CBO Releases Report on Fair-Value Estimates of the Cost of Federal Credit Programs in 2013

June 28, 2012

The federal government provides credit assistance to individuals and businesses in the form of direct loans and through guarantees of loans made by private financial institutions. In a report requested by the Chairman and Ranking Member of the Senate Budget Committee, CBO provides an illustrative analysis of the federal government’s costs for those credit programs following two approaches:

  • The procedures currently used in the federal budget as prescribed by the Federal Credit Reform Act of 1990 (FCRA): Under those procedures, the lifetime costs of credit programs are recorded up front on an accrual basis. Those costs are measured by discounting the government’s future cash flows to a present value using the rates on U.S. Treasury securities with similar terms to maturity.
  • An alternative approach in which cost is based on an estimate of the market value of the federal government’s obligations—termed a fair-value approach.

Lawmakers have considered changing federal budgetary accounting to require a fair-value approach. Costs for all credit programs would be higher under that approach because it accounts more fully than FCRA procedures do for the cost of the risk the government takes on when issuing loans or loan guarantees. CBO’s analysis indicates that:

  • Using FCRA procedures, new loans and loan guarantees issued in 2013 would generate budgetary savings of $45 billion over their lifetime—thereby reducing the budget deficit.
  • Using a fair-value approach, those loans and guarantees would have a lifetime cost of $11 billion—thereby adding to the deficit. Much of the difference between the fair value and FCRA approaches derives from the valuation of student loans.

The lending levels and costs described are illustrative—in particular, they differ from those underlying CBO’s baseline estimates or its analysis of the President’s budget—but they provide a good basis for comparing the overall budgetary impact of the two ways of accounting for the costs of credit programs.

This report was prepared by Wendy Kiska, Rebecca Rockey, and Mitch Remy of CBO’s Financial Analysis Division.