STATEMENT OF TIMOTHY F. DALEY, ASSOCIATE GENERAL COUNSEL FOR LEGISLATIVE SERVICE; DONALD C. KNAPP, DIRECTOR, LEGISLATIVE PROJECTS SERVICE, ACCOMPANIED BY A. H. MONK, ASSISTANT DEPUTY ADMINISTRATOR; WILLIAM H. POISSANT, CHIEF ACTUARY, DEPARTMENT OF INSURANCE, AND O. L. CLAY, INSURANCE COUNSEL, DEPARTMENT OF INSURANCE.

Mr. DALEY. I have a statement prepared. I would be glad to read it.

The CHAIRMAN. We will be happy to hear it.

Mr. DALEY. Under date of January 29, 1960, the Administrator submitted his report on this bill to the committee and it is understood that it has been made a part of the record of this hearing. Among other things, the report comments on certain technical aspects and includes pertinent cost data.

H.R. 9378 proposes two major changes regarding investment of the national service life insurance and U.S. Government life insurance trust funds. First, it would transfer from the Secretary of the Treasury to the Administrator of Veterans' Affairs the authority to invest and reinvest these insurance trust funds in certain specified interest-bearing obligations.

Second, the bill would require that such obligations bear annual interest from the date of acquisition at the higher of the following rates: (A) 3 percent on national service life insurance and 31⁄2 percent on U.S. Government life insurance, or (B) the rate of interest borne by interest-bearing obligations of the United States most recently issued before such acquisition which form a part of the public debt and which had, as of the date of their issue, a comparable maturity. Since the establishment of the insurance trust funds the Secretary of the Treasury, as the fiscal officer of the Government has been vested by law with the responsibility of investing the funds. We doubt whether there is any necessity for transferring this responsibility to the Administrator or that any advantage would be gained by such a duplication of the investment functions of the Treasury.

The members of the committee no doubt have at hand Committee Print No. 155 which sets forth a letter on this subject, dated January 14, 1960, from the Administrator to the chairman.

The letter outlines the history of the investment policy regarding the two insurance trust funds and the factors considered in arriving at the fixed interest rates of 31⁄2 percent and 3 percent on the security holdings in each fund.

It is significant to note from the tables enclosed with the letter that the funds have received around $700 million more by the application of fixed interest rates than would have been received on the basis of the average market yield each year.

Our own actuaries as well as an advisory committee, composed of top actuaries from major private insurance companies, have given thoughtful consideration to the matter of investment of the trust funds. At its meeting last November the advisory committee suggested that the Veterans' Administration attempt to secure a more favorable and realistic rate of return.

Since then our representatives have been working on various proposals and conferring with other interested agencies to arrive at

the best course of action. This morning the Under Secretary of Treasury for Monetary Affairs and his associates have presented to the committee an explanation of a new formula for the investment of the insurance trust funds.

The hearing record contains the details and fiscal effects of the formula and they will not be repeated here. The Treasury formula, in a balancing of the equities, gives the funds a guaranteed interest floor and at the same time allows them to participate in higher rates of interest. The Veterans' Administration actively participated with officials of the Treasury Department in the development of the formula.

In view of the substantial interest subsidies received by the trust funds in past years and the desirability of maintaining a guaranteed rate of income, it is believed that the Treasury approach is fair and equitable. The Veterans' Administration has given careful consideration to all factors involved and has concluded that the Treasury formula should be followed in lieu of the legislative proposal contained in H.R. 9378.

The CHAIRMAN. Thank you.

Are there any questions?

Mr. Corcoran, will you give your full name and title.
Mr. CORCORAN. Mr. Olson, will you introduce me?

Mr. OLSON. I am C. H. Olson, assistant legislative director of the American Legion. John J. Corcoran, the director of our rehabilitation program, succeeded Mr. Kraabel. The insurance matter falls within the jurisdiction of his commission and he will speak for the American Legion.

STATEMENT OF JOHN J. CORCORAN, DIRECTOR NATIONAL REHABILITATION COMMISSION, ACCOMPANIED BY CLARENCE H. OLSON, ASSISTANT DIRECTOR, NATIONAL LEGISLATIVE COMMISSION AND MILO J. WARNER (TOLEDO, OHIO) PAST NATIONAL COMMANDER, AND CURRENTLY CHAIRMAN OF THE INSURANCE ADVISORY COMMITTEE BOARD

Mr. CORCORAN. Mr. Chairman, we are submitting a written statement which with the chairman's permission we will not read. I would like to take this opportunity to summarize what we have said here in the following one or two paragraphs.

First of all, we of the American Legion are very pleased that this subject has been reopened by the introduction of the chairman's bill and we think that the two points that are an essential part of the chairman's bill are supported by the American Legion, namely that there should be some floor to assure the actuarial soundness of the fund. There should be some means of assuring that the funds we are discussing are actuarially sound. This we approve of.

