March 16, 2001
The Honorable Pete V. Domenici, Chairman
The Honorable Kent Conrad, Ranking Member
Committee on the Budget
Washington, D.C. 20510
Dear Pete and Kent:
This letter transmits the views and estimates of the Committee on Banking, Housing and Urban Affairs regarding the funding of programs in our jurisdiction, as required by Section 301 of the Congressional Budget Act.
Securities Markets Oversight and Reform
The Banking Committee is committed to lowering excess user fees collected by the Securities and Exchange Commission (SEC). An illustration of this commitment is evidenced by the expedited manner in which the Committee has moved legislation to reduce these fees early in the 107th Congress. The Competitive Market Supervision Act (S.143) was introduced on January 22, 2001, the first legislative day of the new Congress. On February 14, 2001, the Committee held a hearing on S.143, and on March 1, 2001, the bill was marked up and reported out of Committee.
The original objective of the securities user fees was to provide a funding source for the SEC's operations. In recent years, increases in stock market volume and valuation have generated revenues that far surpass what is needed to operate the agency. For example, aggregate fee revenue in Fiscal Year 2000 was $2.3 billion while that year's SEC's budget totaled only $368 million. This imbalance is projected to worsen even further in the future, with total fee revenues increasing to more than $4.3 billion by Fiscal Year 2006. These excess fees act as a tax on investment and capital formation, diminishing resources available for economic growth, development, and wealth creation. We ask that the Budget Committee assume the elimination of general revenue SEC fees in its budget resolution while retaining the baseline level of offsetting collections, as provided for in S. 143. Based on the most recent Congressional Budget Office estimates, this action is expected to lower collections by $8.9 billion over five years and $14 billion over 10 years.
In addition to reducing the over collection of securities user fees, S.143 will permit the SEC to adjust base rates of compensation for all of its employees outside the Civil Service's General Schedule (GS). The Committee recognizes the serious problem of the loss of experienced staff from the Commission and the risk posed to our nation's financial system by inadequately experienced regulators. A very similar problem was faced by some of the banking regulatory agencies in the 1980s, believed by many to have been a factor in the collapse of the savings and loan system. A key element in addressing the problem at that time was to grant all bank regulatory agencies the compensation flexibility that was enjoyed by some, but not all, of them. In light of the enactment of the Gramm-Leach-Bliley Act last Congress, the Committee now believes it is important to extend to the SEC the same compensation flexibility that was provided to the bank regulators as part of the Financial Institutions Reform, Recovery and Enforcement Act (FIRREA). However, this is not to be interpreted as an entitlement or any form of mandatory spending requirement. Any increased spending the agency might seek in connection with this provision would have to be provided through the standard authorization and appropriations process.
The Committee continues to be disappointed in the inadequate level of meaningful economic analysis in SEC regulation. In the Committee's view, good economic analysis can help inform virtually all of the agency's activities, enabling the Commission to know whether such activities are doing more harm than good. This requirement for economic analysis was highlighted by Congress in the National Securities Market Enhancement Act of 1996. Unless the agency begins to make economic analysis more of a priority, the agency will continue to be in danger of proposing regulations that provide insufficient benefit to outweigh significant costs. The Banking Committee is committed to increasing the role of economic analysis within the SEC, and we ask that the Budget Committee support priority assignment of resources for the Office of Economic Analysis.
The Committee is aware of plans by the SEC to construct a new headquarters building. Such a building may indeed be needed, but little consultation on the matter has been held at this point. We would ask that resources for such a building not be provided in the budget until a new SEC building has been appropriately considered and authorized by the Congress.
International Finance and Trade
In keeping with legislation enacted in recent years, the Committee remains interested in proper reform of the International Monetary Fund (IMF). The issues of mission, moral hazard, vulnerability to financial panic, and support for proper policies, among others, will continue to require attention.
