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VOICE. We haven't.

Mr. PENNER. We will get back to you, Senator, to give you a deadline.

[The report is tentatively scheduled for completion by March 1984.]

Senator PROXMIRE. Is it possible it will be by the time we adjourn in September of 1984?

Mr. PENNER. By September 1984?

Senator PROXMIRE. Yes, sir.

Mr. PENNER. I would think so, sir, yes, sir.

Senator PROXMIRE. Thank you.

Senator TRIBLE. I wonder if you would yield some of your time. I want to follow up a point that Senator Proxmire made.

Senator PROXMIRE. Certainly.

Senator TRIBLE. The point about running all loan guarantees through the FFB.

In your testimony, Dr. Penner, you state:

We understand 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 currently financed as direct loans by the FFB would continue to be financed by the FFB but would be 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.

That statement is consistent with my own thinking. What concerns me here is that if we reach down in the market and we take loan guarantees and we run them through the Federal Financing Bank, we are turning them into Federal loans. I am not sure that is what we want to bring about.

Mr. PENNER. I think what you're getting at, Senator, is that there is quite a difference between 100-percent guaranteed loan, which really has the full faith and credit of the U.S. Government; and a partial guarantee, where the private lender would want to do some underwriting on his own and make his own assessment of the risk. With a 100-percent guaranteed loan, there is really very little concern on the part of the private lender as to making a proper assessment of the risk, and that is left to the issuing agencies to do all of the underwriting.

Senator TRIBLE. Senator Gorton?

Senator GORTON. No questions.
Senator TRIBLE. Senator Hecht.

Senator HECHT. Nothing.

Senator TRIBLE. Dr. Penner, we thank you for being with us today, and we look forward to working with you for some time, all of us.

Mr. PENNER. I look forward to it, also, Mr. Chairman.

Senator TRIBLE. Senator Domenici?

[Response to written questions from the committee follows:]




You have strongly supported the concept of a comprehensive unified budget. My bill moves us far in that direction. What is lost--by the public, fiscal policy, and the budget process--if the unified budget is not comprehensive?

The unified budget is the focal point of budget deliberations, assessments of fiscal policy, and public discussions of the budget. An incomplete statement of the scope and cost of government activity in the unified budget adds complexity and creates confusion. Budget deliberations must consider both on- and off-budget numbers. Assessments of fiscal policy must add off-budget activity to on-budget activity in order to consider the full impact of government spending on the economy. Public debate of the budget is made more complex, and public confidence in the ability of the Congress to control the process is weakened.

Compare the budget review process for an on-budget direct loan program, an off-budget FFB-financed direct loan program (such as one financed by a CBO sale), and a loan guarantee program which results in a direct FFB loan off-budget. Are they all subject to the same budget review and scrutiny?

I will first describe a typical on-budget direct loan, an FFBfinanced direct loan, and a guarantee that results in FFB direct loans, and will then review the distinctions in the budget review process for the three types of transactions. Examples of budget transactions are as follows:

The Export-Import Bank makes direct loans to foreign purchasers of U.S. exports. Direct loan disbursements less any repayments from prior-year loans are recorded as budget authority and outlays of the Export-Import Bank within the unified budget--an on-budget direct loan.

The Farmers Home Administration (FmHA) makes direct loans to individual farmers to support their farm operations or ownership. Once the loans have been extended, FmHA consolidates a number of individual loans as collateral for a certificate of beneficial ownership (CBO) and sells the CBO to the FFB. The FmHA continues to service the individual loans. The FmHA disbursements have both repayments from prior loans and the

proceeds of the sale of the CBO to the FFB netted in calculating budget authority and outlays for the FmHA accounts. The FFB records off-budget budget authority and outlays for the funds disbursed to purchase the CBO from FmHA. The net effect of this transaction is that FmHA budget authority and outlays are shifted off budget to the FFB.

The Department of Defense issues guarantees to foreign purchasers of U.S. defense materials and supplies. These guaranteed securities are then sold to the FFB, which disburses the funds to the U.S. producers for the foreign country. Off-budget budget authority and outlays are recorded in the FFB's books for its disbursement. In a guaranteed loan financed by private lenders, no budget authority or outlays would have been recorded unless the borrower defaulted on the loan.

