oversight

Comments on S. 19 and S. 581

Published by the Government Accountability Office on 1971-03-09.

Below is a raw (and likely hideous) rendition of the original report. (PDF)

                                      STATEMENTOF          -.L
                  Em  B. STAATS, COMPTROLLERGENERALOF THE UI?ITEB STATES
                                         BEFORE                                                    hi
                     COMMI   ON BANKING, HQUSIEG, AND URBANAFFAIRS
                                  UNITED STATESSENATE    .
                                           ON                                                           '

                  S. 19 and S. 581, To amend the Export-Import Bank Act of
                  1945, as amended, to allow for greater expansion of export
                  trade of the United States, to exclude Bank receipts and
                  disbursements from the budget of the United States, and for
                  other purposes

                                             March 9, 1971
      Mr. Chaimn         and Members of the Committee:
              We appear at the Committee's request to present our views and answer

      your questions       on the provisions      of S. 19 and S. 581, which would exclude
                                                                    u
      the receipts       and disbursements      of the Export-Import Bank from the totals
      of the budget of the United States Government and exempt them fromany

      annual expenditure       and net lending       limitetions       imposed on the budget.
      In September 1970, we appeared before the Subcommittee on International

      Finance,     Committee on Banking and Currency,              at its   request on a similar
      bill,    S. 4268, which failed         of enactment.

              As wu know, the General Accounting              Office    has over many years
      favored the principle        of full     disclosure     to the Congress and review by

      the Congress of the budgetary programs submitted by the executive                       branch.

      In our view excluding         the Export-Import        Bank's receipts     and disbursements
      from the budget totals         could establish        an undesirable     precedent which might
      logically       be applied   to other loan programs, since it is impossible               to

      differentiate       between this program and other loan programs except on the

:     basis of a value judgement as to relative                importance or priority.         We do
      not favor       such an exclusion.
P ,
  '
        Our position      is consistent      titb     the conclusion    of the President's

Commission on Budget Concepts of October 1 7, that a;;.1 loan prQgrams

operated by entities         in whfch the capital          stock is owned by the Covern-

ment should be included          in the budge% on a net lending basis.                 That Is

to say, %?ael-xtaget %stals ineltie             ths dj&ffsrenca be%ween loan outlays               or

disbursements        on one side, and loan reimbursements or repayments on the
other side.         This budget policy       as it affects      the Export-Import        Dank had

been in existence         for my    years,      long before the report         on the President's

Commission on Budget Concepts.

        The President's      Commission on Budget Concepts was a bipartisan                      group.
It was chaired by Mr. David Kennedy, who was later                      appointed Secretary         of

the Treasury,        by President   INixon.         The Commission included      the Chairman
anrl the ranking minori%y members of the House and Senate Appropriations
Committee.      I'was privileged       to serve on the Cotission.               Mr. Robert Mayo,

later    Director     of Lhe Bureau of the Dudget, was staff               director.

        The Commission's report was unanimous and its                   recommendations were
adopted by President         Johnson and later          accepted by FYesident Nixon.

        The Budget Commission considered               an alternative     of excluding     all     loans
from the budget,         and arguments were made to the Commission supporting                      this
course of action.          The arguments pro and con were set forth                in an excellent
staff    paper presented to the Commission by Mr. Mayo, and I would like                           to

submi% this for insert         in the record for your use!.
        "The case for excluding        loans from the budget

              ā€œSeveral reasons have been given at one time or another for
        treating loans at the very least as something other than ordinary
        budget expenditures or for excludPng them al%ogather from the cal-
        culation of budget surplus or deficit.       The reascm for excluding
        loarx im the       budget--that    there are not inle&rme items in ordinary
        accounting practice--has     already been &a%&.
                                                                                                        -2-
                    l

      "The same conclusion      seems to be suggested if we consider     the
net economic effect      if the Federal Government simultaneously      makes
a loan and finances      the loan by borrowing.     W&will   set aside for
the moment the case where bonds are sold to the central          bank, which
is the financial     equivalent   of printing   new money.; If the Government
borrows by selling     bonds, its lending and borrowing      of equal amounts
very largely     wash out in net economic effect,     depending somewhat of
course on the type of security       sold and the type of loan made.

