May 16, 1979
Page 11566
The PRESIDING OFFICER. The Senator from Maine.
Mr. MUSKIE. Mr. President, I rise in opposition to the Cochran amendment. With all due respect to my good friend, this is not the first time that this issue has been before us. It has been sort of a running battle for the last 2 or 3 years. Every time disaster strikes, one of the immediate means for relief which occurs to one Senator or another is cheap interest loans.
I simply want to present to the Senate tonight some of the abuses which have flown from the adoption of that kind of emotional, instantaneous reaction to disaster. When disaster strikes our neighbors, our inclination is to give them every helping hand we can, and it has cost the taxpayers a great deal of money in the last 2 or 3 years.
In the 1979 fiscal year budget, to the best of my recollection, the U.S. Government will pay out $52.4 billion in interest on the Federal debt at an average cost to the Government of 8.25 percent.
It is proposed with this amendment that we lower the interest we charge on this money we borrow to 1 percent in some cases and 3 percent in others.
Mr. President, because of this inclination on the part of Senators, liberals and conservatives, when disaster strike their States, liberalism and conservatism go out the windows, our hearts open up to all the victims, we lower the terms, and we make entry to the Federal Treasury easy, because of our compassion for our constituents back home.
It is in the context of that background that the members of the Small Business Committee, Mr. President, have done a statesmanlike job, in my judgment, in negotiating a package of Federal disaster lending program reforms, which although not perfect represent significant improvements over current programs.
I wish to commend the distinguished committee chairman, Senator NELSON, and the distinguished Senators from Kentucky, Senator HUDDLESTON, and Connecticut, Senator WEICKER, for their work in negotiating this agreement.
The disaster loan provisions contained in S. 918 are the product of long negotiations. They are the product of compromise. If significant changes of the type contemplated by the amendment by the Senator from Mississippi are adopted, this entire carefully negotiated agreement can come undone.
Last year, the President vetoed a bill which included home and personal property interest rates higher than the level proposed in the Cochran amendment, partly on the grounds that the bill's rates were too low. I urged the President to veto that bill.
This year we cannot risk seeing the SBA bill vetoed. This year we must have a bill that is signed into law. The reason is that this year, unlike last year, without legislation SBA's program authorizations will expire — we cannot afford to see it vetoed.
The Cochran amendment, however, is undesirable for other reasons as well. First, it would return interest rates on homes and personal property to the disastrously low levels of 1977 and 1978:1 percent on the first $10,000 of loan, and 3 percent on the next $30,000. Second, by lowering interest rates to those levels for home and personal property loans, it would create pressure to reduce interest rates on business loans to unacceptably low levels as well.
Mr. President, this would be unacceptable. We are now acquiring documentary evidence of the program abuses that occur when interest rates are set too low. A soon-to-be-released GAO investigative report on SBA and Farmers Home Administration disaster lending programs will reveal that deeply subsidized interest rates stimulate over-borrowing and encourage people of enormous wealth to abuse the program, all at enormous cost to the taxpayers.
The GAO has not yet completed its report. But let me give you an example of some of the abuses that the GAO investigators have found.
A businessman who also operates several farms borrowed $408,000 for 3 years from SBA due to the 1977 drought. His financial statements showed that he enjoyed annual gross income of $900,000, owned assets valued at $42 million and had a net worth of $38 million. Other credit information showed this individual also had credit available from major banking institutions at the prime rate plus 1 percent.
Another borrower, a millionaire, who obtained an 8-year, $81,300 SBA physical disaster loan, had cash on hand of more than $92,000 and $50,000 worth of other current assets available. In addition, this borrower owned over 1,100 acres of landvalued at $778,000 with a mortgage of only $15,000. The loan file also showed that of the $81,300 loan, the borrower used $15,000 to reduce other outstanding debt and invested the remaining loan funds of $66,300 in a certificate of deposit.
A medical doctor with a net worth of $3.2 million and an annual net profit from his private medical practice of $120,000, received a $500,000 SBA physical disaster farm loan with a repayment period of 15 years. The doctor owns about 1,600 acres of land, a pecan processing plant, and numerous rental properties. In addition to the doctor's real estate holdings and other long-term assets, he had more than $325,000 in cash on hand, marketable securities, and other current assets.
The president and principal owner of a multimillion dollar corporation with plants or sales offices in six States, and two countries, received a $500,000 SBA physical disaster farm loan.
The borrower is an officer, partner or director in at least six other companies and has interest in additional businesses. The borrower has a net worth of $4.8 million and annual gross nonfarm income in excess of $250,000. The nonfarm income isfrom salaries, dividends, interest, rents, director's fees, profits realized from partnerships and small business corporations.
