CONGRESSWOMAN ELISE STEFANIK
On Tuesday, February 7, 2012, the House is scheduled to consider H.R. 3581, the Budget and Accounting Transparency Act of 2012, subject to a rule. The rule provides one hour of debate, equally divided and controlled by the chairs and ranking minority members of the Budget Committee. The rule also makes three amendments in order, each of which is debatable for up to ten minutes. A full summary of the amendments made in order under the rule is available below. The bill was introduced on December 7, 2011, by Rep. Scott Garrett (R-NJ) and referred to the House Budget Committee, the Committee on Oversight and Government Reform and the Committee on Ways and Means. The Budget Committee reported the bill on January 24, 2012, by a vote of 21 -10.
H.R. 3581 would modify the budgetary treatment of federal credit programs such that the cost of direct loans or loan guarantees would be calculated on a “fair value” basis, which includes not only the borrowing costs of the federal government, but also the cost of the market risk the government is incurring by issuing a loan or loan guarantee. Under current law, the Federal Credit Reform Act of 1990 (FCRA) requires that the credit subsidy cost of federal direct loans and loan guarantees be measured on a net present value basis which determines the cost of a loan program based on calculations using the interest rates on Treasury securities and estimated losses that would be expected from defaults. However, this calculation ignores additional costs associated with market risks. According the Congressional Budget Office (CBO), “By incorporating a market-based risk premium, fair-value estimates recognize that the financial risk that the government assumes when issuing credit guarantees is more costly to taxpayers than FCRA-based estimates suggest.” By more accurately accounting for the costs of federal credit programs, H.R. 3581 would increase the estimated costs of such programs compared to measures used under current law.
In addition, the legislation would require that the federal budget reflect the net impact of programs administered by Fannie Mae and Freddie Mac, require that federal agencies post budget justifications on public websites on the same day they are submitted to the Congress, and require the Office of Management and Budget (OMB) and CBO prepare studies on the costs of federal insurance programs and the historical application of the budgetary terms “revenue,” “offsetting collections,” and “offsetting receipts.”
Fair Value Accounting: H.R. 3581 would amend the Federal Credit Reform Act of 1990 (FCRA) to require that, beginning in FY 2014, the costs of federal credit programs be measured on a fair value basis in order to provide a more accurate accounting of the costs of these programs. Under current law, estimates are made on a “net present basis,” which is estimated by discounting cash flows to the time of loan disbursement using the interest rates on Treasury securities of comparable maturity. The bill would require that the cost of a federal loan or loan guarantee program must include a market-based risk premium that is in addition to the net present value cost estimate calculated using Treasury’s discount rates. According to CBO, “estimates prepared using FCRA procedures provide a less-than-comprehensive measure of the cost to taxpayers of federal credit commitments.” Generally, the fair value of an asset is defined as the price that would be received if the asset was sold in an orderly transaction (one that occurs under competitive market conditions between willing participants and does not involve forced liquidation or a distressed sale). Likewise, the fair value of a liability is the price that would have to be paid to induce a market participant to assume the liability.
H.R. 3581 would require calculations for determining the up-front credit subsidy cost of federal loans or loan guarantees programs to include a market-based risk premium that is in addition to the net present value cost estimate calculated using Treasury’s discount rates. Under the legislation, long-term costs of a direct loan or loan guarantee would be estimated on a fair value basis, applying the guidelines set forth by the Financial Accounting Standards Board as well as Treasury discounting. The estimate would exclude administrative costs and any incidental effects on governmental receipts or outlays.
H.R. 3581 would require that by 2015 the president's budget reflect the costs of direct loan and loan guarantee programs and include the planned level of new direct loan obligations or loan guarantee commitments associated with each appropriations request.
Budgetary Adjustment: H.R. 3581 would authorize the one-time upward adjustment of caps on discretionary appropriations set forth in the Budget Control Act of 2011 in order to account for the increase in discretionary credit subsidy costs for loan and loan guarantee programs that will occur when the new accounting rules take effect. According to CBO, “Net receipts from discretionary credit programs reduced the estimated cost of appropriations in 2012 by about $4 billion on a FCRA basis. On a fair-value basis, CBO estimates that those same programs would require additional appropriations of about $20 billion.” Under the legislation, before adjusting the discretionary caps, OMB would be required to report to the Committees on the Budget of the House and the Senate on the amount of that adjustment, the methodology used in determining the size of that adjustment, and a program-by-program itemization of the components of that adjustment.
CBO and OMB Studies on Federal Insurance Programs: The bill would require that not later than one year after the date of enactment, the Directors of CBO and OMB prepare a study and make recommendations on the feasibility of applying fair value concepts to budgeting for the costs of federal insurance programs.
On-Budget Status of Fannie Mae and Freddie: The bill would require that receipts and disbursements, including the administrative expenses, of the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac) be counted as new budget authority, outlays, receipts, deficit or surplus for the purposes of the president's budget submission, the congressional budget, and the Balanced Budget and Emergency Deficit Control Act of 1985. This provision would bring Fannie Mae and Freddie Mac on-budget in order to account for the full budgetary impact of these housing-related government-sponsored enterprises.
