Federal Credit Programs: Comparing Fair Value and the Federal Credit Reform Act (FCRA)

Summary

The U.S. government uses direct loans and loan guarantees in a range of policy areas. More than 100 direct federal loans and private financial institution loans guaranteed by the government, known as federal credit programs, are available to individuals and firms. The credit programs support a wide range of economic activities, including home ownership, education, small business, farming, energy, infrastructure investment, and exports. At the end of fiscal year (FY) 2014, outstanding federal credit totaled $3.3 trillion, with direct loans at $1.0 trillion and loan guarantees at $2.3 trillion.

For budget formulation, the costs or profits of these government programs are estimated as prescribed by the Federal Credit Reform Act of 1990 (FCRA; P.L. 101-508). As measured by FCRA, some of these credit programs generate a profit while others incur costs to the government. The costs of these credit programs are commonly referred to as subsidy costs. When these programs generate a profit, they are considered negative subsidy costs.

In recent years, Congress has debated the best way to measure subsidy costs. The debate has revolved around whether the subsidy costs should be measured as prescribed by FCRA or by what is referred to as the fair-value method. Subsidy costs estimates under FCRA adjust the cash outflows and inflows for the various risks a loan portfolio might face. These cash flows are also discounted using Treasury interest rates for estimating subsidy costs.

One method of estimating the fair-value costs of the credit programs is to use private-market interest rates. Generally, private-sector firms would charge a borrower with a government loan guarantee lower interest rates than they would charge a borrower without the government guarantee. Switching to fair value, therefore, is expected to increase the subsidy costs estimates of credit programs. For example, the Congressional Budget Office (CBO) projects that changing the method of calculating subsidy costs estimates to the fair-value method would increase the 10-year budget cost estimates of student loans by $223 billion, single-family mortgage insurance by $93 billion, and the Export-Import Bank by $16 billion. Many of the credit programs that are estimated to make a profit under FCRA have a subsidy cost (incur loss) under fair value.

Proponents of fair-value cost estimates argue the government’s cost of credit programs should reflect market risks. Those risks are currently excluded from FCRA cost estimates. In their view, the risk posed by the borrowers should be considered as a cost to the taxpayers because taxpayers are ultimately responsible for paying the debt of the U.S. government. Supporters of using the FCRA method argue that it is appropriate for the government to discount at the rate at which it borrows and that market risk is not the same as budgetary costs. In their view, including market risks to estimate credit subsidies includes amounts that the government will never incur. Further, adopting fair value for budget estimates does not necessarily imply that there would be a need to raise taxes or to borrow additional funds because such costs affect only the budget projections not the actual amount of cash flows.

Legislation has been introduced in the 114th Congress (S. 399 and H.R. 119) that would change the method of calculating subsidy costs to the fair-value method. Similar legislative proposals passed the House in the 113th Congress but were not acted on in the Senate. FY2016 budget resolutions in the 114th Congress, S.Con.Res. 11 and H.Con.Res. 27, include provisions that would address the issue of fair value in federal credit programs by requiring CBO to provide fair-value estimates for credit programs at the request of the budget committees. S.Con.Res. 11 was adopted by the House on April 30, 2015, and by the Senate on May 5, 2015.