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D13OTSSI0B or i m a m m m m vzmsas s m a m m i m m m _ ****** S. Beagran, Aaaiatant Chlef Maiale» af Beaaarch «ad Statistica Depoalt Inaurane© Corporation Hmmé&m Cceraittee ot firn t t t w t Aaaoelatlon of Superrtaora af Stata - - » BagreaeotaUaea of thè Votesi Deposit Inaurane® Corporation, » Offlea of tha CcugitroUer ot tha Corrane? and Sia Board of teamers af thè rateai Baaarva System Washington, D. C. *9*u> 5* 19 5 6 ' tojag the many questions posed to the beak examining authorities bsr recent developments in the field of municipal finance the ones clustering about revenue bonds are especially ttm bU m m . So establish a irmmfo&k fm your discussion, which will be concerned with an aspect of this financing, it is ay intention at the outset to sketch the factual background briefly* ffeea the central questian w i U be brou^it into focus as sharply as possible# fkis will be followed by seise about practical difficulties that are encountered in our endeavor to com to grips with the questions and a review of & few typical cases* Finally, ay r«arks will suggest some alternatives for your consideration. It is sy hc^e that your views and observations iii the course of the discussion will provide me with some much needed help in analysing mveaue bond issues as regards their suitability for bank Investment portfolios * Ihere has been an enormous volume of revenue bond financing in recent years, for hugs and this has been stimulated by sn apparently insatiable d m m i costly p ubUe facilities, fear eacasple, highways, bridges and tunnels, snd public building designed to serve such purposes as education, trade centers, and recreation. the old subdivisions of government and the eustemary arrange$oen'ts for credit have been totally inadequate to finance the public facilities now deemed to be essential in our wey of Ufa* Ihere was a time when the cities, the towns, and the counties were able to provide a network of highways adequate for the public needs. Similarly, the school districts able to furnish such facilities ms were deemed ax>propriate for the Comsat educational stiuwSards. llsgps ©sd, costly facilities to serve the seeds of the. tiwte, fear ©xm&ple, port authorities and elaborate recreation establishments w r © unheard of* Bit times have damaged; ®a& now w© suet face the fact that teamds placed upon suMlvisica*® of government have increased tremendously both qualitatively and quantitatively. notion that users can be iBade to pay for »11 or a large part of the cost of public facilities in many case# has gained widespread acceptance in recent years. 11ms, our attitude with respect to public highways has gone through a remarkable change. A serration ago most people would have found it unthinkable to finance the construction of *»**»*» a public facility cm a basis which would anticipate the defrayment of cost by the collection of tolls from users. Bow that notion is widely accepted. As a consequence, in part because of the great increase in the variety of facilities sought foe public mas and in part because user charges have been accepted as an appropriate means of financing than* construction of these facilities in the field of municipal finance has been characterised by an almost unbelievable variety of cobles and unusual financial arrangements, la other words, flit rather prosaic task of analysing afunieipal credits «ban most obligations rested upon a pledge of the f u n faith and credit of a very conventional type of user has been to a considerable extent altered. Today the analyst Is presented with as knotty an assortment of problems in this field as he could ever aspect to find in the area of private enterprise credits. Municipal revenue bonds— so-called- -have developed out of this complex situation. Although there is adequate precedent for this type of • g' <* ffiaanciag in thè hlstory ©f n n i e l p l finase® ¿> thè f&ei ranclas timi thè develo$raents bave given it alatasi «ntirely mw à*n*m***m* mà eoloring. Accardiiigly, history furniefaea thè im&lysc sona guidane* ai ili© outsst bui s o m ha fiada MaatiLf alami I m i in a mmm of inaomiims« Iha^r of tha projects flnaaead by aunietpal wmmam banda represes&i deportares in thè scope of publie estiviti©®» Sos© projeets are in tha a&turs of publie utility eatexprlae cuatoHarily dssasá io fall wtthin iha privai® sector of business aotivitiea. are <sa thè borderline. N n y of theaa provecta, ©f eourae, HisioricaUy, far exasple, ve bave had both pohlia and privatela ovmed vaiar cárpanles m veli m gas and elegirlo utiliti®®„ recanti? thè mmü for empiex and higfcly socializad faciliti*« in trading center® has givesi iapatus to creati« of pori authoritiea with bvmà. pmmm to f l a m acal aparate eatezprisa, Practica!!? all of