When this borrower applied for the loan he requested a 20-year repayment period, however, the request was denied and the repayment period was approved for 15 years. An SBA official noted on the loan approval sheet that the farming losses do not reflect the overall operations of the borrower. He added that the borrower has a very strong operation financially and that repayment should be no problem. The borrower protested the 15-year repayment period and asked for reconsideration. SBA decided in favor of the borrower and changed the repayment period to 20 years
This did not end the borrower's efforts to hold the low-interest money as long as possible. When the first annual installment was due, he mailed SBA a check for the accrued interest and requested that the principal amount due be deferred 1 year because of 1978 crop losses. This time, SBA ruled against the borrower based on substantial other income that the borrower had available to pay SBA obligations.
Another SBA loan recipient, who was identified by SBA officials as a member of one of his State's most influential families and a large landowner, received a $298,700 disaster loan for 5 years. The applicant reported a net worth of $1 million; however, the loan officer commented in his report that the applicant's financial statements were grossly understated. Representatives of local lending institutions unanimously agreed that a borrower with his financial position could have easily obtained credit elsewhere.
A farmer owning 1,000 acres also received a $16,000 SBA disaster loan for 5 years. This was in spite of the fact that the farmer had available $19,000 in cash and $11,000 in accounts receivable. His assets totaled $1.5 million and his net worth $1.1 million. He was also director of a local bank.
Another farmer with $1.4 million of total assets and no liabilities received a $6,700 SBA physical disaster loan for 5 years. The farmer owned 475 acres and had $425,000 of farm equity. Local banking officials said they would give this individual a signature loan for the same amount.
The list of abuses could go on and on. The home and personal property interest rates of the Cochran amendment, together with lower interest rates on business loans — the pressure for which would certainly be increased by passage of the Cochran amendment — would be certain to encourage continuation of such abuses.
In the absence of the Cochran amendment, however, the reforms in S. 918 should do much to correct for these past abuses. First, as I have indicated, holding the amount of interest subsidy to a reasonable level will deny much of the incentive for potential borrowers to abuse the program.
Second, under S. 918, all but a small proportion of agricultural disaster victims would be expected to borrow only from the Farmers Home Administration, an agency that knows agriculture and, therefore, should be more capable than SBA of guarding against fraud and abuse in agricultural lending.
Third, the bill institutes a credit elsewhere test at the SBA to match the one at Farmers Home.
Disaster victims who can obtain credit elsewhere would still be allowed to borrow at both SBA and FmHA, but they would have to pay interest at the Government's cost of borrowing. The taxpayer, therefore, should be relieved of the burden of subsidizing low interest loans to millionaires. Personally, I believe there is serious question whether such credit-worthy borrowers should be allowed to borrow from the Federal Government, but I accept this provision as a necessary compromise.
Now, Mr. President, other members of the Senate Budget Committee and I are in conference with the House Budget Committee on this year's budget resolution, undertaking to do our very best to hold spending down to the level which the Senate has mandated us to do, achieving, hopefully, in 1981, a balanced budget. Here we are talking about a program which, in its abuses over the last 3 years, has resulted in subsidizing millionaires along the lines I have described, who are attracted by low-interest loans from the Government in lieu of credit that is available or resources that are available to them from other sources. I would not like to see the Senate open the door to this kind of budget abuse in the name of disaster relief, as to which there is absolutely no legitimate connection.
RELATIONSHIP OF BILL TO BUDGET RESOLUTION
The authorization contained in S. 918 for SBA programs exclusive of disaster lending can be accommodated within the Senate Concurrent Resolution 22 function 370 targets. That is the first congressional budget resolution. The levels in the House bill are substantially above our targets but we would expect that the Senate Select Committee will work to maintain its funding level in conference.
For disaster lending, full funding in fiscal year 1979 could cause the function 450 budget authority and outlay targets each to be exceeded by $0.1 billion. In fiscal year 1980, assuming an average disaster year — and I do not know how you establish that except statistically over a period in the past — full funding could exceed the budget authority and outlay targets by $0.1 billion. In each of fiscal year 1981 and fiscal year 1982, the potential funding excess would be $0.2 billion in both budget authority and outlays.
Therefore, passage of S. 918 will require offsetting reductions in funding for other programs in function 450. Programs that might be reduced include EDA development finance and HUD urban development action grants, both of which received assumed funding increases under Senate Concurrent Resolution 22.
SECTION 401 POINT OF ORDER
Senators should be aware that S. 918 is also subject to a point of order under section 401 of the Budget Act because of the retroactive interest rate reductions.
Legislation which would apply lower interest rates retroactively to existing SBA disaster loans is "new spending authority" as defined in section 401(c) of the Budget Act.