The budget review of these transactions differs from that of comparable activities not funded through the FFB primarily in that the FFB budget authority and outlays are not included in either the budget resolutions or appropriations bills. Program limits on new direct loan obligations and new loan guarantee commitments for most activities financed by the FFB are included in appropriations bills. Budget authority and outlays for the affected budget functions are understated in the budget resolutions and in the totals of the individual appropriations bills. These omissions make the enforcement provisions of the budget process not applicable to these activities.



Does S. 1679 cut any federal program--TVA, REA, FmHA, FMS?

S. 1679 has no impact on actual program levels for any program. It corrects their budget accounting to show budget authority and outlays with the originating agency, rather than the FFB.

S. 1679 makes the judgement that those programs which have been financed through the FFB in the past (as direct loans) should continue to be financed there. But it does not require any other program-present or future--to be financed there. In particular, it allows guarantee programs which have been financed in the private market, as well as any future guarantee program, to be financed in the market. Do you think that is appropriate?

In guarantee programs financed by the FFB, the federal government both guarantees and finances the loan. There is no private

involvement. Such guarantees should be recorded as direct loans consistent with accepted budget concepts.

Programs affected are:

Foreign military sales credit guarantees;
REA guarantees;

TVA Seven States Energy Corporation guarantees;
NASA satellite leases; and

SBA guaranteed loans to Small Business Investment
Corporations and state and local development companies.

There are two distinctions between guarantee programs that have been financed in private markets (and potentially new programs) and those financed by the FFB: the source of funds and the extent of lender participation in the loan. The source of funds is either Treasury or private lenders. Treasury financing represents government funds that could be raised either through taxes or through borrowing. Treasury borrowing is almost equivalent to the sale of government-guaranteed securities in investment securities markets. To a large extent, investors view Treasury debt and governmentguaranteed securities as comparable investments. Guaranteed securities do trade at slightly higher rates, however.

The second distinction is the extent of lender participation in the loan. The FFB, as a result of Treasury policy, functions only as a source of funds. It accepts no risk and in no way scrutinizes the loans it finances or provides services to the borrowers. Guarantees financed in private markets involve varying amounts of lender participation from shared risk in the SBA business loan programs to services to borrowers or sophisticated analyses of the costs of loans.

The extent to which guaranteed loans not financed by the FFB are comparable to FFB direct loans is difficult to determine, both in terms of investor response to securities and lender participation. I believe that the appropriate policy should be to increase the distinction between FFB-financed guarantees and transactions in investment securities markets. More lender participation should be required in guaranteed loans. I do not believe that the FFB portfolio should be significantly expanded. In sum, I believe the focus of S. 1679 on loans currently financed by the FFB is appropriate.


Among other things, S. 1679 says that those loan guarantee programs which have resulted in direct federal loans from the U.S. Treasury are not loan guarantees, but rather are direct loans, and should be accorded the same budget treatment as on-budget direct loan programs. Would you agree with that? Shouldn't we call a spade a spade, and treat all spades alike?

Yes, loan guarantees guaranteed by the government and financed by the FFB are converted to FFB-financed direct loans. They should receive the same budget treatment as other direct loan programs.

Guaranteed loans were excluded from the Budget Act definition of budget authority, because the guarantee is a contingent liability of the government--involving government expenditure only in case of default. No federal funds are involved. Loan guarantees financed by private institutions and guaranteed by the government should not be treated as direct loans.



Some would argue that federal loan programs--such as the ones brought into the unified budget by this bill--should not be in the unified budget, as a matter of budget principle. How would you respond to this?

The unified budget was designed to reflect the cash flow of the federal government. An accurate picture of the receipts and disbursements for any given year must include outlays for direct loans, even though they will eventually be repaid. The argument that outlays for loans are overstated in the budget in the year they are made because repayments of principal and interest do not affect cash flow until future years does not adequately consider the cash nature of the budget.

While it is true that the budget overstates the cost of loan programs because of repayments, it does not clearly present the true costs of the loans that arise from the subsidy and default costs of new loans extended. These costs occur over the life of the loans, but are incurred at the time the loans are obligated. Better analysis of these costs is needed, and the budget documents should be revised to better present these costs.

Following up, some have suggested that loan programs should not be included in the unified budget because that would make them appear more expensive than they really are. Isn't that really an argument for providing supplementary information on the true cost of such

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