The Committee has devoted significant attention to establishing a modern, effective, and statutory framework for export controls, including careful review of the activities of the Bureau of Export Administration (BXA) of the Department of Commerce. The Committee is scheduled to report the Export Administration Act of 2001 (S. 149), legislation to reauthorize the Export Administration Act of 1979, on March 22, 2001. By focusing controls where they may be most effective, this legislation will enhance U.S. national security while removing unnecessary barriers to trade. Therefore the Committee requests that the Budget Committee assume in its budget resolution the enactment of S. 149. It is anticipated that the Congressional Budget Office analysis of S. 149 will project increases in collections of civil and criminal penalties, automatically triggering additional spending from the Crime Victims' Fund. The net effect of these changes should slightly increase the on-budget surplus.
The Committee supports sufficient funding to ensure the ability of BXA to carry out its core functions. Specifically, the Committee endorses the President's initiative to strengthen BXA export licensing activities through targeted investments. Additionally, the Committee believes that funding for export control enforcement activities merits support in the budget.
With regard to other trade-related agencies, the Committee's important international trade responsibilities will keep the Committee closely involved in the implementation of the President's agenda on trade liberalization and promotion. American consumers and businesses stand to gain significantly from continued efforts to liberalize trade. Toward that end, the Committee supports funding to meet fully the needs of the Office of the U.S. Trade Representative (USTR), an important agency that is charged with, among other duties, negotiating agreements relating to financial services trade.
The President's budget request for the Export-Import Bank calls for the implementation of several policy changes - such as increased risk sharing with the private sector, higher user fees, and more stringent value-added tests - that would result in savings of approximately 25 percent in the Bank's credit subsidy requirements. The Committee, which will be considering reauthorization of the Bank this year, will evaluate these proposals carefully.
The Committee strongly supports the effort to improve national economic statistics at the Bureau of Economic Statistics. Sound data is a public good which is essential for public policy and for improving the assessment of economic trends and conditions.
Federal Transit Administration
The President's budget fully funds the transit "guarantees" in the Transportation Equity Act for the 21st Century at the $6.7 billion level, as anticipated. The Committee plans an aggressive agenda for oversight of the operations of the Federal mass transit program in this Congress to ensure that those limited funds are spent to the best advantage of the transit riders and taxpayers.
Concern exists that available funding for "new start" rail projects has been virtually depleted although the current authorization lasts through fiscal year 2003. It is troubling that in efforts to evaluate the effectiveness of mass transit programs, basic cost and ridership data can only be obtained with difficulty. Greater public awareness of the actual and potential cost and performance of mass transit systems and projects will improve Federal, state and local decision making.
New Federal Fees on State-Chartered Banks
The Committee has consistently opposed a new Federal examination fee for state-chartered banks. As with budgets of the previous administration, the proposed budget for Fiscal Year 2002 includes a proposed fee for state-chartered banks, estimated to raise $508 million by Fiscal Year 2006, and an additional amount of $600 million for the five-year period from FY 2007 through 2011.
At present, the fee structures for both federally and state-chartered banks are identical: both pay their chartering organization for their examinations, and both pay deposit premiums to the Federal Deposit Insurance Corporation to cover the operating expenses of this federal regulator. This balance is critical to the success of the dual banking system. The Committee is concerned that imposing a new federal examination fee on state-chartered banks would create an inequity for state-chartered banks that already pay exam fees assessed by their state regulators. In addition, the profitability of smaller banks would be compromised as that segment of the banking industry would bear significant additional costs.
For these reasons, the Committee has in the past suggested that similar budget proposals to impose a new federal examination fee on state-chartered banks be withdrawn. We know of nothing that would cause the Committee to alter its view of this proposal.
National Flood Insurance Program
The Committee has shown consistent support for the National Flood Insurance Program (NFIP), as administered by the Federal Emergency Management Agency (FEMA). The Committee notes the proposed policy changes to the program intended to save an estimated $12 million in Fiscal Year 2002.
The proposal to phase out the subsidized premium rates for businesses and non-primary residences, such as vacation homes and rental properties, has considerable merit, as this policy change would move the NFIP closer to becoming an actuarially sound program. Additional changes could be considered. A 1999 report estimated that ending the subsidy for secondary residences and businesses would take approximately 246,000 policies out of the subsidized category. Yet, this only accounts for about one-fifth of the total number of subsidized policies. FEMA might consider how subsidized premiums might be phased out for the remaining subsidized policies on primary residences in an effort to place the program on a long-lasting, sound footing and to end any unintended government promotion of unsafe or unwise development.
