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For Release on D e l i v e r y F r i d a y , F e b r u a r y 6, 1970 1 2 : 0 0 Noon, E . S . T . MONETARY POLICY, INTEREST RATE CEILINGS, AND THE ACCESS OF STATE AND LOCAL GOVERNMENTS TO THE CAPITAL MARKETS Remarks By Andrew F . Brimmer Member Board of Governors of the F e d e r a l Reserve System B e f o r e the M i d - Y e a r M e e t i n g of the Maryland S t a t e Bar A s s o c i a t i o n Lord B a l t i m o r e H o t e l B a l t i m o r e , Maryland February 6 , 1970 MONETARY POLICY, INTEREST RATE CEILINGS, AND THE ACCESS OF STATE AND LOCAL GOVERNMENTS TO THE CAPITAL MARKETS By Andrew F. Brimmer* I n 1969, f o r the f i r s t time i n a decade, a s i g n i f i c a n t decline occurred i n the volume o f l o n g - t e r m borrowing by S t a t e and l o c a l governments. On the b a s i s of p r e l i m i n a r y d a t a , j u s t under $12 b i l l i o n l a s t y e a r . such borrowing may have totaled T h i s l e v e l r e p r e s e n t s a drop of b i l l i o n from the $ 1 6 . 4 b i l l i o n recorded i n 1968. $4-1/2 I n 1960, about $ 7 . 2 bil- l i o n of l o n g - t e r m m u n i c i p a l bonds were s o l d ; and i n a l l except one year o f the decade, t h e volume rose s t e a d i l y . u p t r e n d occurred i n 1966, W h i l e an i n t e r r u p t i o n i n the the decrease i n t h a t year was o n l y 5 per cent compared w i t h a drop o f over o n e - q u a r t e r l a s t -- year. The r e l a t i v e d e c l i n e i n the p a r t i c i p a t i o n o f S t a t e and l o c a l governments i n the c a p i t a l market l a s t year can a l s o be t r a c e d i n the F e d e r a l Reserve Board's f l o w of funds s t a t i s t i c s . preliminary estimates, According to our the n e t volume o f funds r a i s e d by a l l s e c t o r s i n 1969 amounted to about $ 8 5 . 6 b i l l i o n , nonfinancial a decrease of $ 1 1 . 8 ^Member, Board of Governors o f the F e d e r a l Reserve System. I am g r a t e f u l t o s e v e r a l persons on the Board's s t a f f f o r a s s i s t a n c e i n the p r e p a r a t i o n o f these remarks. Miss Eleanor P r u i t t c o o r d i n a t e d the c o l l e c t i o n and a n a l y s i s of d a t a on s t a t u t o r y i n t e r e s t r a t e c e i l i n g s and borrowing e x p e r i e n c e s of S t a t e and l o c a l governments. Mr. Darwin Beck d i d the p r e l i m i n a r y a n a l y s i s of member bank h o l d ings of S t a t e and l o c a l s e c u r i t i e s i n s e l e c t e d S t a t e s . Mr. P e t e r J . Feddor designed and c a r r i e d out the computer programming which p e r m i t t e d t h i s a n a l y s i s of t h e banks' h o l d i n g s . I n each F e d e r a l Reserve Bank, a t l e a s t one s t a f f member made an i n f o r m a l survey of the most i m p o r t a n t l o c a l governments t o o b t a i n i n f o r m a t i o n on s t a t u t o r y i n t e r e s t r a t e c e i l i n g s and r e c e n t borrowing e x p e r i e n c e . billion -2- ( o r 12 per c e n t ) from the l e v e l i n the p r e v i o u s y e a r . However, this d e c l i n e i n the t o t a l was more than accounted f o r by the change i n p o s i t i o n of the F e d e r a l Government. I n c a l e n d a r year 1969, made n e t repayments of $ 5 . 4 b i l l i o n - $ 1 3 . 4 b i l l i o n i n the previous y e a r . decrease of $ 1 8 . 8 the the latter compared w i t h n e t borrowings of So the y e a r - t o - y e a r change was a billion. A l l o w i n g f o r the e x p e r i e n c e of the F e d e r a l Government, total funds r a i s e d by o t h e r n o n f i n a n c i a l s e c t o r s i n 1969 amounted to $ 9 1 . 0 bil- lion, the r e p r e s e n t i n g an expansion o f $ 6 . 9 b i l l i o n l e v e l r a i s e d i n 1968. However, ( o r 8 per c e n t ) over the n e t amount o f funds r a i s e d by S t a t e and l o c a l governments i n 1969 shrank by $ 1 . 1 b i l l i o n , ( o r by 11 per I n c o n t r a s t , n e t funds r a i s e d by them rose by $ 2 . 2 b i l l i o n cent) i n 1968. Moreover, cent). ( o r by 28 per the decrease o f $ 1 . 1 b i l l i o n i n n e t funds r a i s e d by S t a t e and l o c a l u n i t s l a s t year r e p r e s e n t e d more than f o u r f i f t h s of the d e c l i n e o f $ 1 . 3 b i l l i o n i n n e t debt f i n a n c i n g i n the c a p i t a l markets. In fact, S t a t e and l o c a l government s e c u r i t i e s were the o n l y issues among the t h r e e p r i n c i p a l types of c a p i t a l market ments to r e g i s t e r a s i g n i f i c a n t d e c l i n e i n 1969. t i g h t n e s s i n the mortgage m a r k e t , g a i n ( o f $200 m i l l i o n ) Mortgages on r e s i d e n t i a l (to $19.9 b i l l i o n ) , between $300 m i l l i o n on o n e - t o - f o u r types of r e s i d e n c e s . D e s p i t e the extreme t o t a l mortgage debt showed a s m a l l to $ 2 7 . 2 b i l l i o n . p r o p e r t i e s rose by $ 1 . 2 b i l l i o n instru- w i t h the g a i n d i v i d e d f a m i l y homes and $900 m i l l i o n on o t h e r Net funds r a i s e d through s a l e s of c o r p o r a t e and -3f o r e i g n bonds showed a modest d e c l i n e of $100 m i l l i o n i n 1969. t h i s d e c l i n e c e n t e r e d e n t i r e l y i n the issues o f domestic However, corporations, where n e t funds r a i s e d through c o r p o r a t e bonds alone d e c l i n e d by $200 m i l l i o n to $ 1 2 . 7 billion. I n terms of the r e l a t i v e access to c r e d i t facilities, the share o f S t a t e and l o c a l governments i n n e t funds r a i s e d by a l l f i n a n c i a l sectors non- ( e x c l u d i n g the F e d e r a l Government) d e c l i n e d t o about 10 per cent i n 1969 from about 12 per cent i n the p r e v i o u s y e a r . r e l a t i v e p o s i t i o n i n the c a p i t a l markets, however, was n o t q u i t e as w e l l ; their sustained share o f n e t funds r a i s e d through c a p i t a l market i n s t r u m e n t s shrank from j u s t under 20 per cent i n 1968 t o j u s t 16 per cent l a s t Their over year. Thus, whether measured by f l o w of funds d a t a or by t h e volume o f l o n g - t e r m bond s a l e s , the access o f S t a t e and l o c a l governments to the c a p i t a l markets weakened c o n s i d e r a b l y i n 1969. T h i s weakening can be a t t r i b u t e d to a number of f a c t o r s . t h e decrease 38 per c e n t ) Undoubtedly, i n the p r o p o r t i o n of borrowing proposals approved by v o t e r s and the r e c o r d l e v e l o f borrowing costs were both c o n t r i b u t i n g ments. (to develop- However, s t a t u t o r y i n t e r e s t r a t e c e i l i n g s appear t o have been of p a r t i c u l a r importance. As m u n i c i p a l bond y i e l d s rose t o an average of 5 . 