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Senator Sasser:

Mr. Dean:

This kind of arrangement is common among electric utilities. At first, we planned to have this nuclear

fuel arrangement financed in the private financial
market. It was the FFB that requested the financing

be handled through it, and it helped create the
present arrangements.

You have said that the financial transactions of

TVA's power system are on-budget, but don't TVA's arrangements with the Seven States Energy Corporation have the effect of moving some of these transactions off-budget?

TVA is responsible for this debt just as it is responsible for its direct borrowing. The obligation is TVA's, not the American taxpayer's, and it should be treated the same as TVA's direct borrowings.

should note that OMB has views about this which

differ from TVA's.


Senator Sasser:

Still, Mr. Dean, when I look at the budget's listing
of Federal credit transactions handled through the
Federal Financing Bank, it strikes me that Seven
States is the largest user of FFB credit.
Why is


Mr. Dean:

The figure listed as "budget authority" in the
Budget for FY 84 is 34 times larger than the actual
level of FFB's lending to Seven States. It thus

appears that Seven States is utilizing more than
26 percent of the FFB's total activities.


loans to Seven States are actually less than 2 percent
of the total FFB credit budget. The discrepancy is
caused by an accounting practice used in the Budget
that measures only gross transactions.

Let me

At the end of FY 83, Seven States will have borrowed
about $1.4 billion from the FFB. This level is
expected to increase to about $1.6 billion by the
end of FY 84--making about $200 million of additional
borrowings during FY 84. However, the Budget lists
the Seven States transactions for FY 84 as $6.3 billion
in "budget authority." Seven States borrows from
the FFB with 90-day notes. This means that every

90 days--four times each year--the entire outstanding
debt is rolled over. Each time it is rolled over,

it is counted again for Budget purposes even though it remains the same debt.

We are pleased that according to OMB and the Congressional Budget Office this overstatement of the Seven States transactions will be corrected. The staff of the Federal Credit Subcommittee played a major role in bringing this about, and we appreciate it.

Senator TRIBLE. Next we will hear from Ron Utt, deputy chief economist, U.S. Chamber of Commerce.

Dr. Utt, welcome. We're pleased to have you here with us today.



Dr. UTT. Thank you, Senator, and thank you for the opportunity to present the chamber's views.

Senator TRIBLE. Dr. Utt, your statement will be made part of the record. We invite you to read your statement or summarize it, as you wish.

Dr. UTT. I am Dr. Ronald Utt, deputy chief economist for the U.S. Chamber of Commerce on whose behalf I am testifying today. I welcome this opportunity to present our views on S. 1679, which would amend the Federal Financing Bank Act by requiring that loans and agency debt financed through the FFB to be included in the unified budget. I would also like to commend the committee for recognizing the urgent need to develop better budgetary control over the massive array of Federal credit programs that now account for more than 20 percent of the funds advanced in U.S. credit markets.

My written statement which has been submitted to the committee details the magnitude of this vast array of programs, and it discusses the many adverse effects that these programs create in our economy. In the interest of time, I will not repeat these issues in my opening statement and request that this statement be submitted for the record.

For now, I would like to focus my remarks on the legislation under consideration and on the other proposals that the chamber recommends for improving congressional control over the credit programs.

Following several years of careful consideration and review of these programs, their economic impacts and the institutional arrangements and budgetary procedures that influence their growth, the chamber recommends the enactment and/or implementation of five key proposals we believe will make an important contribution to reforming the Federal loan programs and limiting their future growth.

First we recommend enactment of S. 1679. In the past we have had some concerns about combining Federal credit advances, including loans and loan guarantees, with the current expenditures which now comprise the bulk of the unified budget, preferring instead the establishment of two separate budgets, one for expenditures and one for credit advances, and subjecting both to the discipline of the budget process. However, recent experience with binding credit budgets and the continuing propensity of Government to give certain activities an off-budget status, has made it clear to us that a more effective control mechanism is needed.

