# Subsidy Cost of Federal Credit: Cost to the Government or Fair Value Cost?

> Briefs, arguments, decisions, and more.

URL: https://www.frixlaw.com/law-library/documents/crs%3AR42503

## Record

- **Collection:** Congressional research report
- **Document type:** CRS Report
- **Published:** April 25, 2012
- **Citation:** R42503

## Text

Subsidy Cost of Federal Credit: Cost to the
Government or Fair Value Cost?
-name redactedSpecialist in Public Finance
April 25, 2012

Congressional Research Service
7-....
www.crs.gov
R42503

CRS Report for Congress
Prepared for Members and Committees of Congress

Subsidy Cost of Federal Credit: Cost to the Government or Fair Value Cost?

Summary
Since the mid-1980s, budget experts have debated whether the best method of measuring the
subsidy cost of federal credit (direct loans and loan guarantees) is the cost to the government or
the fair value cost. The cost to the government would reflect the actual budget cost measured by
discounting of expected cash flows associated with each program at the interest rate on risk-free
Treasury securities. The measure of the cost to the government would place the cost of federal
credit on the same basis as a grant or a tax expenditure; consequently, policymakers would have
an incentive to use the most appropriate means to cover the cost of a government program.
The fair value cost would equal the cost that the credit recipient would have had to pay to borrow
on the private credit market. The fair value cost would include market risk and reflect the
opportunity cost of shifting capital from the private sector to the public sector. Proponents argue
that the social cost rather than the budgetary cost should be used to allocate resources between the
public and private sectors. This debate has yet to be resolved.
The U.S. government uses federal credit to allocate financial capital to a range of areas, including
home ownership, student loans, small business, agriculture, and energy. A direct loan is a
disbursement of funds by the government to a nonfederal borrower under a contract that requires
the repayment of such funds with or without interest. A loan guarantee is a pledge by the federal
government to repay all or part of the principal or interest on any debt obligation of a non-federal
borrower to a non-federal lender. At the end of FY2011, outstanding federal direct loans totaled
$838 billion and outstanding guaranteed loans totaled $2,017 billion.
Before FY1992, federal credit programs were measured on an annual cash flow basis. A new
federal direct loan was treated as a budget outlay in the current fiscal year, and repayments of
principal and payments of interest were treated as offsetting collections (negative outlays) in the
future fiscal years in which they occurred. In the year it was granted, a loan guarantee was a
contingent liability, which means the federal government was only responsible for repayment in
the event of a default. Congress and the executive branch debated options to convert the
budgetary treatment of federal credit from cash flow accounting to accrual accounting, which
would record the subsidy cost of federal credit over the entire life of a loan or loan guarantee.
One of the primary decisions concerning accrual accounting was whether the subsidy cost of
federal credit should be measured by the “cost to the government” or the “fair value” cost.
On November 5, 1990, the President signed P.L. 101-508, 104 Stat. 1388, the Omnibus Budget
Reconciliation Act of 1990 (OBRA90), which included the Federal Credit Reform Act of 1990
(FCRA). Beginning with FY1992, FCRA changed the methodology in the unified budget for
measuring and reporting the cost of federal direct loans and federal loan guarantees from cash
flow to accrual accounting with the cost to the government used in measuring subsidy costs.
In the 112th Congress, six bills have been introduced that would provide for calculation of subsidy
costs using fair value accounting: companion bills S. 1651/H.R. 3414 (Honest Budget Act), H.R.
3581 (Budget and Accounting Transparency Act of 2011), H.R. 3844 (Honest Budget Act of
2012), House Fiscal Year 2012 Budget Resolution (H.Con.Res. 34, 112th Congress), and House
Fiscal Year 2013 Budget Resolution (H.Con.Res. 112, 112th Congress). This report presents a
chronology of this still unresolved debate, which dates from the mid-1980s.
This report will be updated as issues develop and new legislation is introduced.

Congressional Research Service

Subsidy Cost of Federal Credit: Cost to the Government or Fair Value Cost?

Congressional Research Service

Subsidy Cost of Federal Credit: Cost to the Government or Fair Value Cost?

Contents
Introduction...................................................................................................................................... 1
Debate in Mid-1980s ....................................................................................................................... 3
Proposed Credit Reform Legislation in 1987 .................................................................................. 4
GAO’s 1989 Report ......................................................................................................................... 5
CBO’s 1989 Report.......................................................................................................................... 5
Federal Credit Reform Act of 1990 ................................................................................................. 6
CBO’s 2004 Report.......................................................................................................................... 7
President’s 2010 Fiscal Commission ............................................................................................... 8
House FY2012 Budget Resolution .................................................................................................. 8
Budget and Accounting Transparency Act of 2011 ......................................................................... 8
Report of the Center on Budget and Policy Priorities, 2012............................................................ 9
CBPP Criticism of H.R. 3581 .................................................................................................... 9
Criticism of CBPP Report by Phaup ....................................................................................... 10
Analysis of Fair Value Budgeting in FY2013 Budget ................................................................... 11
CBO Issue Brief on Fair-Value Accounting................................................................................... 12
House FY2013 Budget Resolution ................................................................................................ 13

Contacts
Author Contact Information........................................................................................................... 13

Congressional Research Service

Subsidy Cost of Federal Credit: Cost to the Government or Fair Value Cost?

