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OPENING STATEMENT OF SENATOR PROXMIRE

Senator PROXMIRE. Thank you very much, Mr. Chairman.

Mr. Chairman, I certainly congratulate you on your title. I think you have got a nice new twist here. It was called the Truth-inBudgeting Act; you call it the Honest Budgeting Act. I think honest may have more force than truth. I hope so, because we haven't been able to get this put into law, though it certainly should be. You know, I can't think of a more important economic issue that Congress is faced with, as you say so well, than to put our fiscal policy in order. This Government, as we know, is borrowing over $200 billion this year to finance the colossal, record-shattering deficit. That borrowing competes with the economy of the private sector. All of us have met with our home builders, dealers, auto dealers and auto buyers, farmers, and small businessmen, all of whom are hurt badly by these high interest rates and particularly by the threat of continuing deficits.

These deficits are probably going to increase interest rates and increase them to a level higher than they were a year or two ago, when they were at scandalous levels, because the Federal Government is going to be competing so stringently with the private sector. In this context, it seems to me it is essential that we have an honest budget, a truthful budget, a budget that genuinely reflects the borrowing by the Federal Government, as well as the spending by the Federal Government.

We don't have that now. We won't have it, unless we put the Federal Financing Bank into the budget.

Let me finally say, as I see the purpose of the legislation is twofold. First we want to see that all activities have been properly recorded in the budget and are on the books of the borrowing agency. Second, we want to preserve the role of the Federal Financing Bank as a central borrowing agent, so that we do not resurrect all of the problems that led to the establishment of the bank in 1973. As we move foward with the legislation, I hope we can carefully balance these two objectives. If we simply put the Federal Financing Bank back in the budget and do nothing more, the end result could be that the Federal agencies would resume issuing their own guaranteed objections in the market at a much higher ultimate cost to the taxpayer.

I am delighted to see that our lead witness is appropriately the distinguished Senator from Washington, Senator Gorton, who has been an enthusiast advocate and author of legislation like this in the past.

Senator TRIBLE. Thank you, Senator Proxmire.

It is indeed a great pleasure to welcome our distinguished colleague, the senior Senator from the State of Washington. Senator Gorton is an active and constructive member of the Senate Budget Committee, has chaired the temporary task force on Federal credit, has cosponsored this legislation. Therefore, it is quite appropriate that he be our lead-off witness this morning. Senator Gorton.

STATEMENT OF SLADE GORTON, U.S. SENATOR FROM THE STATE OF WASHINGTON

Senator GORTON. Thank you, Mr. Chairman. I'm pleased at this opportunity to appear before the committee, not as a member, but as a witness, to testify in favor of S. 1679, the Honest Budgeting Act of 1983.

As you know, the issue of the Federal credit budgeting is a special interest of mine. Last year I chaired the Temporary Subcommittee or the Budget Committee that examined the budget effects of Federal credit activities, and made recommendations for improved budgeting treatment of those activities. S. 1679 embodies several of these recommendations, and I heartily endorse it as an important step forward in the Federal budget process. S. 1679 is similar to S. 711, which Senator Proxmire and I introduced earlier this year, and I hope the Banking Committee will report this legislation favorably, and at an early date.

The usefulness of the Federal budget depends upon its reflecting accurately the nature and extent of the Federal Government's financial position and policies. Unfortunately, the budget, as it is currently drafted, falls short of this goal in several ways. As a consequence, the budget figures which the Budget Committee works with during its annual deliberation, and which are prominently reported in the press, provide an incomplete picture of both the size and the composition of Federal economic activity.

Two important problems arise because of the budgetary treatment of certain credit transactions carried out by the Federal Financing Bank. First, the purchase by the FFB from Federal agencies of securities representing participation in a pool of assets, called certificates of beneficial ownership, cause outlays for lending in the agency budget to be understated by the amount of said purchases. Consequently, the unified Federal deficit is also understated by an equal amount. There is no justification for this treatment. It is a violation of generally accepted accounting principles, and is counter to the recommendation of the President's Commission of Budget Concepts, promulgated during the Johnson administration. The second problem arises out of FFB purchases of loans guaranteed by other Federal agencies. In this case, the Federal Government, in effect, makes a loan which never appears as an outlay on the Federal budget. This second problem would not arise, if the guaranteed loan were by a private lender, although the subsidiary question of how we account for loan guarantees would remain. FFB participation, however, renders the transaction indistinguishable from an agency loan, and it should be treated as such.

Unlike the first problem, which arises because Congress has been inconsistent in following budget accounting principles, the second problem is more subtle, and arises because the budget principles are not quite adequate to the task for accounting for certain Government financial transactions.