7 2 per cent l a s t y e a r - - from an average o f 4 . 4 5 per c e n t i n 1968 these r a t e l i m i t a t i o n s became o p e r a t i v e f o r the f i r s t w i d e l y s c a t t e r e d areas o f the c o u n t r y . jurisdictions t i m e i n many Although a number o f took steps t o modify a p p l i c a b l e c e i l i n g s , these the moves -- -4- g e n e r a l l y came too l a t e to have much impact on t h e i r a b i l i t y to borrow. Of c o u r s e , the experience of S t a t e and l o c a l governments the c a p i t a l markets l a s t year i s not a t a l l surprising. Given the need on the p a r t of the F e d e r a l Reserve System to pursue a p o l i c y s u b s t a n t i a l r e s t r a i n t as p a r t of the f i g h t a g a i n s t i n f l a t i o n , s h r i n k a g e i n the g e n e r a l a v a i l a b i l i t y o f c r e d i t - - in of a i n the f a c e o f a c o n t i n u i n g s t r o n g demand f o r c r e d i t - - would o b v i o u s l y l e a d t o a significant r i s e i n the l e v e l of market i n t e r e s t r a t e s . circumstances, i t was t o be expected t h a t S t a t e and l o c a l along w i t h o t h e r borrowers, would encounter d i f f i c u l t i e s efforts Under these t o r a i s e funds. because o f t h e r i g i d i t i e s governments, in their But these d i f f i c u l t i e s were c l e a r l y aggravated imposed by s t a t u t o r y l i m i t a t i o n s on the r a t e s o f i n t e r e s t many of them could pay on l o n g - t e r m d e b t . The d e t r i m e n t a l e f f e c t s of these r a t e c e i l i n g s can be t r a c e d i n s e v e r a l ways: The l e a d i n g commercial banks (which n o r m a l l y p r o v i d e a major o u t l e t ) turned away t o a s i g n i f i c a n t degree from the m u n i c i p a l bond market l a s t y e a r . This was e s p e c i a l l y t r u e i n those S t a t e s w i t h the lowest c e i l i n g s . The displacement of S t a t e and l o c a l issues reached a record l e v e l , and here a l s o the impact was p r o p o r t i o n a t e l y g r e a t e r among S t a t e s under the s t r o n g e s t r a t e l i m i t a t i o n s . S t a t e and l o c a l governments had to search v i g o r o u s l y f o r a l t e r n a t i v e sources o f funds: shortterm borrowing jumped s h a r p l y and a number o f -5- borrowers r e l i e d more h e a v i l y on revenue bonds or o t h e r sources where r a t e c e i l i n g s d i d n o t apply i n p a r t i c u l a r cases. I n some i n s t a n c e s , s p e c i a l steps ( o r s p e c i a l persuasion) were undertaken to induce buyers ( p a r t i c u l a r l y commercial banks) t o purchase newly issued o b l i g a t i o n s . But, d e s p i t e these d i v e r s e e f f o r t s , i t appears t h a t some j u r i s d i c t i o n s may have c u r t a i l e d c u r r e n t e x p e n d i t u r e s , and t o t a l c a p i t a l spendi n g by S t a t e and l o c a l u n i t s seems t o have moderated i n 1969. I n l i g h t of these developments - - and g i v e n the prospect of a continued s t r o n g demand f o r funds by S t a t e and l o c a l governments -- the need t o e l i m i n a t e the e x i s t i n g s t a t u t o r y c e i l i n g on i n t e r e s t remains as p r e s s i n g as e v e r . This need assumes even g r e a t e r rates urgency when the expanding demand f o r funds i s set a g a i n s t the d e c l i n e i n the r e l a t i v e a t t r a c t i v e n e s s o f tax-exempt s e c u r i t i e s t o commercial banks. Before examining more c l o s e l y the b e h a v i o r o f S t a t e and l o c a l governments i n the c a p i t a l market l a s t y e a r , a n a l y z e the c o n f i g u r a t i o n of i n t e r e s t r a t e i t would be h e l p f u l to ceilings. S t r u c t u r e of S t a t u t o r y I n t e r e s t Rate C e i l i n g s At the b e g i n n i n g of t h i s y e a r , the 50 S t a t e s were almost e v e n l y d i v i d e d w i t h r e s p e c t t o the presence or absence of statutory l i m i t a t i o n s on the r a t e s of i n t e r e s t they could pay on l o n g - t e r m d e b t . However, the s i t u a t i o n was q u i t e d i f f e r e n t a y e a r ago: not o n l y d i d a s i z a b l e m a j o r i t y o f S t a t e s have such c e i l i n g s b u t the average o f maximum r a t e s payable was a l s o c o n s i d e r a b l y l o w e r . During level the -6- course o f 1969, about a dozen S t a t e s e i t h e r removed, suspended or r a i s e d the e x i s t i n g c e i l i n g s , and a t the end o f l a s t month another h a l f - d o z e n S t a t e s had l e g i s l a t i o n pending or were p l a n n i n g steps r e l a x these c o n s t r a i n t s . I n a number of i n s t a n c e s , changes were also made l a s t y e a r i n the c e i l i n g s a p p l i c a b l e t o o b l i g a t i o n s of government to local units. To o b t a i n a b e t t e r a p p r e c i a t i o n o f the s t r u c t u r e of interest r a t e c e i l i n g s and t h e i r e f f e c t s on borrowing a t the l o c a l l e v e l , F e d e r a l Reserve Banks were asked i n January t o make an i n f o r m a l of the s i t u a t i o n i n t h e i r D i s t r i c t s . The r e s u l t s of t h a t the survey canvass, when combined w i t h i n f o r m a t i o n published by the D a i l y Bond Buyer, p r o v i d e a f a i r l y good d e s c r i p t i o n of the s t a t u s o f s t a t u t o r y r a t e c e i l i n g s a t the beginning of t h i s y e a r . i n some d e t a i l i n Table 1, a t t a c h e d . interest The i n f o r m a t i o n i s shown The Table d i s t i n g u i s h e s between c e i l i n g s a p p l i c a b l e to S t a t e governments and those a p p l i c a b l e t o units; it a l s o d i s t i n g u i s h e s among g e n e r a l o b l i g a t i o n s , and agency i s s u e s . revenue bonds The S t a t e s are l i s t e d according t o the l e v e l the c e i l i n g a p p l i c a b l e to the S t a t e ' s g e n e r a l o b l i g a t i o n s . rule, local of As a the l o c a l c e i l i n g s p r e v a i l throughout the S t a t e , b u t i n some cases l a r g e c i t i e s have s p e c i a l c e i l i n g s . A few of these are a l s o shown s e p a r a