Need for Improved Budgetary Controls Over Federal Credit Programs

Published by the Government Accountability Office on 1990-04-11.

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

: a’GAO             Testimony

                                                       I llwlwl

  For Release       Need for Improved Budgetary Controls
  06   Delhery      Over Federal Credit' Programs
  Expected at
  10:00 a.m.
  April  11, 1990

                    Statement   of
                    Charles A. Bowsher
                    Comptroller    General
                    of the United States
                    Before the
                    Task Force on Urgent Fiscal      Issues
                    Committee on the Budget
                    House of Representatives

                     CWU5,\          ILffi’405
 GAO/T-AFMD-90-18                                I               GAO Form 160 (12/W)
Mr. Chairman'               and Members'of             the     Task Force:

           I am pleased              to be here         to present             our     views            on the          need for
improved           budgetary          controls         over       federal          credit         programs,.               I
would       like      to emphasize             at     the     outset        that      the        need for           credit
budgeting            reform        is a matter          on which            the Budget             Committees,                     the
Office         of Management               and Budget          (OMB), the Congressional                                 Budget
Office         (CBO), and the               General         Accounting             Office         .(GAO) are             in
substantial               agreement.           The issues           have been debated                          and analyzed
for     many years.                Rarely     will      you find            a matter             on which           there           is
such broad            agreement            among those            who have studied                      it.       I believe
the     time       has come to move beyond                        discussion           to the             enactment                of
legislation               needed      to    implement          reform.

           There      are       some differences               in the.details                    of the          reform
proposals            of    these      organizations,               and in my statement                           today         I
will       outline         these      variations            as well        as the           common features.
There       is another             point     I will         make,      and that             is    the         need to have
a broad        perspective             on the problem--one                    that          is not            restricted
simpl,y       to direct            loans     and loan         guarantees.               'The government                        'also
needs       to consider             the     implications            for      the budget             of         federal
insurance            programs         and the        activities            of government-sponsored
enterprises               (GSEs).          Our testimony            last      week on the                     Federal
Savings        and Loan Insurance                    Corporation             (FSLIC)             underscored               this

1Resolving            the Savings and Loan Crisis:                             Billions             More and
 Additiona              Re orms Nee e

But      first,       let      me put         the      issue        in context,            drawing           upon a
report        we recently               issued.2


          Recently,            FSLIC,         the Federal             Housing           Administration                    (FHA),
and the           Department           of Education             suffered               enormous            losses         due to
financial            institution              insolvencies,              foreclosures                  and related
losses        on federal              housing        loans      and, loan              guarantees.              These
losses        are     adding          billions          of dollars             to'the           deficit.            yet' these
are   only         three       examples.of              the    extensive               credit        assistance             an-d
insurance            programs          that      the     federal         government,                 the     nation's
largest           financial           institution,             is     i,nvolved,with.                      These programs
can be divided                 into      four       broad      categories:                 direct           loans,         loan
guarantees,             insurance             commitments,              and GSE loans.

          As seen in             the     table,below,                there      has been a dramatic                         growth
in all        of     the      categories            since      fiscal          year       1965.            The total         of
outstanding             amounts 'has'increased                        over      1,000           percent       and
currently            stands          at almost          $6 trillion.                   Even a'llowing               for     the
,growth       in the          size     of     the economy,              this     percentage                 increase         in
outstanding             amounts          has been enormous.                       It     has been largely
driven,           however,           by the      insurance            and GSE activities.

2Fedsal            Credit   and Insurance:    Programs May Require Increased
 Federal           Assistance   in the Future    (GAO/AFMD-90-11, November 16,
                   Reported Outstanding    Amounts of Individual   Credit
                     and Insurance   Programs Since Fiscal    Year 1965
Dollars            in billions
Program                                                1965               1985'            '1989               1965 to 1989
Direct        loans                                    $ 33             $ 257              $     207                         527
Loan guarantees                                            91              410                   588                         546
Insurance            commitments                         299            2,852                  4,213a                 1,309
Government-Sponsored                      '
  Enterprise   loans                                       15              ,370                  763                  4,987
           Total                                       $438            $3,889              $5,771                     1,218

aOMB redefined  insurance    commitments  for fiscal   year 1989.     This
 makes the 1989 figure    not strictly   comparable  to the figures      for
 1965 and 1985.    However, the change appears to affect      relatively
 small amounts.

