Fair-Value Accounting for Federal Credit Programs

The federal government supports some private 

activities—such as home ownership, postsecondary 

education, and certain commercial ventures—through 

credit assistance offered to individuals and businesses. 

Some of that assistance is in the form of direct federal 

loans, and some is through federal guarantees of loans 

made by private financial institutions. At the end of fiscal 

year 2011, about $2.7 trillion was outstanding in such 

federal direct loans and loan guarantees.1

 The cost of providing credit assistance is an important consideration for 

policymakers as they allocate spending among programs 

and choose between credit assistance and other forms of 

aid such as federal grants—but assessing cost is not a simple matter. Indeed, it is more difficult to measure the cost 

of credit assistance than to assess the costs of other forms 

of aid because the measurement of the cost of credit assistance must account for future cash flows of uncertain 

amounts that can continue for many years. 

According to the rules for budgetary accounting prescribed in the Federal Credit Reform Act of 1990 (FCRA, 

incorporated as title V of the Congressional Budget Act 

of 1974), the estimated lifetime cost of a new loan or loan 

guarantee is recorded in the budget in the year in which 

the loan is disbursed.2

 That lifetime cost is generally 

described as the subsidy provided by the loan or loan 

guarantee. It is measured by discounting all of the 

expected future cash flows associated with the loan or 

loan guarantee—including the amounts disbursed, principal repaid, interest received, fees charged, and net losses 

that accrue from defaults—to a present value at the date 

the loan is disbursed. A present value is a single number 

that expresses a flow of current and future income, or 

payments, in terms of a lump sum received, or paid, 

today; the present value depends on the rate of interest, 

known as the discount rate, that is used to translate future 

cash flows into current dollars.3

FCRA-based cost estimates, however, do not provide a 

comprehensive measure of what federal credit programs 

actually cost the government and, by extension, taxpayers. Under FCRA’s rules, the present value of expected 

future cash flows is calculated by discounting them using 

the rates on U.S. Treasury securities with similar terms to 

maturity. Because that procedure does not fully account 

for the cost of the risk the government takes on when 

issuing loans or loan guarantees, it makes the reported 

cost of federal direct loans and loan guarantees in the federal budget lower than the cost that private institutions 

would assign to similar credit assistance based on market 

prices. Specifically, private institutions would generally 

calculate the present value of expected future cash flows 

by discounting those flows using the rates of return on 

private loans (or securities) with similar risks and maturities. Because the rates of return on private loans exceed 

Treasury rates, the discounted value of expected loan 

repayments is smaller under this alternative approach, 

which implies a larger cost of issuing a loan. (Similar reasoning implies that the private cost of a loan guarantee 

would be higher than its cost as estimated under FCRA.)4

1. The figures for federal credit outstanding and new lending activity 

cited in this document exclude the activities of Fannie Mae and 

Freddie Mac, even though the government placed the two entities 

into conservatorship in 2008 (as discussed later). The figures also 

exclude purchases by the Treasury of securities issued by Fannie 

Mae and Freddie Mac, the financial assets acquired through the 

Troubled Asset Relief Program, amounts committed to the International Monetary Fund, and certain other transactions that 

involve credit assistance but that generally are not considered 

direct federal loans or loan guarantees. Consolidation loans 

offered by the Department of Education are counted toward 

credit outstanding but excluded from new lending activity because 

the Congressional Budget Office considers those loans extensions 

of the original loans.

2. Section 504(d) of FCRA, 2 U.S.C. § 661c (d) (2006).

3. For example, if an investment that will yield $100 one year in the 

future is discounted at 5 percent, its value today is $95.

4. See Congressional Budget Office, Federal Loan Guarantees for the 

Construction of Nuclear Power Plants, Appendix C (August 2011).

ISSUE BRIEF

MARCH 2012
2 FAIR-VALUE ACCOUNTING FOR FEDERAL CREDIT PROGRAMS MARCH 2012

CBO

FCRA and market-based cost estimates alike take into 

account expected losses from defaults by borrowers. 

However, because FCRA estimates use Treasury interest 

rates instead of market-based rates for discounting, 

FCRA estimates do not incorporate the cost of the market risk associated with the loans. Market risk is the 

component of financial risk that remains even after investors have diversified their portfolios as much as possible; 

it arises from shifts in macroeconomic conditions, such as 

productivity and employment, and from changes in 

expectations about future macroeconomic conditions. 

Loans and loan guarantees expose the government to 

market risk because future repayments of loans tend to be 

lower when the economy as a whole is performing poorly 

and resources are more highly valued. 

Some observers argue that using market-based rates for 

discounting loan repayments to the federal government 

would be inappropriate because the government can fund 

its loans by issuing Treasury debt and thus does not seem 

to pay a price for market risk. However, Treasury rates are 

lower than those market-based rates primarily because 

Treasury debt holders are protected against default risk. If 

payments from borrowers fall short of what is owed to the 

federal government, the shortfall must be made up eventually either by raising taxes or by cutting other spending. 

