budget. In most asset sales, the agencies make loans at below market rates and pay the difference between the loan rate and the FFB rate with appropriated funds. FFB also makes loans under programs in which Federal agencies guarantee borrowings of non-Federal entities. Yet, even in this second group of beneficiaries of consolidated financing through FFB, much of the saving is realized by the Government, rather than by the guaranteed borrowers. An extreme case is the HUD guaranteed public housing program, where all of the saving goes to the Government, rather than to the guaranteed borrowers since all interest costs for public housing projects are borne by the Government. If, in cases where guaranteed loans financed by FFB actually reduce costs to private borrowers somewhat below the costs of guaranteed financing in the market, it is determined that this added interest rate saving should not be passed on to guaranteed borrowers, guarantee fees could be increased or other devices could be used to offset the benefit of FFB financing, rather than removing the program from FFB. An alternative approach would be for FFB to raise the interest rate it charges its borrowers. Yet, as indicated above, in many programs this would require an increase in budget outlays by Federal agencies issuing, selling, or guaranteeing obligations purchased by FFB, while the interest rate charged the private borrowers whose loans are financed by FFB would not necessarily increase. In such cases, the net effect would be an increase in gross budget outlays and, when the additional FFB profits are turned over to the Treasury, a corresponding increase in offsetting receipts. Clearly, the better approach would be to require each agency using FFB to charge higher interest rates or fees to the private sector borrowers financed by FFB. In this way, responsibility for program subsidies or costs would remain in the appropriate committees of Congress. Borrowers in Congressionally approved guarantee programs would be assured a source of financing at reasonable rates, and Treasury's debt management objectives would be met without FFB involvement in program decisions and duplication of the functions of the program agencies. FFB budget treatment I will now turn to the question of including FFB activities in the budget, which is the primary purpose of H.R. 2868. Putting the FFB in the budget simply as an aggregate limit could place FFB in the position of allocating FFB credit among competing Federal programs,. In the event that the FFB aggregate credit limit was not sufficient to meet all demands, agency program managers would revert to less efficient forms of financing. Pressures on program managers to reduce budget outlays would be irresistible and would be likely to lead to pressures for a mass exodus from the Bank into the credit markets. We would return to the chaotic market conditions of the early 1970's which led to the establishment of FFB. Today, Treasury and federally-assisted borrowing from the public combined is nearly seven times the 1973 dollar volume, a fact that emphasizes the critical importance of efficient Federal debt management. A positive requirement that FFB transactions, as such, be included in the budget, as opposed to simple repeal of statutory language in the FFB Act that excludes FFB transactions from the budget, could conceivably be interpreted as overriding the normal budget accounting rules, under which transactions among Federal agencies are not reflected in budget totals. In that event, there would be double counting in the budget totals. Specifically, FFB loans to on-budget Federal agencies would be counted twice in the budget, thus inducing such agencies to resume borrowing directly in the market. FFB purchases of obligations of off-budget agencies, assets sold by Federal agencies, and guarantees by Federal agencies, on the other hand, would be counted only once. Accordingly, legislation to include in the budget any programs now financed off-budget by FFB should require that H.R. 2868 would further the Administration's broader goals to provide better controls over all guarantee programs and also minimize the costs to the Government of financing these programs. To do this we need to distinguish among three major issues: (1) program control, (2) budget treatment and (3) method of financing.. The "credit budget" submitted to Congress by the Administration provides for control over the level of loan guarantee commitments by the Budget and Appropriations Committees. Under this approach loan guarantee programs continue to be excluded from budget outlays, but are subject to essentially the same appropriations process that has been applied to direct loans which are included in the budget totals. Since there is no difference in substance between a direct loan and a guaranteed loan, guaranteed loans should be subject to the same scrutiny as direct loans. This is an important step forward, and I am pleased to note that this approach has been adopted in the Congressional budget resolutions and appropriations Acts. We have clearly achieved a consensus that all Federal programs, including off-budget programs, should be subject to more effective controls through the appropriations process. H.R. 2868 would expand the coverage of the Federal budget to include the amount of financing provided by FFB in the outlays of each program. Certain types of guaranteed loans would be required to be financed by FFB, based on certain findings by the Secretary of the Treasury. Other guaranteed loans would be financed outside of FFB. The bill explicitly addresses the genesis of the problem of growth of credit programs by including agency programs in the budget, rather than by limiting the resources available to the financing mechanism, the FFB, for those programs. The requirement that agency programs be financed by FFB, with exceptions to be determined by the Secretary of the Treasury, would prevent agencies from financing in the private market as a means to avoid budget scrutiny. 21-675 0-83--3 H.R. 2868 would not only include in the budget those guarantee programs now financed by FFB. It would also require certain other fully guaranteed securities, which are now financed off-budget in the market, to be financed by FFB and included in the budget. A Federal guarantee creates an instrument that is the credit-risk equivalent of a Treasury security. Yet guaranteed obligations are as sold in the market at yield premiums over Treasury securities a result of their relative trading illiquidity, smaller size of issues, and discrete terms that distinguish them from Treasury issues and each other. Recent market issues of securities fully guaranteed by the Maritime Administration, for example, have been priced at 1 to 1-1/2 points in yield above Treasury securities of comparable maturity. Also, taxexempt public housing notes guaranteed by HUD are now financed in the market at a significant cost to the Government, both from the tax losses and the higher financing costs from this less efficient marketing technique. Clearly, each of these programs should be financed through FFB, at significantly less cost to the Federal Government. Since there is no economic difference between a guaranteed loan and a direct loan by FFB or another Federal agency, there is no reason to incur higher costs to the Government for financing guarantee programs in the private markets. |