thè procaci® flaanoad by nunielpal revaime b m d e are nee* la eiher verde* thè individuai procaci has ne reeord of cpsrstlons« Siailarly* a m i of ihs finaaelng is oasi in thè ftìsra of long* tmm bonds* ibis is a serious departurs tiem thè principie vhicà use firtóy estàfeUshed and thorougbOy testad duriag thè period of thè Greai Bepressioa* vom ì#, that eerialisaiiot! of aaturlties is ths basi vay to arrangs far thè asaaganeai of a debi ensatad by a subdivisión ©f governami, thè doblen tre» ibis background of rapld changa and experiasatatlon in thè fté ìA of »mleìpel finance theze mmr?m thè probi*» of ©aneara to thè benk saasniaing authorities. foUouss fhrassd in slnplest teme, it saay b® espressati as Ars municipal revenas bonds suitshls for bmak investaant wfaen thsy bere thè f ò U o d a g càaracterietics? » » (») The proceeds are used to finance a novel .project, and (b) There la no operating record. Quite frequently the enterprise m y belong to a type that haa been proved feasible in terse of engineering and aeoaoaie aonelderaUane. Bevertheleee, Vo» project under ocnslderation has not denonatrated its ability to service a debt. Orthodox credit analysis does provide sane testa for situations of this character. As a natter of fact, all such revenue automatically be defined aa credits unsuited far bank investment purposes. To» basis for this conclusion la quite reasonable. Thus, prior to the oo^letion of a project the obligations floated to finance it axe deened to be construction loans. Since construction is freu#it v i a may »neertalntles, it is easy to understand vhy Municipal revenue bonds under the orthodox approach to the credit analysis problem are deemed to ha unwiited for banka until the project is completed, teat stresaes seasoning of a credit. The second orthodox Specifically this that the credit cannot be appraised with any real assurance until the ability to •«vice the debt has bean demonstrated by a aetleftoteey operating record. At this tine it seems to as that one Must recognize tbs serious difficulties arising when the orthodox criteria are applied rigorously to all current revenue bond financing. The fact is inescapable that some very promising projects have performed exceedingly veil after completion. In this connection ana need only mention the Rev Jersey Turnpike and the Belavara Manorial Bridge. Parenthetically, it should be noted that if there is a single thread running through all the tangled skein of financing it leads to the conclusion that vary frequently a few good projects at the a» m outset loll investo*« to sleep and they fall io epply proper critici»« to thè inferior provecta th&t appear later in thè oourse of developeieat. Furthemort^ it la obvioua ibat m m informad Dímd boyare bave abandonad thè ortfaodox teste «usi snbstdtuted aaaìysis in appr&lsiiig current ¿ ‘mmi.ci.-pal reventa© flotationg eoverìag venture» timi M y be noval and vitbout cperating ¡neeords* Hnally, it le a feet tfcat thè eonaerclal rating agüeles sean to mfìm% a diffferesee of opiado« regarding thè tmaimmt gì thè«« aituations, Practicaily all of theae revenías boni projeete involve leticane ¡¡piestiosis$ boeever^ ea« only be answrwS of engineering f©asibllity « by ^ualified taatm^ai egg^peerte* position to fhe analyst of oredite le scarcely in a ¿ n a a g * reporte* h^«t tbat provecta deesed to be practica! by eoapeteat engineere ean in feet m cooetrttcted ns planned» Occasionali^^ to be aure, a projeet tfeat le feaeible engineering ®3ii8@ple> m rimpoint dose bave t11 tram m noi prove to be a sound eeononie '/enture, of foli- ronda eonatrocted in thè face of fflaàt engineering ^ fff.eelties tbat bave falled 'io pay thèIr wey w w e eospletod* For As a setter of faet# tfoay thè credit analyst la m oe»g>eteat m arpone to apprai.se thè ovié^c© and fona a jodgeent as regará® thè ear&ing power of a projeet* ^ypioal Cases By taking advesetage of hlodsight* thè characteriatice of a successici aunielpal reventas bond projeet stand out rmther elearly. In t a first place, 1« always convincing evidence of a for t a service* ^dooodly* astiaste« of revenad§ baaed upon the service« and tèa cost of tèe project abla to service it« debt* « I H be la shorty tèi» that it 1« unnecessary to folgr upon nay projected growth in the services io eetiaetlag of earnlag power* Other important characteristics of revean# bcasd projects that to he successful ere tar i# in «11 position of the creditor has been «eli four caments in ta of marketed within t a or three pear« «111 be helpful i© t a extant to which orthodox rule« It «eco» to sa author!tie« cannot departments acquire issues tar purposes t a t do rigid io mmtmt up to the orthodox standards then it is very carefully to scrutinise those
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