of the Treasury to determine EFA's lending rate after considering current market yields on obligations issued by the Treasury, by EFA, and by municipalities.

We feel that this section provides a sufficient expression of congressional intent that the EFA lending rate be established so that EFA will not require a large Federal subsidy but will have the flexibility to adjust to changing market conditions and to offer communities with borrowing problems an interest rate which is reasonably in line with the rates paid by other communities.

We expect that most municipal waste treatment bonds will be readily salable in the private market, and will not require assistance from EFA. EFA will be concerned only with the one out of perhaps every five bond issues that is not readily marketable on reasonable terms.

Under current market conditions EFA might stand ready to lend at an interest rate of about 6 percent, which is approximately the rate currently paid by public bodies on tax-exempt bonds of medium quality. Since most public bodies can now issue their tax-exempt bonds at interest rates below 6 percent, they would have no incentive to apply for an EFA loan. Yet EFA would assure the availability of funds to the less fortunate communities.

Since EFA might be paying as much as 7 percent on its own longterm borrowings in the current market, there would be a 1-percent difference between EFA's borrowing and lending rates, and the bill provides for an annual payment from the Secretary of the Treasury to EFA to cover this difference. Yet we believe that this payment would not involve a net cost to the Federal Government since it would be offset by the additional revenues which the Treasury would receive because of the use of taxable rather than tax-exempt obligations to finance EFA.

In sharp contrast to EFA, the proposed National Environmental Financing Act-S. 1699-would establish a large broad-purpose lending agency, the National Environmental Bank, which would make unlimited amounts of credit available to public bodies for a wide variety of environmental purposes.

The bank could lend directly at a 3-percent interest rate and also guarantee obligations issued by public bodies, which would be tax exempt.

The administration recommends against S. 1699, and the Treasury Department will submit a report to your committee at the earliest possible date indicating our specific problems with the bill.

I would also like to assure your committee that EFA will not become a large or wasteful bureaucracy. In fact, we have developed this rather novel EFA proposal specifically to avoid such problems.

EFA is so structured that its functions will be carried out largely by existing personnel in the Environmental Protection Agency and in Treasury.

EPA, in the course of administering its grant program, will identify those projects in need of credit assistance; and EFA, under the direction of the Treasury, will arrange the financing. Thus we hope to avoid the problems created in the past by legislation requiring various agricultural, health education and other program agencies to become instant financiers. Those agencies have been required to develop

debt management staffs to engage in complicated market borrowing operations.

The result has been a proliferation of Federal borrowing entities competing with each other in the Government agency securities market and selling guaranteed obligations at substantially higher interest costs than would be required if their financing were consolidated.

The EFA mechanism would permit savings to the Federal Government from both (1) consolidated financing of the public body obligations guaranteed by EPA, and (2) centralization of the financing and debt management functions in the Treasury Department, which is already equipped to do the job.

On this note of more efficiency in Federal financing operations, I would like to turn now to S. 3001, the Federal Financing Bank Act.

This legislation was submitted to the Congress by Secretary Connally in December 1971. The bill would establish a Federal Financing Bank (FFB) to provide for coordinated and more efficient financing of Federal and federally assisted borrowings from the public.

Just as EFA would permit consolidation and Treasury coordination of the financing of federally guaranteed waste treatment obligations, the FFB would permit consolidation and coordination of market borrowing activities of all Federal agencies.

In fact, it has been suggested that enactment of the FFB would eliminate the need for EFA. Yet, since the FFB would be essentially a financial shell, and would not be able to lend for any purposes not otherwise authorized by the Congress, legislation such as EFA would still be necessary to provide the basic authorities for EPA loan guarantees, and for Treasury interest subsidy payments.

Moreover, EFA is currently being considered by the conferees on the overall pollution control bill and is urgently needed now as a vital link in the chain of Federal, State, and local antipollution measures, which are long overdue.

