took the position, and very properly so, that a lot more work had to be done with the agencies involved to see whether an agreed-upon package could be developed.

Throughout the period of the last year we have been working on trying to put something together that might have broad support. One of the true leaders in this effort has been the Senator from Wisconsin, and I would like to publicly in this forum, as I have done elsewhere, congratulate him for not only his interest but his persistent interest in this matter.

As he has pointed out, this proposal and now the specific legislation as well has the support of the General Accounting Office, the Congressional Budget Office, the Treasury, OMB, as well as bipartisan leaders in the other body. This is certainly helpful background as we consider the matter this morning. While I have no specific questions, I do appreciate this opportunity, Mr. Chairman, to pay tribute to the leadership of the Senator from Wisconsin on this very important matter.

Thank you.

Senator PROXMIRE. Thank you very much, Mr. Gradison. I want to tell you again how very grateful I am for your activity on this in the House, and if it has a chance, I know it will be because of your efforts.

Mr. JENKINS. Mr. Dorgan?

Mr. DORGAN. Thank you, Mr. Chairman.

I appreciate your statement, Senator Proxmire. I am not as familiar as I want to be with the Federal Financing Bank, but I do know that it is very important to our part of the country with respect to its support of REA programs and others. The 29-percent annual rate of increase in outstanding loans is something that concerns me. I am wondering, however, if the increase in loan activity is not tied directly to the monitary policy that was adopted in 1979, that created such tremendous instability in the private sector lending, and the result is that virtually everyone that could would try to move into financing from the FFB.

Is that probably what stimulated an unusual amount of activity here?

Senator PROXMIRE. Well, there is no question. As you say, you are absolutely right that the increase in borrowing by the Federal Government is increased at all levels and in all ways. The point that I made, though, with the 29 percent compared to about a 14percent increase in other Federal credit programs is that this is kind of a privileged operation.

Because it escapes the discipline of the budget, there is a temptation to put programs through the Federal Financing Bank and for everybody to use this vehicle because it does not reflect itself in the budget. We are all concerned about the budget. We all focus on the deficit. We complain about it. And this is one way of getting out of it. And it just seems to me it is very unfair.

I agree with you. I am concerned about REA, too, and I have talked to REA groups about this. We have the same problem in our State. As you know, we have a big agricultural concern and agricultural economy, but I am convinced that the only fair way to do this is to treat everybody alike, to have a level operation and not

discriminate on the basis of one Federal borrowing agency being able to work through the Federal Financing Bank and others not. Mr. DORGAN. Well, I understand your point

Senator PROXMIRE. You can make a strong case for the capital budget, because you can argue, as Mr. Kudlow just did, in response to a question, that this might affect the opportunity to borrow money. Well, maybe we ought to change that. But I cannot understand for the life of me why we should discriminate in this particular way and have a Federal Financing Bank that accommodates some borrowing and not others.

Mr. DORGAN. I understand that, and I think there is merit in what you say. I want to reiterate the concern that I expressed to Mr. Kudlow with respect to the agricultural programs on the Federal budget. I have heard a good number of times people stand up and say, well, look, they are spending $14 billion on the price support programs. They passed an authorization bill that provides $14 billion. Well, $1.5 billion was for deficiency payments, $12.5 billion was for loan rates for a bushel of wheat or a bushel of corn, and that loan rate is either going to be repaid back, or the commodity is going to be forfeited which has value, but it is not going to show up as a net against the authorization.

My concern is that when we put something in the Federal budget, it not bloat artificially the cost of what we are trying to do, and I think that happens in the agricultural numbers, in the authorization budgets, and I am worried that at some point that could happen in the FFB. I certainly want to learn more about this approach, and I appreciate your bringing it to our attention. I think your statement was a good one.

Senator PROXMIRE. I do think as a member of the Appropriations Committee the Appropriations Committee would take that into account. As you know, so many of us do have our concern about the rural borrowing and other borrowing in here that I think can be justified, but I think we ought to consider it, as I say, equally on the basis of what the fundamental priorities are.

Chairman ROSTENKOWSKI. Mr. Frenzel will inquire.

