INCREASING THE PUBLIC DEBT LIMIT AND ALTERING THE BUDGET TREATMENT OF PROGRAMS FINANCED THROUGH THE FEDERAL FINANCING BANK THURSDAY, MAY 12, 1983 HOUSE OF REPRESENTATIVES, Washington, D.C. The_committee met at 9:30 a.m., pursuant to notice, in room 1100, Longworth House Office Building, Hon. Dan Rostenkowski (chairman of the committee) presiding. [The press release announcing the hearing follows:] [Press Release of Friday, May 6, 1983] HON. DAN ROSTENKOWSKI (D., ILL.), CHAIRMAN, COMMITTEE ON WAYS AND MEANS, ANNOUNCES HEARINGS ON INCREASING THE PUBLIC DEBT LIMIT and ALTERING THE BUDGET TREATMENT OF PROGRAMS FINANCED THROUGH THE FEDERAL FINANCING BANK The Honorable Dan Rostenkowski, (D., Ill.), Chairman of the Committee on Ways and Means, U.S. House of Representatives, today announced that the Committee will hold hearings on increasing the public debt limit and altering the budget treatment of programs financed through the Federal Financing Bank. The hearing will be held on Thursday, May 12, 1983, at 9:30 a.m., in the Committee's main hearing room, Room 1100 Longworth House Office Building. I. BACKGROUND Public Debt Limit. The current limit on the public debt is $1,290.2 billion. This limit extends through the end of fiscal year 1983, September 30, 1983, at which time the limit reverts to its permanent level of $400 billion. As of May 3, 1983, the debt subject to limit was $1,262.5 billion. On May 20, 1983, the Department of the Treasury expects to transfer approximately $23 billion from the general fund to the social security trust funds to reimburse the trust funds for military wage credits. This action is being taken pursuant to the Social Security Act Amendments of 1983, P.L. 98-21, and will have the effect of increasing the debt subject to limit, as these funds are invested in special issue Treasury obligations. The Treasury Department expects to have additional borrowing needs during May which, together with the transfer to the social security trust funds, will exhaust the current debt ceiling by the end of the month. The Administration has indicated that it expects the debt subject to limit to be $1,388.2 billion at the end of FY 1983. Federal Financing Bank. The Federal Financing Bank (FFB) was created as an off-budget Federal agency in the Treasury Department as a means of coordinating Federal borrowing efforts, reducing the costs of Federal borrowing from the public, and minimizing the disruption of Federal borrowing in the private markets. The FFB was authorized to purchase the obligations of any Federal agency and obligations guaranteed by Federal agencies. The FFB began operations in May 1974. The FFB borrows directly from the Treasury, and it in turn borrows that amount in addition to the borrowing needed to finance the budget deficit. Hence, the Federal debt is increased as the Treasury borrows to accommodate the FFB. Because of the (1) process used in purchasing new guaranteed loans, FFB purchases of such guaranteed loans have the effect of converting agency guaranteed loans into direct offbudget loans of the Federal government. When the FFB purchases the loan assets of other Federal agencies, the effect is to transfer direct agency loans into off-budget loans of the FFB. The Administration expects the off-budget outlays of the FFB to be $14.1 billion for Fiscal Year 1983. During recent years, questions have been raised about the appropriateness of the current budget treatment of FFB outlays. II. SCOPE OF THE HEARINGS The hearings will permit the Administration and other interested parties to present their recommendations on an appropriate increase in the public debt limit. In addition, the Committee invites testimony on H.R. 2868, the "Truth in Budgeting Act of 1983," which was introduced on May 3, 1983, by the Hon. Bill Gradison. H.R. 2868 provides that transactions between Federal agencies and the public resulting from obligations held by the FFB shall be reflected in the unified budget as receipts and disbursements of those Federal agencies. Loans guaranteed by a Federal agency that are financed by FFB would be recorded as outlays of that agency and could not exceed the budget authority provided for such purposes. In addition, the bill would prohibit a Federal agency from issuing, selling or guaranteeing obligations of a type ordinarily traded in the securities markets unless the terms of that obligation provided that it could not be held by a person or entity other than the FFB or another Federal agency. The Secretary of the Treasury could waive that requirement in certain circumstances. The provisions of the bill would be effective on October 1, 1984, the beginning of Fiscal Year 1985. In announcing the hearings, Chairman Rostenkowski stated that: "It is obvious that the current debt ceiling is insufficient to accommodate the borrowing needs of the Federal government for the remainder of this fiscal year. Under the House rules, final passage of the Budget Resolution results automatically in House passage of a joint resolution establishing a new debt ceiling consistent with the Budget Resolution. If the First Concurrent Resolution on the Budget for Fiscal Year 1984 is not passed in a timely manner, separate debt ceiling legislation will be necessary and the hearings I have announced for May 12 will prepare for that eventuality. "These hearings will also provide an opportunity to review the operations of the Federal Financing Bank and the way in which the budget reflects its activities. Many members are concerned about the growth of Federal government credit programs and conclude that bringing FFB activities on budget would lead to better oversight of those activities." DETAILS FOR SUBMISSION OF REQUESTS TO BE HEARD Individuals