Administration are zero in the unified budget. 1/ The lending activity is recorded as budget authority and outlays of "off-budget 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 (see Table 2). 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.

1.

Sales of loan assets other than certificates of beneficial ownership to the public by federal agencies convey ownership and servicing responsibility to the purchaser. When a certificate is sold to the FFB, however, the originating agency retains risk of default and servicing. The case can be made that the certificate transaction is borrowing rather than an asset sale.

TABLE 2.

COMPOSITION

OF

OUTLAYS FOR LOAN PROGRAMS FINANCED BY THE FFB, FISCAL YEAR 1982 (In billions of

SOURCE:

a/

Budget of the United States Government, Fiscal Year 1984,
Special Analyses.

The authorization for the REA excludes it from the budget. It is in every other respect comparable to on-budget lending programs.

FFB Conversion of Guaranteed Loans to Direct Loans

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.

Purchases of Agency Debt

The final form of financial transaction engaged in by the FFB is its purchase of agency debt, such as notes issued by the Tennessee Valley Authority. When an agency sells notes to the FFB, it obtains favorable interest rates. The outlays that the agency makes are recorded in the agency's budget (not the FFB's), and the full impact on government borrowing needs is recorded in the unified budget. Since this activity of the FFB performs a useful service and causes no budget distortions, it should be allowed to continue even if reforms are undertaken to correct the accounting of other FFB activities.

WHY THE BUDGET DEFICIT UNDERSTATES
TOTAL FEDERAL BORROWING

The unified budget deficit--the difference between revenues and on-budget outlays--is featured in the President's budget, the Congressional budget resolutions, and most discussions of fiscal policy. But the total borrowing requirements of the federal government, which determine the government's impact on financial markets, also include off-budget outlays. Moreover, the debt ceiling has to be raised to cover financing requirements that result from off-budget as well as on-budget deficits. Unnecessary confusion is added to the budget debate by the fact that the unified deficit understates the government's financing requirements.

Most of the off-budget deficit is accounted for by the transactions of the FFB. (The off-budget deficit also includes the net outlays of the U.S. Postal Service, the Rural Telephone Bank, and the Strategic Petroleum Reserve.) Table 3 shows the extent to which the off-budget accounts understated the total deficit from 1974 to 1983. Because of the FFB, the unified budget deficit understated total deficit spending by nearly one-third in 1979. Since that year, the unified budget deficit has grown so rapidly that it has outpaced the off-budget deficit.

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