Mr. FRENZEL. Senator Proxmire, I want to thank you, too, for the testimony and the work you have done on this. It would also be possible to control this element of the budget if we were to make the credit budget binding in our budget which the Senate is now working on. I wonder if anyone has attempted to do that over in your body.

Senator PROXMIRE. I am not sure I understand what you mean, Mr. Frenzel, when you say binding.

Mr. FRENZEL. We have a credit budget as part of our budget, and we pass the budget, and it becomes binding through the process of reconciliation which is required in the budget when we pass the resolution. However, the credit budget is only a target, and it is not bound by reconciliation.

Senator PROXMIRE. I understand. Yes, I agree with you wholeheartedly on that. I think there is no question in my mind that it should be binding, and that that is a loophole that we should not permit to escape it. Of course, the whole budget process is terribly painful and frustrating for all of us, but I think it provides for a discipline that we should have, and I think the fact that we have

these collosal deficits indicates how critical it is that we maintain that budget process, and making the credit budget binding would be a part of providing for the discipline that we ought to have in it. Mr. FRENZEL. Thank you very much.

Chairman ROSTENKOWSKI. Mr. Flippo will inquire.

Mr. FLIPPO. Thank you very much, Senator. I very much appreciate your statement and the solicitness of it and the preciseness of it as well.

You make an outstanding point here about your concern in regard to budget deficits and in regard to those programs that escape the discipline of the appropriations process. I assume then that any activities would not be your main concern that did not increase the deficit or did not escape the appropriation process.

For instance, if you have some obligations that are not obligations of the Federal Government that do not involve taxpayer funds, then I assume that they would not normally be subject to the appropriations process. I am speaking now of TVA borrowing. TVA's obligations are guaranteed only by the ratepayers of TVA and not by the Federal Government.

Their funds according to the 1959 Act do not go through the appropriations process. They do not because they are not Government funds and so I assume that the intent of your program is to not cover those types of activities.

Senator PROXMIRE. That is correct, yes. I think that would be if I understand you correctly, that would be my intention.

Mr. FLIPPO. Thank you very much.

Chairman ROSTENKOWSKI. Thank you, Senator.

Senator PROXMIRE. Thank you very much, Mr. Chairman. Good to see you, Mr. Chairman. Last time I saw you was at the world's series.

Chairman ROSTENKOWSKI. That is right. You were not even a candidate then.

Senator PROXMIRE. I was pretty unhappy about the Brewers losing.

Chairman RÓSTENKOWSKI. I can understand that. The Chair calls Dr. Rivlin. Welcome, Dr. Rivlin. It is always a pleasure to have you join us. The committee looks foward to your testimony. I am sure that many members will return as soon as they have answered this roll call.

If you would like to proceed, the committee is ready to receive your testimony.

STATEMENT OF DR. ALICE M. RIVLIN, DIRECTOR, CONGRESSIONAL BUDGET OFFICE, ACCOMPANIED BY RICHARD EMERY, BUDGET PROCESS UNIT

Dr. RIVLIN. Thank you. I am delighted to be here, Mr. Chairman, and I have with me today Richard Emery, who is the head of our Budget Process Unit.

In the interest of the time of the committee, I will summarize what we have to say today-which is not to say that I do not think it is important. It seems to me extremely important that the Congress consider carefully the budgetary treatment of the Federal Financing Bank. It is appropriate to consider it on a day when you

are also considering the debt ceiling, because the activities of the bank add to the debt to be financed without appearing entirely in the unified budget. As a budgeteer it seems to me very important that you get all of the activities of the Federal Government spread out in front of you when you consider the budget.

One way to improve the way in which the Congress looks at the budget is to put the Federal Financing Bank into a more sensible role in the budget and have the outlays that it creates appear in the budget.

The Federal Financing Bank, as you know, was created for a very sensible purpose, to reduce the cost to the Federal Government of agency borrowing, and it has accomplished that purpose. It does have other effects, however, and two of its major activities increase the deficit without appearing in the unified budget. The FFB finances three categories of activities. It purchases loan assets from agencies making direct loans to borrowers. It lends to borrowers holding agency guarantees. It also purchases agency debt. Purchasing agency debt does not affect the budget particularly, but the other two activities do.

