Federal Credit Reform: Implementation Of the Changed Budgetary Treatment of Direct Loans and Loan Guarantees

Publication Date: June 2003

Publisher: Library of Congress. Congressional Research Service

Author(s):

Research Area: Banking and finance

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Abstract:

On November 5, 1990, the Omnibus Budget Reconciliation Act of 1990 (P.L. 101-508) was signed into law. P.L. 101-508 added Title V to the Congressional Budget Act. Title V, also called the Federal Credit Reform Act of 1990 (the FCRA), changed how the unified budget reports the cost of federal credit activities (i.e., federal direct loans and loan guarantees). Before fiscal year 1992 (FY1992), for a given fiscal year, the budgetary cost of a new direct loan or loan guarantee was the net cash flow for that fiscal year. This cash flow measure did not accurately reflect the true cost of a loan or loan guarantee, which is its subsidy cost over the entire life of the loan or loan guarantee; i.e., its accrual cost. The purposes of this report are to explain the credit reform provisions, examine their implementation, and discuss proposed modifications.

Beginning with FY1992, federal credit reform legislation required that the reported budgetary cost of a credit program equal the estimated subsidy costs at the time the credit is provided. The FCRA defines the subsidy cost as "the estimated long-term cost to the government of a direct loan or a loan guarantee, calculated on net present value basis, excluding administrative costs." This places the cost of federal credit programs on a budgetary basis equivalent to other federal outlays. This change means, because the subsidy costs of discretionary credit programs are now provided through appropriations acts, that the discretionary credit programs must now compete with other discretionary programs on an equal basis. Funding for most mandatory credit programs (generally entitlement programs) is provided by permanent appropriations. The Director of the Office of Management and Budget (OMB) is responsible for coordinating the estimation of subsidy costs to the government.

Since the passage of the FCRA, federal agencies, working with OMB, have steadily improved their compliance with credit reform standards. In October 1990, the Federal Accounting Standards Advisory Board was established. In August 1993, this Board required that agencies' accounting procedures be consistent with their budgetary procedures for their federal credit programs. The Government Performance and Results Act of 1993 (GPRA) required that federal agencies be held accountable for achieving program results including those of credit programs. Under GPRA, the first annual performance reviews occurred for fiscal year 1999. On August 5, 1997, the Balanced Budget Act of 1997 (P.L. 105-33) was enacted. This law amended the FCRA to make some technical changes including codifying several guidelines set by OMB.

Four proposals to modify current practice have been discussed: the principles of credit reform could be applied to government-sponsored enterprises, the principles of credit reform could be extended to federal insurance programs, the administrative costs of credit programs could be included in the calculation of the costs of these programs, and the budgetary cost of capital for credit programs could be changed to the after-tax rate of return earned by private financial intermediaries.