GAO audit report of Government corporations and agencies, Rept. 861, 83d Cong., 2d sess., January 20, 1954).

World War II brought on another wave of Government corporations, until by 1945, there were 101 such bodies.

It became obvious to the Congress that with so much of the Government's activity being carried on through these bodies, closer attention must be given to their operations.

Government Corporation Control Act

The focusing of closer attention on the numerous Government corporations and noncorporate revenue-producing agencies established in recent decades came about as a result of enactment of the Government Corporation Control Act of 1945 (approved Dec. 6, 1945, 31 U. S. C. 841).

This act for the first time applied uniform requirements of three general types with respect to all such Government bodies: (1) Submission of an annual budget under Bureau of Budget rules including an estimate of financial condition, analysis of surplus and deficit, etc., (2) annual audit by GAO of all Government corporations in accordance with principles and procedures applicable to commercial corporation transactions, (3) Annual GAO Report to Congress showing assets and liabilities, capital surplus or deficit, income and expense, etc.

1950 Senate report on Government corporations

The first report of a cumulative nature under this new law is contained in Senate Report 2685, 81st Congress, 2d session, dated December 20, 1950, entitled "Audits of Government Corporations-Report of the Committee on Expenditures in the Executive Departments."

That previous to the enactment of the Government Corporation Control Act, little, if any, consideration was given by the Congress to subjecting Government corporations to uniform requirements as to accounting for the use of Federal funds by way of interest or retirement of Government investment, is indicated by the following comments on page 3 of that report: "Although certain individual Federal revenue-producing enterprises had earlier been subjected to GAO audit, the introduction of the true commercial-type audit of such governmental instrumentalities followed passage of the Government Corporation Control Act in the 79th Congress (Public Law 248, December 6, 1945)."

It con

This Senate report is a basic document on the subject for two reasons. sists of the Senate's report on some 79 separate GAO audits, each attempting to apply the uniform commercial-type audit to Government corporations established as the result of laws developed by differing committees of Congress, depending upon the portion of the United States economy affected. The Senate report itself and the 79 GAO audits behind it constitute a monumental task, which no industry could undertake. Second, the statement is basic because it was "During this present (81st) Congress (that) the audits have for the first time become current ***"

Pages 5 and 6 of the Senate report pose the precise question of public policy being discussed here. Opening the section on interest the report defines the question thusly:

"This question is whether all Government revenue-producing enterprises, whether incorporated or unincorporated, should pay interest to the Treasury on capital furnished from public funds.”

In its discussion of the question, the report makes these observations:

1. Many corporations conduct their affairs through borrowings from the Treasury on an interest-free basis.

2. Funds so provided constitute indirect subsidization.

3. Citing 2 examples RFC in fiscal 1949 held $350 million interest-free Federal funds, and showed a $5.2 million net income, whereas interest of $7 million (2 percent) would have put RFC about $2 million in the red. The Export-Import Bank held large interest-free Government funds and GAO showed that had interest been charged the $47 million net income for the year would have been reduced 50 percent.

4. The Senate committee staff states that the issue is one "susceptible of very convincing arguments both for and against." Continuing, it states, "The question must be considered in the light of the circumstances which led to the establishment of the individual enterprise." After commenting on the depression role of RFC; the power, flood control, and other needs fulfilled by TVA; and the foreign trade promotion need fulfilled by the Export-Import Bank, the report states, "As with all Government undertakings, these three and others in the same general category must be considered to be to some degree philanthropic, or, better, in the

48155-54-18

general public interest, and Congress may well conclude that consistency lies rather in preserving the continuity of the programs as thus far conducted." [Italic added.]

5. "The staff, being aware as it is of both sides of the question, takes no position thereon ***"

Interest-free United States funds in other Government corporations

This committee, charged with responsibility for congressional policy at the Panama Canal and for the welfare of the maritime commerce of the United States and the American merchant marine should, in examining the question of interest at the Panama Canal be substantially interested in what the Congress has done in that regard with other Government corporations and revenue-producing agencies.

As mentioned above, preceding the Government Corporations Control Act (1945) and before the close scrutiny and consistent recommendations to Congress by the GAO, the finances of these corporations were virtually uncontrolled. Billions were spent through corporate activities directly benefitting various segments of the economy-various private interests. Members of this committee are familiar with early challenges to some of this legislation, on the basis that they constituted class legislation.

