such actions should be taken with out sacrificing the objectives of monetary restraint. Moreover, the extent of the sub sidy element involved should be revealed clearly, and the substitution of public for private credit should be minimized. The Board also suggested (although with out endorsing) several specific actions de signed to stabilize the housing market: (1 ) Improve the liquidity of thrift institu tions so as to withstand better the pressures that develop when general credit condi tions tighten. (2 ) Improve the marketability of residen tial mortgages so as to make them more attractive and to permit lenders to adjust their portfolio positions more readily to conditions of general credit restraint. (3 ) Improve the allocation of residential mortgage funds so as to assure a more efficient distribution of credit during peri ods of general credit restraint. (4 ) Broaden sources of funds available for residential mortgage investment, there by relying less on depository institutions that tend to be vulnerable to conditions accompanying general credit restraint. — Verle Johnston 145 FEDERAL RESERVE BANK OF SAN FRANCISCO Home Away from Home and pleasure-seekers spend roughly $1.5 billion a year at Western lodging establishments in payment for rooms, meals, liquor, and other goods and services. On the basis of these receipts, the region’s lodging industry employs over 120,000 work ers and carries an annual payroll of over $500 million. u s in e s s m e n B Hotel-motel employment in District states has increased recently at a 6-percent annual average rate, rising from 75,000 in 1955 to 121,000 in 1965. Wages are rather low in the industry, because of the relatively low level of skills required and because of the reliance on tips as a supplement to wages, so the industry— although employing about 1 percent of the total working force — ac counts for only 0.8 percent of total wages in District states and for 0.6 precent of total wages elsewhere in the nation. In some West ern states, however, the industry’s importance is far above average— it accounts for 10 percent of total wages in Nevada and for 146 for FRASER Digitized 1 to 2 percent of the total in Hawaii and Arizona. Diverse growth trends The region’s lodging industry is extremely diverse, including as it does some older— even decrepit — hotels and trailer camps along with some of the world’s most palatial pleasure domes. Moreover, establishments vary considerably in size, ranging from mas sive convention hotels in Los Angeles, San Francisco, Honolulu and Las Vegas to momand-pop operated motels located in small rural communities. (O ver one-third of the motels and one-half of the trailer parks in District states do not report any payroll.) And the industry also exhibits a wide range of growth rates; between the 1954 and 1963 Business Census years, hotel receipts in Western states grew by two-thirds, to $641 million, while receipts in the automobileoriented lodging places more than tripled, to $442 million. (California and the Pacific Northwest actually registered a decline in hotel-room space over this period.) Hotels have encountered difficulty in ad justing to the auto and jet age. Because they were originally located near downtown rail road stations, they have lost tourist traffic to freeway-oriented motels and trailer parks, and have lost considerable business traffic as businessmen have shortened their out-oftown stays in tune with jet-age plane sched ules. Hotels nonetheless have fought back by catering to jet-age tourist and convention business and by expanding their downtown parking facilities. Motels meanwhile have m atured along with the automobile age; the newer establishments stand in sharp contrast to the stage-coach inns of the nineteenth century and in almost as sharp contrast to M O NTH LY REVIEW July 1967 Receipts rise at hotels, but even more rapidly at auto-oriented lodgings . . . W estern establishments obtain growing share of total receipts M illio n s of D o lla r) D istrict Share of U.S. R eceip t* (P e rce n t) 600 0 5 10 M illio n s of D o lla rs 15 T ra ile r P a rk ) M o te ls H otels 1954 the cold-water shacks of the 1930’s. The lodging industry has gone through drastic changes in the postwar period. The increased number of travelers, the longer vacations, the sharp rise in auto traffic— all have spurred an especially heavy demand for wayside accommodations which could not be met by the traditional commercial hotels and the older motels and trailer parks. The result is the “grand motel”— an estab lishment with a hotel-style range of services but motel-style conveniences and parking facilities. Located as they are near airports, in major shopping centers, and even in downtown areas, the new-style elegant mo tels have become a characteristic feature of the postwar landscape. Strong income trends Despite the faster growth of motels, West ern hotels have been able to expand their average receipts at the same rate as their competitors. Annual receipts per room in creased by about two-thirds in both types of establishments over the 1954-63 period, to $2,900 for hotels and $2,100 for motels. Average receipts for hotels in the West were Digitized forabout FRASERone-fifth above the average hotel in 1956 1963 come in other regions, while