           I note          that     direct        loan         amounts          declined         from     1985 to               1989,
partly        reflecting               a recent          shift         away from           such       loans      to loan
guarantees                because       of the         latter's           lower      short-term               outlays
effects.             Loan guarantees                   do not          result       in budget           outlays               until       a
borrower            defaults,           while         direct       loan         disbursements             (net         of
repayments)                result       in outlays               when the         loan's        are made,
immediately                increasing           the      reported          budget          deficit.            Therefore,

shifting            from      direct          loans      to guaranteed               loans         reduces            current
outlays            and,     correspondingly,                     the    reported           deficit.            However,
this       shift       does not          necessarily               represent          a savings.                 If      the
guaranteed                loans     default           in the       future,          the     government                will         have

to pay for          the     cost     of    the defaults,,which,                     in turn,        will
increase         the deficit           at that        time.

           The table        also     shows a sharp                increase       in the         insurance
commitments            of   the government.                  Federal         insurance          activities
include         such programs             as those         of FSLIC,          the .Federal          Deposit
Insurance         Corporation             (FDIC),         and the         Pension      'Benefit       GuaraMy
Corporation            ,(PBGC).        The 1965 to               1989 increase           in     insurance
commitments            grew by a little               over        1,000     percent.            I mention           these
insurance         amounts          even though            such programs             are usually             not
covered         by credit          budgeting         reform        proposals.           The proposals
normally         cover      only     the direct            loans     and loan          guarantees            of
federal         agencies.      ; I think           that      the Congress             should       not      overlook
the     similarities           between         the    credit        and insurance              programs            of
federal         agencies.           Insurance         programs            represent       formal         contingent
liabilities            of   the government,,               like     loan     guarantees,            and
therefore         pose the          same basic            kinds     of budget          reporting            and
control         issues.

           ,The most dramatic              grqwth'since             1965 has been in theeloans
extended         by GSEs.           GSEs are         government-chartered,                     privately-owned
entities         whose activities               include           making      loans     to expand            credit
availability              to students,          farmers,           prospective          home buyers,                and
other         segments      of our        society.          They are         off-budget.              Their         loans
outstanding            increased          almost      5,000        percent      over      the      fiscal          years
1965*to         1989 period.              I mention         these      ‘GSE amounts            because        it        is

time       that      we start            considering                   more seriously                 their            potential
budgetary            implications.                     The loans               'of a GSE, if                not        repaid,         could
trigger           a federal          financial              bailout                 under     a federal                "moral
obligation"               commitment.


           The significance                    of      these           g,rowth        trends         in credit                and
insurance            amounts         is       that        they         increase             substantially                 the       risk        of
large       budgetary            losses            to the             federal         government.                  A      nearly
$6 trillion               exposure            is     a huge amount.                      ,While       it     should            be
emphasized               that    the government                        will     probably           experience                  losses           on
only       a small         percentage                of    this         total         exposure,             the        risk      of very
substantial               losses         is    real.             It     should          therefore            be a matter                   of
concern           that      there        are       some disturbing                      developments                   or trends             in
the      loss      patterns          of       these        loan,          guarantee,              insurance,                  and GSE

Direct          Loans

           There         has been a significant                               increase          in direct               loan        write-
offs.           Between         fiscal         years        1985 and 1989 loans                             receivable
annual          write-offs           increased              from             about      $1 billion            to about               $4
billion.           Despite          the write-offs,                          loan     delinquencies                    continued             to
incrtase           in the        same 4-year                period,             going         from         about        $15 billion
to about           $27 billion,                an 80 percent                        increase.