        "Much of the Federal Government's               borrowing     and relending      is
a form of activity           quite different      in economic character         from the
levying      of taxes and the purchase of goods and services                  for public
programs.       In many cases, the Government is simply acting as a con-
duit for funds borrowed from areas or capital                     markets with loanable
funds to spare, passing them on to private,                    State and local govern-
ment, or foreign           parties    who are not able to borrow directly             them-
selves.       In this sense, the Government is engaging in financial
intermediation,          like a bank, a savings and l&n association,                  or
other financial         intermediary.        By borrowing      and relending,      these
institutions        bring the interests         of savers (lenders)       and borrowers
into balance.          When Government lending activity             is viewed this way,
then it seems logical              to treat  loans differently        from ordinary
taxes and expenditures--             indeed even exclude them completely--in
calculating       the budget surplus         or deficit."
                                      3r.f * * *
"The case for including              loans in the budpet

       "Advocates      of including     loans in the calculation         of budget
surplus     or deficit     point out that when the Government makes loans,
it is not just acting as a bank or financial              intermediary.          If
financial     intermediation      were all that were required,           the private
sector could well take care of balancing            the interests          of borrowers
and lenders in a country with such highly developed capital                     markets
as ours.      Clearly    something else is involved,        specifically       a recog-
nition    that without      Federal intervention,     important      public objectives
would not be accomplished           through the ordinary     working of the capital
markets.

       "From this point of view, Federal loan programs represent                   a
redirection    of national   resources   to comply with social         priorities.
They establish    claims on resources      and demands for current          output
of the economy that are very hard to distinguish             from the demands
and claims that arise from Federal expenditures            for grants,        transfer
payments, or subsidies --transactions        which are'clearly       included        in
anyone's measure of Government 'expenditures.'             'Soft'    loans      by   the
Agency for International       Development to developing        countries       repayable
in local currency,      and nonrecourse    loans to farmers made by the


                                                                                    -3-
         Commodity Credit      Corporation   (CCC) for which there is no legal obliga-
         tion to repay if the farmer prefers             to forfeit       his collateral,    are
         only extreme examples of so-called            'loans'      which are particularly
         hard to distinguish      from ordinary      Government expenditures.             In any
         event, the burden on the Treasury           to finance        loans through taxes or
         borrowing    is not less than--or      different      from--the      burden associated
         with financing     any other Government expenditure.
                                                   *****

                "To some, the pressures         to minimize budget expenditures     and
         the budget deficit         provide an argument for excluding     loans so that
         the choice between direct           and indirect  loans can be made solely on
         their    respective    merits.      But if loans were excluded from the budget,
         these same pressures          might well lead to an even worse distortion      of
         program choices.         The misnaming of grants,      transfer payments, and
         subsidies --to get them out of the budget totals--might  ._         be greatly
         stepped up.        * * *'I

         The sum and substance               of the staff          paper was to argue                 that      loans     made

by the Government              would      not be made if          adequate       credit       resources           were

available        on the same terms               in the private        sector.            Accordingly,            the,budget

itself      should    provide      for      any redirection          of economic             resources          through

governmental         action.       The effect              of any such programs              should      be reported

on a net basis,          not on a gross             basis,      and should        be included            in the

calculations         of budget         surplus      or deficit.