Introduction
Since the mid-1980s, budget experts have debated whether the best method of measuring the
subsidy cost of federal credit (direct loans or loan guarantees) is the cost to the government or the
fair value cost. Federal credit is direct loans and loan guarantees. The cost to the government
would reflect the actual budget cost measured by discounting of expected cash flows associated
with each program at the interest rate on risk-free Treasury securities. The measure of the cost to
the government would place the cost of federal credit on the same basis as a grant or a tax
expenditure; consequently, policymakers would have an incentive to use the most appropriate
means to cover the cost of a government program.
The fair value cost estimate would equal the cost that the credit recipient would have had to pay
to borrow on the private credit market. The fair value cost estimate would include market risk and
reflect the opportunity cost of shifting capital from the private sector to the public sector, thus
reflecting the social cost of the programs. Proponents argue that the social cost rather than the
budgetary cost should be used to allocate resources between the public and private sectors. This
debate has yet to be resolved.
The U.S. government uses federal credit to allocate financial capital to a range of areas including
home ownership, student loans, small business, agriculture, and energy.1 A direct loan is “a
disbursement of funds by the government to a nonfederal borrower under a contract that requires
the repayment of such funds with or without interest.”2 A loan guarantee is “a pledge with respect
to the payment of all or part of the principal or interest on any debt obligation of a non-federal
borrower to a non-federal lender.”3 At the end of FY2011, outstanding federal direct loans totaled
$838 billion and outstanding guaranteed loans totaled $2,017 billion.4 Thus, at the end of
FY2011, outstanding federal credit totaled $2.855 trillion.
The weak economy and expansionary monetary policy caused low nominal Treasury interest rates
from FY2009 to FY2011. Consequently, the use of Treasury interest rates in the cost-to-thegovernment measure resulted in aggregate costs of federal credit of negative $19 billion for
FY2009, negative $20 billion for FY2010, and negative $41 billion for FY2011.5 These negative
costs reduced the sizes of the federal deficits. In contrast, the aggregate cost of federal credit
averaged $3.1 billion annually for FY1998-FY2008.6 Arguably, these negative aggregate costs of
federal credit over the past three fiscal years have contributed to the debate about changing to fair
value budgeting. In the 112th Congress, six bills have been introduced that would provide for
calculation of subsidy costs using fair value accounting: companion bills S. 1651/H.R. 3414
(Honest Budget Act), H.R. 3581 (Budget and Accounting Transparency Act of 2011), H.R. 3844

1

For an overview of federal credit reform, see CRS Report RL30346, Federal Credit Reform: Implementation of the
Changed Budgetary Treatment of Direct Loans and Loan Guarantees, by (name redacted).
2
Section 502(1) of the Federal Credit Reform Act of 1990.
3
Section 502(3) of the Federal Credit Reform Act of 1990.
4
U.S. Office of Management and Budget, Analytical Perspectives, Fiscal Year 2013, Budget of the U.S. Government,
Washington: GPO, 2012), p. 401.
5
Congressional Budget Office, Fair-Value Accounting for Federal Credit Programs, March 2012, p. 5.
6
Ibid.

Congressional Research Service

1

Subsidy Cost of Federal Credit: Cost to the Government or Fair Value Cost?

(Honest Budget Act of 2012), House Fiscal Year 2012 Budget Resolution (H.Con.Res. 34, 112th
Congress), and House Fiscal Year 2013 Budget Resolution (H.Con.Res. 112, 112th Congress).
Before FY1992, federal credit programs were measured on an annual cash flow basis. Under this
arrangement, a new federal direct loan was treated as a budget outlay in the current fiscal year,
and repayments of principal and payments of interest were treated as offsetting collections
(negative outlays) in the fiscal years in which they were repaid. If a loan recipient paid a fee, this
fee was also treated as an offsetting collection. Loan defaults reduced repayments of principal and
interest, and therefore offsetting collections. Administrative expenses were reported as outlays. In
a given fiscal year, the budgetary cost of a loan program, not the individual loans, was its net cash
flow. This equaled new loans made plus any administrative expenses associated with these loans
(rarely recognized in the loan accounts) less any loan fees, repayments of principal, and payments
of interest. The federal acceptance of a contingent liability when a loan guarantee was provided
was not included in the federal budget because no cash flow occurred. The administrative costs of
a guarantee program were outlays in the fiscal year in which they occurred. Some guarantee
programs charge fees to the recipient, and these fees were considered offsetting collections. Any
federal outlays necessary to compensate lenders for any default losses covered by a federal
guarantee were not shown in the budget until they were actually paid.
Using the old cash-flow method, it was often difficult for policymakers to accurately monitor and
therefore make informed decisions about federal credit. In addition, administrators at agencies
could understate costs by using various budgetary techniques. One of these was generating
“savings” from the fees on increased volumes of new guarantees while ignoring the increase in
expected losses and offsetting the (cash) cost of new direct loans with current year collections
from old loans.
To remedy these problems, Congress and the executive branch debated options to convert the
budgetary treatment of federal credit from cash flow accounting to accrual accounting (measuring
the cost over the life of the loan or loan guarantee). One of the primary decisions concerned
whether the cost of federal credit should be measured by the “cost to the government” or the “fair
value” cost.

