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Could you submit specific legislative language to close that potential loophole?
Mr. WRIGHT. Yes, sir. I would be more than happy to. [Information not received in time for publication.]
Senator PROXMIRE. Thank you.
Senator TRIBLE. Let me just add, if I might, at this point, that our purpose is to retain the activities now undertaken by the Federal Financing Bank, and not permit agencies to end-run that function. At the same time, precise language is difficult. Wording could well involve picking up activities that are now financed by the private sector. I am not sure that is our objective here, but we want to maintain the discipline of the Federal Financing Bank. We want to make sure those activities are fully reported.
Mr. WRIGHT. Mr. Chairman, I totally agree with you. I think we, as you, have been concerned about picking up inappropriate activities. For example, we have partial guarantees, or activities that are handled most efficiently by the private sector right now. As I said, we are sensitive to that concern, and would be more than happy to work with you on the language.
Senator TRIBLE. Senator Gorton.
Senator TRIBLE. Well, I have a number of questions, Mr. Wright. But their purpose really is to bring out in your testimony today the points you made very persuasively and eloquently in your prepared statement. Since that's part of the record, I will not detain you further, but thank you for being here this morning.
Mr. WRIGHT. Thank you very much, Mr. Chairman.
Senator TRIBLE. Mr. Penner, Rudolf Penner, Director of the Congressional Budget Office.
Director Penner, welcome. To my knowledge, this is the first time you have appeared before the Senate Banking Committee. Whether this is your first or second appearance, you are more than welcome, and we wish you well in your new responsibilities.
STATEMENT OF RUDOLF G. PENNER, DIRECTOR,
CONGRESSIONAL BUDGET OFFICE
Mr. PENNER. Thank you very much, Mr. Chairman. It is, indeed, my first time before this or any Senate committee as CBO Director. I am very pleased to appear before this committee to discuss S. 1679, the Honest Budgeting Act of 1983. I strongly support the objectives of this bill.
The current budgetary treatment of the Federal Financing Bank has created two problems not foreseen at the bank's inception: the transfer of on-budget outlays off-budget as a result of the FFB's purchase of loan assets from on-budget agencies, and the conversion of loan guarantees into off-budget direct Government loans. This potentially causes confusion about fiscal policy and may distort the allocation of resources among programs.
The Congressional Budget Office believes that the budgetary treatment of the FFB should be revised to conform more closely to the original intent of the Congress. This could be accomplished by
modifying the budgetary treatment either of programs financed by the FFB-that is, statute by statute-or of the FFB itself. The Honest Budgeting Act of 1983 introduced by Senator Trible takes the latter approach-it amends the budget treatment of the Federal Financing Bank itself.
My statement this morning will reiterate some of the background material presented to this committee by Dr. Rivlin in the spring. I will also discuss how improving the budget treatment of the FFB relates to the broader concerns of the control of Federal credit activities.
BUDGETARY TREATMENT OF FFB FINANCING
The Federal Financing Bank was intended to be a neutral financial intermediary, lowering the agencies' interest costs but not otherwise affecting the Federal budget. The FFB authorization provided that the bank's activities should not affect the budgetary status of agencies selling obligations to the bank and further provided that the receipts and disbursements of the bank should not be included in the unified budget.
The on-budget activity levels of agencies were not expected to be affected by the establishment of the FFB. In fact, however, the budget treatment of loan asset sales and direct loans to guaranteed borrowers financed by the FFB has affected the unified budget. Under current practices, FFB operations contribute to a situation in which the unified budget deficit understates Federal borrowing requirements, and otherwise identical loans appear to have different budgetary costs.
Special provisions of the law require that sales of certificates of beneficial ownership by the Farmers Home Administration and the Rural Electrification Administration be treated as sales of assets rather than as borrowings by these agencies. The significance of these provisions is that asset sales are treated as negative outlays in the originating agency's budget accounts.
Thus, when the Farmers Home Administration makes $1 million in loans and uses them as collateral for selling $1 million in certificates of beneficial ownership to the FFB, the net outlays for the Farmers Home Administration are zero in the unified budget. The lending activity is recorded as budget authority and outlays of offbudget Federal entities.
In 1982, the sale of certificates of beneficial ownership to the FFB by the Farmers Home Administration reduced on-budget outlays by 70 percent for rural housing, 44 percent for agricultural credit, and 73 percent for rural development.
Similarly, the off-budget Rural Electric and Telephone Revolving Fund shifted all of its direct loans to the FFB, understating its lending by $500 million for 1982.
The budgetary treatment of loan asset sales introduces inconsistency into the budget's consideration for different lending programs. The Farmers Home Administration budget, the agriculture appropriation bill, and related budget functions are all understated in the unified budget. This understatement potentially affects the funding level for these programs.
In my view, almost all federally guaranteed loans should require private participation, either through shared risk or services to the borrower. In the absence of this partnership, guaranteed loans are virtually the same as direct Federal loans. When financed by the FFB, guaranteed loans are converted to direct loans, both guaranteed and financed by the Treasury.
The FFB is authorized to lend directly to borrowers whose loan notes carry a full guarantee of repayment by a Federal agency. The agencies make guarantee commitments to qualified borrowers and then arrange the sale of guaranteed notes to the FFB. The FFB disburses funds raised through the Treasury to the borrowers, thus converting loan guarantees authorized by the Congress into direct loans. The conversion of loan guarantees into direct loans bypasses the constraints established by the Congressional Budget Act of 1974. The Budget Act specifically excludes guaranteed loans from the definition of budget authority. Direct loans, in contrast, require budget authority and are included in the targets and ceilings enacted in the budget resolutions.