To avoid an adverse effect on program participation by moving more toward risk-based premiums that FEMA could implement would be to create a rating system that credits individuals for undertaking mitigation activities that reduce the possibility of loss under the policy. FEMA's Community Rating System does this only on the community level. A similar rating system could be created for individual policyholders who mitigate against future flood losses, much as private insurance systems reward policy holders for actions that reduce risk.
Similarly, FEMA could investigate how premiums might be adjusted to reflect the flood loss history of the properties. About one-third of NFIP's loss claims are from repetitive losses. By charging premiums that reflect the full flood risk, as demonstrated by actual experience, policy holders will be motivated to take steps to mitigate, or even prevent, a repeat loss, which would reduce the probability that they will require assistance from either the NFIP or the Federal Disaster Relief Fund.
Federal Disaster Relief
There are many aspects of the Federal Disaster Relief Program, as administered by FEMA, that can adversely impact the National Flood Insurance Program. For example, it is likely that the rate of presidential disaster declarations in the past has adversely affected participation in the NFIP. It is not helpful when NFIP policyholders witness their uninsured neighbors being assisted through Federal disaster grants or through subsidized loans made available following a presidential disaster declaration. Obviously, an increase in the probability that Federal assistance will be available indiscriminately to the insured and the uninsured following a flood event will cause current or potential NFIP policyholders to reconsider renewing or purchasing a Federal flood insurance policy. The proposal to set a clear definition of when and under what circumstances a Federal disaster declaration should be made, therefore, should be given careful consideration.
The Committee also notes the proposal to reduce the amount of public assistance available for repairing or replacing uninsured public buildings. The current system of requiring American taxpayers to make up for this lack of insurance (via the Federal Treasury) relieves local governments of the responsibility for their decisions to place public property in harm's way. This reform could make local governments accountable to their citizens who will have to pay either insurance premiums or the costs of rebuilding or replacing public property following a disaster.
There is great merit in the concept of including emergency disaster relief as a budget item, rather than authorizing and appropriating emergency, off-budget funds after a significant disaster occurs. The National Emergency Reserve could make it easier for Congress to prepare and budget for the amount of tax dollars needed for disaster relief each year. While any specific natural disaster may be impossible to predict, a certain level of disaster assistance need can be expected and should be planned for.
Office of Federal Housing Enterprise Oversight
The Federal Housing Enterprises Financial Safety and Soundness Act of 1992 established the Office of Federal Housing Enterprise Oversight (OFHEO) as an independent regulator within the Department of Housing and Urban Development (HUD). Its primary mission is to oversee the financial safety and soundness of Fannie Mae and Freddie Mac. OFHEO's means of fulfilling its mission include establishing and ensuring compliance with capital standards for Fannie Mae and Freddie Mac, conducting on-site examinations to assess their management practices and financial condition, rule making, and taking enforcement actions. The Committee urges that OFHEO be given full funding to carry out its oversight mission. Given the relatively small size of OFHEO's budget and the huge assets of the regulated entities, failure to fund OFHEO adequately would certainly be penny-wise and pound-foolish.
Reform the Budget Process to Account for GSEs
The Committee renews its concerns about the budgetary treatment of government sponsored enterprises (GSEs). A growing and disturbing trend in recent years is the expansion of GSEs, particularly into areas well served by the private sector. Reminiscent of the days before credit reform, when credit guarantees were seen as a painless way to create expensive government programs that did not score for budgetary purposes, proposals to create new GSEs are offered by some as a means to direct resources toward favored constituencies in the face of difficult battles over the Federal budget. Currently, the GSE concept allows Federal subsidies to be given without budget scoring, carrying with those guarantees significant contingent liabilities for the U.S. taxpayers. While the obligations of GSEs may formally lack the backing of the Federal government, the markets assume that no GSE would be allowed to fail and applies a discount to the debt of these entities.
Given the unlikelihood that the government would acquiesce in the failure of a GSE, if only for the impact that such a failure could have on the debt of other GSEs and on government borrowing in general, the Budget Committee should give consideration to reforming the budget process to account for the subsidy element and unfunded liabilities of GSE operations and obligations. This is no small matter, if it is remembered that two GSEs alone, Freddie Mac and Fannie Mae, have financial assets of well over $2 trillion, and that borrowing by the Federal Home Loan Banks has exceeded borrowing by the U.S. Treasury.
