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few years and the additional legislation actions that are now under consideration in both houses, including H.R. 2868.

In addition we have just recently initiated a review of FFB's impact on credit and debt management issues.

In the interest of brevity I will not elaborate on our work at the FFB, but I have attached a list of relevant reports, hearing statements and bill comments. If you would like copies, we would be happy to supply them and, if you wish, discuss details with you or your staff.

PROVISIONS OF H.R. 2868

As we read H.R. 2868, the major provisions of the proposed legislation would: Require that credit transactions with the public by Federal agencies resulting from transactions with the FFB be included in unified budget totals of the responsible Federal agencies;

Require the Director of the Office of Management and Budget (OMB) to issue regulations prescribing the manner in which the above provision is to be implemented, and these regulations will have precedence over any prior provisions of law or other regulations to the contrary; and

Require that an obligation of a type which is ordinarily financed in investment markets, as determined by the Secretary of the Treasury, be financed through the FFB, unless a waiver is granted by the Secretary of the Treasury.

Regarding the first provision, we have favored including FFB transactions in the unified budget totals and charging those agencies which provide guarantees to repay the FFB funds. Although we support the objectives of this provision, we believe that certain revisions are needed to accomplish the desired change. For example, as presently written in H.R. 2868, loan quarantee amounts financed by the FFB shall not exceed amounts of budget authority provided to a Federal agency for such purposes. However, the legal definition of budget authority, as stated in section 3(a)(2) of the Congressional Budget Act of 1974, specifically excludes loan quarantee amounts from budget authority.

As for the second provision, we have previously questioned whether the OMB rules issued to prescribe how agency accounts would be charged with FFB transactions would have legal force to supersede existing law. We are prepared to supply alternative language for the record, which, in our judgment, would solve both of these problems.

And finally, we wonder whether the last major provision would provide the executive branch with authority to alter credit programs established by the Congress, thus removing important policy and programmatic decisions from the Congress. This provision could also affect the private credit markets by requiring agencies that have traditionally used private lenders either by management decision or by Congressional mandate to obtain financing from FFB.

We recognize it is necessary to monitor the activity under this provision so that agencies do not ignore the constraints intended by the legislation. Since we cannot anticipate all of the discretion available to the Treasury under the provision, we feel it is necessary to clearly establish in the legislative history of the bill the intent of this provision. An additional step would be the conduct of oversight, especially at the time Treasury proposes its implementing regulations.

With the changes we have suggested we would recommend enactment of this bill. Mr. Chairman, this concludes my prepared statement. I would be pleased to try to answer any questions.

GAO PRODUCTS ON THE FEDERAL FINANCING BANK

U.S. General Accounting Office, "Government Agency Transactions with the Federal Financing Bank Should Be Included in the Budget" (PAD-77-70, August 3, 1977).

Testimony before the Subcommittee on Oversight of the House Committee on Ways and Means on the Budget treatment of the Federal Financing Bank, H.R. 7416, September 20, 1977.

U.S. General Accounting Office, "Legislative Changes Needed to Improve Budget Treatment of Certificates of Beneficial Ownership" (PAD-80-32, April 9, 1980).

U.S. General Accounting Office, "Federal Budget Totals Are Understated Because of Current Budget Practices (PAD-81-22, December 31,1980).

Testimony before the Subcommittee on Federal Credit Programs, Senate Committee on Banking, Housing, and Urban Affairs on the Federal Financing Bank, April 5, 1983.

Chairman ROSTENKOWSKI. Mr. Gradison will inquire.

Mr. GRADISON. Thank you, Mr. Chairman. I particulary appreciate the attention given to these technical problems. We believe we have taken care of them in the draft bill which is before the committee, and I wonder if you could comment on that.

Mr. HAVENS. The draft that I have, sir, is the version that I obtained last Friday afternoon when I was invited to testify. I have not seen a subsequent draft. We would be more than happy to sit down with you or your staff and go over that draft and see if it has solved the problems that we raised.

Mr. GRADISON. Thank you very much. Thank you, Mr. Chairman. Chairman ROSTENKOWSKI. Are there any further questions? If not, thank you very much.

Mr. HAVENS. Thank you, Mr. Chairman.

Chairman ROSTENKOWSKI. The Chair calls Mr. Bennett and Mr. DiLorenzo. Welcome to the committee, gentlemen. Thank you for joining us.

Mr. Bennett, if you will identify yourself for the record, you may proceed.

STATEMENT OF JAMES T. BENNETT, PH. D., AND THOMAS J. DiLORENZO, PH. D., DEPARTMENT OF ECONOMICS, GEORGE MASON UNIVERSITY, THE HERITAGE FOUNDATION

Mr. BENNETT. I am James Bennett, professor of economics at George Mason University, and I would just like to say very briefly first that Dr. DiLorenzo and I are here as individual taxpayers not representing any group or organization and second, that we have prepared a somewhat lengthy bit of testimony for the committee which has already been submitted and which deals primarily with off-budget Government financing programs.