(Issuing additional Treasury debt can postpone but not 

avert the need to raise taxes or cut spending.) Therefore, a 

more comprehensive approach to measuring the cost of 

federal credit programs would recognize market risk as a 

cost to the government and would calculate present values using market-based discount rates. Under such an 

approach, the federal budget would reflect the market 

values of loans and loan guarantees.

Accounting for a credit program’s budgetary costs using 

FCRA procedures instead of market values has important 

consequences for the way policymakers might perceive 

the cost of credit assistance:

B The costs reported in the budget are generally lower 

than the costs to even the most efficient private 

financial institutions for providing credit on the same 

terms;

B The budgetary costs of federal credit programs are 

almost always lower than those of other federal spending that imposes equivalent true costs on taxpayers; 

and

B Purchases of loans at market prices appear to make 

money for the government and, conversely, sales of 

loans at market prices appear to result in losses.

What is termed the fair-value approach to budgeting for 

federal credit programs would measure those programs’ 

costs at market prices or at some approximation of market prices when directly comparable market prices are 

unavailable. A fair-value approach generally entails applying the discount rates on expected future cash flows that 

private financial institutions would apply.5

 In the view of 

the Congressional Budget Office (CBO), adopting a fairvalue approach would provide a more comprehensive way 

to measure the costs of federal credit programs and would 

permit more level comparisons between those costs and 

the costs of other forms of federal assistance. 

Several other considerations would be relevant in judging 

whether to adopt a fair-value approach to federal budgeting. In addition to the practical matters of how to 

implement and apply a fair-value approach, there are 

others:

B Government agencies would incur additional expense, 

for instance, for training staff members in fair-value 

estimating and for developing new valuation models.

B Fair-value cost estimates would be somewhat more 

volatile over time because of changes in market 

conditions—although factors that also affect FCRA 

estimates would continue to be the main cause of 

volatility. 

B Fair-value estimates require analysts to make judgments about discount rates for each program, which 

could be an additional source of inconsistency in the 

estimates of costs from program to program. 

B Fair-value estimates also are considered by some 

observers to be less transparent than FCRA estimates 

are, and they could be more difficult to communicate 

to policymakers and the public. 

Those final two sets of concerns in particular could be 

mitigated by relying on expert advice from private-sector 

accounting firms with significant experience in fair-value 

accounting or by establishing federal guidelines for estimation procedures. 

5. In some cases fair values are calculated by using risk-adjusted discount rates, but in other cases fair values are more accurately estimated using other standard techniques, such as options-pricing 

models. 
MARCH 2012 FAIR-VALUE ACCOUNTING FOR FEDERAL CREDIT PROGRAMS 3

CBO

The government already uses fair-value estimates in 

budgeting for a few types of programs or transactions, 

including commitments of resources for some International Monetary Fund lending facilities and the Troubled 

Asset Relief Program.6

 In addition, CBO uses a fair-value 

approach to incorporate the budgetary costs of Fannie 

Mae and Freddie Mac into its budget projections, and the 

agency has provided supplementary information to the 

Congress about fair-value estimates for the costs of other 

federal credit programs (including student loan programs, loan guarantees for nuclear power plant 

construction, and single-family mortgage guarantees).

In some cases, fair-value estimates of budgetary costs as a 

percentage of loan amounts are considerably higher than 

FCRA estimates: CBO has estimated that the average 

subsidy for direct student loans made between 2010 and 

2020 would be a negative 9 percent under FCRA 

accounting but a positive 12 percent on a fair-value basis. 

(A negative subsidy indicates that, for budgetary purposes, the transactions are recorded as generating net 

income for the government.) Subsequent changes in 

CBO’s interest rate projections would affect both estimates of the amounts of those subsidies, but the large 

gap between them would remain. In other cases, however, 

the difference is more modest: For example, CBO has 

estimated that the cost of the Federal Housing Administration’s (FHA’s) guarantees of single-family home 

mortgages to be extended in 2012 would be -1.9 percent 

on a FCRA basis and 1.5 percent on a fair-value basis. 

The federal budget is designed to account for costs to taxpayers but not for the value of government programs to 

participants or to society more broadly. Credit assistance, 

like other federal spending, can increase public well-being 

by supporting activities that, although beneficial to 

society, are unlikely to be economically viable without 

government support. Credit assistance also can have 

unintended negative consequences, such as encouraging 

high household debt or creating incentives for overinvestment in certain activities. Although the broader benefits 

and costs of programs should be considered along with 

their budgetary costs, the focus in this document is on 

the best way to measure the costs that appear in the 

budget.7

Federal Credit Programs

Credit assistance is provided by the federal government in 

the form of direct loans to borrowers and guarantees of 

loans made by others. With direct loans, the government 

collects scheduled interest and repayments of principal 

(net of amounts not paid when there is a default), and in 

some cases the government also charges borrowers fees. 

With guaranteed loans, the government may collect fees 

at origination and annually from the financial institution 

or the borrower; in return, the government agrees to 

cover all or a portion of losses if the borrower defaults. 