“Cost to the Government”
The cost to the government approach reflects the actual budget cost measured by “discounting of
expected cash flows at the interest rate on risk-free Treasury securities (the rate at which the
government borrows money).”7 For a loan program, these credit flows consist of “disbursements
by the government (loan disbursement and other payments) minus estimated payments to the
government (repayment of principal, payments of interest, and other payments) after adjusting for
projected defaults, prepayments, fees, penalties, and other recoveries.”8 For a loan guarantee
program, these credit flows are “estimated payments by the government (for defaults and
delinquencies, interest rate subsidies, and other payments) minus estimated payment to the
government (for loan origination and other fees, penalties, and recoveries).”9
7
Congressional Budget Office, Estimating the Value of Subsidies for Federal Loans and Loan Guarantees, August
2004, p. 4.
8
U.S. Government Accountability Office, Credit Reform; Review of OMB’s Credit Subsidy Model, Report no.
GAO/AIMD-97-145, August 1997, p. 4.
9
Ibid.

Congressional Research Service

2

Subsidy Cost of Federal Credit: Cost to the Government or Fair Value Cost?

The cost to the government concept would measure the subsidy cost in an equivalent budgetary
method for a grant or a tax expenditure. Thus, a policymaker would not have any incentive to
favor one type of assistance over another because credit, grants, and tax expenditures would all be
measured by the cost to the government.

“Fair Value Cost”
An alternative would be to use the fair value cost, which would equal the cost that the credit
recipient would have had to pay to borrow on the private credit market. In other words, the fair
value cost is based on the price investors would be willing to pay to purchase federal direct loan
assets or reinsure federal loan guarantees. The fair value cost includes market risk and reflects the
opportunity cost of shifting capital from the private sector to the public sector.
On November 5, 1990, President George H. W. Bush signed P.L. 101-508, 104 Stat. 1388, the
Omnibus Budget Reconciliation Act of 1990 (OBRA90). The legislation added a new title to the
Congressional Budget Act, Title V, the Federal Credit Reform Act of 1990 (FCRA). Beginning
with FY1992, FCRA changed the methodology in the unified budget for measuring and reporting
the cost of federal direct loans and federal loan guarantees from cash flow to accrual accounting,
using the cost to the government concept.
Whether the cost to the government or the fair value cost is most appropriate is still debated,
however, and the question remains unresolved. This report gives a chronological examination of
this debate since the 1980s.

Debate in Mid-1980s
In August 1984, the Office of Management and Budget (OMB) issued a revised version of its
Circular A-70, Policies and Guidelines for Federal Credit Programs, which included the
requirement that federal agencies calculate and transmit data to OMB on the subsidy cost of all of
their direct loan and loan guarantee programs. The method used to measure subsidy costs was
specified as comparing private financing terms with those of federal credit. Since 1984, these
agency data were used to report subsidy costs in Special Analysis F, “Federal Credit Programs,”
in the President’s budget documents.10
On December 12, 1985, the passage of the Gramm-Rudman-Hollings (G-R-H) Act, Balanced
Budget and Emergency Deficit Control Act of 1985 (P.L. 99-177), 99 Stat. 1037, required that all
new direct loans and loan guarantees be on-budget.11 Prior to G-R-H, many new direct loans and
loan guarantees were recorded off-budget. With the passage of G-R-H, Congress and the
executive branch became more interested in possible budgetary reforms to improve the recording
of federal credit in the budget. One of the major issues was measuring the subsidy costs of federal

10

Congress of the United States, Congressional Budget Office, Credit Reform: Comparable Budget Costs for Cash and
Credit, December 1989, p. 21.
11
Off-budget accounts are designated by law as excluded from the budget totals. For example, under current law,
transactions of the Social Security trust funds and the Postal Service are off-budget. On-budget accounts are other than
those designated by law as off-budget. The budget combines the on- and off-budget totals to derive unified totals for
federal activity.

Congressional Research Service

3

Subsidy Cost of Federal Credit: Cost to the Government or Fair Value Cost?

credit. This new interest prompted both proposed legislation and research in legislative and
executive branch agencies and the academic community.

