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DIEECT LOANS 



Looking at the problem just from the standpoint of financial efficiency, the 

 most direct, and least expensive, method of financing is direct Federal loans. 

 That is, the Treasury Department is able to borrow at lower interest rates than 

 would he required on the marliet obligations of other borrowers. Direct Federal 

 loans would, of course, require direct budget outlays. Limited budgetary re- 

 sources in recent years have not permitted significant expansion of direct Fed- 

 eral lending, and it appears in some cases that the Congress is unwilling to rely 

 on the availability of budget funds to finance Federal credit programs. 



GUARANTEES OF TAXABLE MUNICIPAL BONDS 



In order to avoid both the budget outlay problems with direct loans and the 

 tax-exemjjt interest problem with loan guarantees the Congress provided last 

 year for a new method of financing, namely, Federal guarantees and interest 

 subsidies on taxable municipal bonds. This new financing technique was first 

 authorized in P.L. 91-296, the Medical Facilities Modernization Act of 1970. In 

 that case, which involved Federal credit aid to public bodies for hospital facili- 

 ties, the Administration submitted legislation proposing guaranteed loans for 

 private hospitals and, in order to avoid the tax-exempt bond guarantee problem, 

 direct loans for public bodies. Yet both the Senate and House committees con- 

 sidering this legislation recommended instead Federal guarantees of tax-exempt 

 obligations. 



In the Congressional consideration of the medical facilities bill there was no 

 apparent disagreement between the Administration and the Congress regarding 

 the problems created by tax-exempt bond guarantees. Nevertheless, the commit- 

 tees apparently felt that guaranteed loans to public bodies, since they would not 

 depend upon the availability of direct loan funds in the budget, were essential 

 to assure the availability of credit aid. Under the circumstances the Adminis- 

 tration agreed to a Senate amendment to the House-passed bill, which was sub- 

 sequently enacted in P.L. 91-296. That amendment provided that the obligations 

 could be purchased by the Federal Government from a revolving loan fund then 

 resold in the private market with a guarantee. When resold the interest on any 

 obligations guaranteed under that Act would be subject to Federal income tax- 

 ation notwithstanding the fact they were obligations issued by States or other 

 public bodies. Similar provisions were later enacted by the Congress for the 

 rural water and sewer loans of the Farmers Home Administration (P.L. 

 91-617), A somewhat different approach was taken for new community loans 

 guaranteed by the Department of Housing and Urban Development (P.L. 91- 

 609). Under that act the new community obligations can be issued directly in 

 the market by the public bodies on a taxable basis. Thus the Congress in 1970 

 provided for the first time for Federal guarantees of taxable municipal obliga- 

 tions and did this in three separate acts. 



The Farmers Home loans and the medical facilities loans are expected 

 to be made directly by the Federal agencies at low interest rates and then 

 sold in the private market with a Federal guarantee and supplemental interest 

 payments to the investor in whatever amounts necessary to meet the market. 

 Tlie new community loans will be made and held by private investors but will 

 also receive a Federal interest subsidy and guarantee. The Treasury Depart- 

 ment and the Administration supported these provisions as preferable to 

 guarantees of tax-exempt bonds and in recognition of the urgent needs for 

 Federal credit assistance in these three areas. 



CONSOLIDATED FINANCING 



Another approach to providing credit assistance to local public bodies is the 

 Environmental Financing Authority proposal by the President in his Environ- 

 mental Message to the Congress on February 8, 1971. 



The Environmental Financing Authority would purchase tax-exempt obli- 

 gations issued by local public bodies to finance the non-Federal share of the 

 costs of the construction of waste treatment facilities eligible for Federal 

 grants from the Environmental Protection Agency. EFA could purchase only- 

 obligations guaranteed by EPA and only if the issuing public body is unable 

 to borrow in the market on reasonable terms. EFA would finance its pur- 

 chases by selling its own securities in the market, and ai)propriations would 

 be authorized to cover the difference between EFA's taxable borrowing rate 

 and its tax-exempt lending rate. 



