Statement of Administration Policy: S. 1665 - Farm Credit Act of 1987

(Senate)
(Sen. Melcher (D) Montana and 5 others)

The administration appreciates the considerable and serious bipartisan effort to craft a sound solution to the problems of the Farm Credit System. There are, nonetheless, a number of remaining problems with S. 1665.

The administration does not oppose the borrower stock guarantee provision, which requires payments to borrowers equal to 100 percent of the par value of their stock when they repay their loans. The administration opposes, however, the additional requirement to maintain the capital position of assisted System institutions at all times at a level equal to 75 percent of the par value of borrower stock, regardless of the earnings prospects or the loan maturity pattern of ,the institution. System institutions such as the Wichita Land Bank have demonstrated their ability to improve their capital situation even while operating at capitalization levels below 75 percent of borrower stock. Requiring an infusion of taxpayer money before it is really needed, merely to maintain an arbitrary minimum capital balance, would impose unnecessary current and future Federal costs.

The administration supports meaningful efforts to reduce costs, improve efficiency, and enhance local control by restructuring the System. While S. 1665's merger and devolution provisions make positive steps in this direction, the administration strongly prefers H.R. 3030's provisions which would be even further improved by returning to the approach in that bill as it existed prior to the House floor amendment.

The administration remains strongly opposed to the creation of a new secondary market credit enhancement vehicle because of its likely damage to the Farm Credit System, its limited benefits and likely costs to the farmers it is supposed to help, and its unnecessary increase in taxpayer exposure for the benefit of private financial institutions. In addition, while S. 1665 has two provisions that would improve the secondary market proposal — a phase-in of enhancement operations and competitive equality for Farm Credit System pooled loans — it unnecessarily provides dramatically broader scope and significantly lower levels of protection for both securities investors and taxpayers than do the secondary market provisions of H.R. 3030.

The Farmers Home Administration (FmHA) title of S. 1665, while significantly better than that of H.R. 3030, continues to be a costly, unnecessary, and extraneous addition to a bill originally designed to assist farmers through stabilization of the Farm Credit System. The full committee markup increased the cost of this title from $290 million to at least $450 million over the next five years by expanding the borrower forbearance provisions. The administration also questions the advisability and need for a secondary market for FmHA loans.

The administration understands that significant floor amendments may be offered to S. 1665. One such amendment would reclassify land in FmHA's inventory to prevent such land from being sold as surplus. This would cost up to $700 million, more than the total cost of the entire FmHA title as currently drafted. Another potential floor amendment would return surplus funds already contributed by System institutions. This would add $415 million to the amount that the System will have to borrow at taxpayer expense.

A third anticipated floor amendment would make the purchase by the System of preferred stock of the Financial Assistance Corporation voluntary rather than mandatory as contained in the current version of S. 1665. Unless such stock purchases amount to $200 million, which would be very unlikely under a voluntary arrangement, the Federal guarantee of the debt obligations issued by the Corporation would exceed 95 percent, and the Assistance Board's borrowings of up to $4 billion would have to be scored on-budget.

The administration strongly opposes any amendments that would increase the cost of the bill, or reduce the already insufficient amount of sharing of System resources to deal with the System's problems before taxpayer funds are required. Adoption of any such amendments would dramatically increase the administration's existing level of concern with the bill. Were the Congress to depart even further from the responsible proposals made and supported by the administration for a lasting and least-cost correction of the Farm Credit System's problems, the administration would have to give very serious consideration to the use of mechanisms in existing law to keep the System solvent rather than acquiescing to legislation embodying expensive and inappropriate public policy.

In view of recent increases in farm land values, which were up over one percent during the last quarter, and related improvements in the financial condition of the Farm Credit System, it would appear that the urgency for prompt enactment of relief legislation such as S. 1665 has diminished significantly. The Congress should carefully weigh the costs of unnecessary or extraneous provisions against this diminishing need for Farm Credit System relief.