May 1, 1978
Page 11871
Mr. MUSKIE. Mr. President, S. 2146, the Agricultural Credit Assistance Act of 1978, which is now before the Senate, is an important farm credit bill. It would authorize needed changes in several programs of the Farmers Home Administration, and it would make Federal loans and loan guarantees available to farmers and ranchers who are affected by a general tightening of agricultural credit.
The PRESIDING OFFICER. Will the Senator yield for a moment so I may ask who is yielding time?
Mr. ALLEN. I yield such time as the distinguished Senator from Maine may require on the bill.
Mr. MUSKIE. I thank the distinguished floor manager for his courtesy.
I support enactment of this bill, Mr. President. I want to make clear my reasons for supporting it, as well as raise questions I have about two of its provisions. I count myself, Mr. President, among those Senators who sense very keenly the plight of American farmers. For thousands of rural families, these have been dark and troubled times. Costs have risen. Prices have fallen.
Crops have shriveled under widespread drought and severe storms. Many families in my own home State of Maine have been among those who have been hurt. Recent months have been particularly bitter for those many farmers who were encouraged by the boom years of 1973–75 to assume heavy debt burdens and invest in expensive land and machinery.
Mr. President, I do not believe anyone on this floor questions the need to preserve the family farm. The family farm is important for the food it produces and the way of life it preserves. I am particularly sensitive to this fact as a result of our experience in Maine. Only a few years ago, we had 5,000 potato farmers. Today there are not many more than 1,000. So I understand from experience in my own State the concerns that have been expressed during the past few months by farmers throughout the Nation.
We all realize that additional assistance to family farms is necessary because of the cost-price squeeze. In the past few months there has been considerable debate about what kinds of assistance should be provided. I have said previously that we must strive to assure our farmers of an adequate, stable income, avoiding the boom-and-bust cycle of the past few years. We must also maintain adequate levels of agricultural production.
Recently in this Chamber, Mr. President, we debated other legislation that purported to solve the farm problem. Unlike that other legislation, this bill deserves our support. Unlike other legislation, this bill would help not just a few, but a broad. spectrum of the Nation's farmers. I have stated before that wheat and feed grain producers are not the only ones facing economic hardship. An acceptable solution to the farm problems must recognize that fact. And this bill does.
This bill makes significant improvements in the Farmers Home Administration loan programs, which benefit many farmers who are facing a difficult year. In fact, they are the only Federal agriculture programs that substantially benefit Maine potato growers. The bill increases lending limits to reflect today's cost of production and land prices. In addition, the bill permits loans to certain partnerships and corporations, which also is a wise response to the changing patterns of American agriculture.
So I am pleased to support this measure as thoughtful and reasonable legislation that will provide much needed aid to a broad spectrum of our farm community. This is the real Agricultural Assistance Act of 1978. This bill should be the centerpiece of the Federal Government's response to the needs of American farmers.
But now to raise my first question about the bill.
Mr. President, I note that section 104 of the bill would increase the authorization ceilings for Farmers' Home rural water and waste disposal grants by $700 million. I understand and share the concern for clean water that underlies this recommendation of the Agriculture Committee. I would like to point out, however, that this bill is about the only place where such a large increase in funding has been suggested for this program. This increase was not recommended in the Senate Agriculture Committee's March 15 report to the Budget Committee, nor did the Appropriations Committee anticipate such an increase in its report. Since no committee has recommended this increase, the fiscal year 1979 first budget resolution targets, which passed the Senate just last week, do not assume full funding of section 104.
I note that this level of funding would not be authorized by the House version of this bill and is not favored by the administration. It does not seem at all likely, therefore, that funding of rural water and waste disposal grants will be substantially above the levels assumed in the first budget resolution for fiscal year 1979. With that understanding, Mr. President, I do not feel compelled to oppose this section of the bill.
I wonder if the distinguished floor manager would want to comment on that point?
Mr. ALLEN. This raise was by amendment in the committee after the estimates had been made by the Agriculture Committee and furnished to the Budget Committee. It would, of course, require an appropriation, and inasmuch as the House figure is substantially lower, some 50 percent or more lower, I would not anticipate, even as to the authorization, that the figure would survive the conference, in my judgment.