The largest share of federal credit assistance (holding 

aside that provided by Fannie Mae and Freddie Mac) has 

come through a few programs. FHA’s mortgage guarantees and the Department of Education’s student loan 

programs together accounted for more than two-thirds 

of federally backed credit outstanding at the end of fiscal 

year 2011. Other major programs include the Department of Veterans Affairs’ mortgage guarantee programs, 

the Department of Agriculture’s credit programs 

(primarily for rural utilities), and the Small Business 

Administration’s loan and loan guarantee programs. In 

addition, more than 150 smaller credit programs provide 

assistance for a variety of activities, including international trade and investments in new technology. 

From 1992 to 2011, the amount of federal direct loans 

and federally guaranteed loans outstanding in programs 

that are recorded in the budget as specified in FCRA grew 

from $860 billion to about $2.7 trillion (see Table 1). 

The average growth rate of about 6 percent per year is 

similar to that for overall federal spending during the 

period. Guaranteed loans made up about three-quarters 

of the loans outstanding in 2011, and direct loans 

accounted for the rest. In the aftermath of the financial 

6. On February 7, 2012, the House of Representatives passed the 

Budget and Accounting Transparency Act of 2012 (H.R. 3581, 

112th Cong., 2nd Sess.), which would expand the use of fairvalue accounting in the budget.

7. Some analysts have argued that it may be appropriate to include 

the full costs of risk to taxpayers in cost–benefit analyses but not 

in budget estimates because the costs of risk do not represent an 

actual government cost (see, for example, Jim Horney, Richard 

Kogan, and Paul Van de Water, House Bill Would Artificially Inflate 

Cost of Federal Credit Programs [Washington, D.C.: Center on 

Budget and Policy Priorities], January 2012). For the reasons laid 

out in this document, CBO’s view is that the cost of risk is a real 

cost to the government that is relevant for budgeting as well as for 

cost–benefit analyses. (For a detailed response to Horney and others, see 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, 

www.tspppa.gwu.edu/docs/Fair%20Market%20Values%20and

%20the%20Budgetary%20Treatment%20of%20Federal%20

Credit%20MP013012Final1.pdf.) 
4 FAIR-VALUE ACCOUNTING FOR FEDERAL CREDIT PROGRAMS MARCH 2012

CBO

Table 1.

Loans and Loan Guarantees in Major Federal Credit Programs

Source: Congressional Budget Office based on data compiled by the Office of Management and Budget.

a. Excludes the activities of Fannie Mae and Freddie Mac, purchases by the Treasury of securities issued by Fannie Mae and Freddie Mac, 

the financial assets acquired through the Troubled Asset Relief Program, and certain other transactions that involve credit assistance but 

that are generally not considered direct federal loans or loan guarantees.

crisis of 2007, reliance on federal credit programs accelerated sharply as the supply of private financing contracted 

and its cost escalated for many borrowers; originations of 

new federally backed loans spiked above $600 billion in 

2009 (see Figure 1). The amount has since declined from 

that peak, but in 2011 it was still more than double that 

before the crisis. 

An important form of federal credit assistance that is not 

included in those figures is that of the mortgage guarantees issued by Fannie Mae and Freddie Mac; through 

those institutions, the federal government now backs 

roughly half of the $11 trillion in mortgages outstanding 

in the United States. In 2008, the federal government 

took control of the two entities, and it now operates them 

to fulfill the public purpose of supporting the residential 

housing and mortgage markets. Both entities rely on 

federal backing to maintain their low-cost access to financial markets. Although they are not legally government 

agencies, and their employees are not civil servants, 

CBO believes that they are effectively part of the government, so the agency includes the financial transactions 

of the two entities alongside all other federal activities in 

its budget projections. In contrast, the Office of 

Management and Budget (OMB) treats the entities as 

nongovernmental and therefore generally reflects only the 

cash transactions between the Treasury and Fannie Mae 

and Freddie Mac in the budget. Including the 21 percent 

of new home loans insured by federal agencies such as 

FHA and the 63 percent of new home loans insured by 

Fannie Mae and Freddie Mac, about 84 percent of new 

mortgages in 2011 carried a federal guarantee. 

Budget Procedures Prescribed by FCRA

FCRA specifies that the subsidy cost of credit is to be 

calculated and recorded on an accrual basis—unlike most 

items in the federal budget, which are shown on a cash 

basis. The main distinction between the two forms of 

accounting is that under cash accounting, expenditures 

are recorded in the years that cash payments are made; 

accrual accounting allows the estimated lifetime cost of a 

direct loan or loan guarantee to be recognized in the year 

that the loan is made and, thus, when resources are firmly 

committed. (A system of supporting accounts is used to 

reconcile FCRA accruals with the cash flows associated 

with credit programs.)8

One advantage of accounting for credit programs on an 

accrual basis is that it eliminates the incentive that would 

exist under cash accounting to favor loan guarantees over 

economically equivalent direct loans. On a cash basis, a 

loan guarantee often would appear to be much less 

expensive than a direct loan with the same default risk 

because fees are collected when the loan is originated but 

defaults often occur much later in the life of the loan. In 

contrast, the initial outlay of principal for a direct loan 

occurs in the current year, whereas the return of that 

principal and many of the interest payments may not 

occur until many years later. 