receipts for mo tels were roughly in line with the average elsewhere. Higher average receipts for hotels reflected both a higher level of room rates and a wider range of income-producing services. In 1963, less than half of hotel receipts in Western hotels came from room rentals — much of the rest was generated by restaurant and bar facilities — while three-quarters of motel receipts came from room rentals. Rising hotel income was accomplished despite the increasing age of the industry’s physical stock; two-thirds of the region’s hotels, as against one-third of its motels, commenced operations before 1949. Rising income was achieved also in the face of a decline in occupancy rates; occupancy, which had exceeded 90 percent during and imme diately after World W ar II, declined from 72 to 62 percent between 1955 and 1965. Motel occupancy rates have been maintained above 70 percent during the past decade, as the aggregate demand for motel space has grown at the expense of traditional hotels. But the hotel industry’s problems have centered around the older, smaller hotels that are both short of modern conveniences and are located in the smaller population centers which have been bypassed by the major airlines and freeways. The magnificent new establishments which cater to the tourist and convention trade have generally pros pered. In the 1963 Business Census year, occupancy rates in large hotels in California, Nevada, and Hawaii ranged between 69 and 77 percent, in contrast to a national (largehotel) average of 63 percent. Even in the larger convention centers, however, a downtrend in hotel space oc curred between 1954 and 1963. In the latter year, New York maintained 122,000 hotel rooms, as against 70,000 in Chicago, 40,000 in Los Angeles, 35,000 in Miami, and 33,000 in San Francisco— which means a drop in room space of one-tenth or more in almost every area. But Hawaii was an exception to this downtrend; hotel-room space in that rapidly growing vacation center tripled over the decade, and recently has grown even more. Travelers' impact on construction Meeting the transient population’s demand for housing has been a major stimulus to the nation’s construction industry over the post war period. Between 1949 and 1963, the industry produced 5,000 new hotels (alm ost 1,000 of them in the W est) plus 17,000 new motels (m ore than 3,000 of them in this region). Motel construction benefits from relatively low building costs. A new 2-to-3 story motel requires only one-half to four-fifths of the cost per room of the average new hotel, and typically it contains less than half the number of rooms of the average hotel. Using massproduction techniques which perm it substan tial cost savings — and consequently, low room rates— “instant motels” have been es tablished by large national motel chains to take advantage of the high-density traffic generated by major freeways. Financing of such facilities is usually done through lifeinsurance firms, commercial banks, and even oil companies, which frequently guarantee mortgages in addition to operating motel service stations. In the future, the rapidly growing number of business, tourist, and conventioneering travelers promises to generate a growing amount of business for W estern hotels, m o Demand shifts cause sharp expansion in motel (but not hotel) room space . . . hotel space concentrated in New York and other convention cities Hotel Rooms (Thousands) Number of Hotels Number of Holt! Room s (Thousands) Rooms (Thousands) 120 75 100 400 50 80 25 300 60 15 40 10 20 New York Chicago Los Angeles M iam i San Froncitco 0 5 1954 1958 1963 July 1967 MO NTHLY REVIEW tels, and tourist parks. With more people on the highways, and more coming on the sky ways with the advent of jumbo jets, a grow ing influx of visitors can be expected to tax present lodging capacity and thereby create a need for increased construction of motels and hotels— or at least of those establish ments which will offer a wide range of mod ern facilities in convenient locations. But as the following sample indicates, the Western lodging industry already is preparing for the growing tide of visitors. In California, construction in recent years has included three large motels, each with 250 to 400 rooms, near San Francisco air port, plus a 1,200-room hotel in downtown San Francisco and a 800-room facility in Beverly Hills. In the planning stage are two large hotels in San Diego, two in Los Ange les, one in Oakland, and one in Anaheim, with room sizes ranging from 400 to 1,000 rooms, plus two more large hotels in the 700-800 room category in San Francisco. One of the latter will contain the largest ballroom-banquet facilities in the West. In Nevada, convention facilities and gam ing tables have attracted a sharp rise in tourism and a consequent boom in construc tion. Room capacity reached 24,000 in 1963, for a one-fifth increase in four year’s time, W estern establishments hold edge in average room receipts R c c tlp ti Ptr Room (D o llo r tl 0__________ 1000 W EST —V- 2000 3000 1954 1963 0 t h « r U .S . Motel# and it is now sharply higher. Las Vegas in recent years has built a 680-room and a 1,000-room hotel, and major new hotelconvention facilities are now planned for Reno and Henderson (near Las Vegas). In Hawaii, a