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In addition to addressing the need to bring all spending

into the unified budget, the Honest Budgeting Act remedies a that have plagued federal credit

number of other


activities in the past. attempted to bring the same discipline to its credit procedures as it has imposed on other spending activities. One way this has been achieved is through the creation of a credit budget now included in congressional budget resolutions. Generally, the credit levels were provided merely as recommendations and were nonbinding. However, as the importance of these programs became more apparent and the ability to effectively calculate the costs associated with credit activities improved, strong consideration was given to make the limits binding.

In the last few years, Congress has


NAM believes that establishing binding credit levels is an important step towards the development of a responsible fiscal spending plan. Currently, the recommended credit levels being circumvented by agency accounting practices. The Honest Budgeting Act would amend these practices, thus providing more effective enforcement of specified credit limits and making each agency more accountable for its credit Currently, when a federal agency provides a direct loan to an individual or business, the transaction is credited against the amount allocated in the agency's budget and in the budget


resolution for that purpose.

However, a change in the

accounting procedure occurs when the agency sells the direct loan to the Federal Financing Bank. As explained in the Senate

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without transfer of the loan). This transaction is treated as an off-setting collection, reducing the on-budget outlays of the lending agency and increasing the off-budget outlays of the FFB." For example, if an agency has a $3 billion lending limit, it could make a $3 billion direct loan to an individual. If it then sells the $3 billion loan to the FFB, the final result is no reduction in the agency's outlays at the end of the transaction. The agency can then create another direct loan for $3 billion without exceeding its credit limit contained in the budget resolution.

S.1679 remedies this problem by requiring agencies to subtract these sales of direct loans or loan guarantees to the Federal Financing Bank from their outlays. Each FFB transaction would be treated as a "means of financing" and would be recorded in full in an agency's outlays. The result would be the discontinuation of the underreporting of credit activity by agencies accompanied by a more accurate accounting of the level of federal participation in the credit markets.

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It would also force all credit

against an agency's

transactions to be counted

credit limit established in a budget

resolution in contrast to the current procedure of accounting

only for those that remain on-budget.

Another problem which is at least addressed by the Honest Budgeting Act is the current ability of an agency to transform a federal loan guarantee into an off-budget direct loan. Many times, through current accounting procedures, congressionally mandated loan guarantees actually become federal direct loans. If an agency sells a loan it has guaranteed to the FFB, the FFB then provides the direct loan. The net result is the federal loan guarantee is transformed into an off-budget direct loan. NAM believes this practice counteracts the congressional intent of many loan guarantee programs and should be rectified. While S.1679 does not deny an agency the ability to transfer a guarantee into a direct loan, it does require agencies selling loan guarantees to the FFB to request an equivalent level of budget authority and charge the loan outlay to the agency's account. This should also enhance the ability of Congress to better calculate federal levels of loan activity and more effectively monitor agency lending levels.

As you consider this legislation further, we also believe you should examine current credit practices to determine if Congress is providing unintentional loan subsidies. Again, as stated in the Senate Report accompanying the FY 1982 first

budget resolution, "Federal direct loans, loan guarantees, and preferential interest rates or tax treatment afforded those loans are presumably intended to allocate credit in a manner different from that which would result without Federal influence. It must, therefore, be true that borrowers receiving guaranteed ΟΙ direct loans receive terms more favorable than they would receive in private capital markets." If, as stated, a federal loan guarantee or direct loan includes a subsidy that would not be available without federal backing, then a federal loan guarantee that is transformed into a direct loan through the FFB may be receiving a double subsidy. should be questioned whether this was the original intent of the drafters of the Federal Financing Bank Act. By requiring each credit transaction to be counted against an agency's allocation, it may be easier for Congress to determine if it is providing more of a subsidy to a borrower than was originally intended.


Finally, I would like to address the provision of the bill designated as the "no escape" clause. NAM agrees with Senator Trible that it is essential that all activities financed through the FFB between October 1, 1981 and September 30, 1984 continue to be financed through the FFB following adoption of the Honest Budgeting Act. This would prevent agencies from going outside the FFB to sell their securities in the open markets, thereby circumventing the budget control provided for

by the bill. It also maintains and reemphasizes the importance of the FFB as an efficient and effective financing tool. Congress should however consider the advisability of including the September 30, 1984 effective date in the "no escape" clause. This could significantly reduce future congressional efforts to control federal credit activities by excluding credit programs created after this date.

As mentioned by Elmer B. Staats in his testimony on behalf of the Committee for Economic Development,

NAM was also

requested by Senator Domenici to provide recommendations regarding the federal budget process.


Monetary Policy Committee created working task



Fiscal and forces which


developed a detailed list of recommendations in the areas of multi-year impoundments and federal credit activities. I have attached a copy of the full report for your information and hope that our recommendations may be considered along with this legislation or as a part of other legislation that would strengthen and further define federal credit procedures.

Again, I appreciate this opportunity to present our views to this Committee. NAM supports your efforts and we look forward to working closely with you in the near future on these important issues.

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