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programs, rather than excluding them from the unified budget-which would make them appear to have zero cost?
The argument that direct loans are overstated in the unified budget because outlays occur in the budget year and repayments in the outyears does nothing to change the need for an accurate reflection of the cash flow of the government. Loan programs must be included in the unified budget so that all outlays can be totaled in one place. Additional analysis and cost information would further clarify the outlays necessary to continue these programs. Excluding them from the unified budget would distort the reflection.
What rationale can there be for including some loan programs in the unified budget, but not others?
There is no acceptable rationale for excluding any direct loans, including loan guarantees converted to FFB-financed direct loans, from the unified budget. Guarantees of loans made by private lending institutions should not be included until such time as the government must repay lenders for defaults.
As a practical matter, isn't the argument that the unified budget "discriminates against" direct loan programs (by making them seem too expensive) weakened substantially by the fact that many loan programs are on a revolving fund basis--and only their net outlays would be recorded in the unified budget anyway? (Even with S. 1679)
The unified budget includes new direct loans net of repayments on existing loans. The credit budget records the volume of new loans. With the correct cash flow recorded in the unified budget, and the correct program levels recorded in the credit budget, present value analysis is required to discern the remaining costs--that is, the value of interest subsidies--of this type of federal assistance.
I'd like to pick up on several of your observations. On page
When off-budget outlays are factored into the picture, the federal commitment in just a few budget functions jumps. And the same is true by agency--just a few agencies' budget are revealed to be much larger than they seem to be.
In view of the story told by those charts, isn't there a very substantial likelihood that the budget process, which relies on incorrect information today, is being badly skewed? Isn't it very likely that Congress --if it had the information provided by the accounting provisions in my bill--would allocate its resources very differently? Isn't it probable that we are making suboptimal budget choices by having this incomplete information today?
The allocation among budget functions will clearly change once the off-budget outlays are shown in the originating accounts, as will the allocation among agencies. It is not clear, however, that the corrections in budget numbers will lead to real changes in priorities.
Program levels for most programs financed by the FFB are currently set in appropriations. The Congress has, therefore, considered the funding levels for these activities. Standard budget practice will require historical data to be revised to new practice. The FFB will be shown on-budget for the budget year, current year, and prior year, and there will be no major jumps in funding levels that appear as a result of the change.
When the fact that the functions most affected (Energy, Commerce and Housing) are relatively small functions is considered in conjunction with historical Congressional support for these activities and the budgeting conventions that will apply to the change, I would not foresee a significant impact of this change on the allocation of federal resources.
Yes it does. Loan guarantees do not require budget authority but direct loans do. FFB direct loans are financed by permanent indefinite borrowing authority. This budget authority is not appropriated--in short, it is uncontrollable, given current practice.
In this regard, isn't S. 1679 preferable in requiring that if a direct loan is made by the FFB on the strength of an agency's guarantee, that direct loan is scored as such on the agency's budget, and cannot exceed the amount of budget authority provided for the purpose?
The requirement in S. 1679 that FFB direct loans be shown in the originating agencies' accounts and not exceed budget authority provided will put these programs on the same footing as all other direct loans. Budget concepts will be neutral, making policy choices clearer.
I'd also like to underscore one other point in your testimony. Opponents of this bill worry that when their off-budget activity is brought on-budget, there will be a sharp jump in budget authority and outlays, which may prompt excessive budget cutting. Yet, on page you note that this really will not happen because, at the same time the off-budget activity is brought on-budget, the prior year's data will also be shifted to the same basis. Thus, there should not be discontinuous upward jumps in Budget Authority and outlays "before" and "after" the proposed accounting changes.
That is true. Normal budget procedures require changes in budget structure to be reflected historically to ensure that budget data are comparable over time.
BUDGET PRESENTATION BEFORE AND AFTER S. 1679
9) Finally, I'd like to make one other point. You mention that had the Honest Budgeting Act been in effect in fiscal year 1982, federal outlays would have been 2 percent higher. In absolute dollar terms, however, the increase would have been substantial--$14 billion. In fact, almost $100 billion in federal spending has been hidden over the past decade by such "small" understatements produced by bad accounting.
STATEMENT OF PETE DOMENICI, U.S. SENATOR FROM THE STATE
Senator DOMENICI. Thank you very much, Mr. Chairman.
Senator DOMENICI. Senator, first I want to thank you for inviting me, and also congratulate you and the committee for treating this matter at this time.