Federal Housing Administration Programs 387 1,181 6 45 44

Student Loans 79 706 12 9 26

Veterans’ Home Loans 176 258 2 20 10

Department of Agriculture Credit Programs 88 99 1 10 4

Small Business Administration Programs 17 82923

Othera 113 339 613 13 ____ _____ ____ ____

Total 860 2,665 6 100 100

Annual

Billions of Dollars of

Change,

Percentage Percentage of

Credit Outstanding Credit Outstanding

1992 2011 1992–2011 1992 2011

8. See Office of Management and Budget, Circular A-11 (2011), 

Part 5: Federal Credit, www.whitehouse.gov/omb/circulars_

a11_current_year_a11_toc.
MARCH 2012 FAIR-VALUE ACCOUNTING FOR FEDERAL CREDIT PROGRAMS 5

CBO

Figure 1.

New Federal Direct Loans and 

Loan Guarantees

(Billions of dollars)

Source: Congressional Budget Office based on data compiled by 

the Office of Management and Budget.

Note: Excludes the activities of Fannie Mae and Freddie Mac, purchases by the Treasury of securities issued by Fannie Mae 

and Freddie Mac, the financial assets acquired through the 

Troubled Asset Relief Program, amounts committed to 

the International Monetary Fund, the consolidation loans 

offered by the Department of Education, and certain other 

transactions that involve credit assistance but that generally 

are not considered federal direct loans or loan guarantees.

Under FCRA, the subsidy cost of a direct loan or loan 

guarantee is calculated as a present value of expected net 

cash flows over the life of the loan; that present value 

depends on the discount rate that is used to translate 

future cash flows into current dollars. FCRA subsidy 

costs are estimated by discounting expected net cash 

flows to the time of loan disbursement using interest rates 

on Treasury securities of comparable maturities. For 

example, cash flows a year after disbursement are discounted using the rate on Treasury securities with one 

year to maturity, and those five years out are discounted 

using the five-year Treasury rate. For loan guarantees, 

expected cash flows include expected payments by the 

government to cover default or delinquency, offset by any 

expected payments to the government, including origination or other fees, penalties, and recoveries on defaulted 

loans. For direct government loans, expected cash flows 

include loan disbursements and expected repayments of 

interest and principal (that is, interest and principal payments after defaults, recoveries, and prepayments), fees, 

and penalties. 

The initial estimates of the cost of federal loan guarantee 

and direct loan programs in each year have historically 

amounted to a small fraction of the volume of loans 

disbursed. Subsidy costs averaged $3.1 billion annually 

for federally backed loans made from 1998 to 2008, for 

example, representing an average subsidy rate (the 

subsidy cost divided by the amount disbursed) of 3.3 percent. In 2009 and 2010, total subsidy costs recorded in 

the budget fell to -$19 billion and -$20 billion, respectively; that is, government credit assistance reduced the 

budget deficit reported in those years. In 2011, total subsidy costs were even lower, at -$42 billion. The reduced 

cost is largely attributable to economic, legislative, and 

administrative changes to student loan and FHA programs. In particular, the reduction in costs (leading to 

subsidy estimates that are more negative) reflects the 

widening gap between the rate charged on new federal 

student loans and Treasury interest rates, legislation that 

replaced the guaranteed student loan program with direct 

student loans (for newly originated loans), and increases 

in fees charged to borrowers by FHA.

Causes and Consequences of 

Understating the Cost of Federal 

Credit Programs

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. 

The budgetary cost of any program accounted for on an 

accrual basis—including the credit programs under 

FCRA—depends not only on expected future cash flows 

but also on the discount rates chosen to convert those 

cash flows into present values. For that reason, the budgetary cost of a credit program does not correspond to 

the actual cash flows associated with the program; rather, 

the budgetary cost recorded upon the disbursement of a 

new loan measures the up-front value of federal resources 

committed to new loans or loan guarantees. Because 

FCRA accounting uses Treasury rates to discount all 

expected future cash flows, regardless of risk, the 

budgetary costs of federal loans and loan guarantees are 

disconnected from market prices. In particular, FCRA 

estimates of the subsidy costs of direct loans and loan 

1992 1995 1998 2001 2004 2007 2010

0

100

200

300

400

500

600

700

Direct Loans

Loan Guarantees

Total Disbursements
6 FAIR-VALUE ACCOUNTING FOR FEDERAL CREDIT PROGRAMS MARCH 2012

CBO

guarantees generally are lower than the present-value cost 

that private financial institutions would assign to the 

same projected future cash flows.