           These write-offs                       plus       the     interest          payments        made by the
Treasury           in     financing               the       loans      are        the main components               of the
government's                  net        costs       in making             the     loans.          A key point          is     that
such costs              are      not       properly.reflected                       in budget         estimates.
Therefore,              when the Congress                      considers             new loan         levels       in    its
budget       process,               it     does not           routinely             consider         the    ult.imate          costs
of     the programs                 involved.

          As mentioned                    earlier,           there        has been a shift                 away from           new
loans       to loan            guarantees',                 where     there         are     also     matters       of

Loan Guarantees

          For one thing,                     the newer              loan     guarantees            pose greater              risks
than      the     ones made in earlier                              years.          Many new guarantee
Programs,           such as those                     for     education             and energy         loans,       involve
loans      with         little'or                no marketable               property            as security.            This
means higher               net       costs           to the        government             when defaults            occur
under       such guarantees,                          This     is a change                from      the midl1960s              when
about       93 percent                   of guarantees               were for         housing         related       loans
backed       by liens               on marketable                  property.              This     makes particularly
disturbing              the     recent            trends       in guarantees                 and terminations                  for
default.            The government's                         outstanding             guaranteed            loans    increased
62 percent,              from            $364 .billion              to $588 billion                 from    1983 to          1989.
Duriffg      the        same time,,               guaranteed               loan     terminations            for    default

increased                even more sharply,                       from     about.$S,         billion          to .about           $11
billion,               a 138 percent                   increase.

           Even on the                   loan     guarantee           programs            backed        by marketable
property,                such as the              federal          housing          program,           the g,overnment                 has
experienced                    significant              losses.           In recent          testimony3             we stated
that       in         fiscal         year       1988 FHA's          four       mortgage             funds,     which        make up
the     largest                federal         housing       credit         program,             incurred        a loss           of
$4.2       billion              and together              have an equity                  deficit        of    $2.9        billion.
We noted               that         substantial           appropriations                  would       be required             to        -
restore           solvency               to the'Genera1               'Insurance           Fund component.

           It     is       important             to remember that                   the    projected           costs        of
these       guarantees                   are     not     systematically               considered              in the budget
process           and not             appropriated             for.

           What about                 the      insurance           area?           The risks          to the        government
today           are      certainly             more evident               than      in years          past.         Only      3
years       ago,          some savings                 and loan           industry         representatives                  spoke
of     $5 billion                   being      needed       to recapitalize,the                       weakened         FSLIC.
Today,           there          is a much grimmer                   picture.              Last       week,     when we
testified                on our          audit     of,FSLIC's              final      'financial             statements,               we
stated           that          at    least       $325 billion              would      be needed              from    all
sources           to pay off                 FSLIC's        obligations,              much of which                 will      come

3198% Financial Audit:                              Federal   Housing                 Administration                  (GAO/T-
 AFMD-89-17, September                             27, 1989).

from       the      U.S.       Treasury.               The $325 billion                    could     easily          go to $400
billion,            or even             to a half         trillion           dollars         if     the economy turns
against          us.        Furthermore,                most of the             taxpayer            amounts          that     will
be paid            out b,y Treasury                have not              been recognized                 to date        in
budgetary              totals.

           I should            also       mention         FDIC.,          Our audit          last        year       of the
Corporation's                  1988 and 1987 financial                          statements4               showed a
weakened            fund,         mainly        reflecting               banking       problems            in' the 'energy,
agriculture,                and real            estate          sectors        of    the     economy.               A record
level       of bank            failures           resulted           in the Corporation                     experiencing
in     1988 its           first         net     loss      since,         inception--$4.2                 billion.            Its
fund       balance          dropped           to about           $14 billion,'producing                          the    lowest
ever       ratio        of the          balance         to      insured       deposits.

           We are         currently             conducting               a new financial                 audit       of FDIC
and are          concerned              by the         threat        to the         fund     of some money center
and other              large       banks.          Failure           of several,of                 the     larger      banks
could       bankrupt              the     fund,        just      as FSLIC was bankrupted                            a couple           of
years       ago.