Budget Review and Analysis: The bill would require that not later than one year after the date of enactment, the Directors of CBO and OMB to prepare a study of the history of offsetting collections against expenditures and the amount of receipts collected annually, the historical application of the budgetary terms “revenue”, “offsetting collections” and “offsetting receipts”, and review the application of those terms. CBO would be required to review the OMB study. Both CBO and OMB would then be required to each make recommendations to the House and Senate Budget Committees as to whether such usage should be continued or modified. In addition, the bill would require that agencies make available on their public websites all budget justification materials provided to Congress on the same day as the justifications are submitted to Congress. The materials must be searchable, sortable, and downloadable.
According to Committee Report 112-380, the Federal Credit Reform Act of 1990 (FCRA) reformed the budgetary treatment of Federal direct loans and loan guarantees to account for the cost of these programs on an accrual basis. Previously, federal direct loan and loan guarantee programs were accounted for on a cash basis, with expenditures and receipts being recorded in the year in which they occurred. Under the 1990 bill, the cost of these programs is developed by producing a net present value of cash flows using a discount rate based on the Federal Government’s borrowing costs. Under FCRA, net present value is estimated by discounting cash flows to the time of loan disbursement using the interest rates on Treasury securities of comparable maturity. (For example, a year after disbursement, cash flows are discounted using a rate on one-year Treasury securities; five years out, they are discounted using a five-year rate; and so on.)
Over time, CBO has concluded that the Treasury discount rate does not fully capture the cost of credit programs. According to CBO, “estimates prepared using FCRA procedures provide a less-than-comprehensive measure of the cost to taxpayers of federal credit commitments. In particular, discounting expected cash flows at Treasury rates—and thus ignoring market risk—yields an estimate of the cost of a loan guarantee that is lower than what competitive financial institutions would charge for such protection.”
H.R. 3581 would correct this current flaw by amending FCRA to ensure the full exposure to the taxpayer is recorded in the budget by providing that fair value estimates be used in calculating the cost of Federal credit programs. The executive branch and Congress would be required to use “fair value” accounting in calculating the costs of federal credit programs that consider not only the borrowing costs of the Federal government, but also the costs of the market risk the Federal government is incurring by issuing a loan or loan guarantee. This reform would bring federal budgeting in line with private sector cost-estimating practices.
The main conceptual difference between FCRA estimates and fair-value estimates is in the choice of discount rates. Instead of using Treasury rates to discount future cash flows, fair-value estimates employ rates that are consistent with the risk of a specific credit obligation. Fair-value estimates of federal subsidy costs also may incorporate administrative expenses that are essential to preserving the value of an asset, such as servicing and collection costs.
According to CBO, if fair-value procedures were used to estimate the cost of new credit activity in 2012, the total deficit for the year would be about $55 billion greater than the deficit as measured under current estimating procedures. However, since the legislation would not change the terms of such credit programs, but would change what is recorded in the budget as the cost of credit assistance, the changes in the estimates of the costs of credit programs would not be scored by CBO as attributable to H.R. 3581.
According to CBO, implementing H.R. 3581 would increase discretionary spending subject appropriation by $14 million over the FY 2012 through FY 2017. The increase in spending subject to appropriations would come as a result of additional costs associated with measuring the cost of federal credit programs on a fair value basis, as well as requirements to post budget justifications on the Internet and produce studies which would require additional resources, according to CBO.
In addition, CBO estimates that if fair-value procedures were used to estimate the cost of new credit activity in 2012, the total deficit for the year would be about $55 billion greater than the deficit as measured under current estimating procedures. However, since the legislation would not change the terms of such credit programs, but would change what is recorded in the budget as the cost of credit assistance, the changes in the estimates of the costs of credit programs would not be scored by CBO as attributable to H.R. 3581.
Amendment No. 1—Rep. Shelia Jackson-Lee (D-TX): The amendment would shorten the time period in which CBO and OMB are required to report to Congress on the feasibility of applying fair value concepts to budgeting for the costs of federal insurance programs from one year to six months after enactment.
Amendment No. 2—Rep. Robert Dold (R-IL)/Rep. Mike Quigley (D-IL): The amendment would require the Director of OMB to prepare all budgets submitted to the President according to both the accrual-basis and cash basis accounting method.
Amendment No. 3—Rep. Paul Tonko (D-NY): The amendment would establish a six-member commission to make recommendations on the best measures to accurately account for the costs of federal credit programs. The provisions of H.R. 3581 would be delayed until the recommendations of the Commission are made, and could be superseded by a majority vote of the Commission. In addition, Congress would be required to vote on the recommendation of the Commission with 45 days of their submission. Under the amendment, the Commission would consist of the Director of the CBO, the Director of OMB, and four additional non-congressional members each appointed by the Speaker and Minority Leader of the House and the Majority and Minority leaders of the Senate.