While we are also hoping for prompt enactment of the Federal Financing Bank Act, we urge in any event that EFA's important contribution to the antipollution program not be further delayed in the

process.

The Federal Financing Bank Act was first suggested in the President's January 1971 budget message, when he indicated his concern with the lack of coordination of Federal credit programs with overall fiscal and public debt management policy.

The President stated that legislation will be proposed to permit the review and coordination of Federal credit programs along with other Federal programs.

The Federal Financing Bank Act would implement the President's statement by providing a means, (1) to centralize the marketing and reduce the cost of Federal and federally assisted borrowing activities, (2) to assure debt management coordination by the Secretary of the Treasury of Federal agency direct and guaranteed borrowing plans, and (3) to facilitate presidential review of loan guarantee activity in the light of fiscal requirements and overall demands on U.S. financial markets.

The need for more effective financing and coordination of Federal

credit programs has been recognized in a number of Government and private studies over the past decade and was a matter of particular concern in the 1967 Report of the President's Commission on Budget Concepts.

The pressing need for the Federal Financing Bank Act at this juncture arises from both, (1) the sheer growth in the number and dollar volume of Federal and federally assisted borrowing activities, (2) the growing tendency to finance these activities directly in the securities markets rather than through dispersed lending institutions. Because of the proliferation of new Federal borrowing activities we are already at the point where some Federal financing is coming to market at least 3 out of every 5 business days. We are also at the point where borrowings for Federal programs, which have increased about twice as fast as other borrowings over the past decade, now require nearly half the total credit available in the economy.

That is, the combined net credit demands of Federal and federally assisted borrowers are estimated to total $58 billion in the fiscal year 1973, or nearly 50 percent of the expected total of funds advanced in credit markets in fiscal 1973, compared to just 22 percent in fiscal 1963, a decade ago.

Until recent years, the typical forms of credit assistance by Federal agencies were either direct budget loans financed by the Treasury or guarantees of loans generally made by lending institutions, such as commercial banks and thrift institutions, who were normally engaged in that type of lending activity and were equipped to service the loans and assume some portion of the loan risks.

In recent years, however, the volume of direct Federal loans has dwindled, and we have moved toward full guarantees of timely payment of principal and interest on loans made by private lenders so that the share of risk borne by the lender has steadily declined.

Also, the Congress has increasingly provided for direct Federal interest subsidies on loans made by private lenders so that a portion or all of any extra borrowing costs resulting from inefficient financing of these loans is now borne directly by the Federal taxpayer rather than the borrower.

Moreover, even with complete Federal guarantees and interest subsidies, it was found that the flow of credit at reasonable interest rates for the various purposes authorized to be assisted by the Congress has not always been adequate.

Thus, more and more of these programs have come to be financed, like Treasury borrowings, directly in the securities markets rather than through lending institutions.

This has been particularly true during tight money periods when the flow of deposit funds to banks and thrift institutions has not been sufficient to assure the availability of financing for Federal credit assistance programs.

Thus we have relied more and more on direct securities market financing by means of issues by federally sponsored agencies such as FNMA and the farm credit agencies; by direct Federal borrowings by budget agencies such as the Export-Import Bank, TVA and the Postal Service; by loan asset sales in the securities market by the Farmers Home Administration, the Defense Department, HUD, VA,

SBA, and others; and by other Federal guarantees of securities such as GNMA mortgage-backed securities, public housing bonds, urban renewal notes, new community debentures, merchant marine bonds,

et cetera.

Similar financing arrangements have been proposed for a number of new agencies or programs.

Federal credit agencies are thus required to develop their own financing staffs, and their abilities to cope with their principal program functions are lessened by the need also to deal with the complex debt management operations essential to minimizing their borrowing costs and avoiding cash flow problems which could disrupt their basic lending programs.

Borrowing costs of the various Federal agency financing methods normally exceed Treasury borrowing costs by substantial amounts, despite the fact that these issues are backed by the Federal Gov

ernment.