S. 1679 corrects both of these problems and represents an important step toward improving the utility of the Federal budget. Furthermore, it corrects the problems in a proper fashion by attributing the economic activity to the Federal agency which is ultimately responsible for initiating it. It avoids the often suggested, but theo

retically incorrect, solution of simply treating the FFB as the agency and incorporating its outlays into the Federal budget. This latter is an important point. I emphasize that the problem is not the FFB itself. Since its establishment in 1974, it has shown itself to be an effective mechanism for marketing the obligations of various Federal agencies in an orderly manner. It has resulted in savings to the Federal Government by virtue of its ability to finance debt at a lower rate than would otherwise be possible.

Furthermore, I also wish to emphasize that my support for S. 1679 is in no way an attack upon the several Federal agencies which use FFB financing, and whose agency budget treatment would be affected by this legislation. I simply wish to assure that our accounting treatment of agency transactions is consistent, and that the budget reflects accurately, the Federal Government activity in this area. Without accurate accounting information, it is impossible for Congress to make an informed decision about budget issues.

Passage of S. 1679 would be an important step toward fulfilling the recommendations made by the temporary task force on Federal credit of the Budget Committee, and also the recommendations embodied in this year's first concurrent budget resolution. It would also insure that the existence of the FFB financing mechanism itself would be natural with respect to the budget. This is a condition of the FFB charter which is presently not being met because of its purchase of guaranteed agency loans. S. 1679 is also highly complementary to my own proposal for a Federal credit budget in S. 1582.

I concur in the suggestion which is to be made by Senator Domenici with respect to the clarification of the budget statement of the Rural Electrification Agency. I am sympathetic with the underlying goal of incorporating presently off-budget activities into the unified budget. I believe, however, that it might be wise to pursue the particular issue of the REA separately from S. 1679, since it involves specific separate legislation which is under the jurisdiction of the Agriculture Committee.

Even with this modification, S. 1679 would improve the accuracy of the REA's agency budget-that is, it's off-budget budget-although it would leave open the question of it being incorporated into the unified Federal budget.

In conclusion, I believe S. 1679 to be a good bill which will significantly improve budget accounting and assist the Budget Committee and the Congress in its annual task. I urge this committee to report favorably this legislation.

[The complete statement follows:]

STATEMENT OF SENATOR SLADE GORTON BEFORE BANKING COMMITTEE

S. 1679

-

HONEST BUDGETING ACT OF 1983

SEPTEMBER 19, 1983

I am pleased, Mr. Chairman, at the opportunity to appear

before this committee not as a member, but as a witness, to testify in support of S. 1679, the Honest Budgeting Act of 1983.

As you know, the issue of federal credit budgeting is a

special interest of mine. Last year I chaired a Temporary Subcommittee of the Budget Committee that examined the budget effects of federal credit activities, and made recommendations for improved budgeting treatment of those activities. S. 1679 embodies several of these recommendations, and I heartily endorse it as an important step forward in the federal budget process. S. 1679 is similar to S. 711, which Senator Proxmire and I introduced earlier this year, and I hope the Banking Committee will report this legislation favorably, and at an early date.

The usefulness of the federal budget depends upon its reflecting accurately the nature and extent of the federal government's financial position and policies. Unfortunately, the budget as it is currently

drafted falls short of this goal in several ways. As a consequence, the budget figures which the Budget Committee works with during its annual deliberations, and which are prominently reported in the press, provide an incomplete picture of both the size and composition of federal economic activity.

Bank.

Two important problems arise because of the budgetary treatment of certain credit transactions carried out by the Federal Financing First, the purchase of the FFB from tederal agencies of securities representing participation in a pool of assets, called Certificates of Beneficial Ownership, cause outlays for lending

in the agency budget to be understated by the amount of such purchase. Consequently, the unified federal deficit is also understated

by an equal amount. There is no justification for this treatment. It is a violation of generally accepted accounting principles, and is counter to the recommendation of the President's Commission of Budget Concepts, promulgated during the Johnson Administration. The second problem arises out of FFB purchases of loans guaranteed by other federal agencies. In this case, the federal government in effect makes a loan which never appears as an outlay on the federal budget. This second problem would not arise if the guaranteed loan were made by a private lender, although the subsidiary question of how to account for loan guarantees would remain. FFB participation, however, renders the transaction indistinguishable from an agency loan, and it should be treated as such. Unlike the first problem, which arises because Congress has been inconsistent in following budget accounting principles, this second problem is more subtle, and arises because the budget principles are not quite adequate to the task of accounting for certain government financial transactions.

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