We will not go into that in any detail, but rather respond to questions.

Chairman ROSTENKOWSKI. Your entire testimony will be included in the record.

Mr. BENNETT. Thank you, sir.

I would like to say that in terms of the debt limit none of our written testimony deals with that because from our perspective the debt limit is more or less a moot issue since each time it is required the limit is immediately raised. I doubt that anyone in this room or anyone in the country doubts that it will be raised so that in a sense the debt limit is just a contradiction in terms in that it really does not limit the debt of the Nation.

In summary with regard to off-budget Federal programs, we believe or at least I believe speaking for myself that the best approach would be simply to abolish the Federal Financing Bank and its activities and reduce substantially the role of the Federal Government in the credit markets of the Nation. If there is expenditure to be made for various programs rather than subsidizing them through loans either off-budget or on-budget, it would be much clearer if simply a direct appropriation were made to the individuals involved rather than to have the funding developed through loan programs.

With that I will conclude.

[The prepared statement follows:]

STATEMENT OF JAMES T. BENNETT, PROFESSOR OF POLITICAL ECONOMY AND PUBLIC POLICY, AND THOMAS J. DILORENZO, ASSISTANT PROFESSOR OF ECONOMICS, GEORGE MASON UNIVERSITY, FAIRFAx, Va.

The discussion of off-budget financial activities presented herein is from the authors' book, Underground Government: The Off-Budget Public Sector, published in 1983 by the CATO Institute of Washington, D.C.

THE UNDERGROUND FEDERAL GOVERNMENT

Budget reform and the form of the budget

In keeping with the traditions established at the state and local levels of government, the federal government has responded to recent taxpayer demands for fiscal restraint by marshalling hundreds of billions of dollars in spending off-budget via the credit markets. There are three basic ways in which, through the credit markets, federal spending is hidden and kept off the budget. First, numerous agencies have simply been deleted from the budget. Second, government control over resource allocation is extended by guaranteeing loans made to specially privileged individuals, businesses, and governments. Third, there are numerous privately owned, but federally sponsored and controlled, enterprises such as the Federal National Mortgage Association which are also off-the-books borrowers.

In addition to manipulating credit market activities, federal politicans have increasingly recognized that, in principle, anything that can be accomplished through taxing and spending can also be accomplished by regulation. All of these activities must be taken into account to assess accurately the role of the federal government in the economy.

The Congressional Budget and Impoundment Control Act of 1974 has been praised by U.S. News and World Report as a "revolutionary budget reform intended to give Congress a tighter grip on the nation's purse strings." The "Budget Reform Act" emerged from a recognition that existing budgetary procedures generated a bias toward overspending and budget deficits. Prior to 1974, the total amount of federal spending was the product of many individual appropriations decisions; no explicit limit was ever placed on the total amount of public expenditure. Each Congressman had then, as he does now, a very strong incentive to maximize spending on his own voting constituency, while limiting the extent to which he must pay for the spending, but no Congressman was required to take responsibility for the total amount of federal spending that resulted from the appropriations process. The Budget Reform Act created a budget committee for each house responsible for setting overall targets for revenues, expenditures, and the resultant deficit (or surplus). The Congressional Budget Office was created to assist in this process.

The main impact of the Budget Act is to make taxing, spending, and deficit levels explicit and to hold Congress accountable for them; the Act itself does nothing to curb spending. In keeping with the "traditions" established at the state and local levels of government, the relatively mild budgetary discipline set forth in the Budget Act elicited a great deal of "back door spending" at the federal level. In the wake of the Budget Act, numerous agencies have been and continue to be placed offbudget and beyond the purview of any appropriations process. Thus, while the Congress was publicly proclaiming a need for fiscal discipline in federal budget matters and enacting legislation to deal with the problem of "uncontrollable" spending, it was simultaneously establishing mechanisms through which spending could be placed off-budget. Off-budget federal outlays, by agency, since 1973 are shown in Table 1. Although the estimated $32.2 billion in off-budget outlays in 1981 was only about 5 percent of the federal budget, this amount has increased by an astounding 32,200 percent since 1973. Most recently, the Synthetic Fuels Corporation, which began operations in 1981, was also placed off-budget. Congress had previously authorized $20 billion for the development of this "industry." The penchant for back door federal spending is obviously_non-partisan. Both the Democratic-controlled House and the Republican-controlled Senate, at the insistence of the Reagan administration, voted to place the Strategic Petroleum Reserve "off the books." There have even been bi-partisan proposals for "dealing" with the social security crisis by placing the social security program, with over $220 billion in expenditures in 1982, off-budget!