Secondly, there is inherent in the chairman's bill the concept that every investor should receive a fair return on his investment and of course we of the American Legion subscribe to this principle. In answer to a question Mr. Adair asked the preceding witness we do support the formula suggested. We support it, again, because we think there should be the 3- and 3-percent floor. And we are certainly willing to accept the one-half percent cushion. Perhaps

not for a reason as obvious and not a reason advanced by the preceding witnesses. We are supporting the one-half percent cushion in an effort to be prepared to defend the criticism that came up in 1950 when it was complained that the Government was subsidizing these funds through this interest subsidy. So we feel by giving the Secretary of the Treasury the half percent cushion now it is fair to the public and to the veterans and will help us defend against this criticism of subsidy should in the future the interest rates go below the floor. The CHAIRMAN: Are there any questions by members of the committee?

Thank you, John. I think you might want to introduce your chairman of your insurance advisory committee.

Mr. CORCORAN: I would like to introduce Mr. Milo J. Warner, chairman of the insurance advisory board.

The CHAIRMAN. Thank you, Mr. Corcoran. Your statement will be made part of the record.

(The statement referred to is as follows:)

STATEMENT OF JOHN J. CORCORAN, DIRECTOR, THE AMERICAN LEGION NATIONAL REHABILITATION COMMISSION, ON H.R. 9378

Mr. Chairman and members of the committee, we appreciate this opportunity to express the views of the American Legion on current proposals to modify the procedure for investing the national service life insurance trust fund and the U.S. Government life insurance trust fund.

We are pleased that the chairman has seen fit to reopen this subject by the introduction of the bill, H.R. 9378. This measure would amend sections 720 and 755 of title 38, United States Code, so as to provide for the investment of both the national service life insurance fund and the U.S. Government life insurance fund in obligations bearing current rates of interest, subject to a floor of 3 percent per annum for the NSLI trust fund and 31⁄2 percent per annum for the USGLI trust fund.

The existing section 720(b) authorizes the Secretary of the Treasury to invest and reinvest the NSLI Fund, or any part thereof, in interest-bearing obligations of the United States or in obligations guaranteed as to principal and interest by the United States, and to sell such obligations for the purposes of the fund. Under section 755(b), the Secretary of the Treasury is authorized to invest and reinvest the USGLI fund, or any part thereof, in interest-bearing obligations of the United States, or bonds of the Federal farm-loan banks, and to sell such obligations and bonds for the purposes of the fund.

The rate of interest at which the respective funds are to be invested is left to the discretion of the Secretary of the Treasury.

Early in 1941, the Secretary, with the approval of the President, determined to have the investments of the NSLI fund in special series of Treasury obligations and bear interest at the rate of 3 percent. This rate was selected on the basis of the fact that the National Service Life Insurance Act requires that the premium rates for such insurance shall be the net rates based upon the American Experience Table of Mortality and interest at the rate of 3 percent per annum. In 1944, the President approved a recommendation of the Secretary that the special obligations issued to the USGLI fund bear interest at the rate of 31⁄2 percent inasmuch as the controlling law specifies that the basis of the calculation of the reserves and all other values under the USGLI policies shall be the American Experience Table of Mortality and interest at 31⁄2 percent.

Thus, since the years 1941 and 1944 respectively, these funds have been invested at 3 percent for the NSLI program and 31⁄2 percent for the USGLI program. Currently, the NSLI fund is entirely invested in 5-year special 3-percent Treasury notes. The special obligations issued to the USGLI fund are in the form of 1-year, 32-percent certificates of indebtedness.

It will be remembered that during the years when the market rates of interest were less than 3 percent, there was considerable criticism from certain circles that these fixed rates resulted in an unwarranted "subsidy" of the veterans' insurance trust funds by the taxpayers as a whole. In the period since the average rates of interest have been higher than 3 and 31⁄2 percent, we note that

these same voices have not come forward to complain that the trust funds are now "subsidizing" the public.

In effect, the chairman's bill, H.R. 9378, makes two important points which we are glad to endorse. First, by reason of its nature, any insurance trust fund must be administered in such manner as will guarantee its actuarial soundness. Secondly, public policy upholds the underlying concept of H.R. 9378; that the individuals concerned are entitled to a fair return on their investment.

We are particularly pleased that the bill would give statutory sanction to the floor of 3 and 31⁄2 percent, respectively, for the interest rates applicable to investments of the NSLI and USGLI trust funds. The American Legion supports the judgment of the Treasury Department that Congress did not intend that the rates of interest for investment purposes should be less than the rates specified in the respective provisions of law for determining premium costs and for other purposes.

Also, it is our understanding that the Veterans' Administration deems these rates of interest to be the safe minimums requisite to securing the actuarial soundness of the respective trust funds.

It is the American Legion's longstanding policy to support programs and procedures which will maintain the integrity of the NSLI and USGLI trust funds, and to oppose measures which may tend to jeopardize the integrity of such funds. To insure compliance with this policy and in order that the organization's position with respect to the NSLI and USGLI programs will be in accord with sound insurance practices, all proposals for change in these programs are normally referred for consideration and recommendation to the American Legion Insurance Advisory Board. The wisdom of this practice has been demonstrated time and again inasmuch as the board is comprised of individuals who are experts in insurance matters.

