MAY 25 2 14 FX '72

Reference is made to your request for the views of this Department on B.R. 8395, "The Rehabilitation Act of 1972," as passed by the House.

Section 406 of the bill would authorize the Secretary of Health, Education and Welfare to insure mortgage loans made to public and private borrowers for new multipurpose rehabilitation facilities.

Under existing law, the interest income from most obligations issued by State and local public bodies is exempt from Federal income taxation. Since the bill would not alter the tax status of obligations issued by public bodies to finance rehabilitation facilities, the guarantee authority would result in Federal guarantees of tax-exempt obligations. The Treasury is strongly opposed to Federal guarantees of tax-exempt obligations.

The Department's opposition to Federal guarantees of tax-exempt obligatious is based on four fundamental problems raised by such guarantees: (1) the guarantee of tax-exempts is an inefficient subsidy since the Federal tax revenue loss exceeds the interest savings of the borrower from tax-exempt intercal, (2) the guarantee of tax-exempts disproportionately benefits investors in high Federal income tax brackets, (3) such guaranteed obligations heighten the competition for the limited amount of funds available to State and local borrowers from high tax bracket investors and raise the cost of fat meine other local projects for which direct Federal credit aid is not proviced, and (4) such guarantees conflict with Federal debt management olicy oy creating a class of securities (tax-exempt) which the Federal Govern vat itself is prohibited from issuing by the Public Debt Act of 1941.

5 ecion 407 of the bill would authorize the Secretary of Health, Education 116 Mime to make annual interest grants to public and private agencies te truce Lae cost of borrowing for the construction of rehabilitation faciliLAUR I grants could be made over periods up to 40 years, in amounts e un to the difference between the average annual debt service on the amount and the dept service if the applicable interest rate were three 93, the interest rate payable by new borrowers would be fixed

Experience with Federal credit programs indicates that fixed interest rates to borrowers produce perverse and unintended variations in interest rate subsidies as market rates vary, which result in inequities among borrowers using the program at different times and extraordinary demands for Federal loan and related grant funds at times of greatest inflationary pressures and overall budget tightness. Thus, the Department has consistently recommended that Federal lending agencies be permitted to vary the interest rate charged new borrowers from time to time at least as much as market rates and current Treasury borrowing costs vary. Since there would be no requirement under the proposal that the applicant demonstrate a need for the proposed subsidy, and no incentive for the applicant to seek out the lowest interest rate obtainable in the market because all interest in excess of the 3 percent payable by the borrower would be paid by the Federal Government, the proposal could lead to unnecessary dependence on Federal subsidies and excessive Federal costs. Public Law 91-296 added a new Part B to title VI of the Public Health Service Act under which the Secretary of Health, Education and Welfare is authorized to provide credit assistance at subsidy interest rates to public and private agencies for modernization and construction of medical facilities without resorting to guarantees of tax-exempt obligations and fixed interest rates to borrowers. Since rehabilitation facilities are specifically eligible for assistance under Part B of title VI, there is no apparent need for the proposals contained in sections 406 and 407 of H.R. 8395.

In view of the foregoing, the Department is opposed to sections 406 and 407.

The Department has been advised by the Office of Management and Budget that there is no objection from the standpoint of the Administration's program to the submission of this report to your Committee.

B-164288

COMPTROLLER GENERAL OF THE UNITED STATES
WASHINGTON, D.C. 20548

May 25, 1972

Dear Mr. Chairman:

Reference is made to your request of March 24, 1972, for our report on H. R. 8395, 924 Congress, 2d Session, the proposed "Rehabilitation Act of 1972."

If enacted, the bill would, inter alia, extend and revise the authorization of grants to States for vocational rehabilitation services, and authorize grants for services to persons with severe disabilities. We have no comment to offer with respect to the substantive provisions of the bill. However, the following matters are submitted for the committee's consideration.

H.R. 8395 contains no provision authorizing the Secretary of Health, Education, and Welfare and the Comptroller General, their representatives, to have access, for the purpose of audit and examination, to the books and records of the recipients of the Federal grants to be authorized. Such authority is provided to Federal grantor agencies and to the Comptroller General with respect to grants-in-aid to States pursuant to section 202 of the Intergovernmental Cooperation Act of 1968, approved October 16, 1968, Pub. L. 90-577, 82 Stat. 1101, 42 U.S.C. 4212. We recommend that such authority be provided with respect to other recipients of funds under the proposed legislation. This could be accomplished by the following language:

"Fach recipient of a grant under this Act shall keep such
records as the Secretary may prescribe, including records
which fully disclose the amount and disposition by such
recipient of the proceeds of such grant, the total cost
of the project or undertaking in connection with which
such grant is made or used, the amount of that portion
of the cost of the project or undertaking supplied by
other sources, and such records as will facilitate an
efetive audit.

"ne Secretary and the Comptroller General of the United
States, or any of their duly authorized representatives,
shall have access for the purpose of audit and examina-
tion to any books, documents, papers, and records of the
recipient of any grant under this Act which are pertinent
to such grant."

B-164288

Section 406 of the bill authorizes the Secretary of Health, Education, and Welfare to insure mortgages executed by a mortgagor approved by the Secretary. The Department of Housing and Urban Development has responsibility under authority contained in the National Housing Act, for administering a range of mortgage insurance programs. The committee may wish to consider this in deciding whether to assign responsibility for a new mortgage insurance program to the Department of Health, Education, and Welfare.

This is in response to your request of March 24, 1972 for the views of this Office on H.R. 8395, the "Rehabilitation Act of 1972."

In testimony before your Committee on May 15, 1972, ir. Stephen Kurzman, Assistant Secretary for Legislation, Tepartient of Health, Education, and Welfare, indicated certain objections to the bill and favored instead the chactent of S. 3368, the Administration's "Vocational Ahabilitation Amendments of 1972." While noting that 1.1. 395 and S. 3368 have similar objectives, Mr. Kurzman indiceted in particular the Department's opposition to provisions of il.R. 8395 that would:

authorize special project grants for the
provision of services to individuals with
cnd-stage renal disease, services which are
basically medical rather than vocational,

-- reorient the VR program toward objectives
which are not employment related by
authorizing a separate formula grant
program for services to the severely
handicapped, individuals who are already
clicibly and are being served under the
isting VR programs, and