and organizations interested in presenting oral testimony must submit their requests to be heard in writing no later than noon, Wednesday, May 11, 1983, to John J. Salmon, Chief Counsel, Committee on Ways and Means, U.S. House of Representatives, 1102 Longworth House Office Building, Washington, D.C. 20515. It is urged that persons and organizations having a common position make every effort to designate one spokesman to represent them in order for the Committee to hear as many points of view as possible. Time for oral presentations will be strictly limited with the understanding that a more detailed statement may be included in the printed record of the hearings. This process will afford more time for members to interrogate witnesses. In addition, witnesses may be grouped as panelists with strict time limitations for each panelist. In order to assue the most productive use of the limited amount of time available to question hearing witnesses, witnesses scheduled to appear before the Committee are required to submit 125 copies of their prepared statements to the full Committee office, room 1102 Longworth House Office Building, at least 24 hours in advance of their scheduled appearance. Failure to comply with this requirement may result in the witnesses being denied the opportunity to testify in person. Each statement to be presented to the Committee or any written statement submitted for the printed record must contain the following information: 1. The name, full address, and capacity in which the witness will appear, as well as a telephone number where he or his designated representative may be reached; 2. A list of any clients or persons, or any organization for whom the witness appears; and 3. A topical outline or summary of comments and recommendations. WRITTEN STATEMENT IN LIEU OF PERSONAL APPEARANCE Persons submitting a written statement in lieu of a personal appearance should submit at least six (6) copies of their statement by the close of business, Thursday, May 12, 1983, to John J. Salmon, Chief Counsel, Committee on Ways and Means, U.S. House of Representatives, Washington, D.C. 20515. If those filing written statements for the record of the printed hearings wish to have their statements distributed to the press and the interested public, they may submit 100 additional copies for this purpose if provided to the Committee office during the course of the public hearings. Chairman ROSTENKOWSKI. The committee will come to order. The purpose of our hearing this morning is to consider the administration's request for an increase in the public debt limit. The committee will also receive testimony on a proposal to place the activities of the Federal Financing Bank on-budget. Confronting the need to increase the debt limit is never a pleasant political task. Last year, when we passed the budget resolution for fiscal year 1983, a debt limit of $1,290 billion was expected to be sufficient to carry the Federal Government through September 30, 1983. Today, the administration will inform us that the debt ceiling must be increased by nearly $100 billion more for fiscal year 1983, and then an additional $235 billion will be necessary for fiscal year 1984. By the end of fiscal year 1985, the public debt is likely to be double what it was when President Reagan came to office. There is no single factor for the deficits we are experiencing and continue to face, but there are a number of major contributions. The administration's tax cut in 1981 was simply too large. Defense spending plans are too ambitious. Supply-side economics did not produce the miracles touted by its advocates. Domestic spending cuts could not be made in the amounts the administration advocated without being insensitive to the basic needs of the most vulnerable members of our society. But whatever the factors are that have brought us to this point, we face the prospect of being unable to pay Government bills. We know that some action must be taken. It is my pleasure to welcome the Deputy Secretary of the Treasury, the Honorable R. T. McNamar, but before I do that, I will recognize my colleague, Mr. Conable. Mr. CONABLE. I do not wish to add much to what you have said, Mr. Chairman. There are a great many myths and opportunities for mischief involved in this process which repeats itself more frequently than we would like. Let me say that for myself I will support anything that will make this process honest, realistic, and less of an opportunity to hold the Government hostage subject to various forms of legislative blackmail. I hope we will move in this committee with great promptness to bring this issue out in a form that will be honest and simple and will not involve a lot of unhappy conjunctions of one sort or another. I hope also that we will so conduct ourselves that we can continue to take advantage in the future of the process already set up for the House involving the so-called Gephardt amendment which makes less of a legislative point of this process. I thank the chairman for his willingness to hear this promptly. I hope the commit tee will bring it out promptly, and I hope that we will deal with it in as matter of fact and as direct a way as possible. Chairman ROSTENKOWSKI. Thank you, Mr. Conable. Mr. McNamar, if you are ready, the committee is ready to receive your testimony. STATEMENT OF HON. R. T. MCNAMAR, DEPUTY SECRETARY, DEPARTMENT OF THE TREASURY, ACCOMPANIED BY WARREN CARTER, ACTING ASSISTANT SECRETARY FOR DOMESTIC FINANCE Mr. MCNAMAR. Thank you, Mr. Chairman and members of the committee. I have a longer full testimony which I would like to submit for the record, and a shorter oral summary which I would like to read. My purpose today is to advise you of the need