           There        is also           the     Pension         Benefit           Guaranty         Corporation
(PBGC) and its                    approximately                 $800 billion               in outstanding
commitments.                   I am particularly                     worried         about         the government's

4Fin&cial  Audit:                         Federal  Deposit  Insurance    Corporation's      1988
 and 1981 Financial                        Statements   (GAO/AFMD-89-63,     April    28 I 1989                                    1   l

exposure           in those        instances                where      there            are     large,       financially
troubled           companies        with        underfunded                plans.

           While     the      government              col.lects         insurance                premiums           on most of
its      insurance          programs',          it         is clear         that         the     level       of premiums                  is
insufficient               to cover        costs            in many cases.                      Already,           losses       are
occurring,           and they           could         grow significantly                          if     the economy'
undergoes           a downturn.

           This     brings       us to the             GSEs.          Very         little          of     the
approximately                $776 billion                  in GSE debt             and outstanding                    mortgage-
backed        securities           is expressly                guaranteed                   by the        government.
Nonetheless,               the   financial             markets          treat            most of          these       GSE
instruments               as "agency         debt"           under      a perceived                    implicit            federal
guarantee.                Accordingly,               the     GSEs are           able          to market            their
issuances           at     favorable         interest             rates.

           That     this      assumed federal                  backing             can become an explicit
federal           commitment        was demonstrated                       in      1987 when federal
legislation              wa,s enacted           providing             billions                in payments             and
explicit           loan     guarantees               to the       failing               Farm Credit               System,       a
GSE.        Such a result               is not         a foregone               conclusion.                  It     2s worth
noting       that        another        GSE, the             Federal         National              Mortgage
Association,               ran   into      a serious              interest               rate      squeeze          in the
early   1980s but managed to work out                                    of        it     without          federal
assistance.    Nevertheless, the farm                                    credit               crisis       and impact                on

the      federal           budget      was one of           the       reasons         that      the     1989 Financial
Institutions                 Reform,      Recovery,             and Enforcement                 Act     (FIRREA)
required           GAO and the            Treasury          to study            the        safety     and soundness
of GSEs.            Our first            report         under        this     FIRREA requirement                     will,be
issued          shortly.

          Given         these       cred,it,       insurance,               and GSE problems,                 what      should
the government                  do?     My remaining              remarks           will       mainly        address'
proposals           for       improving          budgetary            controls          over        the government's
direct          loans        and loan          guarantees.


          The history               of budgeting           for        federal         credit         programs         over
the      past      decade        has been one of gradually                            changming the             timing         and
nature          of congressional                 action      on credit              programs.            The trend             has
been for           the Congress                to get     involved            at ea,rlier            stages      in the
life      cycle         of    loans     and guarantees,                     and to increasingly                  consider
the      cost      implications                of new loans            and guarantees.                  The current
proposals           of GAO and others                    represent            the     latest         stage      in    this

          Prior         to this        decade,       most direct                loans        were made through
revolving           funds        not    requiring          annual            appropriations,                 while      loan
guarantees   required                   appropriations                 only      when defaults                occurred.
As a result,    credit                  programs          typically             came under            budget         scrutiny

only      when appropriations                      were needed             to recapitalize                        loan
accounts          or    to cover          defaults         experienced                on previously                   extended
guarantees.               Congressional               budgetary            actions           were after-the-fact.

          This     began         to change           when OMB included                      a “credit               b&et”           in
the      President’s             budget      submission              for     fiscal          year          1981.         The
credit       budget         was a compilation                   of     the     various              loan      and loan
guarantee          accounts         in the budget,                   accompanied                  by recommend,ed
appropriation              act     limits          on the       new loans             and guarantees                     of    those
accounts.              In subsequent            years,          increasing             numbers              of such
accounts          have been placed                   unde.r such appropriation                              act
limitations,              with     the      result       that        by fiscal              year          1989,      about         38
percent          of new direct              loan      obligations              and 59 percent                       of new
guarantee          commitments              were made under                  such statutory                       limitations.