Proposed Credit Reform Legislation in 1987
In February 1987, the Reagan Administration proposed extensive credit reform in its FY1988
Budget.12 The Administration’s proposals were introduced in the House as H.R. 1754 and the
Senate as S. 745, the Federal Credit Reform Act of 1987. Senators Lawton Chiles and Pete
Domenici extensively revised the Reagan proposal. Their proposal was included as an
amendment to H.J.Res. 324 to raise the debt limit as it passed the Senate on July 31, 1987, but
was eliminated by the conference agreement.13
The Administration’s proposal measured the subsidy cost as the dollar benefit to the borrower,
while the Chiles-Domenici proposal measured subsidy cost as the dollar cost to the federal
government. Furthermore, the two proposals differed in their methods of determining the value of
subsidy costs.
The Administration proposed to sell most loans on private credit markets.14 The value of a loan’s
subsidy cost would equal the difference between its face value and its selling price. The
Administration’s proposal also sought to reinsure most loan guarantees with single payment
policies, and government’s payment for reinsurance would measure the subsidy cost. Thus, most
credit subsidies would be measured objectively by market forces. For those credit programs for
which loan sales and guarantee reinsurance would be inappropriate, the subsidy cost was to be
estimated by the Secretary of the Treasury in consultation with the relevant agencies.
The Chiles-Domenici proposal neither required nor authorized the selling of direct loans and
specifically forbade the reinsurance of federal loan guarantees. These stipulations reflected the
belief that market transactions would have been inappropriate in measuring the subsidy cost to the
federal government. Under the Chiles-Domenici proposal, a federal credit management agency
would have been established in the Treasury Department, and this agency would estimate subsidy
costs as cost to the government.

12

The information in this section is from the following source: archived CRS Report 87-939 E, Credit Reform: ChilesDomenici Proposal Contrasted with Reagan Proposal, by (name redacted). A copy of this report is available from the
author.
13
For explanations of these proposals, see Executive Office of the President, Office of Management and Budget,
Section-By-Section Analysis of the Federal Credit Reform Act of 1987, Washington, March 1987, 17 p.; and U.S.
Congress, House, Increasing the Statutory Limit on the Public Debt, Conference Report to Accompany H.J.Res. 324,
100th Congress, 1st Session, Washington, September 21, 1987, pp. 68-70.
14
For GAO’s views on the federal government’s proposed sale of loan assets, see Frederick D. Wolf, “Federal
Government Credit Program: Privatization Through Loan Sales,” Public Budgeting & Finance, vol. 8, no. 4, Winter
1988, pp. 74-80.

Congressional Research Service

4

Subsidy Cost of Federal Credit: Cost to the Government or Fair Value Cost?

GAO’s 1989 Report
In April 1989, the then-General Accounting Office issued a report titled Budgetary Treatment of
Federal Credit Programs, which included analyses of credit reform proposals recommended by
the Senate Budget Committee, CBO, OMB, and GAO.15 In the report, GAO stated the following:
The four proposals differ principally only on the method used to calculate credit subsidy
costs. We [GAO] and the Senate Budget Committee propose measuring the direct budgetary
costs of credit programs. In our recent reports, we recommend a “cost-to-the-government”
model, which measures loan subsidy costs as the difference between the costs to the
Treasury of making the loan and the expected receipts flowing back to the Treasury from the
loan repayments—calculated on a present-value basis.
On the other hand, CBO and OMB prefer a market-valuation oriented measurement approach
which calculates the economic benefit borrowers receive as a result of obtaining federal,
rather than private sector, loans. OMB believes that the economic subsidy offered to
borrowers is the most important aspect of federal credit, and it proposes putting this
economic subsidy measure in the federal budget. OMB computes subsidy costs as the present
value of the additional payments that a federal borrower would be required to pay for a
similar loan from the private sector. CBO’s preference for market-valuation subsidy costs is
based on the assumption that government credit program costs appropriately measured are
comparable to costs incurred by private sector financial institutions.
As stated in our prior reports, we [GAO] prefer the cost-to-the-government measure of credit
subsidy costs because it measures future cash outlays. We believe that market-valuation
subsidy costs will overstate the actual cost to the government. Subsidies measured in terms
of market values will generally be larger than subsidies measured in terms of the cost to the
government because they will include some costs, such as premiums for liquidity and risk
(above and beyond expected default costs), which would not be reflected in budget outlays.16

CBO’s 1989 Report
In December 1989, the Congressional Budget Office (CBO) published a report titled Credit
Reform: Comparable Budget Costs for Cash and Credit, which provided an analysis of federal
credit reform proposals.17 One chapter explained possible methods of calculating subsidy costs of
federal credit,18 and discussed selecting the appropriate discount rate in determining costs. In
examining the option of using Treasury borrowing rates, the report stated the following:
The bills, notes, and bonds issued by the Treasury are believed to be virtually free of default
risk. Rates on such debt, therefore, contain no risk premium and are commonly considered
risk-free. Use of a Treasury borrowing rate to discount future cash flows on a credit contract
treats those payments as though they were certain to be received. If the government were to
15

U.S. General Accounting Office, Budgetary Treatment of Federal Credit Programs, Report No. AFMD-89-42, April
1989, 28 pp.
16
Ibid., pp. 3-4.
17
This report satisfied the requirements of Section 212 of the Balanced Budget and Emergency Deficit Control
Reaffirmation Act of 1987 (P.L. 100-119), 101 Stat. 754, which directed CBO in consultation with GAO to study
specified aspects of federal credit.
18
Congressional Budget Office, Credit Reform: Comparable Budget Costs for Cash and Credit, pp. 33-46.