t e l y . For convenient r e f e r e n c e , summarized as follows: the d e t a i l s i n T a b l e 1 can be -7- L e v e l of C e i l i n g ( J a n u a r y , 1970) No C e i l i n g S t a t e Governments Revenue S t a t e General Bonds Agency Obligations Local Governments General Revenue Local Obligations Bonds Agency 24 23 22 19 21 19 9 7 7 14 13 14 11 11 11 15 13 11 Under 6 per cent 4 4 3 2 0 1 Varies 1 1 3 0 1 1 Not issued 1 4 3 0 1 2 Not 0 0 1 0 1 2 50 50 50 50 50 50 7 per cent and over 6 t o 7 per cent authorized Total This summary p o i n t s up s e v e r a l s t r i k i n g f e a t u r e s : W h i l e almost half the S t a t e s have no c e i l i n g s on g e n e r a l o b l i g a t i o n s , of them have c e i l i n g s below 7 per cent - limit i s below 6 per c e n t . almost one-third and i n four o f the l a t t e r As f a r as S t a t e s are concerned, the situation appears to be a p p r o x i m a t e l y the same w i t h r e s p e c t to the range of ings on a l l t h r e e types of o b l i g a t i o n s . somewhat more v a r i e t y i s e v i d e n t . But among l o c a l the ceil- governments, A s l i g h t l y l a r g e r number of States have e s t a b l i s h e d maximum i n t e r e s t r a t e c e i l i n g s on the main types of l o n g - t e r m debt issued by l o c a l j u r i s d i c t i o n s . On the o t h e r hand, average l e v e l of the c e i l i n g s appears to be somewhat h i g h e r . the -8- Impact of I n t e r e s t Rate Ceilings I f we look behind the summary, however, we can b e g i n to see the i n f l u e n c e of the r a t e l i m i t a t i o n s of S t a t e and l o c a l governments. on the c a p i t a l market b e h a v i o r The e x p e r i e n c e of t h r e e of the S t a t e s w i t h c e i l i n g s of l e s s than 6 per cent on g e n e r a l is especially instructive. four obligations C a l i f o r n i a - - w i t h a 5 per cent l i m i t -- i s the most d r a m a t i c example of a S t a t e t h a t has s u f f e r e d because of a low c e i l i n g . It topped the l i s t of S t a t e s i n the volume of bonds d i s p l a c e d i n 1969, and one banker e s t i m a t e s t h a t C a l i f o r n i a was able to s e l l only o n e - t e n t h of the bonds needed t o f i n a n c e p u b l i c in that year. I n Arkansas, where the r a t e v a r i e s between 5 and 6 per cent and where s e c u r i t i e s must be sold a t p a r , v i r t u a l l y no buyers can be found f o r c i t y , agency bonds. purposes - - In fact, it it is reported county and o t h e r is reported that - - for a l l that governmental practical these l o c a l u n i t s i n Arkansas have been out of the improvement business f o r some t i m e . ceiling, projects capital I n Kansas, w i t h a 5 - 1 / 2 per cent the number and d o l l a r volume of issues are both r e p o r t e d have d e c l i n e d s i g n i f i c a n t l y i n the preceding y e a r . It i n 1969 compared w i t h the l e v e l s to reached i s a l s o r e p o r t e d t h a t both C a l i f o r n i a and Kansas are p l a n n i n g t o r e v i s e t h e i r i n t e r e s t r a t e c e i l i n g s i n the near future. The most s t r i k i n g f a c t about the e l e v e n S t a t e s w i t h ceilings on g e n e r a l o b l i g a t i o n s between 6 and 7 per cent i s t h a t about h a l f them (Colorado, Illinois, Oklahoma, Utah and V i r g i n i a ) have of legislation -9- pending t o r a i s e the l i m i t . I n the meantime, the e x i s t i n g c e i l i n g s have been s u b s t a n t i a l . reported that Mississippi is finding i t bonds a t the 6 per cent c e i l i n g . will let the adverse e f f e c t s For example, it almost impossible to of is sell A p p a r e n t l y some d e a l e r s i n the S t a t e t a k e the issues a t t h a t r a t e - - if the government w i l l agree to them have the use o f the funds f o r a s p e c i f i e d amount of time. Alabama, In the c i t y of Birmingham i s s a i d t o be r e l y i n g h e a v i l y on revenue bonds which do not have a c e i l i n g . In Illinois, the c i t y Chicago has found the i n t e r e s t r a t e c e i l i n g s p a r t i c u l a r l y Until recently, 7 per c e n t . difficulty disruptive. t h e 6 per cent l i m i t was suspended u n t i l J u l y 1971, and d u r i n g t h i s p e r i o d t h e C i t y can t r y t o s e l l issues Even so, Chicago i s r e p o r t e d t o be having s e l l i n g i t s o b l i g a t i o n s t o the banks. system has been h i t p a r t i c u l a r l y of 1, at considerable The Chicago school hard. About h a l f of the S t a t e s which now have c e i l i n g s o f 7 per cent or more on g e n e r a l o b l i g a t i o n s o n l y r e c e n t l y r a i s e d t h e i r limits to t h i s l e v e l . Oregon I n c l u d e d i n t h i s group a r e M i c h i g a n , M i s s o u r i , and P e n n s y l v a n i a . Moreover, M i c h i g a n and Pennsylvania have o n l y temporary a u t h o r i z a t i o n f o r t h e h i g h e r c e i l i n g s . Undoubtedly, some borrowers which do not have h i g h - g r a d e r a t i n g s f i n d i t d i f f i c u l t borrow even a t these l i m i t s - - unless they a r e w i l l i n g t o l i m i t selves to r e l a t i v e l y short m a t u r i t i e s . that For i n s t a n c e , to them- i t was r e p o r t e d l o c a l governments i n Kentucky a r e h a v i n g t r o u b l e s e l l i n g bonds -10- a t 7 per cent and are r e l y i n g h e a v i l y on one-year bond anticipation notes. Finally, no o f f i c i a l f o r a number of S t a t e and l o c a l governments w i t h ceilings, For example, the s i t u a t i o n i s not as f i r m as i t may seem. i n both New York and New J e r s e y , f o r about one y e a r , and by mid-1970 the c e i l i n g s are scheduled t o r e t u r n t o the previous l e v e l s of tively. Moreover, ceilings, t h e c e i l i n g was suspended 5 per cent and i n some S t a t e s which may or may not have the S t a t e usury laws o r d i n a r i l y a p p l y . even where no s p e c i f i c c e i l i n g i s s e t , tive legal limit Consequently, 6 per c e n t , Thus, respecofficial i n some cases t h e r e a c t u a l l y may be an e f f e c - to i n t e r e s t r a t e s t h a t can be p a i d on m u n i c i p a l s . i f market y i e l d s were to c o n t i n u e t o r i s e as they d i d over the l a s t y e a r , a fairly l a r g e number of S t a t e s would have to r e w r i t e t h e i r usury laws as w e l l . Before c l o s i n g t h i s p a r t of the d i s