Effective Management of the National Consumer Cooperative Bank
In 1981, Congress privatized the National Consumer Cooperative Bank (NCB) by converting all government owned class A preferred stock to Treasury-issued class A notes. As a result, the NCB became a private institution and now owes the government $180 million. Congress has given the NCB a payment deadline of October 2020.
To help pay its debt, the NCB can significantly increase its earnings by improving loan account management and reporting. Its investment policy should require reporting of investments, especially those that are downgraded after purchase, and an explanation of reasons for maintaining them. There should also be a clear strategy for making and managing investments, and a more effective way to measure the risk to the bank's overall financial condition associated with changes in interest rates.
Individual Development Accounts
The Committee notes the proposal to provide savings assistance to low-income individuals through the use of Individual Development Accounts. In evaluating this proposal, great care should be given to ensure that any assistance and benefits provided through these accounts are fully directed to the intended low-income individual owners of the accounts.
Federal Housing Programs
The Committee notes favorably the passage of major housing authorization legislation in the 106th Congress. The American Homeownership and Economic Opportunity Act of 2000 (P.L. 106-569) included several important elements: modernization of the Department of Housing and Urban Development's manufactured housing program; the Section 202 elderly housing and Section 811 disabled housing programs; the Native American housing programs; and the reverse mortgage program. The Committee will continue its oversight of the Department's regulatory processes and ensure that the Congressional intent of this Act is honored. Adequate funding should be provided to implement these provisions.
The Committee will continue to give major priority to oversight of the Department of Housing and Urban Development (HUD). The Department should concentrate its limited resources on the fulfillment of its core mission: to provide decent and affordable housing for those who are truly needy, and to revitalize our nation's poorer communities. HUD has often sought to do too much in an ultimately failing effort to please too wide an array of constituencies, and this has put a great strain on its staff resources and morale.
The Administration is strongly encouraged to focus primarily on management reforms, and to do so until HUD achieves and consistently maintains acceptable standards in all areas. Among the most serious weakness are HUD's inadequate information and financial management systems and its poor use of human capital resources. While the agency has made improvements to its organizational and internal control structures, further improvements are needed.
The Committee is eager to work with the Administration in a careful assessment of proposed budget initiatives. The Committee continues to be concerned with HUD programs that are duplicative in nature, and commends the Administration for proposing that its American Dream Downpayment Fund be incorporated into the existing HOME program. The Committee will seek to provide adequate safeguards to ensure that existing and proposed initiatives are focused on those recipients they are intended to serve.
The Committee maintains a strong interest in the consolidation of existing housing and community development programs in order to increase efficacies, improve accountability, save taxpayer money and provide greater responsibility and flexibility to State and local governments.
As a general rule, the Committee will continue to oppose the creation of any new HUD programs without specific authorization. Moreover, the creation of a new housing production program within HUD without appropriate, careful Congressional authorization must be avoided.
In the Taxpayer Relief Act of 1997, Congress legislated changes to S corporation rules, making it more attractive to elect the S corporation structure. Pursuant to section 721 of the Gramm-Leach-Bliley Act, which became law in 1999 (P.L. 106-102), the General Accounting Office reported to Congress in May 2000 on expanded small bank access to S corporation treatment. Any proposal resulting adversely on S corporation elections must be seen as contrary to the intent of Congress, very recently expressed. Instead, continued action should be taken to facilitate and expand the applicability of S corporation treatment for our nation's community banks.
Public Utility Holding Company Act of 2001
On January 30, 2001, Senator Shelby introduced S.206, the "Public Utility Holding Company Act of 2001," legislation substantially identical to a bill reported by the Committee in the 106th Congress. This bill represents the first step toward passing comprehensive electricity deregulation in the Senate, and it is expected to be joined with other elements of reform within the jurisdiction of the Energy and Finance Committees.
While the direct budgetary impact from enactment of S.206 and related provisions is expected to be small, the General Accounting Office projects that the Federal government, as the largest electric consumer in the country, could save hundreds of millions of dollars per year in the future as competition lowers retail electricity prices.