Congressional Research Service

5

Subsidy Cost of Federal Credit: Cost to the Government or Fair Value Cost?

use its own risk-free cost of borrowing to discount uncertain future cash flows, it would be
the only financial institution to do so. An aversion to risk causes others, including federally
insured banks and thrifts, to discount risky income at a higher than risk-free rate.
Those who recommend that the government use a risk-free rate to discount risky future
income argue that the risk-free rate reflects what the government actually pays to provide
credit assistance. GAO, for example, has advocated valuing federal loans by using Treasury
borrowing rates to discount receipts, minus losses from defaults. Using a risk-free Treasury
rate for discounting supports a budget policy that recognizes only costs paid in cash.19

The report also considered the option of using market rates:
Others recommend that the government select a discount rate equal to the rate that the
government would receive by investing in other equally risky assets. They maintain that the
use of such a rate is necessary to capture the opportunity costs of credit or the value of
alternatives forgone. The use of rates that account for risk is also necessary to distinguish the
cost of assets with equal expected income but different degrees of risk.20

The report indicated major data deficiencies in making subsidy cost calculations. “In general,
federal agencies do not have access to historical data on the characteristics of borrowers, on the
financed project, or on the cash flows for individual loans and guarantees.”21

Federal Credit Reform Act of 1990
On November 5, 1990, the President signed P.L. 101-508, 104 Stat. 1388, the Omnibus Budget
Reconciliation Act of 1990 (OBRA90). The legislation added a new title to the Congressional
Budget Act, Title V, the Federal Credit Reform Act of 1990 (FCRA). Beginning with FY1992,
FCRA changed the methodology in the unified budget for measuring and reporting the cost of
federal direct loans and federal loan guarantees from cash flow to accrual accounting.
The four stated purposes of FCRA (Section 501) were to
(1) measure more accurately the costs of federal credit programs;
(2) place the cost of credit programs on a budgetary basis equivalent to other federal
spending;
(3) encourage the delivery of benefits in the form most appropriate to the needs of
beneficiaries; and
(4) improve the allocation of resources among credit programs and other spending.

FCRA required the budgetary cost of federal credit to be measured for any one year as the net
present value of the cost to the government of credit subsidies in the fiscal year the credit is
provided.
19

Ibid., pp. 39-40.
Ibid., p. 40.
21
Ibid., p. 36.
20

Congressional Research Service

6

Subsidy Cost of Federal Credit: Cost to the Government or Fair Value Cost?

Although FCRA specified the use of the cost to the taxpayer in measuring credit subsidies, some
public finance professionals, including some experts at CBO, continued to advocate a shift to the
use of fair value cost.

CBO’s 2004 Report
In August 2004, CBO issued a report on federal credit subsidies that examined two ways of
including the market price for risk: risk-adjusted discount rates and options-pricing methods.22
The risk-adjusted discount rate (ADR) method “adds a spread—the difference between the
interest rate on a Treasury security and the rate on a risky security—to Treasury rates and uses the
resulting adjusted rate to discount expected cash flows associated with a loan.”23 The ADR
method results in a higher discount rate for both costs and revenues and, with a few exceptions
for negative subsidies, raises the net cost of credit programs.
“An option is a marketable security which allows the owner to buy (or sell) another security at a
stipulated price on or before a specified date.”24 “The general ideal behind options-pricing
methods is that assets with the same payoffs must have the same price; otherwise, investors
would have the opportunity to earn a risk-free profit by buying low and selling high.”25 An
options-pricing method is likely to be more accurate than the ADR method, but only when the
necessary data and model are available.26 Options-pricing models are seldom used to value credit
provided to individuals; instead the use of the ADR method is usually appropriate.27 Optionpricing methods are usually better than ADR methods in valuing credit provided to commercial
enterprises.28 The best method to use varies for other credit programs, such as “loan assistance to
sovereign states, municipalities, and special-purpose enterprises.”29
As an example of the process, CBO applied a type of options pricing—the binomial pricing
method—to calculate the risk-adjusted cost of extending federal loan guarantees to Chrysler in
1980 and to America West Airlines (AWA) in 2002. CBO computed that the market-value loss of
the Chrysler loan guarantee was $239.0 million instead of the Treasury-rate loss of $107.6
million.30 CBO also found that the calculated market-value loss was $26.3 million for the AWA
loan guarantee instead of a gain of $47.4 million using Treasury interest rates.31

22
Congressional Budget Office, Estimating the Value of Subsidies for Federal Loans and Loan Guarantees, August,
2004, p. 4.
23
Ibid., p. 7.
24
Robert C. Radcliffe, Investment: Concepts, Analysis, and Strategy (Glenview, Ill.: Scott, Foresman and Company,
1982), p. 348.
25
Congressional Budget Office, Estimating the Value of Subsidies for Federal Loans and Loan Guarantees, p. 8.
26
Ibid.
27
Ibid.
28
Ibid.
29
Ibid., p. 9.
30
Ibid., pp. 12-19.
31
Ibid.

Congressional Research Service

7

Subsidy Cost of Federal Credit: Cost to the Government or Fair Value Cost?