c u s s i o n , we should pause to take note of the S t a t e of M a r y l a n d ! s e x p e r i e n c e - - briefly the f a c t s are w i d e l y known. I t w i l l be r e c a l l e d t h a t u n t i l although last December the c e i l i n g on the S t a t e ' s g e n e r a l o b l i g a t i o n s was 5 per However, since i t s difficulty cent. issues were r a t e d Aaa, Maryland had e x p e r i e n c e d no i n s e l l i n g bonds u n t i l it attempted t o market $40 m i l l i o n of c o n s t r u c t i o n bonds i n l a t e November of l a s t y e a r . At t h a t time, h i g h - g r a d e m u n i c i p a l bond y i e l d s were r a p i d l y approaching 6 - 1 / 2 per cent. Maryland was faced w i t h the a l t e r n a t i v e s of h a l t i n g borrowing from the c u r r e n t o p e r a t i n g surplus construction, (a s h o r t - r u n s o l u t i o n a t -11- best), or changing the c e i l i n g . As i t happened, the l e g i s l a t u r e was c a l l e d which - 5 per cent c e i l i n g a l t o g e t h e r . among o t h e r a c t i o n s - - removed the But b e f o r e t h a t a c t i o n could be t a k e n , the S t a t e had to f a c e an extremely d i f f i c u l t mentioned below) a s p e c i a l session of situation -- and (as some of the temporary moves which were made i n the i n t e r v a l are prime examples of the r e a l burdens imposed by rate interest ceilings. The conclusions which can be drawn w i t h r e s p e c t to the s t r u c t u r e and impact of s t a t u t o r y i n t e r e s t r a t e c e i l i n g s on S t a t e and l o c a l government debt can be s t a t e d s u c c i n c t l y : while the e x i s t e n c e of c e i l i n g s remains r a t h e r widespread, a l a r g e number of S t a t e s r a i s e d or suspended such l i m i t a t i o n s d u r i n g the l a s t y e a r or are now c o n s i d e r i n g such i n c r e a s e s . In fact, i n some cases, States which l i f t e d t h e i r r a t e c e i l i n g s l a s t year may w e l l have t o do so again i f bond f l o t a t i o n s California remain heavy. With the e x c e p t i o n of (which must submit a proposed r a t e change to the v o t e r s a general e l e c t i o n ) , l a s t year. If every major borrower r a i s e d or suspended they had not taken these s t e p s , California) are s t i l l encountering ceilings they would have been unable t o s e l l bonds under the market c o n d i t i o n s p r e v a i l i n g most of the l a s t t w e l v e months - - in and many of them during (especially obstacles. D e c l i n e i n Commercial Banks 1 Demand f o r S t a t e and L o c a l Government Debt As i s w i d e l y known, the commercial banks have p r o v i d e d the p r i n c i p a l o u t l e t f o r m u n i c i p a l i s s u e s . traditionally This strong -12- demand undoubtedly r e f l e c t e d the advantage of tax-exempt income to the banks. an In addition, however, many banks a l s o seemed to have accepted o b l i g a t i o n t o a s s i s t t h e i r own S t a t e and l o c a l governments w i t h their f i n a n c i n g problems, and t h i s w i l l i n g n e s s t o a s s i s t was enhanced by the d e p o s i t of p u b l i c funds. of adverse circumstances - interest rate ceilings, reform - - frequently But i n 1969, a c o n j u n c t u r e i n c l u d i n g reduced bank r e s o u r c e s , low and u n c e r t a i n t i e s over F e d e r a l income t a x brought about a sharp d e c l i n e i n commercial banks 1 participa- t i o n i n the m u n i c i p a l bond market. L a s t y e a r , n e t purchases of S t a t e and l o c a l government by commercial banks amounted to only $ 1 . 2 b i l l i o n - $ 8 . 7 b i l l i o n i n 1968 and $ 9 . 0 b i l l i o n i n 1967. i n contrast compared w i t h t h e n e t funds r a i s e d by these governments. are Last the banks 1 share r e p r e s e n t e d only 14 per cent of the t o t a l . year, I n 1967, t h e banks expanded t h e i r holdings by an amount g r e a t e r than the rise in l i a b i l i t i e s of S t a t e and l o c a l governments: absorbed n e a r l y 90 per cent of the t o t a l Of c o u r s e , I n 1968, the banks increase. as i n d i c a t e d above, some p a r t of the commercial g e n e r a l l y reduced a v a i l a b i l i t y of c r e d i t a t these i n s t i t u t i o n s But t h i s total the t o t a l rose by banks 1 lessened demand f o r m u n i c i p a l issues can be a t t r i b u t e d to year. to The d e c l i n e was even more d r a m a t i c when the changes i n commercial banks 1 h o l d i n g s $ 7 . 7 b i l l i o n and bank holdings by $ 9 . 0 b i l l i o n . issues i s by no means the e n t i r e s t o r y . the last There c e r t a i n l y was -13- a sharp d e c l i n e i n 1969 i n the volume of funds advanced by commercial banks t o a l l borrowers. Last year, t h i s t o t a l was about $ 9 . 6 billion, compared w i t h $ 3 9 . 3 b i l l i o n i n 1968 and $ 3 6 . 5 b i l l i o n i n 1967. Even so, S t a t e and l o c a l governments got a s u b s t a n t i a l l y reduced share 1969 - - only 1 2 - 1 / 2 per cent of the t o t a l , in compared w i t h 25 per cent i n 1967 and 22 per cent i n 1968. As I s t r e s s e d above, I b e l i e v e a good p a r t of t h e lessened t a s t e o f commercial banks f o r m u n i c i p a l o b l i g a t i o n s r e f l e c t s the adverse e f f e c t s o f the low l i m i t s on i n t e r e s t r a t e s which many S t a t e and l o c a l j u r i s d i c t i o n s can pay. To t e s t t h i s c o n c l u s i o n , we have made a s p e c i a l a n a l y s i s of the y e a r - t o - y e a r changes i n S t a t e and l o c a l government s e c u r i t i e s h e l d by weekly r e p o r t i n g member banks i n a dozen S t a t e s d u r i n g the t h r e e years 1966-1969. States For the most p a r t , these (on the average) have been the l e a d i n g borrowers through t h e issuance of l o n g - t e r m s e c u r i t i e s over the l a s t f i v e y e a r s . of the a n a l y s i s are shown i n Tables 2 and 3, Among the twelve S t a t e s , The d e t a i l s attached. t h e r e were f o u r (California, Maryland, New York and N o r t h C a r o l i n a ) which had i n t e r e s t r a t e c e i l i n g s of 5 per cent or l e s s on g e n e r a l o b l i g a t i o n s through much o f 1969. As i n d i c a t e d i n Table 2, the a c t u a l h o l d i n g s of S t a t e and l o c a l s e c u r i t i e s by banks i n these f o u r S t a t e s d e c l i n e d from the end of 1968 t o the end of