Economists attribute most of the difference between 

FCRA and market valuations of loans and loan guarantees to investors’ requiring compensation—a market risk 

premium—for the risk associated with such loans and 

loan guarantees. Macroeconomic conditions affect the 

value of most assets and liabilities, although to varying 

degrees. Most investments are more likely to have low 

returns when the economy as a whole is weak and 

resources are especially scarce and highly valued and to 

have high returns in times of relative plenty when 

resources are less valuable. Such investments are exposed 

to market risk, and investors require compensation for 

bearing that risk; the greater the correlation between the 

returns on the investment and the state of the overall 

economy, the greater the amount of the risk, and the 

greater the required compensation. By contrast, investors 

do not expect to earn a risk premium on investments 

whose risk can be neutralized if they are held as part of a 

diversified portfolio. 

In effect, the discount rate that investors apply to cash 

flows for a risky loan is higher than the rate on Treasury 

securities by the amount of a market risk premium—

and the more market risk associated with the loan, the 

higher the premium. If taxpayers were to finance such a 

loan as private investors, they would use discount rates 

that include a market risk premium to estimate the 

value of the loan, which would have the effect of assigning a higher cost to potential losses than under FCRA 

accounting. 

Because FCRA accounting requires the use of Treasury 

rates for discounting, it implicitly treats the market risk 

associated with federal credit programs as having no cost 

to the government. As a result, the subsidy provided by 

the government is understated under FCRA accounting. 

Moreover, the higher the market risk that is associated 

with a credit obligation, the greater is that understatement. (The costs of risk to the federal government and 

how they compare with such costs to the private sector 

are discussed further in Box 1.)

Using Treasury discount rates also reduces the comparability of the estimated budgetary cost of credit and the 

budgetary cost of most of the government’s other 

activities, which is calculated on the basis of market 

prices. For example, grants or monetary transfers are 

recorded in the budget at their cash value, and recipients 

use those funds to purchase goods and services at market 

prices. Government purchases from the private sector, 

such as for military hardware, the labor of the federal 

workforce, buildings, computers, and electricity, also 

must cover the private cost of providing those resources, 

including the cost of the capital used to produce them. 

One consequence of using Treasury rates to calculate the 

cost of federal credit assistance is that some large credit 

programs, such as FHA’s mortgage guarantees and the 

federal direct student loan programs, appear in some 

years to make money for taxpayers. That appearance creates a budgetary incentive to expand the programs 

beyond the scale that would be chosen if the budget 

reflected their costs at market value. If, instead, the discount rates used in calculating the present values of cash 

flows for those loans included a market risk premium, 

estimates for those programs might show a net cost for 

taxpayers. 

In the case of certain other credit programs, the federal 

government sets interest rates and fees to eliminate the 

budgetary cost. Because the cost of market risk is not 

considered in FCRA-based estimates, the government 

offers credit to borrowers on terms that are generally 

more favorable than would be offered by even the most 

efficient and competitive private financial institutions. 

When the government is not truly more efficient than the 

private sector at providing credit, those more favorable 

terms constitute an unrecognized subsidy to borrowers 

and a hidden cost to the government.

Even when a credit program has a budgetary cost under 

FCRA, neglecting the market price of risk lowers the 

reported cost relative to that of a grant or benefit payment with the same market cost, thus skewing the 

information that policymakers receive. For example, the 

government could provide assistance to low-income 

homebuyers through grants that cover down payments or 

through loan guarantees that subsidize their borrowing. 

FCRA accounting makes a loan program appear less 

costly than a grant program with the same cost measured 

at market value. 

The information supplied by FCRA accounting also 

could mislead policymakers about the merits of buying,
MARCH 2012 FAIR-VALUE ACCOUNTING FOR FEDERAL CREDIT PROGRAMS 7

CBO

Box 1.

What Market Risk Costs the Federal Government and Taxpayers

Loans and loan guarantees generally have significant 

exposure to so-called market risk because borrowers 

default on their debt obligations more frequently and 

with greater severity (meaning that recoveries from 

the borrowers are lower) when the economy as a 

whole is weak. Investors require compensation for 

bearing such risk because losses that occur when the 

economy is weak are occurring when resources are 

more highly valued.

Some analysts argue that market risk associated with 

loans and loan guarantees is much less costly for the 

federal government than for private investors because 

of several inherent advantages of the government in 

extending credit. Specifically, some analysts contend 

that the federal government is better able to accommodate risk because it can spread risk more widely 

and because it can borrow money at the Treasury 

Department’s interest rates, which are lower than 

those in the private sector. In addition, some analysts 

note that the federal government’s costs of extending 

credit may be lower than the private sector’s costs 

because the government has no obligation to earn a 

profit on its activities. 

In the view of the Congressional Budget Office, those 

characteristics of the federal government do not alter 

the basic conclusion that the assumption of market 

risk represents a cost to the government: When the 

government extends credit, the associated market risk 

of those obligations is effectively passed along to citizens who, as investors, would view that risk as costly. 

If the federal government is able to spread certain 

risks more widely than the private sector can, the 

government may be a relatively efficient provider of 

certain types of insurance. That is, a private provider 

of such insurance might charge higher fees if it is 

unable to transfer the risk to a wide group of investors. However, even if the federal government can 

spread risks widely, it cannot eliminate the component of risk that is associated with fluctuations in 

the aggregate economy—market risk—and which 

investors require compensation to bear.