President’s 2010 Fiscal Commission
In 2010, President Barack Obama established the National Commission on Fiscal Responsibility
and Reform “to address the nation’s fiscal challenges.”32 In December 2010, the commission
issued its report that included a recommendation to “Review and Reform Budget Concepts.” This
recommendation stated that
Current scoring rules and definitions cause policy makers to undervalue some policies and
overvalue others. The Commission recommends a complete review of all budget scoring
practices (“budget concepts”) by the budget committees, the Congressional Budget Office,
and the Office of Management and Budget. Changes should aim to more accurately reflect
the true cost of government liabilities, including by considering accrual accounting, riskadjusted credit reforms, and similar concepts.33

Thus, the President’s fiscal commission arguably endorsed considering a change to fair value
accounting for credit programs.

House FY2012 Budget Resolution
On April 11, 2011, Representative Paul Ryan, chairman of the House Committee on the Budget,
introduced the Fiscal Year 2012 Budget Resolution, H.Con.Res. 34, 112th Congress. This
resolution passed the House by a yeas to nays vote of 235 to 193 but was rejected in the Senate by
a yeas to nays vote of 40 to 57.
Section 408, “Fair Value Estimates,” requires that any CBO estimate prepared for a measure
under the Federal Credit Reform Act shall also provide, as a supplement, and to the extent
practicable, upon the request of the chairman or ranking Member of the Committee on the
Budget, an estimate of the current actual or estimated market values representing the “fair value”
of assets and liabilities affected by such measure. Section 408 also authorizes the chairman to use
such estimate to determine compliance with the Congressional Budget Act of 1974 and other
budgetary enforcement controls. Thus, this budget resolution was supportive of fair value
accounting.

Budget and Accounting Transparency Act of 2011
On December 7, 2011, Representative Scott Garrett introduced H.R. 3581, the Budget and
Accounting Transparency Act of 2011.34 On February 7, 2012, the House passed H.R. 3581 by a
yeas to nays vote of 245 to 180. On February 9, 2012, the act was referred to the Senate
Committee on the Budget. This act includes a provision that would amend FCRA by requiring the
calculation of the subsidy cost of federal credit be accounted for on a “fair value” basis.
32

The National Commission on Fiscal Responsibility and Reform, The Moment of Truth, Washington, December 2010,
65 p.
33
Ibid., pp. 57-58.
34
The provisions concerning fair value account in S. 1651, H.R. 3414, and H.R. 3844 were similar to H.R. 3581, but
only H.R. 3581 has seen floor action.

Congressional Research Service

8

Subsidy Cost of Federal Credit: Cost to the Government or Fair Value Cost?

Report of the Center on Budget and Policy
Priorities, 2012
On January 24, 2012, the Center on Budget and Policy Priorities (CBPP)35 issued a report
opposing H.R. 3581 titled House Bill Would Artificially Inflate Cost of Federal Credit
Programs.36 The authors argue that the addition of a risk component would overstate the federal
costs of credit programs and force policy makers to offset phantom costs with phantom offsets in
order to avoid overstating the size of the federal deficit.37 The authors maintain that H.R. 3581
has “the four flaws,” alleged negative characteristics that are identified below.

CBPP Criticism of H.R. 3581
•

Government May Be Less Risk Averse than Individuals

The authors argue that “individuals are risk averse in part because their financial assets are likely
to be needed at specific times, even when the value of those assets has declined.”38 In contrast,
the Treasury can borrow inexpensively when the times are bad.
•

Risk Aversion Is Not a Budgetary Cost

The authors assert that “adding a risk-aversion adjustment to the spending side of the budget
would add an extra ‘cost’ that the government does not actually incur─and that doesn’t need to be
covered by additional taxes or borrowing.”39 Thus, a risk-aversion adjustment would be a
phantom cost.40
•

Proposal Does Not Treat All Programs the Same

The authors maintain that “when allocating public funds, the budget must reflect costs
comparable across all programs.”41 But the Budget and Accounting Transparency Act of 2011
“would make credit programs appear more expensive to the Treasury than they truly are without
making similar adjustment for other programs whose actual costs also are uncertain.”42
•

Phantom Costs Require Phantom Offsets

The authors declare that the phantom cost from the risk-aversion adjustment causes proponents
“to tacitly or explicitly advocate accompanying that adjustment with a phantom offset.”43 The
authors state that the Budget and Accounting Transparency Act of 2011
35

The conservative Heritage Foundation refers to the Center on Budget and Policy Priorities as a “liberal” think tank.
Jim Horney, Richard Kogan, and Paul Van de Water, House Bill Would Artificially Inflate Cost of Federal Credit
Programs, Center on Budget and Policy Priorities, Washington, January 24, 2012, 9 p.
37
Ibid., p. 1.
38
Ibid., p. 6.
39
Ibid.
40
Ibid.
41
Ibid., p. 7.
42
Ibid.
43
Ibid.
36

Congressional Research Service

9

Subsidy Cost of Federal Credit: Cost to the Government or Fair Value Cost?

creates a phantom downward “means of financing” offset that, over time, would prevent the
debt from being too high even though the annual deficits would consistently be overstated.
One result of this approach is that the sum of deficits over time would diverge more than it
already does from the amount of debt held by the public.44