Mr. MUSKIE. I appreciate the distinguished Senator's comment, and it is consistent with my own view of the situation.
While we are on the subject of water and waste disposal grants, Mr. President, I would like to point out the importance of eliminating overlap and competition among programs to improve waste water treatment and solid waste disposal. Where possible, consolidation of these programs should be encouraged.
There is potential overlap between the Farmers Home program and the waste water treatment construction grants program of the Environmental Protection Agency. The former addresses a variety of needs including water supply, waste water treatment, and solid waste disposal.
May I say that I have seen the benefits that these programs could bring to small rural communities in my own State, as well as the State of Alabama.
Mr. ALLEN. Yes.
Mr. MUSKIE. A State which is served so well by my good friend from Alabama.
EPA, of course, provides 75 percent grants for construction of waste water treatment facilities. Careful examination of the relationship between the programs should be made in the near future, with the view to eliminating overlap and competition that may develop.
I have earlier stated that such overlap and competition among programs is a prime source of Government waste. So this kind of rigorous analysis of ongoing programs is vital if we are to improve the efficiency with which Federal resources are used.
Mr. ALLEN. I certainly agree with the distinguished Senator from Maine, and that should be done. I feel that legislation is being proposed now that will consolidate and streamline many of these programs so that there will not be the overlaps the distinguished Senator points out.
Mr. MUSKIE. I thank my good friend again.
Mr. President, I get to the second question I have and it is a more troublesome question in many ways, so I would like to lay out my view of it and perhaps the distinguished floor manager would be kind enough to comment on it and to give me his view of it.
Mr. President, I support this bill. However, it now contains one provision which, it seems to me, is unnecessary, which would be very expensive, and which should be removed before this bill becomes law. Section 114 of the bill would make permanent a 3-percent interest rate for Farmers Home Administration emergency loans that was enacted less than a year ago as a special, temporary, emergency response to severe flooding in some parts of the country. That provision is not essential to this bill, and including it will seriously set back our attempts to reduce the deficit and balance the budget.
Prior to last August, Farmers Home emergency loans were made at an interest rate of 5 percent. Small Business Administration disaster loans were made at the Government's cost of money, or 6½ percent. In response to severe flooding in certain parts of our country, the Small Business Amendments of 1977 reduced these rates substantially. This law, enacted only last August, established low interest rates for SBA and Farmers Home disaster loans on an emergency, temporary basis.
Thus, during the last 8 months 3-percent loans up to $250,000 have been available for businesses, including farms, that have suffered physical damage from a declared disaster. This provision is due to expire on September 30 of this year and 3-percent rates would not be available for disasters occurring after that date.
Mr. President, with the market interest rates at their current level these 3-percent interest rates now provide disaster victims with benefits that are extremely high in comparison with past practice.
The history of disaster loan interest rates should be kept in mind. The FmHA emergency loan program was enacted in 1949. Interest rates were set at 3 percent, at the time a rate that was substantially above the Government's cost of money. For short periods of time in 1951 and again in 1953, the Government attempted to set emergency loan interest rates at a level close to that charged by private lenders. This was done so the Government could offer loans for recovery from disasters but not encourage program abuse with excessive benefits.
The SBA disaster loan program was initiated in 1953. The program's 3-percent interest rates were also substantially above the Government's cost of money at that time. In fact, right up until the late 1960's, a 3-percent interest rate on disaster loans was very close to the Government's cost of money. Throughout this period, therefore, the subsidy to borrowers and the costs to the taxpayers were very low.
In the late 1960's, the private market interest rates rose sharply, and the fixed 3-percent disaster loan interest rates began to provide very attractive benefits to borrowers and heavy costs to the Government. To correct problems resulting from that situation, the Disaster Relief Act of 1970 raised the FmHA emergency loan rates, beginning in 1972, to a rate close to the Government's cost of money.
In 1972, low-interest rates, loan forgiveness and other benefits were enacted in response to Hurricane Agnes. The widespread abuses that resulted led Congress in 1973 to increase the SBA and FmHA rate to 5 percent. In 1975, SBA rates were further raised to the Government's cost of money.
