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(2) We are concerned also that language contained in S. 1679 creates some doubt as to the recourse available to the holder of the REA guarantee should the Secretary of Treasury determine that the guaranteed loan, for whatever reasons, should not be processed through the FFB.
As it now stands, this language could, we fear, be interpreted in such as way as to effectively overturn a decision made by the REA Administrator that a project is qualified for and worthy of an REA guarantee by eliminating any method for exercising that guarantee. Under existing law, the holder of the guarantee has the discretion to use whatever means of financing that is in the best interest of the consumer member. The language in S. 1679 precludes the holder of the guarantee from following this course of action.
Since 1981, the RE Act has stipulated that so long as it is making similar loans, the Federal Financing Bank must process and fund duly approved REA guarantees at the discretion and option of the borrower. This provision gives the electric cooperative the flexibility to arrange financing needed for a project in the manner most advantageous to the consumer.
For a program, which just a few years ago, was threatened with an abrupt and complete termination of its access to the Federal Financing Bank, the so-called "no escape" provision of S. 1679 is, we believe, both unnecessary and needlessly limiting.
To force holders of REA guarantees to make exclusive use of the FFB for the funding of these loans would, we believe, serve no positive purpose for the government or the rural electric consumers, and could, further, be an impediment to greater use of non-governmental financing by these borrowers in the future.
In summary, we fully support efforts to get the nation's economy back on an even course, and applaud this Committee's efforts to examine this problem from the credit perspective. We also, however, emphasize our present and continuing accountability to the Congress, and point with pride to our responsible record of repayment. Finally, we welcome any objective review of the rural electric program and its contribution to the productive capacity of the nation.
Thank you very much for this opportunity to have our views heard.
REVIEW OF LOAN APPLICATIONS BY REA
(1) REA borrower submits loan application packet to REA Operations Field Representative (the local area office). The OFR makes initial determination as to need for financial assistance, ascertains that borrowers eligibility requirements are met, and determines that loan documents are in order prior to forwarding the REA Washington offices;
(2) Loan Applications for insured loans are forwarded to the respective Area Office (Northeast, North Central, Southeast, Southwest, or Western) at REA in Washington. Area Office reviews and separates various segments of packet for analysis by other divisions. Loan applications for guaranteed loans are sent onto Power Supply Division; (3) Respective segments of packet undergo analysis and review by the Engineering Standards Division, the Environmental & Energy Requirements Division, and the Energy Management and Utilization Division;
(4) Final staff review fo all loan applications is made by the Electric Loans and Management Divison, which re-assembles the various segments of the loan packet, and prepares and gathers any needed supplemental information pertinent to the loan. The division also recommends, to the REA Administrator, whether a loan merits his approval;
(5) The loan packet, complete with any recommendations by the REA staff, is set to USDA's Office of the General Counsel to assure compliance with legal requirements is met;
(6) The loan application packet is forwarded to the Assistant Administrator for consideration; and finally,
(7) To the REA Administrator.
NRECA MEMBERSHIP RESOLUTIONS TO ACCOMPANY THE STATEMENT OF
SENATE COMMITTEE ON BANKING, HOUSING AND URBAN AFFAIRS
CREDIT BUDGET REVIEW
Legislative changes are being proposed to review annually all federal credit programs and establish a limited credit budget. P.L. 93-32 established a strict procedure for congressional review and authorization of the REA insured and guaranteed loan programs. The congressional appropriations committees annually set a floor and ceiling on REA insured loans. Each loan guarantee is subject to review by Congress 30 days prior to approval, and Congress is also regularly informed of the year's cumulative total.
The comprehensive review of the REA loan program completely meets the Congressional interests in controlling federal credit. Other credit programs should be similarly reviewed and restricted consistent with the increasing Congressional concerns in this area.
We oppose any additional review of the REA program as being redundant and unnecessary.
OFF BUDGET FEDERAL PROGRAMS
We note with some concern the ever-increasing amount of legislation that is being introduced in Congress which would place the Rural Electrification and Telephone Revolving Fund, the Rural Telephone Bank, the Federal Financing Bank and other federal programs in the federal budget.
Since our loan programs have no budgetary authority, require no budgetary outlays and therefore have no impact at all on the budget, we strongly oppose any effort by Congress or any federal agency to place those programs in the federal budget.
FEDERAL FINANCING BANK
The Federal Financing Bank (FFB) has served to coordinate and facilitate government credit activities in an efficient and advantageous manner. It should be continued without change. FFB funding of REA loan guarantees is mutually beneficial to the government and to the borrower. The borrower saves a substantial 150 basis points in interest costs and the FFB makes about $5-million on each year's guarantee program. We commend the Congress for mandating the availability of the FFB funding of REA loan guarantees. We oppose any effort to restrict the FFB participation.
Unlike the budget accounting of corporate businesses and nearly all state governments, the federal government's budget does not differentiate between spending programs and lending or investment programs. A capital budget would greatly enhance the federal budget by treating capital programs as investments and not as expenses, thus increasing the nation's productive capacity and yielding future benefits.