Although the authors believe that a risk-aversion cost should not play a part in budget accounting,
it “should play a part in the cost-benefit analysis that policymakers should undertake in deciding
whether a government program constitutes wise public policy.”45
Furthermore, in response to a request from Representative Chris Van Hollen, Robert D.
Reischauer, a member of the CBPP board of directors and president emeritus of the Urban
Institute, sent a letter expressing his strong opposition to the use of fair value accounting in
proposed H.R. 3581. He stated that
H.R. 3581 proposes to place an additional budgetary cost on top of the actual cash flows.
This additional cost is supposed to reflect a cost to society that stems from the fact that, even
if the cash flows turn out to be exactly as estimated, the possibility that the credit programs
would cost more (or Less) than estimated imposes a cost on a risk-averse public.46

Criticism of CBPP Report by Phaup
Professor Marvin Phaup, a research scholar and professorial lecturer at the Trachtenberg School
of Public Administration and Public Policy at George Washington University, wrote a comment
on CBPP’s release on H.R. 3581.47 Professor Phaup made the following five points:48
•

H.R. 3581, he asserted, would remove “phantom” budgetary gains to the
government from direct lending and loan guarantee programs. Those illusory
gains mislead policy makers about the costs of their policy decisions.

•

What he described as illusory gains on federal credit also encourage budget
gimmickry. For example, FCRTA would permit the government to balance its
budget immediately on paper by issuing large amounts of Treasury debt and
using the proceeds to invest in an equally large portfolio of risky loans. In his
view, this result would be absurd because in issuing a dollar of debt and buying a
dollar of risky loans at market prices, the government’s net financial position is
unchanged.

•

According to Professor Phaup, if the current practice of using the prices of
Treasury securities to value risky loans rather than the market value of the risky
securities themselves were extended to other assets, then the government could—

44

Ibid., p. 8.
Ibid.
46
Center on Budget and Policy Priorities, “Reischauer ‘Strongly Opposes’ House Bill to Inflate Cost of Federal Credit
Programs,” Robert D. Reischauer letter to Representative Chris Van Hollen, January 24, 2012.
47
Marvin Phaup, Fair Market Values and the Budgetary Treatment of Federal Credit: Comment on CBPP’s Release on
H.R. 3581, manuscript, George Washington University, March 2012, 5 pp. Available at
http://www.tspppa.gwu.edu/docs/Fair%20Market%20Values%20and%20the%20Budgetary%20Treatment%20of%20F
ederal%20Credit%20MP013012Final1.pdf.
48
Ibid., pp. 1-2.
45

Congressional Research Service

10

Subsidy Cost of Federal Credit: Cost to the Government or Fair Value Cost?

with the same logic—direct the Treasury to buy a ton of lead, value it at the price
of gold, and record the gain as deficit reduction.
•

The cost of market risk, he maintains, should be a budget cost because it is a cost
to government stakeholders and its absorption by some yields an unrecognized
subsidy to others. CBPP would include this cost in cost-benefit analyses where
the purpose is to decide if a federal activity produces a net gain but not in the
budget. Budgeting without an evaluation function, however, he considers to be
little more than a redundant projection of Treasury’s borrowing requirements.

•

Finally, he suggests that the cost of market risk should not be excluded from the
budget on grounds that the money isn’t paid out by the government. Both the
Universal Service Fund and the United Mine Workers of American Benefit Funds
are included in the budget, even though the money is untouched by federal hands.

Analysis of Fair Value Budgeting in FY2013 Budget
In the President’s Budget for FY2013, the Office of Management and Budget selected “Fair Value
Budgeting for Credit Programs” as a topic for in-depth analysis.49
OMB compared and contrasted the current cost to the government with fair value budgeting,
which would reflect social costs. OMB found that
The current FCRA method for estimating cost provides a different measure of cost than the
fair value method, which takes different risks and costs into account. To calculate fair value,
cash flows unadjusted for expected losses would be discounted with a market rate that
reflects the characters of the cash flows of the loan or loan guarantee (comparable market
rate), instead of Treasury rates. The comparable market rate would differ from the maturitymatched Treasury rate in most cases and vary across credit programs, and even across
individual loans and guarantees in some cases.
Fair value is conceptually appealing in that it reflects closely the preferences of market
participants. It is debatable, however, whether fair value estimates for credit programs also
represent the preferences of taxpayers and the society as a whole. In addition to this
conceptual issue, several practical and implementation issues would need to be carefully
considered in evaluating fair value proposals. Key issues include: how to develop accurate
estimation methods; comparability of cost estimates across programs; and whether agencies
would be able to implement fair value, particularly given limited administrative resources. A
fair value proposal that does not address these conceptual and practical issues would
probably fail to improve resource allocation and could even be counter-productive.50

OMB stated that the market interest rate on a private loan depends on seven factors, with only the
first two of the following being reflected in the Treasury rate.51 These seven factors were
identified by OMB:
•

time preference (present versus future, included in FCRA cost estimate)

49
U.S. Executive Office of the President, Office of Management and Budget, Analytical Perspectives, Budget of the
U.S. Government, Fiscal Year 2013, U.S. Govt. Print Off., Washington, 2012, pp. 393-399.
50
Ibid., p. 393.
51
Ibid., pp. 393-395.

Congressional Research Service

11

Subsidy Cost of Federal Credit: Cost to the Government or Fair Value Cost?