When guaranteed loans are converted to direct loans, agencies increase their direct lending without having to request additional budget authority. The largest programs are the Rural Electric and Telephone Revolving Fund, which effectively increased its direct loans from the $1.1 billion authorized to $5.8 billion extended in 1982, and the foreign military sales credit program, which increased its direct loans from $0.4 billion to $3.5 billion in 1982. These direct loans are accounted for in the off-budget FFB, not in the on-budget agency of origination.
To the extent that financing by the FFB enables agencies to lend more money, it affects the allocation of Federal resources. It also increases direct Federal borrowing requirements and the gap between the unified budget deficit and total Federal borrowing.
HONEST BUDGETING ACT OF 1983
Senator Trible has introduced legislation to correct the problems presented by the budgetary treatment of the FFB by amending the Federal Financing Bank Act. The Honest Budgeting Act of 1983 would require the transactions of the FFB to be reflected in the unified budget. The Federal budget would, therefore, more accurately reflect the fiscal operations of the Federal Government. The bill would require the transactions of the FFB to be recorded in the originating agencies' budgets, thereby insuring that all agency transactions would be taken into consideration as budget resources were allocated. Budget authority would have to be appropriated for any agency-guaranteed loan that was financed by the FFB.
In order to insure that agencies could not bypass the FFB and return to the securities market, the Honest Budgeting Act would require that all activities financed through the bank prior to the effective date would remain in the bank thereafter. Thus, when the new accounting provisions took effect, these activities would be fully and correctly recorded in the budget.
We understand that the intent of the bill is to freeze current practice with respect to programs now financed through the FFB and to correct their budget treatment. Thus, all guarantees cur
rently financed as direct loans by the FFB would continue to be financed by the FFB but would be correctly recorded as direct loans. Additional guarantee programs could be financed by the FFB if they were appropriately recorded as direct loans of the originating agencies. Assuming this interpretation is correct, I believe that this is the right approach.
As noted previously, I would prefer to see most guaranteed loans have significant private sector involvement, and as a result, they would not qualify for FFB financing.
Had the Honest Budgeting Act been in place for fiscal year 1982, total unified budget outlays would have increased by $14 billion, or 2 percent. Federal borrowing requirements would have been unchanged. Two budget functions would have been greatly increased: the energy function by 111 percent and the commerce and housing function by 74 percent. The budgets of individual agencies would have been increased even more dramatically. Farmers Home Administration outlays would have increased from $3 billion to $8 billion. Outlays for the military sales program would have increased by 460 percent.
To the individual agencies and borrowers that have benefited from the present budgetary treatment of the FFB, the Honest Budgeting Act no doubt presents some concerns. The budget authority and outlays they have previously shifted to the FFB would henceforth be shown in their budgets.
But the effects should not be overstated.
First, the standard budget convention is to adjust all historical data to reflect subsequent changes in budget structure. There would be no jump in year-to-year agency budget authority and outlays upon implementation of the Honest Budgeting Act.
Second, the program levels of almost all of the large credit programs financed through the FFB are clearly controlled through the appropriations process. As part of the credit budget, the Appropriations Committees have set limits on new direct loan obligations and loan guarantee commitments for all but three of the programs financed through the FFB.
Correcting the budgetary treatment of the FFB will improve the unified budget. It will make the unified budget more comprehensive and improve accountability by recording transactions in their appropriate places. The unified budget will become a better measure of the cash flow of the Federal Government, and of Federal borrowing requirements. Improving the unified budget treatment of lending is, however, only a partial solution to the budget treatment of credit programs.
The unified budget is an inadequate device to control Federal credit activities in several respects; first, it understates program levels; second, it overstates the long-term costs of credit programs, since most loans will ultimately be repaid; and, finally, it does not present clearly the long-run costs arising from subsidies and loan defaults.
The unified budget understates program levels for direct loans by counting only net lending; that is, new loans less repayments. The costs of guaranteed loans are recorded in the budget only when borrowers default. To some extent, this shortcoming is addressed in the credit budget which, the Budget Committees have implemented
on an experimental basis by establishing nonbinding limits on new direct loan obligations and loan guarantee commitments. The credit budget will still be necessary even after the FFB is reformed. I believe that credit budget procedures should be fully incorporated into the Congressional Budget Act.
Neither the unified budget nor the credit budget, however, accurately describes the relative cost to the taxpayer of spending, lending, and guarantees. Direct Federal spending for purchases, grants, or income transfers has a different cost from direct loans of Federal funds, most of which will be repaid, and from Federal guarantees of private transactions, which are contingent costs to taxpayers. A dollar of income transfers is not equal to a dollar of direct loans or a dollar of guaranteed private borrowing in the amount of income generated or in long-term Federal financing requirements. Since these are important cost criteria for deciding how best to deliver a Government service, the absence of a common metric for these different programs can, and probably has, distorted choice. CBO has a study in progress on the relationship between spending and lending.
In closing, I see three changes needed to improve the budget treatment of credit programs: recording agency activities financed by the FFB in the originating agencies' budgets, implementation of a congressional credit budget, and further study of the relationship between spending and lending programs.
We look forward to working with you on these issues. [The complete statement follows:]