We therefore urge adoption by the Congress and the Administration of a capital budget.
Senator TRIBLE. Mr. Lewis, it is always a pleasure to see you. We are especially pleased to hear you today speaking in your capacity as president for the National Rural Electric Cooperative Association.
REASONS FOR REA TO REMAIN OFFBUDGET
I believe the heart of your statement is the basic contention that REA is offbudget by law and ought to stay that way. Tell us, if you will, why REA should remain offbudget. We know the process of making laws is an ongoing one, and it is true that REA is off budget today. But tell us again for the record, if you will, why in your judgment REA activities should remain offbudget.
Mr. LEWIS. Well, basically, Senator, as I said one time before, I do not think that loans, guaranteed loans, should be treated as outlays of a Government agency, in that they are really an asset and not expenditures.
Also, the off-budget nature of our dealings with the Federal Financing Bank keeps us under the jurisdiction of REA and the Congress, but I am afraid under the proposed legislation we would also have to deal with the Office of Management and Budget. And that I do fear as another restraint on our being able to use the Federal Financing Bank. Our use of it is so vital to the construction of generation and transmission by members of our cooperative that I fear that if we have restraints in that area, we will simply have no source at any price for the type of large amounts of funds that we are expected by our consumers to expend.
Senator TRIBLE. From what I hear you say, it seems that you are saying—at least this is what I hear-that you do not really object to the objectives of this bill, which is to strengthen the budget process, but rather as the spokesman for your important association, you are concerned that your cooperatives need access to funding in order to serve their constituent interests. And any change in the status quo concerns you.
Mr. LEWIS. Yes, sir. I call to your attention the fact that wholesale power from the generation cooperatives as well as the investor owned utilities about 10 years ago was 1 cent per kilowatt-hour. It is now 4.1 cents and 25 percent of that cost is cost of money. It's a big item to us.
Senator TRIBLE. Let me assure you the purpose of this legislation is not in any way to reduce the Federal commitment to your program, but rather to strengthen the budget process and to insure that we have a better accounting of the full force of Government activities.
Now, let me focus on the second reservation you raised toward the end of your testimony. You indicated a concern that all co-ops want to maintain their present flexibility so that they would have the opportunity to use the FFB or go into the private market. Of course, this bill would require the borrower to go to the FFB first for a loan.
Tell me, if you will, exactly what that flexibility has meant to the operation of the FFB. For example, what fraction of REA guarantees have been financed in the private market in the last year or
the last many years, or has the Federal Financing Bank been responsible for those funding activities?
Mr. LEWIS. I am told that only about 10 percent went outside of the Federal Financing Bank.
Senator TRIBLE. 10 percent in the last year? What timeframe are we talking about?
Mr. SMITH. It wouldn't vary that much from year to year, Senator. The Banks of Cooperatives have funded part of some loan guarantees over the last 6 years. I think the total amount of their outstanding funding under the REA guarantees is about-a little over $1 billion. There has been about $15 billion advanced under the loan guarantees. So roughly 10 percent or so has been financed by the Banks of Cooperatives.
They are very concerned that under the provision that the FFB have the right of first refusal, they might not be able to participate as they have in funding the REA loan guarantees.
Senator TRIBLE. My purpose in drafting this legislation is not to foreclose the opportunity to raise dollars in the private sector, but rather to insure that the activities that now proceed through the FFB continue to do so, so that Government agencies cannot endrun the process and thus avoid the budgetary scrutiny that this legislation hopes to bring about.
Mr. LEWIS. May I say, Senator, that I read in the record your reasons for wanting this bill. Let me say again how much we are in favor of your doing just what you are trying to do. We just wanted to make known to you and the committee our concerns that it might affect our program and see if there was anything that could be changed.
Senator TRIBLE. I appreciate your very constructive statement. I might also say that I appreciate the opportunities that we have had to talk about this legislation. And your association should know that you have shared your thoughts and concerns very effectively. So we will continue those conversations in the effort to improve and strengthen the budget process and yet not undercut your important efforts.
I see Senator Sasser is here. He may be holding off his fire until the TVA round.
We welcome you. Would you care to ask questions of Mr. Lewis? Senator SASSER. Thank you, Mr. Chairman. No, I will forego any questions at this time. I perhaps might have some questions at a later time for the record. Thank you.
Senator TRIBLE. Fine. Thank you very much.
Next we will hear from Charles Dean, Chairman of the Board, Tennessee Valley Authority.
Mr. Dean, welcome.
Senator SASSER. Mr. Chairman, prior to hearing Mr. Dean's testimony, I would like to make a brief statement if the Chair will permit.
Senator TRIBLE. The Senator from Tennessee.
STATEMENT OF JIM SASSER, U.S. SENATOR FROM THE STATE OF
Senator SASSER. Thank you, Mr. Chairman.