•

expected loss from default (included in FCRA cost estimate)

•

compensation for uncertain returns—uncertainty premium

•

compensation for lower liquidity—liquidity premium

•

cost of administering the loan (This cost is not included in an FCRA cost estimate
but is relevant to taxpayers. It is currently recorded on a cash basis.)

•

tax rate on interest income

•

contract terms determining lenders’ and borrowers’ rights

CBO Issue Brief on Fair-Value Accounting
In March 2012, CBO released an issue brief titled Fair-Value Accounting for Federal Credit
Programs. CBO indicated its support for fair value accounting:
FCRA cost estimates understate the cost of federal credit programs to the government
because of the requirement that Treasury rates be used for discounting. Using comprehensive
cost measures for budgeting, and accounting for credit on a basis that is equivalent to that for
other federal programs—stated objectives of FCRA—would be better accomplished if the
cost of extending federal credit was assessed at market prices rather than on a FCRA basis.52

CBO acknowledges that fair value accounting involves implementation issues. “Because most
public-sector credit programs have no exact analogue in the private sector, estimating their fair
value usually involves approximation.”53 Fair value accounting would result in additional effort
and expense.54 Fair value estimates would be more volatile “over time because the cost of market
risk is not constant.”55 Finally, “fair-value estimates might be less transparent than FCRA
estimates and thus more dependent on the judgment of agencies and analysts responsible for the
programs.”56 CBO maintains that these concerns, however, can “be addressed in various ways.”57
For example, expert advice from private-sector accounting firms with experience in fair-value
accounting could lessen the volatility of estimates, and the establishment of federal guidelines for
estimation procedures could make estimates more transparent.58
CBO indicates the fair-value accounting is currently applied in a few cases. For example, the
Emergency Economic Stabilization Act of 2008 (P.L. 110-343), 122 Stat. 3765, specified that the
estimated cost of the Troubled Assist Relief Program be calculated using a discount rate adjusted
for the market cost of risk.59 CBO also has made studies for Congress about the cost of some

52

Congressional Budget Office, Fair-Value Accounting for Federal Credit Programs, p. 5.
Ibid., p. 10.
54
Ibid.
55
Ibid.
56
Ibid.
57
Ibid.
58
Ibid, p. 2.
59
Ibid.
53

Congressional Research Service

12

Subsidy Cost of Federal Credit: Cost to the Government or Fair Value Cost?

federal credit programs using fair value account versus the current cost to the government under
FCRA.60
CBO states that under FCRA, the total subsidy cost of federal credit averaged $3.1 billion
annually from FY1998 to FY2008.61 But the total subsidy cost of federal credit was negative $19
billion for FY2009, negative $20 billion for FY2010, and negative $41 billion for FY2011.62
These data suggest that a change to fair value accounting could significantly affect the deficit.

House FY2013 Budget Resolution
On March 23, 2012, Representative Paul Ryan introduced the Fiscal Year 2013 Budget
Resolution, H.Con.Res. 112, 112th Congress. The fair value provision was similar to that in the
House FY2012 Budget Resolution. On March 29, this budget resolution passed the House by a
228 to 191 vote. Section 507(a) titled “Fair Value Estimates”
requires the Congressional Budget Office, upon the request of the chair or ranking member
of the Committee on the Budget, to make a supplemental estimate of the current actual or
estimated market values representing the “fair value” of assets and liabilities affected by a
measure as part of any estimate prepared for the measure under credit reform requirements of
the Federal Credit Reform Act.
Authorizes the chair to use such estimate to determine compliance of the measure in question
with the Congressional Budget Act of 1974 and other budgetary enforcement controls.63

Debate about fair value budgeting has yet to be resolved.

Author Contact Information
(name redacted)
Specialist in Public Finance
[redacted]@crs.loc.gov, 7-....

60

Ibid., p. 11.
Ibid., p. 5.
62
Ibid.
63
This description of Section 507(a) is from the LIS summary written by CRS.
61

Congressional Research Service

13

EveryCRSReport.com
The Congressional Research Service (CRS) is a federal legislative branch agency, housed inside the
Library of Congress, charged with providing the United States Congress non-partisan advice on
issues that may come before Congress.
EveryCRSReport.com republishes CRS reports that are available to all Congressional staff. The
reports are not classified, and Members of Congress routinely make individual reports available to
the public.
Prior to our republication, we redacted names, phone numbers and email addresses of analysts
who produced the reports. We also added this page to the report. We have not intentionally made
any other changes to any report published on EveryCRSReport.com.
CRS reports, as a work of the United States government, are not subject to copyright protection in
the United States. Any CRS report may be reproduced and distributed in its entirety without
permission from CRS. However, as a CRS report may include copyrighted images or material from a
third party, you may need to obtain permission of the copyright holder if you wish to copy or
otherwise use copyrighted material.
Information in a CRS report should not be relied upon for purposes other than public
understanding of information that has been provided by CRS to members of Congress in
connection with CRS' institutional role.
EveryCRSReport.com is not a government website and is not affiliated with CRS. We do not claim
copyright on any CRS report we have republished.

---

Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/crs%3AR42503. Public record. Not legal advice.