1 Footnotes at end of article.

21-675 0-83--7

As is evident from Table 1, the Federal Financing Bank (FFB) is by far the most active off-budget agency.2 The FFB, a part of the Treasury Department, does business with both on- and off-budget agencies. The predominant activity of the FFB is the purchase of agency debt from funds obtained by borrowing directly from the Treasury. FFB borrowing not, however, included as part of the Treasury's budget outlays; interest payments from the FFB to the Treasury are, nevertheless, counted as deductions from Treasury outlays. Consequently, FFB borrowing actually results in a reduction in outlays reported by the Treasury Department! In essence, the FFB serves as an intermediary which permits the spending of federal agencies to be placed off-budget.

A second type of FFB activity is the purchase of agency loans or loan assets. When a federal agency sells a loan to a private entity, the loan is considered repaid for budgetary purposes. Loans made by federal agencies are afforded the same treatment when the FFB is the purchaser. Proceeds from the sale are counted as loan repayments rather than as a means of financing and thus are an offset to the agency's gross expenditures. An agency's on-budget loan can therefore be converted to an off-budget loan by selling it to the FFB. In 1981, about 90 percent of all federal agency loans and loan asset sales were sold to the FFB resulting in off-budget financing.

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Source: "Budget of the United States Government," Office of Management and Budget, 1982.

Rather than selling individual loans an agency can sometimes pool its loans and issue securities backed by the pooled loans. These securities, known as "Certificates of Beneficial Ownership," are then turned over to the FFB for cash, placing them off-budget. The agency has cash to loan again, and can repeat the process as many times as it chooses. This procedure allows federal agencies to make loans to privileged customers with virtually no budgetary limit.

Another type of FFB activity is the granting of off-budget loans to guaranteed borrowers. Typically, a loan guarantee occurs when a federal agency sanctions a loan between a private lender and a private borrower. The result is an interest subsidy to the borrower at no explicit cost to the Treasury unless a borrower defaults. Frequently, however, an agency will ask the FFB to act as the private lender and purchase the borrower's note. In this case the loan guarantee becomes, in effect, a direct loan from the government which is not reflected in the budget. In 1981 FFB purchases of loan guarantees amounted to over $10 billion.

The outstanding holdings of the FFB in 1981, by type of activity, are shown in Table 2. As seen there, total outstanding holdings as of 1981 exceeded $107 billion. The primary beneficiaries have been the Farmers Home Administration (FmHA) and, to a lesser extent, many other agencies which can transfer enormous sums offbudget. The FmHA increased its loans by over 500 percent in the first five years after the establishment of the FFB.3

Activity

Table 2.-Federal Financing Bank outstanding holdings, 1981

Export-Import Bank..

Agency debt:

Other..

Tennessee Valley Authority.

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Total Federal Financing Bank outstanding holdings.

1 Primarily Certificates of Beneficial Ownership.

Billions

$12.4 10.9

1.6

48.8

2.6

.4

12.3

9.1

9.2

107.3

Source: U.S. Congress Joint Economic Committee, "The Underground Federal Economy", Staff Report (Washington, D.C.: U.S. Government Printing Office, April 20, 1982), p. 12.

TABLE 3.-OUTSTANDING FEDERAL FINANCING BANK LOANS TO GUARANTEED BORROWERS, FISCAL

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In sum, the activities of the FFB give federal politicans and bureaucrats a virtual blank check, with no direct budgetary consequences, with which to dispense rapidly growing amounts of loans and subsidies to their constituent interest groups. The political costs of federal largesse are effectively reduced by the FFB. As an indication of the political bonanza being enjoyed by various federal politicians and their supporting federal agencies, Table 3 lists outstanding FFB loans to guaranteed borrowers during the 1980-82 period. At a time when "fiscal restraint" is being attempted (at least verbally) by some members of Congress and the Reagan administration, FFB loans outstanding to guaranteed borrowers are expected to double in just two years, with one category, loans for low-rent housing, increasing by 340 percent. In essence, the loan guarantees administered by the FFB constitute the "back door financing" of additional governmental control and regulation of the economy's resources. Government agencies can grant special privileges to select groups of individuals, business firms, foreign governments, or even other government-sponsored enterprises (e.g., the TVA), without being subjected to Congressional scrutiny and, theoretically, without budgetary limit. The FFB, therefore, provides federal agencies with a powerful potential for wide-scale intrusion into credit market decisionmaking.

Economic implications of FFB loan guarantees

Many advocates of free enterprise have objected to congressional action that granted New York City and the Chrysler Corporation several billion dollars in highly publicized loan guarantees. The New York City loan guarantee does little to address the city's fiscal problem-deficit spending and encourages other cities to follow the same route to bankruptcy, with hopes of being "rescued" by the taxpaying public. The Chrysler loan guarantee, its critics observe, simply bails out an inefficient business enterprise by siphoning over a billion dollars in credit that would be put to more highly valued uses by more credit-worthy borrowers. The general consequences of subsidizing failing businesses are well-known and are diagnosed worldwide as the "British Disease." Great Britain's anemic industrial performance of the

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