Obama Needs Congressional Approval to Guarantee Auto Warranties, Says Democrat Budget Chair

April 1, 2009 - 5:53 PM
House Budget Chairman John Spratt (D-S.C.) told CNSNews.com on Wednesday that President Obama's promise to guarantee the warranties on all General Motors and Chrysler automobiles while the companies undergo government-supervised restructuring needs legislative authorization from Congress.

Rep. John Spratt (D.-S.C.)

Capitol Hill (CNSNews.com) – Members of Congress from both parties, including the chairman of the House Budget Committee, told CNSNews.com on Wednesday that President Obama’s plan to guarantee the warranties on all General Motors and Chrysler automobiles while the companies undergo government-supervised restructuring—a program that could cost taxpayers $10 billion per year—needs legislative authorization.
 
“I would think that for a government officer to extend a warranty that will create a liability for the government, an act of law would be required,” House Budget Chairman John Spratt (D-S.C.) told CNSNews.com. “If I were the beneficiary of the warranty, I would certainly want to know the entity that extended it to me had legal authority to grant it.”

Securing congressional approval for the plan might not be easy. When Congress tried to approve the initial auto industry bailout at the end of last year, it passed in the House, but stalled in the Senate, where 60 votes were needed to end debate on the issue, and it only received 52.

President Obama announced Monday that starting on that day the federal government would guarantee the warranties on all new Chrysler and General Motors cars.

“If you buy a car from Chrysler or General Motors, you will be able to get your car serviced and repaired, just like always. Your warranty will be safe.  In fact, it will be safer than it’s ever been because starting today, the United States government will stand behind your warranty,” Obama said at the White House Monday when he announced his plan for dealing with the two auto makers.

The Warranty Commitment Program outlined by the administration would establish reserve funds that include 125 percent of the projected costs for servicing all Chrysler and all GM warranties for cars sold during the course of the restructuring program. Under the plan, the auto manufacturers will put up 15 percent of the projected costs, and the federal government will put up 110 percent.

House Majority Leader Steny Hoyer (D-Md.) told CNSNews.com Tuesday that he did not know where President Obama got the authority to undertake the entire auto bailout plan, a plan which requires a restructuring by GM, the merger of Chrysler with Fiat and a commitment by the auto makers to produce more fuel-efficient vehicles in order to get additional federal money from the Troubled Assets Relief Program (TARP). The two car makers have already received $17.4 billion in loans from TARP.
 
The administration may be acting under the broad authority of the Budget and Accounting Act of 1921, Spratt told CNSNews.com Wednesday. But, he stressed if it is not backed by some legislation, it should be.
 
“You asked me something on which I am absolutely cold. I don't know a damn thing about it other than what I learned years ago doing procurement work in the Pentagon,” Spratt said. “I would think as a matter of principle, this ought to be backed by legislative action. But I also think there will be some legislation to implement whatever the plan is.”
 
Treasury Department spokesman Isaac Baker could not be reached for comment after several phone calls Wednesday.
 
The administration has never offered a cost projection of the warranty guarantee. But the trade publication Warranty Week on March 19 said that in 2007 GM paid $4.46 billion in warranties and Chrysler paid $6.1 billion in warranties.
 
“You can see quickly that 110 percent of $10 billion is a significant amount of taxpayer money,” said Ernest Istook, a former House member from Oklahoma and distinguished fellow at the Heritage Foundation who wrote a report on the cost of the warranty program to be released Thursday.
 
“Guaranteeing warranties is a very expensive proposition,” Istook told CNSNews.com. “You’ve noticed the administration has not put a dollar figure on it.”
 
Such a potentially large amount of government funds should be debated in Congress before it is added to government liability, said Rep. Patrick McHenry (R-N.C.).
 
“That is the concern about having government ownership in private enterprise,” McHenry told CNSNews.com. “It raises so many concerns, many we have never seen as a government. This policy should be debated fully and the funds should be authorized only under full congressional procedure.”

Istook said the legal authority of the administration to embark on the auto plan is a question that needs to be asked of the entire bailout system.

“It’s on a par with other things,” Istook said. “The money they are using comes from the $700 billion bailout passed by Congress. The administration claims a blank check.”

The actual TARP language approved by Congress only authorized the secretary of the treasury to spend the money purchasing “troubled assets” from financial institutions.
 
The TARP law specifically says, “The Secretary is authorized to establish the Troubled Asset Relief Program (or ‘TARP’) to purchase, and to make and fund commitments to purchase, troubled assets from any financial institution, on such terms and conditions as are determined by the Secretary, and in accordance with this Act and the policies and procedures developed and published by the Secretary.”
 
The law does not include auto companies under the category of “financial institution.” The law says the following: “The term ‘financial institution’ means any institution, including, but not limited to, any bank, savings association, credit union, security broker or dealer, or insurance company, established and regulated under the laws of the United States or any State, territory, or possession of the United States, the District of Columbia, Commonwealth of Puerto Rico, Commonwealth of Northern Mariana Islands, Guam, American Samoa, or the United States Virgin Islands, and having significant operations in the United States, but excluding any central bank of, or institution owned by, a foreign government.”
 
House Education an Labor Chairman George Miller (D-Calif.) did not know whether the administration needs congressional authorization to guarantee warranties.
 
“They’re using the Treasury or the TARP funds for this, so I assume they are making that  a condition of going forward with the TARP funds,” Miller told CNSNews.com. “I don’t know that there is any explicit legislative authority, but I don’t know that it’s beyond their existing authority in terms of how they are allocating and conditioning the funds.”
 
Rep. Heath Schuler (D-N.C.) supports guaranteeing the warranties, and does not know if congressional action is necessary. But he said he would like for Congress to be involved.
 
“As always, as a member of Congress, we’d like to have our say so, without a doubt we’d like to have our say so,” Schuler told CNSNews.com.