The industry has caused a study to be made of these various Government corporations with respect to the question of interest or dividends, and feels that the results will be of interest to this committee.

The following tables and comments thereon show that the Government has pumped billions of dollars into corporate activities benefiting private interests, without regard to interest or dividends on that investment in most cases.

The first table (table 1) indicates 39 corporations to which the Government has furnished public funds in the form of interest-free investment in capital stock. The Government's investment as of June 30, 1952-this is the close of the last fiscal year for which GAO audits are available amounted to over $308 million.

TABLE 1.-Government-owned revenue-producing corporations, with Government's investment in capital stock interest-free, from inception

In connection with the Federal banks for cooperatives, it is interesting to note that the enabling statute (12 U. S. C. 1134 (d), 1134 (1)) authorizes these banks to pay dividends not exceeding 7 percent annually. "But no dividends have ever been paid" (H. Doc. 165, 83d Cong., p. 47).

The Federal intermediate credit banks have paid the Government a token return of $8.5 million in the form of franchise taxes, as provided for in the statute. The law makes no provision for dividends or interest-in this case.

Similarly, in the case of the production-credit corporations "no dividends have ever been paid by these corporations inasmuch as the law does not provide for dividends (H. Doc. 165, 83d Cong., p. 31).

The Federal Crop Insurance Corporation presents an interesting case. The statute not only provides for no interest on the Government's investment in capital stock but premiums are not required by law to be determined to cover anticipated indemnities and do not include a factor to cover administrative expenses. Hence FCIC operations must of necessity be an additional expense to the Government. (See table 4 and accompanying text.)

The 39 corporations have paid no interest or dividends on the Government's investment in their capital stock, and are still operating with interest-free public funds.

Table 2 lists 14 corporations that were permitted the use of Government funds invested in their capital stock interest-free for as long as Government funds were so invested. The Government's investment was over $398 million.

TABLE 2.-Government-owned revenue-producing corporations, with Government's investment in capital stock, interest-free, from conception to retirement, sale, or dissolution

1 Corporations so marked are mixed-ownership corporations.

2 Figure is for June 30, 1945. By June 1947, Government-owned stock had been retired.

The next table (table 3) shows the effect of the Controls Act and consistent recommendations by the GAO that interest be charged in order according to the GAO-that the total cost to Government may be known by carrying interest charges on the books even though revenue from operations may not be expected to be sufficient to reimburse Treasury for that interest.

The corporations listed were permitted the use of the Government's investment in their capital stock interest-free from inception to the period 1948-50, when new legislation provided for interest.

TABLE 3.-Government funds invested. interest-free as of June 30, 1947, in Government-owned revenue-producing corporations that have been charged interest commencing on varying dates up to 1950

In the case of the CCC, one of our most expensive corporations, no interest was charged from 1933 through fiscal 1948 (H. Doc. 148, 81st Cong., p. 41, et seq.), when the CCC Charter Act was passed. CCC operations have resulted in losses met by congressional appropriations. (See table 4.)

The Virgin Islands Corporation was not created until June 30, 1949, and its enabling act requires interest on the Government's investment. But it had a deficit status of $0.5 million in 1952.

No interest or dividends were received by the Treasury from the Export-Import Bank from 1934 through fiscal 1951, though dividends were paid, 1934 to 1945, to the RFC, then the owner of the preferred stock. In 1947, the Export-Import Bank Act of 1945 was amended to provide for, but not to require, dividends, for the act stated that net earnings shall be used for payment of dividends on capital stock "after reasonable provision for possible losses." On June 26, 1952, the bank's Board of Directors authorized the payment of the first dividend $20 million, equal to 2 percent, for fiscal 1952.

Only recently (1950) was the FDIC Act amended to require interest at 2 percent. And this was not required until it had over a billion dollars in assets. No insured bank had gone into receivership since 1944.

The RFC paid nothing on the Government's investment in its capital stock through fiscal 1948, when the act was amended by Public Law 548 to require dividends in the "amount by which its accumulated net income exceeds $250 million." This, however, followed legislation canceling billions of RFC obligations to Treasury. (See table 4.)

