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TESTIMONY OF SENATOR LAWTON CHILES
S.1679, THE HONEST BUDGETING ACT OF 1983
SEPTEMBER 19, 1983
Mr. Chairman, I'm pleased to be a cosponsor of S.1679, the Honest Budgeting Act of 1983, and I appreciate the chance to present testimony before the Senate Committee on Banking, Housing, and Urban Affairs.
Certainly Senator Trible deserves our respect for proposing this legislation. Although he has been a member of the Senate less than one year, he has already made good use of the previous six years he spent in the House of Representatives and the term he served as a member of the House Budget Committee. S.1679 is a testament to his experience.
The bill aims to convert much of the borrowing activity of federal agencies from so-called "off budget" transactions into the unified federal budget. Nine years ago, the Federal Financing Bank was established to centralize financing authority for marketable federal securities. Although it was originally thought FFB activities would amount to around $6 billion annually, outstanding loans totaled more than $107 billion by the end of 1981.
On the plus side, FFB loans offer lower interest rates to federal agencies than available if their securities were sold on the open market. The down side is that since FFB transactions are considered off-budget, the funds it expends are counted
neither in initiating agency budgets nor in the unified budget. As a consequence while we save millions in interest payments
annually, we are distorting the budget picture and hiding
billions in outlays by putting them "off-budget".
At present, the only credit activities subject to Congressional control in the unified budget are on-budget direct loans and default payments under loan guarantees.
larger share of direct federal lending, by far, is accomplished through off-budget FFB loans to borrowers who have obtained loan guarantees from a federal agency. FFB purchase of agencyguaranteed loans converts guarantees into direct loans of FFB. Due to the off-budget nature of the FFB and because agency guarantees do not constitute an outlay, these transactions do not appear in the unified budget.
This practice of allowing federal agencies convert loan guarantees into direct loans is a matter of extreme concern for many reasons. Each year, federal agencies with access to FFB are able to increase their direct lending without requesting additional budget authority. Since loan guarantees which are contingent liabilities can be converted into direct loans requiring direct federal outlays and federal borrowing, Congressional control of outlays and contingent liability is undetermined.
The guarantee into loan process also creates a double subsidy to borrowers which Congress may not have intended. This occurs because with a guarantee, a borrower can borrow more cheaply than he can without federal assistance; with a direct loan from FFB, that borrower gets the added benefit of further interest rate reduction, since FFB lends at one-eighth of a percentage point above the Treasury's own cost of funds. Finally, and perhaps
most objectionable, the converting of guarantees into direct loans leads to significant underepresentation of agency outlays, federal outlays and the federal deficit.
Compounding the guarantee to direct loan difficulties created by certain FFB transactions, the FFB is also the principal purchaser of loan assets sold by federal agencies. By selling loans to the FFB, agencies are able to convert loans from onbudget outlays to off-budget FFB expenditures. Moreover, since accounting provisions allow agencies to offset outlays with receipts from sales, agencies can effectively extend far more credit than they are legally authorized.
As a result of the budgetary treatment of FFB loan asset sales and direct loans to guaranteed borrowing each year, select federal agencies are able to undertake activities far beyond the financial limits established by their direct appropriations. And equally disturbing, those outlays in the end, are not reflected
in the unified budget. A recent CBO study, for example, reported that in 1980, the Farmers Home Administration reported outlays of $3.0 billion. Not included in that figure was an additional $6.9
billion in loans financed through loan asset sales to the FFB. If these outlays had been charged to FmHA, its outlays would have increased three-fold.
In terms of total federal spending, FFB transactions significantly understate the federal government's total borrowing needs as reflected in the unified budget deficit. For example, in 1981, the unified budget deficit underrepresented the total deficit (unified deficit plus FFB deficit) by fully $21 billion. For both 1982 and 1983, nearly $14 billion each year will be unaccounted for in the unified budget deficit.
Although S.1679 addresses several other credit issues, it's core value is clear. It moves to refocus control of credit outlays directly under the supervision of Congress. And it eliminates a sizeable portion of the underestimates now plaguing the budget.
Bad as our deficits are right now
even that dismal level is lower than the facts if the
activities of the FFB are brought into the budget. The fact is, Mr. Chairman, we can't fight the federal deficits with accounting magic. We've got to have both political courage and accurate
figures. The courage must come to each of us separately.
can do something about accuracy by acting in unison to approve
Some years ago, I authored the Government in the Sunshine Act, the law that opened up agency hearings to the public. It was my belief both then and now that sunshine is the best disinfectant. If the public has a true grasp of what goes on in government, their judgement can be trusted to support remedies or improvements to correct our problems.
There should be no doubt our economic problems are severe. For some months now we've been riding the crest of economic recovery. We saw interest rates decline, we saw housing and auto sales revive, and business inventories shrink. Things looked pretty good. But then came the word that the federal deficit would be more than $200 billion this fiscal year.
Now we see interest rates inching back up. Recent reports show auto sales less vigorous than they have been, and housing starts have fallen back in the face of those climbing interest rates. The key gremlin in the slowing of recovery is the size of
the federal deficit.