The average d e c l i n e f o r t h i s group was about 10 per c e n t . For all weekly r e p o r t i n g member banks, holdings of m u n i c i p a l o b l i g a t i o n s d e c l i n e d - - but by only 7 per c e n t . Banks i n a l l of t h e o t h e r 1969. also States -14- shown ( e x c e p t those i n Pennsylvania) this period. recorded moderate increases over The d e c l i n e i n holdings by Pennsylvania banks may be e x p l a i n e d by the f a c t t h a t the r a t i n g of P h i l a d e l p h i a bonds was reduced s h a r p l y by p r i v a t e r a t i n g agencies i n l a t e 1967, T a b l e 3 shows r a t i o s of member banks 1 holdings of S t a t e and local obligations to t o t a l s e c u r i t i e s h e l d . Again, it is clear that banks i n those S t a t e s s u b j e c t to low i n t e r e s t r a t e c e i l i n g s have adjusted t h e i r investments i n a way t h a t i s i n sharp c o n t r a s t to the e x p e r i e n c e of banks i n S t a t e s not under i n t e r e s t r a t e In general, limitations. the r a t i o of S t a t e and l o c a l o b l i g a t i o n s to t o t a l secu- r i t i e s has been r i s i n g f o r a l l banks from the end of 1966 to the end of 1969. However, from the end o f 1968 t o the end of 1969, the i n c r e a s e i n the r a t i o a t banks i n S t a t e s not s u b j e c t to low i n t e r e s t r a t e l i m i t a t i o n s has been much g r e a t e r than i n those S t a t e s where such i n t e r e s t r a t e l i m i t a t i o n s apply. latter In fact, group has been about unchanged. this ratio the r a t i o f o r For example, this the change i n f o r banks i n the four S t a t e s which were s u b j e c t to a 5 per cent i n t e r e s t r a t e l i m i t a t i o n ranged from - 2 . 2 to 2 . 9 w i t h a mean of 0.5 from the end of 1968 to the end of 1969. f o r banks i n those S t a t e s , or more than t e n times f o r the low i n t e r e s t r a t e S t a t e s . (This i n c l u s i o n of these d a t a would not change the r e s u l t greater comparison excludes banks i n Pennsylvania f o r the reasons s t a t e d above. ratio i n our sample, not s u b j e c t to such l i m i t a - t i o n s was 3 . 4 to 7 . 9 w i t h a mean of 6 . 1 , than the r a t i o The range i n t h i s However, significantly.) -15- It i s hazardous t o i n f e r too much from these d a t a since the number of banks r e p o r t i n g from each S t a t e v a r i e s a p p r e c i a b l y . p a t t e r n seems too c l o s e l y c o r r e l a t e d not t o r e f l e c t Nevertheless, some common p o r t - f o l i o adjustment by banks i n S t a t e s where low i n t e r e s t r a t e are i n the limitations effect. A l l of the rough c a l c u l a t i o n s presented above show banks i n S t a t e s w i t h low i n t e r e s t r a t e c e i l i n g s h o l d i n g r e l a t i v e l y fewer State and l o c a l o b l i g a t i o n s than do banks i n S t a t e s where no such c o n s t r a i n t exists. In addition, it can be i n f e r r e d from the d a t a t h a t the market f o r S t a t e and l o c a l o b l i g a t i o n s , i s concerned, i s segmented, a t l e a s t so f a r as the banking system and i n l a r g e p a r t such s e c u r i t i e s are not r e a d i l y t r a d e d on an i n t e r s t a t e b a s i s . e a s i l y traded, If these s e c u r i t i e s were more one would expect t o see more u n i f o r m movement i n the p o r t f o l i o adjustments of banks as the o b l i g a t i o n s of some S t a t e s come under i n t e r e s t r a t e c o n t r a i n t s . That i s , banks i n S t a t e s w i t h low i n t e r e s t r a t e c e i l i n g s would s u b s t i t u t e o b l i g a t i o n s from t h e i r home S t a t e f o r the s e c u r i t i e s of S t a t e s w i t h h i g h e r r a t e s . o f the d a t a a v a i l a b l e , in a significant On the basis such s u b s t i t u t i o n does not appear t o take place volume. The h o l d i n g s o f S t a t e and l o c a l s e c u r i t i e s by banks located i n the S t a t e of Maryland appear t o f o l l o w the g e n e r a l p a t t e r n of banks l o c a t e d i n S t a t e s w i t h low i n t e r e s t r a t e c e i l i n g s . (The change i n the Maryland law came too l a t e i n the year to have much e f f e c t on the h o l d ings o f banks i n the S t a t e . ) Holdings of such s e c u r i t i e s by Maryland -16- banks d e c l i n e d almost 11 per cent from t h e end o f 1968 t o the end o f 1969, about i n l i n e w i t h the e x p e r i e n c e o f o t h e r banks i n S t a t e s where low i n t e r e s t r a t e c e i l i n g s were i n e f f e c t . The r a t i o s o f State and l o c a l s e c u r i t i e s t o t o t a l s e c u r i t i e s a t Maryland banks r e i n f o r c e s the above p a t t e r n . T h i s r a t i o was about unchanged from the end o f 1968 to t h e end of 1969, i n c r e a s i n g o n l y 0 . 6 per c e n t , compared to the average i n c r e a s e of 6 . 1 f o r banks i n S t a t e s w i t h h i g h e r i n t e r e s t rate ceilings. I n summary, the d a t a f o r weekly r e p o r t i n g member banks show t h a t from the end o f 1968 t o the end o f 1969 l a r g e banks seem t o have f o l l o w e d a c o n s i s t e n t p a t t e r n o f reducing the importance of S t a t e and local obligations in their portfolios. The d a t a a l s o show t h a t at banks i n S t a t e s where i n t e r e s t r a t e c e i l i n g s p e r m i t t e d on g e n e r a l o b l i g a t i o n s e c u r i t i e s a r e out o f l i n e w i t h market r a t e s o f interest t h e p o r t f o l i o adjustment was much more d r a s t i c than i n those S t a t e s where such c e i l i n g s d i d not a p p l y . Market Displacements and the Search f o r A l t e r n a t i v e Sources o f Funds W i t h the t r a d i t i o n a l commercial bank market f o r S t a t e and l o c a l government issues f a l l i n g away, these j u r i s d i c t i o n s have been f o r c e d t o search v i g o r o u s l y f o r o t h e r means of a d j u s t i n g to c a p i t a l market c o n d i t i o n s . I n many i n s t a n c e s , stringent these a l t e r n a t i v e s have been unwieldy and o f t e n more expensive t h a n p u b l i c market borrowing based on the f u l l f a i t h and c r e d i t of the i s s u i n g agency. -17- I n the f i r s t p l a c e , though, many would-be borrowers simply had t o stand a s i d e from the market a t t h e time they o r i g i n a l l y t o s e l l bonds. A rough i n