The federal government’s ability to borrow at Treasury rates also does not reduce the cost to taxpayers of 

the market risk associated with federal credit programs. Treasury rates are relatively low because the 

securities are backed by the government’s ability to 

raise taxes. When the government finances a risky 

loan or loan guarantee by selling a Treasury security, 

it is effectively shifting risk to members of the public. 

If such a loan is repaid as expected, the interest and 

principal payments cover the government’s obligation 

to the holder of the Treasury security, but if the borrower defaults, the obligation to the security holder 

must be paid for either by raising taxes or by cutting 

other spending to be able to repay the Treasury debt. 

(Issuing additional Treasury debt can postpone but 

not avert the need to raise taxes or cut spending.) 

Thus, the risk is effectively borne by taxpayers (or by 

beneficiaries of government programs); like investors, 

taxpayers and government beneficiaries generally 

value resources more highly when the economy is 

performing poorly. 

The view that the federal government is a low-cost 

provider of credit because it does not need to make a 

profit rests on the notion that the market risk premium represents a type of profit rather than a normal 

compensation for risk. However, economists view 

“economic profits” as arising only when the return on 

private investment exceeds what investors in a competitive market would require. That is, an economic 

profit is earned when the expected return more than 

compensates investors for the fact that money in 

hand now is worth more than the same amount 

received in the future and for bearing market risk. So, 

for instance, when a business has a monopoly over a 

product, it can set prices above costs to earn an economic profit. In competitive financial markets, the 

presence of many buyers and sellers of financial assets 

tends to eliminate economic profits, and the risk 

premium that remains is normal compensation for 

bearing the risk. 

Thus, none of the differences between the federal 

government and private investors changes the fact 

that investments with returns that are correlated with 

the performance of the economy as a whole are risky 

in a way that other investments are not. Federal credit 

programs expose taxpayers to that market risk.
8 FAIR-VALUE ACCOUNTING FOR FEDERAL CREDIT PROGRAMS MARCH 2012

CBO

selling, or holding loans. Under FCRA, selling a loan at a 

competitive price in the open market would produce an 

estimated budgetary loss because the proceeds of the sale 

would be less than the value the government assigns to 

carrying the loan, even though the transaction would 

entail no economic gain or loss (apart from possible 

indirect effects that would occur as a result of the sale). 

Conversely, the purchase of a loan at a market price 

would show a budgetary gain. For example, OMB 

reported a budgetary gain of almost $6 billion in 2009 

for the Treasury’s purchases at market prices of mortgagebacked securities issued by Fannie Mae and Freddie 

Mac.9

The Alternative of Fair-Value 

Accounting

Fair-value accounting is an alternative to FCRA 

accounting that more fully incorporates the cost to the 

government (and, by extension, taxpayers) of the risks 

inherent in federal credit transactions. The fair-value 

approach produces estimates of the cost of providing credit 

that either correspond to or approximate the market price 

of that credit. Thus, moving to fair-value accounting 

would provide policymakers, program administrators, and 

the public with a more complete picture of program costs, 

and it would tend to make purchases and sales of loans at 

market prices by federal agencies budget-neutral. It also 

would put credit on a more level playing field with most 

other federal expenditures. However, the Congress and 

federal agencies would confront several challenges in 

adopting fair-value accounting, including the expense of 

implementing a new system and the need to cope with the 

greater difficulty—especially initially—of estimating, verifying, and communicating program costs.10

Fair-Value Accounting

The fair value of a loan is the price that would be received 

if the loan were sold in what is known as an orderly 

transaction—one that occurs under competitive market 

conditions between willing participants and that does not 

involve forced liquidation or a distressed sale.11 Similarly, 

the fair value of a loan guarantee is the price that would 

have to be paid to induce a private financial institution to 

assume the guarantee commitment. FCRA-based and 

fair-value estimates alike incorporate the same projections 

of future cash flows. But instead of using Treasury rates to 

discount those cash flows, fair-value estimates employ 

discounting methods that are consistent with the risk of 

the loan or loan guarantee. (See Box 2 for a numerical 

example of subsidy cost calculations under FCRA and 

fair-value accounting.)

One consequence of switching to fair-value accounting is 

that the reported budgetary costs of most direct loan and 

loan guarantee programs would be higher than they 

appear under FCRA accounting: Credit programs that 

show modest budgetary savings or that have a subsidy 

cost of zero under FCRA would tend to show a positive 

subsidy with fair-value accounting, and programs that 

have positive subsidies now would see that subsidy rate 

increase. For instance, a program that offers loans to borrowers at or just slightly above Treasury rates and that has 

a low average default rate would show a positive fair-value 

subsidy cost because of the market risk that those loans 

entail.