for congressional action to increase the public debt limit and to provide additional authority to issue long-term marketable Treasury bonds. I will also comment on H.R. 2868, a bill to require that programs financed by the Federal Financing Bank be included in the Federal budget. Our immediate need is for legislation by May 31 to increase the debt limit to at least $1,389 billion for the remainder of fiscal year 1983. The present temporary debt limit of $1,290.2 billion will expire on September 30, 1983, and the debt limit will then revert to the permanent ceiling of $400 billion. Based on the Office of Management and Budget's April estimates of fiscal 1983 and fiscal 1984 budget deficits of $210.2 billion and $190.2 billion, respectively, and of other transactions affecting the debt subject to limit, the amount of debt subject to limit outstanding on September 30, 1983, and September 30, 1984, will be $1,388 billion and $1,619 billion, respectively, assuming a $20 billion cash balance on those dates. Given this projected debt level for fiscal 1984 and allowing a $5 billion margin for contingencies, we request the debt limit be increased to $1,624 billion through September 30, 1984. We recognize that Congress has not yet completed action on the first budget resolution for fiscal year 1984 and that that resolution may contain a different debt limit figure for fiscal year 1984. We would urge that any budget resolution debt limit figure incorporate our recommended $5 billion margin for contingencies and our assumption that the cash balance at the end of fiscal year 1984 will be $20 billion. For fiscal year 1983, the budget resolution adopted by the House on March 23, 1983 contains a debt limit figure of $1,389 billion for September 30, 1983, which is $1 billion greater than our current estimate for debt subject to limit on that date. While we believe that the additional margin for contingencies should be $5 billion rather than $1 billion, our current estimates indicate that the $1,389 billion figure will be adequate to meet our financing needs through fiscal year 1983. As to the timing of congressional action on the debt limit bill, our current estimates indicate that final action on the bill will be needed by May 31, 1983, at which time the current limit of $1,290.2 billion will be exceeded. On June 1 the debt will reach $1,320 bil lion and the Treasury's cash balance will be $13 billion. Even if the Treasury ran its cash balance down to zero on June 1, and were thus unable to pay the Government's bills, the June 1 debt of $1,307 billion would still be $17 billion above the statutory limit. Our current request for an increase in the debt limit reflects two provisions of the Social Security Amendments of 1983 which Congress passed and the President signed on April 20, 1983. First, that act requires a transfer within 30 days after enactment from the general fund to the social security trust funds of about $23 billion to finance certain military retirement credits. This transfer will be made on May 20. Since these funds will be immediately invested in public debt securities, there will be a corresponding increase in the debt subject to limit on that day. Second, that Act requires that tax receipts which would otherwise be credited to the social security trust funds as received during a month be credited to the trust funds on the first day of the month. We estimate the tax receipts for the month of June will be about $16 billion. Since these funds are invested immediately in public debt securities, the transfer on June 1 will account for about $16 billion of the increase in the debt to $1,320 billion on that date. If Congress does not act on the debt limit by June 1, the Treasury will be unable to issue these securities. Thus, unlike earlier years when Congress delayed action on the debt limit and the Treasury was able to stay within the debt limit for a few days by various cash management techniques, we no longer have that flexibility this year largely because of the new social security bill. Timely action on the debt ceiling is required to avoid a repetition of past dislocations which have hampered Treasury financing operations. In recent years, delays in action on the debt limit have generated market uncertainty about Treasury financing schedules and on several occasions costly emergency measures have been undertaken, including suspension of savings bond sales, cancellation of scheduled security auctions, and failure to fully invest trust funds. In this regard, following our normal financing schedule, the Department will announce next week an auction of 2-year notes which would settle on May 31. Without assurance of timely congressional action on the debt limit legislation, this scheduled auction will have to be postponed, and the increased market uncertainty could add to the cost of Treasury financing. Action on the debt limit bill this month is absolutely essential. Otherwise, if the Congress does not act and the debt limit is not increased, the Government will need to determine which obligations should be paid-social security checks, payroll checks, unemployment checks, defense contracts-or indeed whether for the first time in history the United States will default on its securities. Now, I would like to bring to your attention our need for additional authority before the end of this year to issue marketable Treasury bonds. The maximum interest rate that the Treasury may pay on marketable bonds, that is, those securities with maturities in excess of 10 years, has long been limited by law to 44 percent. The dollar limit on bonds which the Treasury may issue without regard to the 44-percent ceiling has been increased from time to time, most re |