S. 1679 offers such a mechanism for those credit programs that would be subject to its scope. By bringing many of these programs onto the budget and into the mainstream of the budget debate, these programs will no longer be cloaked in the obscurity that has aided and abetted their rapid growth over the past 7 years.

With each dollar of net lending contributing a dollar to the highly visible unified budget deficit, there is a greater likelihood that firmer limits will be placed on credit programs in an effort to reduce the deficit. Furthermore, by bringing the FFB's lending activities onto the budget and by requiring that these loans be reflected in the deficit, the unified budget will provide a more accurate picture of the extent to which these activities absorb and reallocate the Nation's scarce resources.

As important as this step would be, this committee should recognize that many more legislative initiatives will be required to come to grips with the problem of rapid credit growth. There are two reasons for this.

First, inclusion in the unified budget is no guarantee that growth in credit programs will be restrained. As long as many of these programs maintain their entitlement status and continue to offer very attractive subsidized rates to program beneficiaries, control problems will persist.

In the absence of other forms of restraint, control proposals that rely chiefly on better accountability, honest budgeting, and aggregate targets will not necessarily be effective in controlling program growth for the same reason that the spending entitlements continue to slip past the elaborate and comprehensive controls and accountabilities of the existing congressional budget process. Second, because only a portion of the Federal Government's credit activities are funded by the FFB, control procedures which encompass all credit activities are also needed.

For this reason, the chamber continues to endorse legislation that would establish a formal, permanent credit budget that subjects all loans and loan guarantees to the discipline of the budget. With a formal credit budget, Congress would have to set an overall credit target consistent with general macroeconomic policy objectives, trends in the budget deficit and the state of domestic financial markets.

Once such an upper limit on total credit support is established, Congress would be required to allocate this fixed total among competing uses. This would necessitate scrutiny of each of the many credit programs. In turn, this evaluation process could lead to program reforms, as well as to the elimination of duplicative programs and those that have outlived their usefulness.


In addition to our support of S. 1679 and legislation that would establish a credit budget, the chamber also recommends that Congress consider the development and/or the enactment of the following additional proposals.

In order to facilitate an effective evaluation process, our third recommendation is that Congress develop a clear and concise criteria that could be used to reassess each of the existing programs and to better relate the objectives of the program with the type of credit assistance that is offered.

In surveying the 350-some odd programs, it is obvious that they represent a 50-year accumulation of overlapping activities without any clear sense of priorities regarding either the level of support,

the depth of support or the type of support. Interest rate subsidies, for example, vary widely and appear to have little relationship to current national objectives.

Development of a criteria for granting credit support should be able to assist us in answering questions such as, what are the beneficiaries' credit problems-access or ability to pay? Is the existing interest rate subsidy appropriate in light of the changed financial market conditions? Are the programs equitable? Has the original program objective been met? Where an interest rate subsidy was once offered, will a guarantee be sufficient now?

Given the vast scope and complexity of the Government's credit market involvement, such criteria will be essential to making informed decisions on the needs for existing and proposed credit programs?

Our fourth recommendation is to limit interest rate subsidies on direct loans and on guaranteed loans that are converted into direct loans. Many program interest rates were set by statute in the distant past when market rates were much lower. Programs that once offered modest subsidies now offer deep ones. The failure to change these rates in response to changed market conditions has contributed both to rising program costs and excessive program demand.

Finally, we urge that in reviewing the existing programs, Congress consider modification, reduction or elimination of those programs and program objectives that can now be met by private sector sources. Many Federal credit programs have provided important benefits to our economy by either demonstrating the commercial viability of a certain type of loan or enterprise, or by providing credit for important segments of our economy when financial and economic stress immobilized the private financial system. But as times change, the initial justification for establishing the program may no longer exist.

In conclusion, the chamber believes that the reforms included in S. 1679, the establishment of a formal credit budget and the three additional proposals discussed in our statement would make an important contribution to limiting the growth in Federal credit programs.

We urge this committee to carefully consider these proposals and recommend that Congress enact the appropriate legislation to put them in place.

[The complete statement follows:]

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