Borrowing costs are increased because of the sheer proliferation of competing issues crowding each other in the financing calendar, the cumbersome nature of many of the securities, problems of timing and small size of issues, and the limited markets in which they are sold. Underwriting costs are often a significant additional cost factor due to the method of marketing.

Under the proposed Federal Financing Bank Act these essentially debt management problems could be shifted from the program agencies to the Federal Financing Bank. Many of the obligations which are placed directly in the private market under numerous Federal programs would instead be financed by the Bank.

The Bank, in turn, would issue its own securities. The Bank would have the necessary expertise, flexibility, volume and marketing power to minimize financing costs and to assure an effective flow of credit for programs established by the Congress.

The proposed legislation would also assure more orderly and effective Federal financial management by requiring the submission of agency financing plans to the Secretary of the Treasury and coordination of borrowing activities by the Secretary.

The Congress has required such Treasury coordination of agency borrowings in many cases, but some agencies are not subject to the requirements, and in many cases the requirements are vague or incomplete.

Finally, the legislation provides that loan guarantee commitments, which are not subject to the overall Federal budget restraints, could be made only in accordance with budget programs submitted to the President. The President would be authorized to limit guarantee programs when necessary in view of the overall fiscal requirements and demands for credit.

The Federal Financing Bank Act would thus provide both a more effective means of financing, as well as a focal point for early recognition of the volume of the proposed level of Government assisted credit and its likely impact on financial markets.

During the course of our discussions of the Federal Financing Bank with the various agencies involved, with public interest groups and with capital market participants, considerable support for the legislation has developed.

Most people agree that the coordinated and economical financing of the Government's activities and programs is clearly in the public interest. In those discussions I found it helpful to emphasize the following points:

The Bank would not be a program agency. That is, it would neither add to nor subtract from existing Federal credit assistance programs. The Bank would not be authorized, nor would the Secretary of the Treasury be authorized, to make any judgments with respect to the purposes of Federal agency programs. The Bank is designed merely to improve the financing of programs otherwise authorized by the Congress.

The Federal Financing Bank would not be another big bureaucracy. It would rely upon the existing staff and facilities of the Treasury Department and the Federal Reserve banks in its borrowing operations. In fact, the establishment of the Bank would reduce Federal bureaucracy since it would eliminate the need for establishing new financing staffs for each new Federal credit program or agency.

The Federal Financing Bank is not a device to remove programs from the Federal budget; nor is it a device to bring programs back into the budget. The Bank would in no way affect the existing budget treatment of Federal credit programs. If a program is now financed outside of the budget, that treatment would continue. If a program is now financed in the budget, that treatment would continue. The bank is intended to improve the financing of all Federal borrowing activities regardless of their budget

treatment.

The Federal Financing Bank Act is not an assault on the taxexempt municipal bond market. Rather than involving the Federal Government in the tax-exempt market, the Bank would permit the Federal Government to withdraw from that market. Under existing arrangements Federal agencies finance some of their programs in the municipal market by means of Federal guarantees and debt service subsidies on tax-exempt obligations, for example, for public housing and urban renewal. These programs currently require about $1 out of every $8 invested in taxexempt obligations. Over time the Federal Financing Bank would permit the removal of the financing of these federally impacted programs from the tax-exempt market, thus reducing pressures on that market. Consequently, State and local governments should benefit, in terms of more receptive markets for all their borrowings, by enactment of this legislation.

We feel strongly, as is evident from our revenue-sharing proposals, that State and local governments should have more, rather than less, financial independence.

In this regard, I would like to emphasize that the Federal Financing Bank should not be confused with Urbank or with other legislative proposals which would permit the Federal Government to subsidize all municipal bonds, either through a new central financing institution, or through guarantees and interest subsidy payments on taxable municipal bonds.

The major concern with those proposals, as I understand it, is that