substantial construction boom has gone hand-in-hand with its tourist boom. Hotel room space more than tripled in the 1955-65 period, to 15,000, and a 50-percent expansion of this capacity will probably be completed within the next several years. The industry recently added two new hotels of 880-room and 1,060 room capacity, respec tively, and in the planning stage are two more large hotels at Waikiki as well as several smaller establishments on the islands of Kauai and Hawaii. — Paul Ma Publication Staff: R. Mansfield, Chartist; Phoebe Fisher, Editorial Assistant. Single and group subscriptions to the Monthly Review are available on request from the Admin istrative Service Department, Federal Reserve Bank of San Francisco, 400 Sansome Street, San Francisco, California 94120 149 FEDERAL RESERVE BANK OF SAN FRANCISCO Growth and Muni Bonds with other financial markets, the market for state-local governm ent bonds (m unicipal bonds) felt the pressure of restrictive monetary policy in 1966. Yet, despite a sharp drop in muni-bond sales during the summer period’s tight-money peak, total state-local sales reached $11.05 billion for the year as a whole. This was ex ceeded only by the previous year’s record sales of $11.14 billion. A lo n g Over the 1962-66 period, municipal-bond sales exhibited a 6-percent average annual rate of growth. This upsurge in borrowing accompanied a sharp rise in state-local gov ernment spending, which over the postwar period has increased far more steeply than federal spending. By late 1964, in fact, statelocal expenditures on goods and services actually exceeded those of the Federal gov ernment, and continued to do so through the middle of last year, when sharply in creased expenditures for Vietnam reversed the balance once again. Interest rates on municipal bonds have Muni-bond sales slacken during tight-money period Millio** of Dollor* Ptrcont — DISTRICT SHARE OF U.S. 20 10 150 1962 1963 1964 I96S 1966 1967 fluctuated with overall monetary conditions. In the last several years, little variation in spread has developed between muni-bond yields, on the one hand, and corporate and Treasury bond yields, on the other. In 1962, the average yield on A aa municipal bonds was 3.03 percent; by 1965, it was 3.16 per cent; and for 1966 it was 3.90 percent with a peak of 4.18 percent being reached in September. Lower-rated bonds followed a roughly similar path, but there was one new development: the spread between A aa and Baa bonds tended to narrow somewhat over time. In 1962 the spread varied between 57 and 80 basis points, while in 1966 the spread was from 39 to 60 basis points. W est outpaces nation Governmental units in Twelfth District states increased their borrowing as well as their spending at a faster-than-national pace during the 1962-66 period. Total new issues rose from $1.38 billion in 1962 to $2.30 billion in 1965, before declining to $2.02 billion in 1966. Thus, the W est’s share of total bond sales rose from 16 to 18 percent over the period, and actually exceeded 20 percent in 1964 and 1965. The average volume of borrowing has tended to vary directly with the various states’ population and income. While there are, of course, other forces influencing decisions to borrow, the high degree of correlation of these two factors with bond sales is quite clear, and the relationship undoubtedly is mutual. Income and population growth, in other words, have been m ajor factors in ducing and supporting the growth of W estern state-local borrowing over this timespan, and the consequent rise in state-local spending has added to income and attracted potential migrants. California governmental units naturally July 1967 M O N TH LY REVIEW were the largest borrowers over this period; their issues were never less than half the Dis trict total of funds raised, and in 1966 Cali fornia issues ($1,642 million) made up almost four-fifths of the regional total. Fur thermore, in every year since 1962, they accounted for the largest dollar volume of issues of any state in the union. The totals were bolstered during the past three years by five State of California issues of $100 million or more. Washington came next in regional imporportance, being second to California in every year of this period except 1966. Washing ton’s peak was reached in 1963, when its $722 million in new flotations— mostly as sociated with the financing of the Columbia River power project— gave it fourth place in national rankings. That state also floated a $ 3 14-million offering in 1964— the fifth largest single issue sold in the nation up to that time. Physical and human resources A breakdown of last year’s total flotations permits an analysis of the purposes for which Western governmental units borrow so heavi ly. The largest category last year, making up one-third of the District total (as against one-sixth nationally) was public utilities and conservation. California’s program dominat ed both District and national borrowing in the category of water-resource and recreation development. Six issues, ranging from $20 million to $160 million in size, helped push the state-wide total to $638 million. Next in importance was education, which took more than one-quarter of total funds raised in the District last year. Higher edu cation in