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turn, this evaluative process could lead to program reforms, as well as the elimination of duplicative programs and those that have outlived their usefulness.

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

Establish Criteria for Granting Federal Credit Support

In order to evaluate effectively the extensive collection of federal credit programs, it is imperative that Congress have a clear and concise criteria to apply to each program when considering whether the program should be continued as is, reformed, reduced or eliminated. Given the different basic forms of credit support that are offered and the many different reasons why programs have been established, such a criteria would be a valuable tool for reforming the credit programs and establishing better control over their growth.

As a starting point, I would observe that credit programs have been established for three basic reasons:


(a) To overcome imperfections in credit markets.
imperfections include inadequate private credit
facilities and/or an overestimation of loan risk by
private lenders.



To overcome a divergence between an investment's private
and social returns. In some cases, a project may have
important benefits to society while yielding only modest
returns to a private investor.

To compensate for the inadequate incomes of potential
loan recipients. Individuals or communities with low to
moderate incomes may be denied access to needed credit
because of an inability to carry the debt service
charges at market interest rates.

In the case of (a), loan guarantees or direct loans at market interest rates would be the appropriate form of federal credit assistance. In the case of (b) and (c), some form of interest rate subsidy may be offered in conjunction with either a direct loan or loan guarantee.

The categorization of programs by the above criteria or some similar set of objectives would be a useful starting point for evaluating the government's diverse credit activities. Once this is done, programs within categories could be more easily compared and subsidies better evaluated.

Limit the Interest Rate Subsidies Available on Direct Loan Programs

A review of Tables F-14a and F-14b of Special Analysis F of the budget. indicates that the interest rate subsidies on some programs are quite deep and that the dollar costs of these subsidies are expensive in terms of present and future budget outlays. In the case of many of these programs, the interest rates were set by statute at a time when market interest rates were much lower. As market interest rates increased over time, programs that once received modest subsidies now receive deep ones. As a consequence, the demands for these loans increased sharply as more and more individuals attempt to take advantage of the generous federal subsidies. The rapid growth in the student loan program during the late 1970s and early 1980s is an example of this. As long as interest rates on federal loans are below market rates, these credit programs will remain popular and constituent pressure will make it difficult to limit their growth, regardless of how they are treated in the budget.

The establishment of a minimum federal lending rate might be a solution to this problem. Further, this Committee might also consider altering the so-called "unsubsidized" rates on direct loans funded by the FFB by lending at a rate comparable to what private borrowers pay rather than what the federal government pays. While the government does make a profit on these loans, the loan recipients often receive a loan at a rate below comparable market interest rates.

Re form or Limit Programs When there are Adequate Sources
of Funds from Private Sector Lenders

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 at a time when financial and economic stress immobilized the private financial system. But as times change, the initial justification for

establishing the program may no longer be valid. When private sector sources are available to meet the needs of current program recipients, consideration should be given to modifying, reducing or eliminating those federal credit programs that compete directly with private sector lenders.

Relevance of Proposals to an Existing Federal Credit Program

Having listed and discussed these proposals, a useful exercise in evaluating their appropriateness would be to relate them to an existing credit program that relies heavily on the FFB for funds. For purposes of this exercise, the Rural Electrification Administration (REA) is selected, largely because it was recently evaluated by the Office of the Inspector General, U.S. Department of Agriculture, and because nearly 20 percent of the total FFB new lending in FY 1982 went to fund REA activity, according to a CBO study on federal credit.

The original purpose of the REA was to provide the necessary capital to extend electric service to rural areas that had not been electrified by the private utility industry. The REA Act authorizes loans for the purpose of financing the construction and operation of generating, transmission, and distribution systems for furnishing electric energy to persons in rural areas. The Inspector General's Audit Report focuses on REA's operation of the revolving fund, policies and procedures for making and disbursing insured loans to cooperatives, and the cooperatives' use of such loan funds. The report discovered that the financial condition of the revolving fund is deteriorating rapidly, due to the growing disparity between incomes and expenses. It will eventually require congressional appropriations unless interest rates can be increased and loan criteria changed.

The problems uncovered by the Audit Report on REA, which relate to the general problems of federal credit discussed in our statement and to the recommended reforms, are as follows:

1. Because REA is required by law to limit interest rates to
5 percent on loans made from the revolving fund, and because
the cost of government borrowing over the past ten years has
significantly exceeded those rates, REA has begun selling the
fund's assets to finance the program. By 1985, REA's
interest expense will exceed interest income. Unless

interest rates charged to borrowers are increased to reflect
the cost of government borrowing, REA will have to seek
Congressional appropriations to subsidize the fund. This
subsidy would be in addition to the $307 million a year in
subsidies presently obtained by the REA by interest-free
notes to the U.S. Treasury.