d i c a t i o n o f the e x t e n t o f t h i s planned interruption i n plans i s g i v e n by t h e volume o f displacements as r e p o r t e d by the Bond Buyer. In this series, displacements i n c l u d e issues which were postponed, on which no b i d was r e c e i v e d , or on which a l l b i d s were rejected. At the beginning of January, o f m u n i c i p a l displacements 1970, the c u m u l a t i v e ( c u m u l a t i v e from September 3 , 1968, when the s e r i e s was s t a r t e d ) was $ 2 , 8 3 6 m i l l i o n . backlog of displacements, total Although t h i s i s a l a r g e one should be c a u t i o u s i n i n t e r p r e t i n g meaning, s i n c e i t p r o b a b l y u n d e r e s t i m a t e s t h e a c t u a l volume o f put a s i d e — a t l e a s t t e m p o r a r i l y . Moreover, the s e r i e s its issues cannot c a p t u r e those issues which were never i n i t i a t e d because l o c a l officials knew i t would be u s e l e s s and c o s t l y t o a d v e r t i s e bonds, g i v e n the p r e v a i l i n g l e v e l of yields. S t a t e and l o c a l o f f i c i a l s — faced w i t h r e s t r i c t e d access t o t h e l o n g - t e r m c a p i t a l markets because o f c e i l i n g s on g e n e r a l o b l i g a t i o n s — have r e l i e d more h e a v i l y on revenue bonds, borrowing, i n c r e a s e d t a x e s or c u r t a i l m e n t o f e x p e n d i t u r e s . short-term I n 1969, a s u b s t a n t i a l number o f government u n i t s r e s o r t e d t o one or more o f these measures. often Revenue bonds o r issues o f s p e c i a l have more l i b e r a l i n t e r e s t r a t e c e i l i n g s than those on S t a t e g e n e r a l o b l i g a t i o n bonds. authorities Therefore, a number o f governments use -18- s p e c i a l b u i l d i n g a u t h o r i t i e s which can i s s u e revenue bonds and then l e a s e the f a c i l i t i e s back to the school or l i b r a r y o f f i c i a l cannot market t h e i r own bonds. but i t This i s not a new d e v i c e , i s r e p o r t e d t h a t a number of j u r i s d i c t i o n s districts) which of course, (particularly school r e l i e d on such s p e c i a l a u t h o r i t i e s much more f r e q u e n t l y in 1969. S h o r t - t e r m borrowing by S t a t e and l o c a l governments sharply l a s t year. increased P r e l i m i n a r y e s t i m a t e s suggest t h a t the t o t a l may have reached about $ 1 1 . 9 b i l l i o n , amount recorded i n 1968. a r i s e of $ 3 . 2 b i l l i o n over At t h i s l e v e l , the s h o r t - t e r m borrowing would r e p r e s e n t more than h a l f o f the $ 2 3 . 4 b i l l i o n of t o t a l new issues o f f e r e d i n 1969. T h i s was a r e c o r d p r o p o r t i o n by a l a r g e margin. 1968 share o f s h o r t - t e r m issues i n the t o t a l ( j u s t over o n e - t h i r d ) was about the average f o r the decade of the 1 9 6 0 f s . ever, The I n many cases, how- t h e r e a r e l e g a l l i m i t a t i o n s .on r e f u n d i n g s h o r t - t e r m obligations, so t h i s means can p r o v i d e o n l y a temporary s o l u t i o n t o the financing problems o f most u n i t s . A number o f S t a t e and l o c a l governments have a l s o found necessary t o t a k e s p e c i a l steps ( o r to engage i n s p e c i a l t o induce buyers — p a r t i c u l a r l y commercial banks - issued o b l i g a t i o n s . it persuasion) t o purchase newly A good example o f t h i s i s r e p o r t e d from Chicago. The l e a d i n g banks i n t h a t c i t y agreed t o t a k e $45 m i l l i o n o f a proposed $145 m i l l i o n t a x a n t i c i p a t i o n borrowing a f t e r the S t a t e 0 f -19- Illinois agreed t o p l a c e $15 m i l l i o n i n n o n - i n t e r e s t b e a r i n g d e p o s i t s w i t h those banks. Another example of banks 1 response t o appeals i s found i n the S t a t e of Maryland. difficulties special L a t e l a s t y e a r , when i n s e l l i n g bonds arose because o f t h e then e x i s t i n g 5 per cent r a t e c e i l i n g , the S t a t e T r e a s u r e r n e g o t i a t e d w i t h six l a r g e M a r y l a n d banks and o b t a i n e d commitments from them t o lend $12 m i l l i o n to the S t a t e f o r a few months u n t i l t h e L e g i s l a t u r e could a c t a t i t s r e g u l a r session i n February. The banks agreed t o l e n d t h e money a t 5 per c e n t , w e l l below the prime r a t e . I n passing, it should be noted t h a t a t l e a s t some of these banks h e l d a s i z a b l e amount o f p u b l i c d e p o s i t s - - which undoubtedly was a f a c t o r i n their c o n s i d e r a t i o n of the appeal t o p a r t i c i p a t e i n t h e l o a n pool f o r the State. Still o t h e r examples o f the a l t e r n a t i v e s on which S t a t e and l o c a l governments have depended t o r a i s e funds could be c i t e d . However, they a l l tell t h e same s t o r y : low i n t e r e s t r a t e g r e a t l y l i m i t e d the access o f many of these u n i t s t o t h e market i n t h e l a s t y e a r o f s h a r p l y r i s i n g market ceilings capital yields. E f f e c t s on S t a t e and L o c a l Government E x p e n d i t u r e s Because we have o n l y incomplete d a t a on c a p i t a l o u t l a y s by S t a t e and l o c a l u n i t s , it is d i f f i c u l t to assess t h e impact o f borrowing problems on t h e i r l e v e l of spending. Surveys conducted by t h e F e d e r a l Reserve System i n 1966 ( a year i n which l o n g - t e r m these -20- borrowings by these governments were $ 1 . 4 b i l l i o n lower than o r i g i n a l plans) d i d not show a s i g n i f i c a n t d e c l i n e i n c a p i t a l spending as a r e s u l t of the reduced a v a i l a b i l i t y of c r e d i t . However, there was no long p e r i o d of ready a v a i l a b i l i t y of funds between the c r e d i t of 1966 and the end of stringency 1968 which would have permitted these govern- ments time to b u i l d up t h e i r l i q u i d assets and increase the borrowing flexibility. Moreover, the s h o r t - f a l l between planned and a c t u a l long-term borrowing i n 1969 was undoubtedly much g r e a t e r than the $ 1 . 