To sum up, Mr. President, Congress has generally kept interest rates for disaster loans close to the Government's cost of borrowing to finance them.
From time to time, it has been argued that the Federal Government should make low interest rate loans available to victims of a disaster. Of course, that argument appears on the surface to have merit. Those who have lost much in a disaster would find it easier to get back on their feet with subsidized loans than with a market-rate loan.
Mr. President, I am certain that no one in this Chamber would argue against providing Federal assistance to help needy victims recover from the effects of unforeseeable natural disasters. However, Mr. President, I am convinced that deeply subsidized interest rates are precisely the wrong way to offer that aid. Fixed, deeply subsidized interest rates create serious problems for the Federal Government. I would like to highlight a few of those problems.
First, at any given volume of Federal loans, the lower the interest rates, the more the public has to pay. This 3-percent interest rate can be very costly indeed. In fact, the disaster loans expected to be made in fiscal year 1978 alone will cost the taxpayers about $.2 billion each year for the next 7 years. That $1.4 billion is the actual cost to the taxpayers just for 1 year's loans, assuming every one of those loans is repaid. I do not believe we can sustain those costs. Indeed, the drain these heavy subsidies make on budgetary resources reduces the funds available for other lending of the Farmers Home Administration for farm ownership and operation.
Second, the subsidy costs tend to create even greater subsidy costs. Deep subsidies encourage even those who do not really need the emergency loans to apply for them. Moreover, such subsidies create strong incentives for those eligible, especially those who ordinarily use credit, to borrow as much as possible under a Federal disaster program. Just to note one illustration, on a $50,000, 7-year loan, a 3-percent interest rate provides large savings over a loan at the Government's cost of money — savings that are equivalent to a $5,000 outright grant. In fact, at 3 percent any eligible borrower could make money by borrowing under the disaster loan program and putting the proceeds in his local bank.
Mr. ALLEN. Mr. President, will the Senator yield at that point?
Mr. MUSKIE. I yield.
Mr. ALLEN. The Senator realizes, of course, that this 3 percent money that is available for disaster loans is available only to persons who are unable to obtain credit elsewhere. So I would doubt that someone unable to obtain credit would be able to borrow money at 3 percent and then put it in the bank at 5, 6, or 7 percent. It is only available to those who are unable to get credit elsewhere. I call that to the attention of the Senator.
The PRESIDING OFFICER. The time of the proponents of the bill has expired.
Mr. ALLEN. I yield an additional 15 minutes on the bill.
The PRESIDING OFFICER. The time on the bill for the proponents has expired. Do the opponents wish to yield time? The opponents have 16 minutes remaining.
Mr. ALLEN. I ask unanimous consent that there be an additional 30 minutes for the proponents of the bill.
The PRESIDING OFFICER. If the Senator will withhold that temporarily, the Chair points out to the Senator from Maine that he would have 2 hours on the amendment.
Mr. ALLEN. He has not offered an amendment.
The PRESIDING OFFICER. Is there objection to the request of the Senator from Alabama?
Mr. CURTIS. Mr. President, reserving the right to object, how much time does the minority have?
The PRESIDING OFFICER. Sixteen minutes.
Without objection, it is so ordered.
Mr. MUSKIE. I say to the distinguished floor manager that I am aware that the "no credit
elsewhere" test is applicable. But past history indicates that it is a test that is easily met. There is pressure on banking institutions to cooperate with applicants in meeting that test; and the deeper the subsidy, the greater the pressures on banking institutions to cooperate with banking customers.
The second point I would make is that the proceeds of such loans are easily substituted for other funds in a borrower's total financial program. In other words, if an applicant is eligible for the subsidized credit, he cannot effectively be limited on the amount he borrows. It is extremely difficult to insure that the proceeds of the disaster loan will not be used for purposes unrelated to the disaster needs for which he may apply for the credit.
I will make this final point, as a wrap-up: The deeper the subsidy, the greater incentive one creates to use the Government credit rather than conventional private credit, and the more pressure there is to abuse the program. I think past experience demonstrates this to be fact. That is my concern, I say to the Senator.