          In 1985,         the Congress               added budget              resolution                  controls           to
these      growing         appropriations                controls.              The idea                  was to’ provide
in the       annual        resolutions               overall         targets          for         credit       programsl
and allocations                  to the      various           functions         of         the      budget
(agriculture,              housing,          etc.).            Prior       to this,               the      levels        were
left      to the       actions        of several               appropriations                     bills       passed          at
differ.ent         times.

         Yet even with              these       changes,             the     credit          decisions              of.the
Congress          today     are     still       not      based         on estimates                  of final            costs.
Appripriations              controls          about        to be enacted                    for      fiscal         year       1991

will      indirectly         govern        future          costs       by limiting             new levels               of
activity.             These limits           will         not,     however,         directly            control
credit        costs     because       the      amounts            in the       appropriations                  bills
authorize         gross      levels        of credit              activity,         not     the       ultimate              costs
to the        government          on those          programs.

          One result         is    that      the current              cash-based           budget             continues
to misrepresent              the     costs       of credit            activities.              ‘The costs               of ‘a
new direct            loan   program         are     overstated               in the      initial             years         of
the      cash disbursements                and understated                    in the      later         years          of
cash      repayments.             Similarly,              loan     guarantees          appear           to be cost-
free      and are       excluded          from      the budget’s               cash-flow             totals       until
default        payments       are made.              Under         such a system,               it      is
practically            impossible          to make valid                comparisons            of grant,                loan,
and guarantee             alternatives              for     extending           aid.

,   ”

                     This      weakness                 in current         controls           has s timulated            several
            proposals              for      budgetary            reform      from         leaders      of    the    Budget
            Committees ,5                 OMB,6 CB0,7             and GAO.8           Each of          the      proposals
            endorses          the         notion        of estimating               the     total      credit       subsidy       costs
            for     proposed              direc t        loans      and loan, guarantees,                    and appropriating
            funds     for      the         subsidy          costs     before         the      loans     and guarantees              are
            made.          Credit          subsidy          costs     would       be recorded               and controlled              at
            the     time      of         the    decis ion         to extend          credit         assis tance,         thus'
            providing          the          information             necessary         to permit             comparisons          with
            other     programs                 during       budget        review.

            5See Chairman Panetta's    H.R. 3929 introduced                                            in the        2nd session
             of the   10ls t Congress;  and H.J. Res. 324,                                            a joint        resolution
             passed by the Senate on July 31, ,1987.

            6See Budget of the United States    G overnment, .Fiscal Year 1989
             (Part 6b) an,d Budget of the United States G overnment,    Fiscal
             Year 1990 (Part 6).

            7See CBO's Credit                       Reform:          Comparable             Budget      Costs      for    Cash and
             Credit (December                       1989).

            8Budget Issues:   Budgetary    Treatment                                      of Pederal'.Credit                Programs
             (GAO/AFMD-89-42, April     10, 1989).

’   .

                      In m ost of             the      proposals,              credit          subsidy                  accounts            would            be
            established              in agencies               having          credit          programs,                      to which
            projected             credit       subsidy              costs      would          be appropriated.                              In
            addition,             m ost would              establish           credit          financing                      accounts            in
            Treasury          or     in the          originating               agencies           to provide                         the    nonsubsidy
            portion          of     the      funding         for      direct         loans        and to m ake ,default
            paym ents         for      loan      guarantees.                   When a loan                   is m ade,                the
            originating              agency          would          p$y the       appropriated                          subsidy            amount            to a
            financing             account       where          it     would       be com bined                         with      the       balance            of
            the      loan     amount          and disbursed                  to the           recipient.

                      We would             add a word of caution                         about              the         placem ent            of       the
            financing             accounts--          in Treasury               or the           agencies?                      we would               be
            concerned             about       any centralized                   approach               if         it         is accom panied                  by
            debt      m anagem e'nt procedures                        that      lessen           agencies                     accountability
            and responsibility                       for     their          programs.