         There    is a very       brief      statement         in the Commission              report         itself      which

reads:

                 "In line with the Commission's          conviction   that a unified
                 budget system is essential,          and that a comprehensive
                 definition     of the budget is very important,         the inclusion
                 of net lending as well as other expenditures              in the budget
                 has particular      significance.      With both in the budget,       there
                 should be no pressure by special           interests   or program partisans
                 to redesign other expenditure          programs to give them the
                 appearance of direct          loans in order to get them out of the
                 budget."
      We believe      there may be other courses of action that would provide
some of the flexib3.Uty             the Export-Import             Bank is seeklhg,
      (1)      In lieu of,S.        19 and S. 581, we believe                  that one alternative
course of action would be to do what was done when the'Federa1                                       Eatiornal
Mortgage Association         was removed. from the Budget--to                        have all    or part
of the Export-Import         Bank operations                go into the private            sector.      If
this were done, however, because of the &port-Import                                  Bank's need to
maintain    an internationally            competitive          export financing            lemling     rate,
currently      6 percent,        it would be necessary to provide                     for some sort of
Government support such as borrowing                        authority      or line     of credit       frm
the Treasury,      and possibly         a Government backed &ammtee                        of any obliga-
tions issued by the new organization.                         Aside from these types of supm%
to improve the cred5t rating               and lower the borrowing                   costs of the private
corporation,      it would of course have to be self-sufficient                              in that its
cost of funds would have to be covered by its                             own capital       a& loan
income.
      This test of economic self-sufficiency                            and independence is at the
heart of the Budget Commission's criteria                         for exclusion          from the cover-
age of the executive             budget totals.             Conversion to a private             operation
would provide      flexibility         for the Bank.             We understand that the Federal
Reserve Board concurs in this                   position.        The Board has taken the position
that if the Export-Iqort               Bank's operations                are sufficiently        different
from those of other Federal agencies to justify                              exclusion      of them from
the budget process,         it may be that the best answer lies                          in converting
the bank to a private             institution        as has been done with FNMA, The Board

                                                                                                               -5-
    further            states           that      such a solution              would         provide       them with              the flexibility

    the Bank seeks,                       without        doing      violence          to the principles                     of the unified

    budget.

                (2)         Another            vehicle      for     providing           the Export-Import                      Bank with             the

    flexibility                  it     seeks       in order        to promote              the export        of U. S. products                        and

    services,               is        the current         guarantee           and credit          agreement               under         considera-

    tion        between               the Export-Import              Bank and the Private                     Export             Funding                   ā€™

ā€˜   Corporation                   (PEFCO).           The basic         purpose          of PEFCO is           to mobilize                 private

    capital,               both        long and short              term,      to help          finance       exports             of U. S.

    manufactured                      products.          To accomplish               this      purpose,       PEFCO plans                 to pur-

    chase medium and long-term                               paper         generated           by U. S, exports                   and guaranteed

    by the Export-Import                            Bank.         PEFCO plans           to finance           its         activities             by

    offering               short        and long         term      secured         notes.        The notes               are     to be secured

    by deposit               of Export-Import                     Bank guaranteed               importer           notes         with     a trustee.

                It     appears            to me that         the PEFCO agreement                    would          help        meet the objective

    of the            Export-Import                 Bank to mobilize                 private       capital,              both     long      term

    and short               term,         to help        finance       exports.of              U. S. products.                    It     would        be

    difficult               without            any experience              factor,          however,        to assess             at     this        time

    whether            the arrangements                   provided          for      by the agreement                    would     achieve            its

    intended               purpose , and/or               result       in a substantial                  increase              in cost          to

    carry            out    the agreement,                  Moreover,             we have some doubt                     about         the legal

    authority               of the Export-Import                     Bank to enter               into       the specific                 arrange-

    ments provided                      in the agreement               that        go beyond        their          corporate             tenure.

    These arrangements                          include      obligating              the Government                for      the payment               of


                                                                                                                                                               -6-
.




    interest           on the debt obligations                    of PEFCO which                   are to be issued                     with

    the Export-Import                   Bank approval            and guaranty,               far      beyond the presently

    authorized              corporate         tenure       of the Export-Import,Bank.

            (3)            A third      alternative          would       be to exclude                all         loan programs

    from the budget.                    The arguments            for     and against               this      are stated                above.

    For example,               such loans would              be those            made by the Farmers                      Home Administra-

    tion,       Veterans            Administration,           Rural           Electrification                Administration,

    Small Business                  Administration,           and the College                   Housing            Loans made by

    the Department                  of Housing         and Urban Development,                       all      of which,                from

    somebody's              point      of view have a high                    priority       and are extremely                         important.