Mr. ALLEN. On that point, I believe the Senator will notice, however, that the 3 percent would apply only to borrowers who cannot obtain credit elsewhere at reasonable rates and terms up to the amount of the actual loss. Other borrowers would be required to pay an interest rate not in excess of the cost of money to the Government plus not to exceed 1 percent. For all borrowers, the interest rate for loans in excess of the actual loss is the prevailing private market interest rate.
So there would not be an opportunity there for a borrower to borrow at 3 percent money that he does not need.
I think that would allay some of the fears of the distinguished Senator.
Mr. MUSKIE. There is always the temptation to overstate the need.
I do not know how rigid one can make the test of need administratively to avoid over-borrowing on the Government's credit. When it is possible for the subsidy to produce the equivalent of a $5,000 outright grant on a $50,000 7-year loan, the pressures to get the full advantage of that subsidy or the credit are bound to be very great. I think the best safeguard against opening up those abuses is to reduce the amount of the subsidy. I believe our experience demonstrates that over the years.
I do not question the Senator's and the committee's concern about those possible abuses. I do take notice of the fact that these attempted safeguards have been written in. But I must say, in all honesty, that in my judgment the most effective safeguard would be to limit the amount of the subsidy.
There would be some subsidy at the 5-percent rate, or even at the Government's cost of credit. So we are not talking about offering unsubsidized loans. We are talking about limiting the size of the subsidy.
Our past experience, as I have recited in the course of these remarks, indicates that over the years we have learned that the prudent course is to keep the interest rate as close as possible to the Government's cost of money.
This year, I say to the Senator, the total of loans of FHA and SBA was $5.8 billion compared to an average of about $900 million in preceding years.
So, obviously, this 3-percent program is enormously attractive. When you have that kind of money available on these attractive terms, I am concerned that writing this interest rate into law as a permanent feature is a long-term commitment that we should not take at this time. And I say that in all candor and with full appreciation of what the committee has tried to do to safeguard against the abuses to which I referred.
Mr. ALLEN. I thank the distinguished Senator.
Mr. MUSKIE. So, based on what we already know, Mr. President, we have a clear warning that these deeply subsidized rates should not be established as permanent policy.
No wonder one expert in agricultural credit said anyone would be a very poor businessman not to borrow as much as he could for as long as he could at those rates. The Government should not create that kind of incentive for abuse, and the taxpayers should not be asked to pay for it.
Based on what we already know, we have a clear warning that these deeply subsidized rates should not be established as permanent policy.
A strong case can be made that these loans should be made at an interest rate no lower than the Government's cost of money. The rate at which the Federal Government borrows is, of course, much lower than the rate that private borrowers must otherwise pay. So Federal loans made at the Government's cost of money provide large benefits to borrowers.
The issues related to disaster loans deserve much more careful attention from Congress and the administration than they have been given. Unfortunately, Mr. President, we do not yet have a comprehensive, long-term national policy for responding to disasters.
Indeed, the Government does not now accurately estimate how the Federal budget will be affected by changes in interest rates and other elements of Federal disaster loan programs.
Senator BELLMON and I have asked CBO to develop improved procedures to estimate those costs. That work, is of course, extremely important to our efforts to control the budget.
I strongly support the broad review of all disaster assistance that has been scheduled over the next months. We should consider how the interest rates for disaster loans should be set — fixed rates tend to produce fluctuating and unanticipated benefits when inflation and other factors drive up private market rates. We should consider ways to make sure that benefits go only to those who really need Federal assistance and only for those purposes that involve the national interest.
For several decades national disaster policy has emerged as a patchwork of hasty, ad hoc reactions to past disasters. It has been made clear to us for at least the last 8 months, how that approach can interfere with responsible budgeting of our scarce resources. I note that the administration, just this past Friday, submitted to the Congress its proposal for comprehensive crop insurance. I expect the President's plan for reorganizing Federal disaster assistance programs to be submitted early in June. I hope, Mr. President, that these proposals will be solid steps toward the comprehensive disaster policy that is so badly needed.