Concerns About Implementation 

Fair values for government loans and loan guarantees can 

be estimated by reference to the market prices of similar 

products offered by private companies (for example, the 

interest rates charged on private-sector loans to students 

can be combined with other information to infer a risk 

premium for federal student loans) or by employing standard financial valuation techniques (such as discounting 

expected cash flows with risk-adjusted discount rates, or 

using an options-pricing model—a type of model that 

many private-sector practitioners use to evaluate guarantees). CBO has applied each of those methods in various 

analyses of credit programs; the choice of methodology 

has depended on which approach was expected to produce the most reliable estimates given the characteristics 

9. See Budget of the United States Government, Fiscal Year 2010, 

Analytical Perspectives, p. 76, Table 7-9, www.gpo.gov/fdsys/pkg/

BUDGET-2010-PER/content-detail.html. Loan purchases and 

sales by Fannie Mae and Freddie Mac do not have a direct effect 

on the federal budget, which generally only reflects cash transactions between the Treasury and those entities. However, the 

Treasury’s purchases of mortgage-backed securities were accounted 

for on a FCRA basis, a departure from cash treatment.

10. See “Special Topics,” Budget of the United States Government, 

Fiscal Year 2013, Analytical Perspectives, pp. 373–379, 

www.whitehouse.gov/omb/budget/Analytical_Perspectives. 

11. See Financial Accounting Standards Board, Original Pronouncements, as Amended. Statement of Financial Accounting Standards 

No. 157: Fair Value Measurements (Norwalk, Conn.: Financial 

Accounting Foundation, 2010), www.fasb.org/pdf/aop_FAS157.pdf. 
MARCH 2012 FAIR-VALUE ACCOUNTING FOR FEDERAL CREDIT PROGRAMS 9

CBO

Box 2.

Comparison of Methods: FCRA and Fair-Value Accounting

FCRA and Fair-Value Treatments of a Three-Year Direct Loan for $100 Million at 3 Percent Interest

(Millions of dollars)

Source: Congressional Budget Office.

Note: FCRA = Federal Credit Reform Act of 1990; n.a. = not applicable.

a. Sum of the discounted net cash outflow.

b. One divided by (one plus the discount rate) raised to the power of the number of years until the payment is made or received.

For example, 1/(1 + 0.5/100)2

 = 0.990.

c. The net cash outflow multiplied by the present-value factor.

Consider a $100 million portfolio of federal direct 

loans with 3-year terms and an annual interest rate of 

3 percent. Net federal cash flows each year include disbursements, the scheduled payments of principal and 

interest, and default losses (see the table). Note that 

the net interest and principal payments that the government will receive are the scheduled payments of 

principal and interest minus the amounts that are 

expected not to be paid by or recovered from the borrowers because of default.

According to the rules for budgetary accounting prescribed in the Federal Credit Reform Act of 1990 

(FCRA, incorporated as title V of the Congressional 

Budget Act of 1974), the net cash flow in each future 

year is discounted at a compounded annual rate equal 

to the yield on Treasury securities with the same term 

to maturity—up to three years, in the current example.1

 The FCRA subsidy of -$1.6 million (that is, a net 

reduction in the budget deficit) is the sum across all 

years of the net cash outflow from the government in 

each year discounted on a FCRA basis (that is, the 

annual net cash outflow multiplied by the corresponding present-value factor). 

Suppose that, on the basis of observed pricing for a 

privately held portfolio that is comparable to the federal loan portfolio, the implied fair-value discount rate 

for the cash flows in each period is 1.5 percentage 

points higher than the corresponding Treasury rate. 

The fair-value subsidy is computed in the same way as 

the FCRA subsidy, using the same net cash outflows, 

but the present-value factor is computed from the 

Treasury rate plus the market risk premium of 1.5 percentage points. Accounting for market risk in this 

example changes the estimated subsidy to a positive 

subsidy of $1.3 million, which implies a cost to the 

government.

Disbursement 100000 n.a.

Scheduled Interest Payments 0 -3 -2 -1 n.a.

Scheduled Principal Payments 0 -33 -33 -34 n.a.

Default Losses 0111 n.a.

Net Cash Outflow from the Federal Government 100 -35 -34 -34 n.a.

0 0.25 0.50 1.00 n.a.

1 0.998 0.990 0.971 n.a.

Federal Governmentc 100 -34.9 -33.7 -33.0 -1.6

0 1.75 2.00 2.50 n.a.

1 0.983 0.961 0.929 n.a.

Federal Governmentc 100 -34.4 -32.7 -31.6 1.3

FCRA Treatment

Fair-Value Treatment

Year

Subsidy a 0123

Cash Flows

Treasury Discount Rate (Percent per annum)

FCRA Discounted Net Cash Outflow from the 

FCRA Present-Value Factor b

Fair-Value Discount Rate (Percent per annum) 

Fair-Value Present-Value Factor b

Fair-Value Discounted Net Cash Outflow from the 

1. Section 502(5)(E) of FCRA, 2 U.S.C. §661a (5)(E) (2006).
10 FAIR-VALUE ACCOUNTING FOR FEDERAL CREDIT PROGRAMS MARCH 2012

CBO

of the obligations being evaluated and the information 

available.12

In private-sector applications (such as in financial reporting by large financial institutions), fair values are based 

on actual market prices whenever reliable prices are available. However, when comparable credit products are not 

publicly traded—or during a financial crisis, when the 

few transactions that occur are likely to be at distressed 

prices—fair values must be approximated. Because most 

public-sector credit programs have no exact analogue in 

the private sector, estimating their fair value usually 

involves approximation. In addition, adjustments may be 

needed to account for true cost differences between the 

government and the private sector; for instance, the private sector generally spends more than the government 

does on marketing. Private lenders would set interest rates 

and fees to recover those higher costs, and if the difference was not accounted for, the cost of the federal 

program would be overstated.