    These loan programs,                      as you probably                 know, repqesent                a total           of outstand-

    ing loans              today      of about      $51 billion.                 I do not know how anyone                              could,

    differentiate                  between       the Export-Import                 Bank case and _.the other                           cases

    represented               by the loans          that     are included                 in the budget                 today.

            The arguments                 that     the Bank supports                     U. S. exports,                 that     it     helps

    meet the U. S. balance                        of payments           problems,           and that              it    makes a profit--

    valid       as these             points      may be-- do not make it                    unique          from a budgetary                    point

    of view.               As we have just             pointed         out,      other      loan       programs            have their                own

    important              purposes.            Supporters       of these              programs        could           argue     with         equal

    force           that    they      are unique.            The issue           is,      therefore,              whether        all         of these

    programs,              and many others,             are to be reviewed                    in an orderly                    way so that

    the Congress               can make informed               decisions               as to the priorities                      of need.

               It      is argued         that     Export-Import               Bank loan disbursements                           take         place

    over a period                  of years,       as do disbursements                     under          other        Federal          loan

    programs.               However,          the Office       of Management and Budget                                COMB) should                 have



                                                                                                                                              -7-
and presumably                does have estimates                  of the rate                of disbursement            available

to it      when it           estimates         net budget          outlays.             Even if       OMB estimates              were

wrong,      it     could,        after        considering          disbursements                and receipts            under        out-

standing          loan agreements,                make an upward adjustment.                           It     could      also        increase

loan operations                during         the course          of the year            if     the Bank could             justify

an overall           increase          in loan operations.                       This    is permissible               under      the

Government           Corporation              Control      Act     for     all     corporation              budgets,       unless

the Congress            limits         the program          specifically                in appropriation                acts.

          As pointed           out in hearings              on similar             legislative              proposals         last

year,      whether           the net         lending    of the Bank is included                        in the portion                  of

the President's                budget         used in determining                  the deficit              or surplus          is with-

in his      discretion.                Legislation          for     this         purpose        is not required.                 However,

the Executive                Branch,         as a policy          matter         has again          chosen to include                  the

net     lending        for     the Export-Import                  Bank in the budget                  along      with      other           loan

programs,           in line         with      the recommendations                  of his        Budget       Commission,              which

recommendations                the President            had theretofore                  adopted.

          (4)      A fourth          and obvious           alternative             would        be the submission

by the !Zxecutive                Branch        of an amendment to the overall                               expenditure

control          limitation          for      fiscal    year       1971 to increase                  the lending           operations

of the Bank.                 This    limit       expires      on June 30 of this                     year.

          (5)      Finally,          if,      in the judgment              of the Congress,                  the Export-

Import      Bank program               is deemed to have a high                         priority,           we believe          that

a far      simpler           and more desirable              approach             would        be to simply           adjust         the



                                                                                                                                     -8-
expenditure             ceiling       upward,         rather     than    removing         the program         from         the

budget.            This would         permit         the Bank to operate             within        a congressionally

established            budget        program without             creating       an undesirable              precedent

that        would     arise       from removal          of the Bank's           operation          from the Budget.

            In summary,           Mr. Chairman,           we do not argue             that       the Bank's         lending

operations            are not extremely                important,        nor that         they     should     not be

given        high     priority.          But the budget             is;essentially            a device        for         bringing
                                                                      I
together            competing        needs so that             overall      priorities        may be established

and resources              allocated,           It     is hard      to escape the conclusion                       that     the

Bank's         problem        is not with            the way the budget              is developed,           but with            the

fact        that     the hecutive             Branch      does not assign             as high         a priority           to the

Bank's         lending        operations        as the Bank desires.                     Similarly,         the Congress,

if     it    believes         that    additional          resources         should       be made available                 to the

Export-Import              Bank,      after     weighing          the merits         of other         programs,           can do

so within            the budgetary            process.

            This     concludes        my statement,             Mr. Chairman.