4 b i l l i o n estimated f o r 1966. While we have no d i r e c t measure of t h i s gap f o r l a s t year, the decline of over $4 b i l l i o n i n long-term bond sales i n 1969 compared w i t h the volume i n the previous year certainly does suggest t h a t i t was q u i t e l a r g e . T h e r e f o r e , i t i s expected t h a t the impact on construction spending i n 1969 was more severe than i n the e a r l i e r p e r i o d . The l a t e s t S t a t e and l o c a l government construction f i g u r e s a v a i l a b l e (for the t h i r d q u a r t e r of 1969) suggest t h a t an adverse impact of reduced municipal l o n g - t e r m borrowing was already appearing by the end of l a s t summer. I n the twelve months ending l a s t September, S t a t e and l o c a l outlays f o r new construction rose by 7 per c e n t ; i n the same period a year e a r l i e r , the r i s e was close to 9 per cent. i n the most recent period, expenditures on educational Moreover, facilities showed no change, whereas i n the previous year such outlays rose by 3 per cent. -21- L o c a l governments, which f i n a n c e almost t w o - t h i r d s of their c a p i t a l o u t l a y s by means of l o n g - t e r m borrowing, w i l l p r o b a b l y be a f f e c t e d more s e v e r e l y i n t h i s r e s p e c t than S t a t e governments, r e l y on l o n g - t e r m bonds t o f i n a n c e about h a l f o f t h e i r expenditures. budget, it which construction Given the p r e s e n t emphasis on c o n t r o l o f t h e F e d e r a l i s u n l i k e l y t h a t F e d e r a l g r a n t s t o t h e S t a t e s and s u b d i v i s i o n s w i l l expand enough t o t a k e up the s l a c k . Thus, i f if these governmental u n i t s a r e to f i n d r e l i e f -- t h e i r c a p i t a l investment i s not t o be hampered c o n t i n u o u s l y - - must have g r e a t e r access t o the c a p i t a l m a r k e t s . Removal o f low r a t e c e i l i n g s on t h e i r debt i s one necessary s t e p i n the r i g h t and they interest direction. Outlook f o r S t a t e and L o c a l Government Borrowing T r y i n g t o assess the o u t l o o k f o r S t a t e and l o c a l i n the c a p i t a l market i s o b v i o u s l y v e r y d i f f i c u l t . governments Furthermore, this d i f f i c u l t y i s compounded by the need on my p a r t t o a v o i d making any suggestion about the probable f u t u r e course of monetary p o l i c y . theless, Never- a number of elements u n d e r l y i n g such an o u t l o o k can be m a r s h a l l e d . I n 1969, l o n g - t e r m o f f e r i n g s of s e c u r i t i e s by S t a t e and l o c a l governments averaged between $800 m i l l i o n and $900 m i l l i o n per month, and the monthly average was s m a l l e r i n the second h a l f the f i r s t h a l f o f the y e a r . was about $ 1 . 3 b i l l i o n . I n January, i t t h a n i t was i n i s e s t i m a t e d t h a t t h e volume The s a l e of these issues was f a c i l i t a t e d by a d e c l i n e i n m u n i c i p a l y i e l d s through mid-month, and t h e lower r a t e s a l s o induced t h e r e o f f e r i n g o f s e v e r a l i s s u e s interest previously -22- postponed. The improved market c o n d i t i o n s i n the f i r s t January were i n t u r n helped by a strengthened d e a l e r position, of inventory and a l a r g e percentage of the January o f f e r i n g s was of a high q u a l i t y with shorter-term m a t u r i t i e s . ever, part I n r e c e n t weeks, how- t h e c a l e n d a r of a n t i c i p a t e d l o n g - t e r m f i n a n c i n g has b u i l t up t o a s i z a b l e volume, w h i l e purchases have been c o n c e n t r a t e d more on s h o r t e r m a t u r i t i e s . term t a x - e x e m p t relatively The r e s u l t has been a rebound i n long- yields. Given the s t e a d i l y expanding backlog of displacements and the continued buildup i n the forward c a l e n d a r , the volume of m u n i c i p a l f l o t a t i o n s may remain v e r y l a r g e f o r a number of months. longer run, t h e need t o f i n a n c e a h i g h - - Over the and even r i s i n g - - level c a p i t a l f o r m a t i o n i n S t a t e and l o c a l j u r i s d i c t i o n s w i l l almost become more - - r a t h e r than l e s s - - Against t h i s prospect, officials t o put o f f the removal of outdated i n t e r e s t r a t e w i t h i n present c e i l i n g s . generated issues, artificially certainly pressing. i t would seem i m p r a c t i c a l f o r i n t h e hope t h a t market r a t e s w i l l soon d e c l i n e t o l e v e l s public ceilings comfortably I n a d d i t i o n t o the expected volume of newly the supply of m u n i c i p a l s e c u r i t i e s has been suppressed, and i s p o t e n t i a l l y anywhere from the $ 2 . 8 b i l l i o n r e c o r d e d i n the Bond Buyer 1 s displacement s e r i e s to the e s t i m a t e d $4 - $5 b i l l i o n s h o r t f a l l i n planned borrowings i n 1969. C e r t a i n l y no one would argue t h a t the need f o r schools, of housing, -23- utilities, transportation, and o t h e r p u b l i c f a c i l i t i e s w i l l be any I n the meantime, the major element of u n c e r t a i n t y i n the less. i n t e r e s t r a t e p i c t u r e i s the demand f o r tax-exempt s e c u r i t i e s . The reduced purchases by commercial banks and the c h a l l e n g e t o the tax- exempt market among i n d i v i d u a l s which was r a i s e d by t a x r e f o r m l e g i s l a t i o n l a s t year both depressed demand f o r m u n i c i p a l so much t h a t even the sharp f a l l securities i n volume i n 1969 could o n l y be absorbed a t the cost of s h a r p l y r i s i n g market yields. I n d i v i d u a l buying w i l l undoubtedly p i c k up a g a i n i f there a r e no f u r t h e r moves by Congress t o e l i m i n a t e the tax exemption privilege. Commercial bank purchases o b v i o u s l y w i l l depend on g e n e r a l c r e d i t market c o n d i t i o n s , but i t would seem u n l i k e l y t h a t t h e r e would be s u f f i c i e n t demand by banks to absorb the p o t e n t i a l supply which would come to market i f m u n i c i p a l r a t e s were t o ease This implies t h a t , even i f m u n i c i p a l y i e l d s d e c l i n e somewhat from t h e i r present high l e v e l s , l e v e l s i n the near f u t u r e . t h e y probably w i l l not r e t u r n t o pre-1966 W h i l e f l o w of funds d a t a suggest c o r p o r a t i o n s i n c r e a s e d t h e i r h o l d i n g s of m u n i c i p a l s d u r i n g 1969, i t significantly. substantially appears t h a t most o f t h e i r purchases were o f term s e c u r i t i e s . obligations. short- Thus, i t would be e x t r e m e l y unwise f o r S