2. REA has interpreted the Rural Electrification Act and
Congressional directives to allow loans to be made to
cooperatives regardless of their financial strength or the
urban/rural characteristics of their service areas.
Consequently, REA continues to provide loans to borrowers
whose service areas are no longer rural, as defined in the
Act, and to borrowers who are financially sound and could
obtain credit from other sources.

3. The Audit Report and a prior General Accounting Office
(GAO) report conclude that many cooperatives could obtain
outside financing at higher interest rates without a
significant adverse effect to rural electric users. The
Report selected 50 cooperatives which appeared to be
financially sound to determine if their financial positions
were similar to those of neighboring investor-owned or
municipal systems. It found that 44 of the cooperatives were
in a stronger financial position than neighboring
investor-owned or municipal utilities providing similar
services. The report then analyzed what effect higher
interest costs would have on 37 of the 50 cooperatives.
The results of the analysis showed that the increased costs
associated with the higher U.S. Treasury rate did not have a
significant impact on the retail electric rates of
distribution cooperatives. According to the analysis, 17 of
the 37 cooperatives had lower retail electric rates than the
comparable investor-owned utilities, both before and after
adjustment for the higher costs. Furthermore, of the 12
cooperatives whose rates were higher, but within 10 percent
of the neighboring utilities before adjustment, 11 remained
in that category.

4. The Report's judgment sample of 38 cooperatives located
within 50 miles of a large urban center disclosed 34 whose
service areas were no longer entirely rural. A review of 9

of the 34 revealed that they were primarily serving the
suburban residents of major metropolitan areas.

Thus, as the government's own study indicates, there is reason to

believe that many of these credit programs are no longer serving their

original purpose, and that they are providing assistance and subsidies to entities that are capable of obtaining their credit resources from the private sector at market interest rates.


The U.S. Chamber believes that S. 1679 and the other proposals set forth in this statement would make an important contribution to limiting the growth in federal credit programs and restoring a better balance between the private and public sectors. We urge this Committee to consider carefully these reforms, and we recommend that Congress enact the appropriate legislation to put them in place.

Senator TRIBLE. Dr. Utt, I thank you very much for your statement. It's a good one. You have put forward a number of issues that ought to be pursued by the Congress. And I am pleased that you have decided that this, too, is an important step which will move us toward a responsible budget process to better decisions, hopefully, and I'm hopeful these steps can be taken and we can focus our attention on some of the other ideas you have advanced. I thank you for being with us.

Dr. UTT. Thank you.

Senator TRIBLE. I do not have questions to propound to you at this time. Your statement was thorough and comprehensive, and I thank you very much.

Dr. ÚTT. Thank you, Senator, for giving us an opportunity to be



Senator TRIBLE. Mr. Staats, it's good to welcome you back to this committee. Our experience has been on the House side. I am glad that we could both be here today. I am pleased that your testimony today is as chairman of the subcommittee on budget concepts and processes of the Committee for Economic Development. I know that you have been a student of the budget process and have long advocated the need to strengthen that process so we can make more informed decisions in government.

Your testimony is most welcome.

Mr. STAATS. Thank you very much, Mr. Chairman. I am delighted to be back here. I have appeared before this committee many, many times. I have enjoyed our relationship very much, indeed.

I have a brief statement, Mr. Chairman, which I would like to read. I believe it can be done in about 10 minutes.

Senator TRIBLE. Please. Take as much time as you wish today. Mr. STAATS. I might just add that part of the purpose here is to make visible these agencies-the extent of which the subsidy is involved in the credit programs. That is not done today. We have to go back and examine the basis for the legislation to know whether it's 6 percent, or 3 percent, or current market rate, or whatever the law may provide.

While these proposals are not of direct relevance to the legislation which you have before you today, I hope they will receive careful consideration by your committee in the future.

We see all of this as being related to the whole subject of attention to Federal credit. We thought it would be useful to outline all of the parts of our report which dealt with credit activities.

Senator TRIBLE. Mr. Staats, I thank you for that very thoughtful presentation. I would request that the studies to which you have referred be made a part of the record at this point, so we will have the full benefit of the studies of CED.

[The complete statement and studies follow:]

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