District states accounted for almost 6 percent of total borrowing, as opposed to a 3-percent share nationally. The District also outpaced the nation in borrowing for elementary and secondary education. Over the 1962-66 period as a whole, California governmental units led all others in borrow ing for this purpose, as the state in some years devoted almost 30 percent of its bond receipts to elementary and secondary schools. Social-welfare activities, such as public housing, veterans, and recreation, amounted to 14 percent of District borrowing last year. Almost one-third of the total was concen trated in a single State of California issue, which divided $100 million equally between recreation and veterans programs. Oregon also raised $30 million in two issues for veterans. Transportation issues took under 9 percent of District borrowing, concentrated mostly in two large bond issues— $50 million for the San Francisco Bay Area Rapid Transit District and $48 million for the California Toll Bridge Authority. Transportation issues, by the way, have been declining in impor tance over the past decade, since the Federal highway program has relieved much of the financial burden on states and local govern ments. The District failed to participate in the upsurge of industrial-aid financing, which P U R P O S E S O F S O R R O W IN G , BY STATE, 1966 ($ millions) Elem.-Secondary Education A lask a Arizona C alifo rn ia H aw aii Idaho N evada Oregon Utah W ashington Total Higher Education __ ----- 14 346 28 60 — 5 10 33 8 21 437 Source: Investment Bankers Association 1 — 17 1 7 114 Transportation 5 131 1 1 19 11 _ 8 176 Utilities, Conservation 5 16 638 ____ ____ 13 18 3 27 720 Social Welfare __ 7 219 3 3 3 49 1 6 291 Other Total 6 23 190 20 1 6 13 2 16 277 11 93 1,584 24 11 51 141 15 85 2,015 FEDERAL RESERVE BANK on the national scene was perhaps the most noticeable development in the field of statelocal finance last year. This type of financing, which uses the tax-free feature of municipal bonds to provide facilities at a lower cost than private corporations can obtain, is de signed to attract new industry to develop particular areas. Nationally, industrial-aid issues doubled in 1966, to $504 million, or roughly 5 percent of total state-local borrow ing, but none of these bonds were issued by Twelfth District states. Actually, only four District states permit the issuance of such bonds, which have come to be widely crit icized as a doubtful fiscal practice. States expand their borrowing In the West as in the rest of the nation, borrowing by state governments has in creased relative to that by cities and counties. Borrowing by special districts and similar public bodies meanwhile has risen substan tially, because of the capabilities of such or ganizations for accomplishing area-wide proje c ts o r b e c a u s e o f th e d e s ire to av o id limitations on borrowing imposed by state constitutions. School-district financing has tended to lag, but since educational expenditures have re mained high, this simply represents a shift to state-government borrowing. The State of California, to cite the most obvious case, borrowed over $600 million between 1962 and 1966 to provide credits for local school construction programs. The dollar volume of bonds raised by special districts more than doubled in the 1962-65 period alone, thereby financing such heterogeneous activities as toll bridges, elec tric companies, water works, and irrigation projects. These public bodies have been set up to handle projects not easily operated by ordinary government organizations or to un dertake joint functions for several govern ments. In the West, where public power and http://fraser.stlouisfed.org/ 152 Federal Reserve Bank of St. Louis OF SAN FRANCISCO State-governm ent borrowing more important here than elsewhere Poretnt 100 |- Othor U.S. W EST WEST O ttitrU S . - Sp tcial O iit ric t i- 80 60 School D ist r ic t *- I 40 - C it it t - C o u n t ie s ' 20 ■S t a t u - 1962 1965 water projects have been historically impor tant, the special district has continued to play a major role. The Columbia River proj ect was largely financed by public-utility districts in Washington, while California’s water-development program has stimulated local water and irrigation districts to increase their activities. California meanwhile has wit nessed the development of a new form of public agency— a special authority which constructs some project, usually a civic build ing or stadium, and then leases it back to the city or county concerned. Recent issues under this kind of arrangement include the $27-million San Diego Stadium and the $26million Oakland-Alameda Stadium. Like public bodies everywhere, District governmental units have expanded their bor rowing in order to finance their growing expenditures. A temporary setback occurred during 1966’s period of monetary restraint, but the basic uptrend has now reasserted itself; in the first half of 1967, muni-bond sales in the nation as a whole were about 30 percent higher than in the like period of a year ago. Indeed, the strong growth trend in municipal borrowing seems certain to continue in line with the upward trend in state-local expenditures. — Robert Johnston
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