We regret that our insurance advisory board has not had opportunity to consider the proposals under discussion here today. The board's annual meeting I will not be held until the 27th and 28th of this month.

We have, however, consulted with Mr. Milo J. Warner, chairman of the insurance advisory board, and with Mr. Robert M. McCurdy, chairman of the national rehabilitation commission. Mr. Warner, a past national commander of the American Legion, is accompanying me today.

Specifically, we have discussed the provisions of H. R. 9378 and the proposal of the Treasury Department, recently reported in the appendix of the Congressional Record and advanced by representatives of the Secretary of the Treasury in their appearance before this committee earlier today.

In our opinion, the Treasury proposal has considerable merit. In essence, it would retain the historic interest rates of 3 percent for NSLI fund investments and 31⁄2 percent for USGLI fund investments as a floor, but provide for reinvestment of such funds at interest rates approaching current market yields.

Under the recommended formula, as we understand it, the special obligations issued to the funds would bear interest at a rate of one-half of 1 percent lower than a rate equal to the average market yield (computed as of the end of the calendar month next preceding the date of issue and adjusted to the nearest multiple of one-eighth of 1 percent) borne by all marketable interest-bearing obligations of the United States then forming a part of the public debt that are not due or callable until after the expiration of 3 years from the end of such calendar month; provided that the special obligations issued to the USGLI fund shall be at rates not less than 31⁄2 percent and the obligations issued to the NSLI fund shall be at rates not less than 3 percent.

The reduction of one-half of 1 percent below the current average interest rate would be in consideration of the guaranteed floor of 3 and 31⁄2 percent for the respective funds.

We believe the principles inherent in this plan are fair to both the public and the veterans concerned. We are satisfied it would be acceptable to the individual NSLI and USGLI policyholders. Certainly, it should serve to help curb further criticisms should the average market rates of interest subsequently, fall below 32 or 3 percent.

The Treasury Department's plan for conversion to the recommended formula appears to be well reasoned and in keeping with Veterans' Administration requirements relative to operation of the iusurance program.

On behalf of the American Legion, we respectfully urge the committee's careful consideration of the proposal to reinvest the veterans' insurance trust funds at a rate of interest one-half of 1 percent less than the current average market yields.

subject to a minimum rate of 3 percent for the NSLI fund and 31⁄2 percent for the USGLI fund.

Thank you for your interest in and attention to the views of the American Legion. The CHAIRMAN. We will hear next from Mr. John R. Holden, national legislative director of AMVETS.

Mr. Holden, we are happy to have you here.
Will you please proceed, Mr. Holden.

STATEMENT OF JOHN R. HOLDEN, LEGISLATIVE DIRECTOR, AMVETS

Mr. HOLDEN. Mr. Chairman and members of the committee, we appreciate this opportunity to present the views of AMVETS on the legislation now pending before this committee. AMVETS have followed with great interest the discussions relating to the study conducted by the chairman of this committee of the interest yield resulting from the investment of the veterans life insurance trust funds.

We do not profess to be experts in matters of high fiscal policy. We have, however, arrived at two inescapable and rather obvious conclusions. First, the life insurance trust funds should be invested in a manner that assures a fair and competitive return. Secondly, these funds are not yielding returns commensurate with today's market.

It has been pointed out that the national service life insurance trust fund, in excess of $52 billion, has been invested in special issues of the Treasury, with 5-year maturity periods bearing 3-percent interest. The U.S. Government life insurance trust fund exceeding $1 billion has been invested in Treasury special issues of 1-year maturity at 31⁄2 percent. Meanwhile, the Treasury during 1959 offered securities for sale at considerably higher interest rates. In May, July, and October 1959, short term issues with yields of 4, 4%, and 5 percent respectively were offered.

Now, it is extremely difficult for us to see the logic that permits the Secretary of the Treasury to buy Government securities at a low rate of interest in one transaction, and then in the next breath, offer other Government securities for sale at a higher rate of interest.

In the field of veterans housing, we have continually been plagued by an ever spiralling rate of interest on GI home loans. In a few years, the rate has increased from 4 percent to 54 percent. Even now, there are indications that the current rate of 5% percent is not sufficient to attract more than a trickle of the mortgage capital necessary to satisfy the needs of home buying veterans. Yet, moneys held in trust for this same group that can't borrow money at 5 percent are being invested at 3 and 31⁄2 percent. This situation may be compared to that of the man who borrows money at 5 percent so that he may open a savings account yielding 3 percent.

We of AMVETS have studied the provisions of H.R. 9378, a measure designed to make changes in the procedure for investing the veterans life insurance trust funds. We have also reviewed the change in procedures outlined in the January 13 minutes of the meeting of the Treasury Department's Committee on Investment Policy.

Both of these documents suggest a complex formula for investing the trust funds. Inasmuch as the Secretary of the Treasury has the authority to invest the trust in securities bearing a higher yield, and the Treasury Department has expressed a willingness to do so, legislation establishing a formula may not be necessary.