Obviously, this is the kind of thing that one has a tendency to let slip, as we have many others, and not concern ourselves with it. But clearly, it should be of great concern, and you are assigning that kind of quality to it.
I want to apologize for being late this morning. I am sure you had some excellent witnesses. I was supposed to be here promptly at 10 a.m., but frankly, I was trying to model myself after Senator Proxmire, and trying to get in shape.
Senator PROXMIRE. You're looking in a lot better shape than I
Senator DOMENICI. I was out getting healthy, if that's possible. First, so I don't forget, I want to share-Senator Chiles, who is the ranking Democrat on the Budget Committee, has a detailed statement. He supports the measure. He won't be here, because of a conflict. He asked me to put his statement in simultaneously with mine.
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Senator TRIBLE. Senator Chiles' statement will be made a part of the record, as will your statement, Senator Domenici.
We welcome your comments at this time.
Senator DOMENICI. Mr. Chairman, I also have a little interesting chart that I had the staff work up which portrays the "Impact of off-budget FFB financing" in the fiscal year 1984 first budget resolution. The chart shows all of the functions that would be modified or changed in the 1984 budget if your bill became law. I would say, for you and the staff, that chart does not include REA. If you want to include REA, and you need something, the Budget Committee staff will give it to you. I am sure your staff knows the effect of REA on the effected function.
FFB OFF-BUDGET FINANCING DISTORTS BUDGET
Mr. Chairman, Senator Proxmire, and other members, I am pleased to testify in support of Senate bill 1679, Senator Trible's Honest Budgeting Act of 1983.
Nearly 10 years ago, as you know, Congress established the Federal Financing Bank, commonly known as the FFB, in the Treasury Department. It was an excellent idea, and still is. It was there in order to permit the Treasury Department to coordinate Federal agencies' borrowing from the public.
There had previously been enormous traffic jams in the credit markets caused by the increasing numbers and the bewildering variety of agency securities and the large volume of Treasury debt.
The FFB was empowered to buy securities issued by the Federal agencies, such as Postal Service, the Eximbank, and to borrow from Treasury to finance purchases of such agency debt. This procedure was designed to allow all Federal borrowing to be financed by the Treasury at less cost to the taxpayers and private borrowers. In the last decade, this procedure has worked well, saving considerable amounts of money through what we perceive to be lower interest rates on Federal borrowing, and the elimination of duplication of agency financial staffs.
Contrary to the original intent of Congress, as I understand it, the FFB has become an important source of off-budget financing for Federal direct loans to private borrowers made by or at the request of other agencies. This, as I again understand it, unintentional use of the FFB for off-budget financing distorts the budget process. That is why I support your bill. I don't think it was ever intended to be used in this manner, and I don't think we ought to continue.
It provides off-budget financing of direct loans in two ways: First by purchasing loan assets, called certificates of beneficial ownership, CBO's, from lending agencies. The Farmers Home Administration and Rural Electrification Administration sell nearly all the CBO's purchased by the FFB. Second, by making loans to private borrowers whose credit is backed by other agencies' guarantees of the loans. The largest FFB guaranteed loan financing is done for the Defense Department's foreign military sales program and for the REA.
These two aspects of the FFB's activity distort the budgetary process because Federal lending financed by the FFB does not appear in the unified budget or in the spending totals in congressional budget resolutions. The off-budget status of lending financed by the FFB undermines the integrity of the budget and Congress ability to make informed budget choices, if that be their desire. Sometimes I wonder whether it is, but nonetheless, we have to continue to assume it.
Sales of CBO's to the FFB by on-budget lending agencies, notably Farmers Home, offset the agencies' loan outlays, transferring that spending off-budget to the FFB. This reduces on-budget outlays and the deficit, leaving the perception of lower spending while in fact the reality is that total Government outlays remain the same.
Mr. Chairman and members of the committee, my statement goes on in some detail. I don't intend to read it all. I would ask that it be made a part of the record.
You can tell by the work I have done on this that I am a strong advocate of the unified budget and of the budget process. On the other hand, I am not one that doesn't think there's room for improving the unified budget and/or the budget process. There is room for improvement in both, but certainly to continue to permit the FFB to go off-budget as described is not one of those ways to improve it, in my opinion. In fact, it works to its detriment, in terms of giving a real picture to ourselves, to the American people, and to the agencies involved, of how much of the national budget they are using for their particular functions of government.
I would be pleased to try to answer any questions that you might have. I thank you very much for permitting me to testify.