The corporations listed in tables 1, 2, and 3 are all discussed in Senate Report No. 861, which is the GAO's report to the Senate Committee on Government Operations, dated January 1954. This same report covers a few corporations that were required to pay interest from the time of their establishment-the Federal Savings and Loan Association, owned not by Treasury but by the Home Owner's Loan Association; the Federal National Mortgage Association, owned by the RFC; and the Federal home loan banks, jointly owned by the Government (through the RFC) and the member banks. But GAO comments do not indicate entire approval of the amounts paid.

Then there follows a fourth table, showing appropriations and cancellations, all of which represent additional expenditures of Government funds.

TABLE 4.-Appropriations and cancellations respecting certain Government corporations to the close of fiscal 1952 unless otherwise indicated

During the years indicated, the Federal Farm Mortgage Corporation and Federal land banks received $57 million and $277 million, respectively, in direct appropriations to compensate them for lowering rates of interest, as required by law.

Costs to the Government for the Federal Crop Insurance Corporation include cancellation of $73 million in capital stock as of August 1949 to cover insurance losses prior to that date. The remainder consists of direct appropriations for FCIC administrative costs, which must be provided for by congressional appropriations since the law does not provide for adequate revenues to cover such costs. RFC cancellations indicated in the table of close to $2.8 billion include the June 30, 1945, cancellation to cover the RFC's indebtedness to the Treasury for

its prewar operations, and further cancellations of RFC indebtedness in the amounts of $174 million and $122 million when the RFC's capital stock in the Export-Import Bank and home loan banks were transferred to the Treasury. Not included is a $9.3 billion cancellation in 1948 to compensate the RFC for obligations incurred in national defense and war activities.

Both the Public Housing Administration and the Tennessee Valley Authority operate primarily with funds provided through direct appropriations. This type of financing has the effect of providing billions of dollars interest-free to these agencies.

Still more Government funds were obtained by Government corporations without adequate interest rates being paid. Following is a table of such borrowings by six corporations as of June 30, 1947.

TABLE 5.-Borrowings from Treasury as of June 30, 1947

It should be noted that legislation approved June 30, 1947 (61 Stat. 202), requires that Treasury borrowings bear interest at a rate determined by the Secretary of the Treasury, taking into consideration the current average rate on outstanding marketable obligations of the United States.

It has been necessary for the industry to compile this information itself. It was not available in any single source that can be located. It is believed such a compilation has not been attempted before. The material necessary to be examined was voluminous, and the various cross-financing methods in the maze of Government corporations, especially starting in the 1930's, were such that it was extremely difficult to present the information included concisely and accurately. However, the foregoing represents a conscientious effort to present a cumulative picture to date.

It may be summarized this way:

1. As of June 30, 1947, over $2.2 billions of public funds were invested interestfree in the capital stock of 47 corporations, benefiting agricultural interests, banking interests, bank depositors, traders, homeowners, and users of inland waterways. The Government's investment in capital stock in these corporations had been interest-free from inception of the various corporations.

2. Beginning with the amendment in 1947 of the Export-Import Bank Act, and continuing thereafter, legislation was enacted providing that 12 corporations pay interest or dividends. As of June 30, 1947, the Government's investment in the capital stock of these corporations was close to $1.6 billion. However, as noted, performance has not been 100 percent.

3. As of today, the Government is still furnishing interest-free Government funds to 39 corporations. As of June 30, 1952, the Government's investment in the capital stock of these corporations amounted to $308 million.

4. To June 30, 1952, the Government had appropriated to, or canceled obligations of, 7 corporations in amounts totaling $9.6 billions, to the benefit of agriculture, banks, general industry, and the users of electrical power.

5. Prior to June 30, 1947, various Government corporations were permitted the use of large amounts borrowed from the United States Treasury either interestfree or at rates of interest not commensurate with average rates paid by the Treasury. As of June 30, 1947, such borrowings by 6 corporations totaled $3.4 billion, the greater part of which was borrowed at 1 percent.

Thus, we see that the Government had invested about $14 billion in Government corporations other than the Panama Canal Company either interest-free or on a noncompensatory basis. As shown on page 50 of this statement, the interest