Perhaps, in the long run, the Government's cost of money should be adopted as the interest rate for both SBA and Farmers Home disaster loans. The administration, I understand, favors uniform rates for Farmers Home and SBA disaster loans with a 5 percent rate on loans for losses to primary dwellings and personal property and a rate equal to the cost of Treasury borrowing for losses to income producing properties, both farm and non-farm. The administration favors imposing a test of credit elsewhere for disaster loans that are to be used for income producing property.
I note that the House version of this bill would allow rates for Farmers Home emergency loans to return to the 5 percent levels that will be in effect under current law. At the very least, the final bill should permit the Farmers Home rates to return levels in effect prior to last August.
Therefore, I urge the Senate conferees to accept the House position on Farmers Home emergency loan rates.
I yield the floor.
Mr. ALLEN. Mr. President, I yield myself such time as I may require.
I commend the distinguished Senator from Maine for his very competent analysis of these provisions and assure him that I appreciate his watchdog role here in the Senate, and I feel that he has been a strong force for good in seeking to see that the Federal Government adopts a sound fiscal policy.
We all recall that emergency legislation for farmers did pass the Senate some weeks ago. It was threatened with a veto and was defeated in the House of Representatives. We do know that our farmers are in serious economic difficulties.
We do not feel that now would be the time to cut back greatly on the low interest rate for disaster loans because as to a farmer, already beset by economic troubles in his farming operations, where everything that goes into the production of the crop has gone up greatly in price and the amount that the farmer receives for his crops has gone down in recent months, we would hate to add additional burdens to the farmer.
I point out that in a number of these programs of the Farmers Home Administration raises have been made in the interest rate on a number of programs, and the only program where there has been a continuation of a low rate has been on the disaster loans.
I recall when the law was that in case of loans for natural disasters there would be a $5,000 forgiveness on the loans. That has been abandoned. But it has been felt or was at the time Congress went to the 3-percent rate those farmers, who had a natural disaster and were unable to get loans elsewhere, would be extended the 3-percent loan rate on the actual amount of their loss and it would be the cost of money on amounts above the actual loss.
But I heard the amount argued here on the floor the other day between the distinguished occupant of the chair, Mr. HARRY F. BYRD, JR., and the distinguished chairman of the Budget Committee on the appropriations that we are making to international banks and IDA, and the billions of dollars that we invest in these international financial institutions. We all know that IDA makes loans where the first 10 years all they pay is about seven-eighths of 1 percent for service charge and no one, I assume, thinks there is a great deal of prospect of getting the principal back much less the interest. So I am not shocked at the idea of a 3-percent loan to farmers where they have a natural disaster.
Then on the programs where the interest rate has been raised, I ask unanimous consent, Mr. President, that a table I have had prepared having to do with the interest rates on various loans be inserted at this point in the RECORD.
There being no objection, the table was ordered to be printed in the RECORD, as follows:
[Table omitted]
Mr. ALLEN. If the distinguished Senator does not have a copy, we furnished his staff with a copy of this, and I would like to have him examine that.
Mr. MUSKIE. Mr. President, will the Senator yield for a question?
Mr. ALLEN. I yield.
Mr. MUSKIE. On the basis of the questions that trouble me and which also have troubled the committee, because the committee has undertaken to establish some safeguards, I wonder if the Senator would consider putting a time period, that is, make the policy the bill proposes, say, a year so that we can get another year's experience of evaluating these programs and the potential for abuse, while we address ourselves to the broader question of disaster loans and policies that ought to implement them, and which would give us another trial period? It would not nail us down to an indefinite policy that might prove unwise and, I think, the Senator might think well of that.
Mr. ALLEN. Yes, I am prepared to answer that.
As I understand, the Senator is suggesting another year at the 3 percent, and then going to 5 percent; is that correct?
Mr. MUSKIE. Yes, unless we should again within the year decide to extend it.
Mr. ALLEN. I think that is a very fair proposal, and certainly I would be willing to recommend that to the committee.
Mr. MUSKIE. May I then work with the Senator's staff in putting together an amendment of that kind?
Mr. ALLEN. Yes, that would be 1 year from September 30, of course—
Mr. MUSKIE. Yes.
Mr. ALLEN (continuing). Because it is already authorized up to that time.