LOAN ASSET SALES SHIFT ON-BUDGET OUTLAYS OFF BUDGET

Let me pick up on page 6 of my statement and talk a little bit about those two activities. First loan asset sales shifting on-budget outlays off budget.

Special provisions of law require sales of certificates of beneficial ownership by the Farmers Home Administration and the Rural Electrification Administration to be treated as sales of assets rather than as borrowing by these agencies. The significance of these provisions is that asset sales are treated as negative outlays in the originating agency's budget accounts. Thus, when the Farmers Home Administration makes $1 million in loans and uses them as collateral for selling $1 million in certificates of beneficial ownership to the FFB, the net outlays for the Farmers Home Administration are zero in the unified budget.

Before the FFB was established when the Farmers Home Administration or REA sold the CBO to a nonfederal investor, the special provisions of the law governing the treatment of CBO sales also removed the lending activity from the budget. The creation of the FFB, however, made the understatement of direct lending and of unified budget outlays a direct result of Federal activity. Instead of the outlays being incurred by a nonfederal investor, they are incurred by an off-budget entity of the Federal Government itself. In current budget documents, the lending activity is recorded as budget authority and outlays of off-budget Federal entities.

In 1982 the sale of CBO's to the FFB by the Farmers Home Administration reduced on-budget outlays by 70 percent for rural housing, 42 percent for agricultural credit, and 73 percent for rural development. That is in table 2 in my prepared statement.

The off-budget Rural Electric and Telephone Revolving Fund shifted all of its direct loans to the FFB. Its $500 million lending activity for 1982 does not appear in the unified budget.

The budgetary treatment of loan asset sales introduces a lack of uniformity into the budget's consideration. The Farmers Home Ad

ministration budget, the agriculture appropriation bill, and related budget functions are all understated in the unified budget. This understatement potentially affects the funding level for all of these programs.

FFB CONVERSION OF GUARANTEED LOANS TO DIRECT LOANS

The FFB is authorized to lend directly to borrowers whose loan notes carry a full guarantee of repayment by a Federal agency. The agencies make guarantee commitments to qualified borrowers and then sell the guaranteed notes to the FFB. The FFB disperses funds raised through the Treasury to the borrowers, thus converting loan guarantees authorized by the Congress into direct loans. The conversion of loan guarantees into direct loans bypasses the constraints established by the Budget Act. The Budget Act specifically excludes guaranteed loans from the definition of budget authority. Direct loans, in contrast require budget authority and are included in the targets and ceilings enacted in the budget resolutions.

When guaranteed loans are converted to direct loans, agencies increase their direct lending without having to request additional budget authority. The largest programs are the Rural Electric and Telephone Revolving Fund, which effectively increased its direct loans from $1.1 billion authorized to $5.8 billion extended in 1982, and the foreign military sales credit program, which increased its direct loans from $0.4 billion to $3.5 billion in 1982. The direct loans are accounted for in the off-budget FFB, not in the on-budget agency of origination.

If financing by the FFB makes it easier for a higher loan level to be attained, it affects the allocation of the Federal resources. FFB financing also increases direct Federal borrowing requirements and the gap between the unified budget deficit and total Federal borrowing.

BUDGET DEFICIT UNDERSTATES TOTAL FEDERAL BORROWING

The unified budget deficit, the difference between revenues and on-budget outlays, is featured in the President's budget, the congressional budget resolutions and most discussions of fiscal policy. Yet, it is the total borrowing requirements of the Federal Government that determine the Government's impact on financial markets. Also, the debt ceiling must be increased to cover total borrowing requirements, which result from both on- and off-budget deficits. Unnecessary confusion is added to the budget debate by the fact that the unified deficit understates the Government's borrowing requirements.

Most of the off-budget deficit is accounted for by the transactions of the FFB, as shown in table 3 in my statement. Because of the FFB the unified budget deficit understated the total deficit spending by about a third in 1979. Since that year, the unified budget deficit has grown so rapidly that it has outpaced the off-budget deficit. It should be easier to bring all spending on-budget now that the off-budget spending is a relatively small proportion of the total deficit.