                      However,             as I said           at     the      outset,           the         areas             of agreem ent
            outweigh          any differences                       among these           proposals                      and provide                   a
            sound      basis         for     m oving         ahead withm needed                       reform .                  Never,theless,
            there      are        som e differences                   worth      m entioning                  among the                    proposals.
            One such difference                       relates          to      the m ethod'used                          to calculate
            credit       subsidy            costs.           Our proposal,                and that                      of     the     Budget
            Com m ittees,            could      be term ed             a "cost-to-the-governm ent"                                          approach.
            For direct              loans,      it         would      m easure          the     net          present              value          of        the
            difference             between           the     costs          to the       Treasury                      of m aking           the        loans,


    and the          expected                 receipts          flowing           back       to the         Treasury            from        loan
    repayments.                   Treasury             costs       would          essentially               be Treasury's
    interest          costs             for     borrowing               funds          to finance           the     loans.             The
    calculation               of expected                 receipts              from       loan         repayments         would
    mainly          take         into     ,consideration                   interest              earnings         and default

              OMB, on the                     other      hand,          prefers          a different              method         that
    could        be termed               a "market-valuation"                             approach.              In the         past,        Cl30
    has also          seen some merit                          inthis           approach.                This     method         would
    calculate              the     economic              benefit          borrowers               receive         as a result                of
    obtaining              federal             loans      at more favorable                        terms         than     would         be
    available              to them from                  the     private               sector.           The subsidy             costs
    would        be the           present             value       of the          additional              payments         that         a
    federal          borrower             would          be required                   to pay for           a similar            loan
    from      the     private             sector.

              Although             a market              valuation              approach           may be useful                 for        some
    purposes,           we prefer'the                     cost-to-the-government                             method        for
    governmental                  budgeting              purposes.                It     would          be more consistent
    with      current             budgeting              practices,               and with;the               cost       valuation
    practices              followed             for      most other               federal          programs.              When the
    Congress          funds             the     School          Lunch program,                    for     example,         it
    provides          amounts             to cover              the ,government's                       costs,      not    amounts
    equal        to the           benefits             to recipients,                    which          may be quite

           Also,         we think       that         it     would      be ve'ry difficult                     to calculate
with       reasonable              confidence             a market          valuation           for      loans       given      to
marginally               creditworthy           recipients,                 many of whom will                    default        on
their        loan        repayments.            For many such persons,                           there         is no real
credit          market       OK set      of applicable                     interest          rates.'          Such persons
come to the               government           for        loans      because          they      cannot         get
commercial               financing.

          All       of    the proposals               would       affect         agencies'             credit-related
budget          authority           and outlays             by requiring               appropriations                   for
credit          subsidy       outlays.               However,          they      wou,ld not            all     affect         the
unified          budget       deficit          in the         same way.               The GAO, OMB, and Senate
Budget          Committee           proposals             would      not      alter     the      government's
reported,            bottom-line             deficit.               They would          be deficit-neutral                      in
their       effects.              Consider,           for     example,           a $50,000             loan.         Under
current          practices,            a $50,000             loan      disbursement              would         count, as a
$50,000          budget       outlay          in the year              of disbursement,                      and add to the
deficit          that       amount      (assuming             no offsetting              repayments                 that
year).           Under       the      GAO, OMB, and Senate                       Budget 'Committee
approaches,               there       would     still         be a $50.,000             outlay          and impact             on'
the      deficit.            The subsidy              portion,          say $5,000,              would         be
highlighted               in budget          reporting            and funded            in appropriations.

          On the          other      hand,      the CBO proposal                      and the bill               introduced
by Chairman Panetta of the House Budget Committee   (H.R. 3929),
would ultimately  move the nonsubsidy portion of the direct  loans

"below         the      line,"         or off-budget,                     on the      grounds          that       such outlays
do not         change          the government's                     financial             condition.              The argument
is     that     this       portion             of        the    loans      represents             money that               the
government              will      recover            over         time     through         loan       repayments.                     CBO
,and H.R.         3929 would               redefine               these      expenditures              as a "medns of
financing            the deficit."                        In our         $50,000      loan        example,         CBO,and
H.R.      3929 would              count         as a budget                outlay         only     the      $5,000          subsidy