Mr. MUSKIE. Yes. Let us try to put that together. I think that might be a happy compromise.
Mr. ALLEN. Of course, as the Senator points out, the House has got the 5-percent figure, and it is possible that somewhere in between there an agreement could be reached that might be even more satisfactory to the distinguished Senator.
Mr. MUSKIE. Yes. Well, I thank the Senator.
Mr. ALLEN. The Senator realizes that this particular section 114, does have a two-tier interest rate: as to those who have no credit, cannot get credit elsewhere, this low rate applies. But all farmers who have sustained a natural disaster would be able to apply to the Farmers Home at the cost of money to the Government, plus 1 percent.
Mr. MUSKIE. Yes.
Mr. ALLEN. So there would be no loss there to the Government. But that would be available to all farmers who sustain natural disasters.
Mr. MUSKIE. I understand.
Mr. ALLEN. I thank the distinguished Senator for his suggestions. The appeal he made here on the floor has been most effective, certainly has influenced the thinking of the committee, I can assure the distinguished Senator, and if that would be satisfactory to the distinguished chairman of the Budget Committee we will prepare an amendment giving this 3-percent interest rate life for an additional 1 year beyond September 30 of this year.
Mr. MUSKIE. I was sure, knowing the Senator's concern about budgetary prudence, that my argument might be appealing.
Mr. ALLEN. Yes. It affected me deeply,I will say to the distinguished Senator.
Mr. MUSKIE. I thank the Senator.
Mr. ALLEN. Mr. President, I mentioned a moment ago that the time when $5,000 forgiveness was allowed on Government loans to disaster victims, specifically the $5,000, was in effect the years 1973 to 1974, and prior to that time in 1970 and 1971 there had been a $2,500 forgiveness feature.
I suggest the absence of a quorum and ask unanimous consent that the time not be charged to either side.
The PRESIDING OFFICER (Mr. SARBANES) . Is there objection? The Chair hears none, and it is so ordered. The clerk will call the roll.
The second assistant legislative clerk proceeded to call the roll.
Mr. MUSKIE. Mr. President, I ask unanimous consent that the order for the quorum call be rescinded.
The PRESIDING OFFICER. Without objection, it is so ordered.
UP AMENDMENT NO. 1253
Mr. MUSKIE. Mr. President, earlier, the distinguished floor manager of the bill (Mr. ALLEN) and I had a colloquy about a compromise of the interest rate issue with respect to disaster loans. We have worked out an amendment which would provide, in effect, that if an applicant for a disaster loan were unable to get credit elsewhere, he would be eligible for a loan at the rates provided by this amendment. Until October 1, 1979, that rate would be 3 percent; thereafter, it would be 5 percent. If the applicant were not eligible for this loan under other provisions of the bill pending before us, the interest rate would be the cost of money to the Government, as I understand it.
Mr. ALLEN. Plus 1 percent.
Mr. MUSKIE. Plus 1 percent.
This, I think, incorporates the understanding that the distinguished floor manager and I had earlier when we discussed this without the benefit of having language before us. This language, I think, adequately and fully implements what we discussed, so I offer the amendment at this time, Mr. President, as an amendment cosponsored by the distinguished floor manager of the bill.
The PRESIDING OFFICER. The clerk will state the amendment.
The second assistant legislative clerk read as follows:
The Senator from Maine (Mr. MUSKIE) for himself and Mr. ALLEN, proposes unprinted amendment numbered 1253.
On page 22, strike out lines r3 and 14, and insert in lieu thereof the following:
"of time, the interest rate shall be 5 per centum per annum: Provided, That all such loans covering losses from disasters occurring before October 1, 1979, shall be at a rate of 3 per centum per annum, and".
Mr. ALLEN. Mr. President, the committee will take this amendment. We believe it improves the bill and makes it a sounder and fairer bill. We recommend that the Senate agree to the amendment.
The PRESIDING OFFICER. Do the Senators yield back their time on the amendment?
Mr. MUSKIE. I yield back my time, Mr. President.
Mr. ALLEN. I yield back my time.
The PRESIDING OFFICER. All time is yielded back. The question is on agreeing to the amendment.
The amendment was agreed to.