t a t e and l o c a l governments t o count on these f i r m s as a l a s t i n g o u t l e t their that for -24- Instead, they should r e a l l y set t o work t r y i n g t o improve t h e i r access t o the l o n g - t e r m c a p i t a l m a r k e t . go forward on a number of f r o n t s , While t h i s e f f o r t must the removal of outdated statutory l i m i t s on t h e i n t e r e s t r a t e s they can pay on l o n g - t e r m debt i s a necessary move - - which ought to be made w i t h o u t f u r t h e r delay. Table 1. A r e a and L e v e l o f Ceiling S t a t u t o r y I n t e r e s t R a t e C e i l i n g s on S t a t e and L o c a l Government S e c u r i t i e s , by S t a t e and Type o f O b l i g a t i o n , J a n u a r y , 1970 S t a t e Governments General Revenue Obligations Bonds State Agency L o c a l Governments Revenue General Bonds Obligations Local Agency Comments Under 6 p e r c e n t (On G e n e r a l O b l i g a t i o n s ) Arizona Arkansas California 5 Varies 5 5 Not 5 issued Varies Varies 6 6 6 6 5 5 None Varies 6 S t a t e : U s u a l l y 5 per cent. 7 S t a t e : Some a g e n c i e s have 7 p e r cent c e i l i n g . Kansas 5-1/2 6 5-1/2 5-1/2 6 5-1/2 Montana 5-1/2 5-1/2 6 6 6 6 6 6 Between 6 and 7 p e r c e n t (On G e n e r a l O b l i g a t i o n s ) Alabama Varies Birmingham 6 Hawaii 6 Illinois Chicago 6 Iowa 6 7 6-1/2 6-1/2 Kentucky 6 6 Alaska None Not 6 Not None None None 6-1/2 None Varies None None None auth. 7 6 6 7 issued 6-1/2 6 6 None Not Local: 8 per cent usury applies. limit auth. 6 None 7 7 6 7 7 7 Local: Chicago l i m i t u n t i l J u l y 1, suspendedI 1971 2 S t a t e Governments Revenue General Bonds Obligations State Agency L o c a l Governments General Revenue Obligations Bonds Local Agency Comments Between 6 and 7 p e r c e n t (On G e n e r a l O b l i g a t i o n s ) (continued) Mississippi 6 6 6 6 New M e x i c o 6 4 6 6 North Dakota Not 6-1/2 issued Not issued Varies Oklahoma 6 5 Utah 6 6 6 Virginia 6 6 6 6 None 6 6 6 6 Not None auth. None 6 Not auth. None None 6 6 6 6 6 6 7 p e r c e n t and o v e r (On G e n e r a l O b l i g a t i o n s ) None None Colorado 7 Florida 7 7 7 7-1/2 7-1/2 7-1/2 Michigan 8 8 8 8 8 8 Missouri 8 8 8 8 8 8 Nevada 7 Not issued 7 7 7 7 Oregon Portland 7 Not i s s u e d Not i s s u e dI 7 6 Pennsylvania Philadelphia 7 None Not 7 7 issued Not issued 7 None 7 None Local: Portland ceiling City Charter. in From 6 d u r i n g J u l y 1 , 1969 t o J u l y 1 , 1970 Exception: 6 on p o r t , t r a n s i t and s t r e e t bonds. 3 S t a t e Governments General Revenue Obligations Bonds 7 p e r c e n t and o v e r State Agency L o c a l Governments General Revenue Bonds Obligations Local Agency Comments (cont'd) South C a r o l i n a 7 7 7 7 7 7 10 10 10 10 10 10 Connecticut None None None None None Delaware None Georgia None None None None Idaho None None None None None None Indiana None None None None None None Louisiana New O r l e a n s None None None None None None 6 None 6 Maine None None None None None Varies Maryland None None None None None None Massachusetts None None None None None None Minnesota None None None None None None Nebraska None None None None None None New Hampshire None None None None None None New J e r s e y None None None None None None Tennessee No c e i l i n g s (On G e n e r a l O b l i g a t i o n s ) 6 6 6 Not issued 6 6 7 7 Local: 9 per cent usury applies. limit L i m i t suspended, J u l y l , 1969 t o June 3 0 , 1970 4 S t a t e Governments Revenue General Obligations Bonds No c e i l i n g s (On G e n e r a l State Agency L o c a l Governments Revenue General Bonds Obligations Local Agency (cont'd) Obligations) New Y o r k None None None None None None North None None None None None None None None None 8 Island None None None 6 South Dakota None Texas None None None Vermont None None None 6 6 Washington None None None 8 8 8 West V i r g i n i a None 6 6 6 Wisconsin None None None 8 8 8 Wyoming None None None Carolina Ohio Rhode Comments Not issued 6 6 6 6 None None Not Not 8 8 auth. 6 issued 6 None None None Not L i m i t suspended, A p r i l 1 5 , 1969 t o A p r i l 15, 1970. L o c a l : 10 p e r c e n t u s u r y l i m i t applies. issued None Table 2. S t a t e and L o c a l Government S e c u r i t i e s H e l d by W e e k l y R e p o r t i n g Member Banks i n S e l e c t e d S t a t e s (Amounts i n m i l l i o n s o f d o l l a r s ) Seclected Dates Calif.-/ MarylancF-' North New York!/ Carolinai'Fla. Illinois Michigan New Jersey Ohio 2/ Pa.-' Texas Va. All Weekly Reporters December 2 8 , 1966 3,759 183 6,571 433 217 1,590 1,265 584 1,473 1,342 907 297 23,410 December 2 7 , 1967 4,740 284 8,202 511 221 1,673 1,563 728 1,930 1,950 1,043 362 29,407 December 3 1 , 1968 5,376 280 9,448 620 310 2,111 1,821 825 2,127 2,434 1,286 424 34,500 December 3 1 , 1969 4,880 250 8,319 560 315 2,153 1,901 856 2,134 2,087 1,206 428 31,974 Changes: (per cent) 1966 - 1967 26.1 55.2 24.8 18.0 1.8 5.2 23.6 24.7 31.0 45.3 15.0 21.9 25.6 1967 - 1968 13.4 -1.4 15.2 10.7 40.3 26.2 16.5 13.3 10.2 24.8 23.3 17.1 17.3 1968 - 1969 -9.2 -10.7 -11.9 -9.7 1.6 2.0 4.4 3.8 0.3 -14.3 1.5 0.9 -7.3 (1) States with interest rate ceilings t h r o u g h most o f 1 9 6 9 . of 5 per cent or less on g e n e r a l obligations (2) The r a t i n g o f p h i j * a £ e l p h i a bonds was reduced s h a r p l y by p r i v a t e r a t i n g a g e n c i e s i n l a t e 1 9 6 8 , and t h i s may have had a n a d v e r s e e f f e c t on bank h o l d i n g s of these s e c u r i t i e s . Table 3. Selected Dates Calif.!/ R a t i o o f S t a t e and L o c a l Government t o T o t a l S e c u r i t i e s H e l d by W e e k l y R e p o r t i n g Member Banks i n S e l e c t e d S t a t e s ( P e r c e n t ) Marylandi' New York!' North Carolinai' Fla. 111. Michigan New Jersey Ohio Pa. 2 / Texas Va. All Weekly Reporters December 2 8 , 1966 44.9 40.9 48.0 55.5 39.8 44.6 43.1 53.0 46.2 47. 7 43.8 50.3 45.5 December 2 7 , 1967 51.3 49.9 50.5 56.5 35.4 41.4 45.4 55.3 48.0 51. 3 44.6 51.3 47.6 December 3 1 , 1968 49.6 48.4 52.7 59.9 43.8 44.6 46.4 54.7 51.4 57. 9 47.6 54.6 50.5 December 3 1 , 1969 52.5 49.0 53.4 57.7 51.7 50.2 52.6 61.1 57.3 59. 8 55.0 58.0 53.6 Changes i n R a t i o (Percentage Points) 1966 - 1967 6.4 9.0 2.5 1.0 -4.4 -3.2 2.3 2.3 1.8 3. 6 0.8 1.0 2.1 1967 - 1968 -1.7 -1.5 2.5 3.4 8.4 3.2 1.0 -0.6 3.4 6. 6 3.0 -3.3 2.9 1968 - 1969 2.9 0.6 0.7 -2.2 7.9 5.6 6.2 6.4 5.9 1. 9 7.4 3.4 3.1 JL/ 2/ Same as T a b l e Same as T a b l e 2. 2.
@FedFRASER