Section 401(c) (2) (C) of the Budget Act provides that the term "spending authority" means authority:
To make payments (including loans and grants), the budget authority for which is not provided for in advance by appropriation acts, to any person or government it, under the provisions of the law containing such authority, the United States is obligated to make such payments to persons or governments who meet the requirements established by such law.
Consideration of legislation which assesses the three characteristics set forth in section 401(c) (2) (C) is subject to special provisions of the Budget Act, since such legislation commits the Federal Government to make expenditures without prior review through the appropriations process. The three characteristics of legislation described in section 401(c) (2) (C) , or "entitlement" legislation, are:
First. The legislation authorizes payments;
Second. The budget authority for these payments is not provided for in advance by appropriation acts; and
Third. The Government is obligated to make the payments to all persons who meet the requirements established by the law.
A provision applying lower interest rates retroactively to existing loans on which payments already have been made possesses all three characteristics of entitlement legislation.
First, such a provision provides authority to make payments. Under current law, holders of loans made in connection with disasters which have occurred since October 1, 1978, have been making repayments under the terms of the higher interest rates. This legislation would decrease the amounts owed by these loan holders. Thus, it entitles at least some of the loan holders to refunds for excess repayments already made. These refunds are "payments" within the definition of section 401(c) (2) (C).
Second, the budget authority for these payments is not provided for in advance "by appropriations acts." Section 3(a) (5) of the Budget Act defines the term "appropriation act" as "an act referred to in section 105 of title 1, United States Code." Section 105 refers to "appropriation acts" in terms of single year appropriations. In this case, subsequent appropriations action would be required to liquidate the existing obligation to make the payments. However, the obligation itself arises upon enactment of the retroactive interest rates.
Third, the United States — that is, the Small Business Administration — is obligated to make payments to all persons who have paid interest at the higher rate and who cannot receive the benefit of the lower rates except by obtaining a refund. While all those who have received disaster loans since October 1 would not be entitled to cash refunds, many were holders of 6-month loans which already have been fully repaid. In these cases, at least, payments would have to be made.
Section 401(c) (1) of the Budget Act provides that "new spending authority means spending authority not provided by law on the effective date of this section." The effective date of section 401 was March 5, 1975. Therefore, the spending authority provided in the retroactive provision is "new spending authority" in terms of section 401(c).
Section 401(b) (1) of the Budget Act provides that:
It is not in order in either the House of Representatives or the Senate to consider any bill or resolution which provides new spending authority described in subsection 401(c) (2) (C) (or any amendment which provides such new spending authority) which is to become effective before the first day of the fiscal year which begins during the calendar year in which such bill or resolution is reported.
Since the provision applying the lower interest rates retroactively would be "new spending authority" effective before October 1, 1979, and will be reported in calendar year 1979, it is subject to a point of order under section 401(b) (1).
Mr. President, it is possible for S. 918 to be modified so as not to violate section 401, by elimination of the retroactive feature of the disaster loan interest rate reductions. However, such a modification would create a situation in which victims of disasters which occurred prior to last October 1 or after the effective date of the new legislation received subsidized loans, whereas others were required to pay interest at the Government's cost of money.
In this instance, strict adherence to section 401 would result in a serious inequity not intended by the authors of the Budget Act. Therefore, I shall not raise a point of order, although I wish to establish for the RECORD the applicability of section 401 of the Budget Act to S. 918 as reported.
Mr. President, I will close with some summaries of what happened in 1978 when, on the basis of the interest rate treatment given to homes and small businesses in the SBA disaster loan program, the program was opened to agricultural loans. At that time, widespread drought and the resulting strains in the agricultural credit markets brought pressure that resulted in crop damage being declared eligible for SBA disaster loans.
As we now know, in consequence of those changes, SBA disaster loan volume shot up from an annual average of $200 million to a record $2.5 billion by fiscal year 1978, with many of those loans as I described earlier in my statement in specific terms.
Farmers Home emergency loan volume also rose precipitously from an average annual level of about $700 million to $3.4 billion in fiscal 1978.
That is a total of $5.9 billion for the two disaster loan programs, more than a sixfold increase that no one had anticipated, and that caused enormous problems for our efforts to reduce the Federal deficit and achieve a balanced budget.
In my 5 years as chairman of the Budget Committee, I do not know of any program that has created greater risk of higher deficits and imbalances in the Federal budget than the temptation of this body to let its compassion get away from it when dealing with disasters around the country.
It cost us almost $6 billion in less than a 12-month period in 1978 for yielding to that temptation. I hope we do not repeat the experience today.
I thank the Chair very much.