          GAO would              distinguish                   between       the     subsidy          and nonsubsidy
amounts         in a different                      way.          I am referring                 to our proposal                      to
restructure              the      unified            budget         into      general,            trust,,       and
enterprise              funds,         with         an operating              and capital              component                for
each.          In that           proposhl,               we would          classify          the      credit       subsidy                 in
the      operating             part      of th'e budget                   and the         nonsubsidy            amount           in        the
capital         part.          'Both,          however,            would      remain         within         the    unified
budget.          We believe,it                      is     important          to maintain              a link         between
the      government's                 overall             budget        deficit       and its          borrowing                needs.

          We urge          that        Congress,                OMB, and CBO look                  carefully               at    our
proposed         budget           restructuring,                    which         we believe           would       permit              a
better         understanding                   of the government's                        financial            performance
and financing                  requirements.                      In the meantime,                 however,           it        is
clear         to us that              credit         reform         would         be'an      important            improvement
that      can be accomplished                            within      the present              budget           structure.

         I want         to emphasi'ze               that         the differences                  among the         proposals
should         not    be seen as major                     impediments                 to reform.              I am
confident            that      the        common features                 outweigh             the differences               and
that     ways can be found                        to reach          agreement            on an approach               that
would     be a significant                        improvement             over     current            credit      budgeting

         I would            like,         now, to turn              to some related                   matters.


         H.R.        3929 would             treat         the government's                 deposit             insurance.as
a type       of      loan      guaranty            and require              appropriations                for     the
estimated            costs          not    covered         by insurance                 fees     and premiums.                We
think     that        such a proposal                     deserves          careful            consideration.
Indeed,         we would             probably         extend         the        concept         to    include       all      forms
of     insurance            programs             where     it     has been determined                     that      there      are
costs     that        cannot          be covered                by existing             or future         fee'and
premium         receipts.                 This     has proved             to be the             case with         FSLIC,       for

         The basic             issue        is     similar         to     that     of     loan        guarantees.
There     needs        to be a timely                     recognit,ion            of,     and appropriations
for,     the      expected            costs        that         cannot      be covered               by fees      and
premiums.             On insurance                 programs,             this     would         essentially           be the
costs that            are projected                 for      payment            from     Treasury.


               Of course,          the government's                   current        rescue         of the              thrift
    deposit           insurance         system       comes to mind.                  This      is a clear                  case
    where           a combination         of deregulation,                      industry       mistakes,                 and
    economic           downturns         created          an insurance              need not            covered            by the
    premiums           and fees.          The government                 will       have to pay hundreds                            of
    billions           of dollars         to clear            up the problem.                  How much of                   this
    Treasury           price     tag,     reflecting             costs      and liabilities                      already
    incurred,           has been included                    in budgetary            totals?                 Only     about         $19
    billion           has been reflected                  in the budget              authority                totals.              This
    is an amazing               budgetary          shortfall.

               It     is past     time      for     the      government            to get         its         books        right         on
    this       savings         and loan      problem.             I would          urge     all         parties
    concerned           to do the         following            as we approach               anothesr             Gramm-
    Rudman-Hollings               (G-R-H)          deficit        snapshot           date      later           this        year:
    make full           and accurate              estimates           of the       costs       in a timely
    fashion           and get     Treasury's            share         figured        into      the budget's

              Also,      on GSEs, we are currently                          studying           certa,in             budget
    treatment           issues      as well         as the' safety                and soundness                 of GSEs.
    Some are'inappropriately                        being        used to move federal                          activities
    off-budget,            and we will             report        to the Congress                  soon on our
    recommendations               to minimize             this     kind         of problem              in     the       future.

        In conclusion,       I would     urge        the Congress     to move forward           at
this    time   on cr,edit    budgeting         reform.      I would    also     suggest    an
examination      of    the concepts      for     possible     application        to the
insurance      areas     of the budget.

        This   completes     my statement,           Mr. Chairman.          I would   be glad
to respond      to the questions         you or Members of the                Task Force    may