Implementing fair-value accounting for federal credit 

programs would entail additional effort and expense for 

government agencies, particularly OMB, which oversees 

the process of estimating the costs of such programs. 

Start-up expenses of the fair-value approach would 

include funding for additional training and possible 

expansion of staff, redesign of procedures and account 

structures, and development of models and approaches 

for producing the estimates. Even over the long term, 

some additional resources would probably be needed 

because of the estimates’ greater complexity. Failure to 

provide the necessary funding, both for start-up costs and 

for the continuing costs of a switch to fair-value accounting, could leave the government and policymakers with 

insufficient information for making choices about future 

federal credit assistance.

Incorporating the cost of market risk into budgetary cost 

estimates for credit programs also would tend to increase 

those estimates’ volatility over time because the cost of 

market risk is not constant. However, the additional 

volatility introduced would probably be less than the considerable volatility of FCRA estimates that is attributable 

to fluctuating Treasury rates, swings in projected losses 

resulting from defaults, and administrative changes in 

fees and other terms of loans. For example, the fair-value 

estimates of costs for the Troubled Asset Relief Program 

have changed considerably over time, but those changes 

are primarily the result of changes in the components of 

the estimates that also would have been used in FCRA 

estimates, such as projections of participation rates in 

government programs and projections of the repayment 

rates of loans.

Another concern is that 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, creating inconsistencies 

among programs and making estimates more difficult to 

communicate to policymakers or the public. FCRA and 

fair-value estimates alike depend on analysts’ projections 

of such variables as prepayment patterns, default rates, 

and the amounts recoverable after a default. The models 

that agencies use to project cash flows generally are not 

made public now, so the transparency of current FCRA 

estimates is limited. However, fair-value estimates would 

be even more dependent on analysts’ judgment because 

they would depend on choices about market risk premiums in addition to estimates of cash flows. 

Such concerns could be addressed in various ways—for 

example, through the use of accounting practices similar 

to those used to audit fair-value estimates produced by 

private financial institutions. Guidelines also could be 

established by OMB or through legislation to ensure that 

the choices of discount rates and other assumptions that 

are used in the models followed systematic procedures 

and could be adequately verified. Briefing sessions for the 

staff of the Congress and federal agencies as well as development of materials that explained how the estimates 

were derived would facilitate communication about the 

estimates.

Accounting for Administrative Costs

FCRA accounting separates the administrative expenses 

of federal credit programs from the programs’ subsidy 

costs, and it accounts for administrative expenses on a 

cash basis. The consequent mix of cash and accrual 

accounting, and the use of multiple accounts, makes 

assessing the total costs of a program difficult. It also 

complicates cost comparisons from one program to 

another. 

Comprehensive fair-value estimates of subsidies for credit 

programs would incorporate certain administrative 

12. For additional information on alternative approaches to calculating the fair value of federal credit programs, see Deborah Lucas 

and Marvin Phaup, “The Cost of Risk to the Government and Its 

Implications for Federal Budgeting,” in Deborah Lucas, ed., 

Measuring and Managing Federal Financial Risk (University of 

Chicago Press, 2010), pp. 29–54.
MARCH 2012 FAIR-VALUE ACCOUNTING FOR FEDERAL CREDIT PROGRAMS 11

CBO

expenses, such as servicing and collection costs, that are 

essential to preserving the value of the government’s 

claims (rather than accounting separately for those costs 

on a cash basis). Those essential preservation expenses can 

differ significantly among credit programs, and including 

them in subsidy cost estimates would make comparing 

various subsidy costs easier. However, doing so could 

erode Congressional control over program expenditures 

because, under FCRA, all increases in estimated costs 

after a loan or loan guarantee is initiated (including those 

arising from increased expenditures on servicing or loan 

collection) are automatically appropriated.13 Another 

concern is that implementing a switch from cash to 

accrual accounting for essential preservation expenses 

would be administratively complicated. 

Moreover, although including administrative costs in 

subsidy estimates would improve comparability between 

different credit programs, in some instances it might 

hinder the ability to compare credit assistance and grant 

programs. Grant programs also incur administrative 

costs, and those costs are not readily linked to the funds 

disbursed in any one year. Including all administrative 

costs in credit programs but not in grant programs could 

reduce comparability between the two. However, if the 

adjustment was just for essential preservation expenses in 

credit programs, comparability with grant costs could be 

improved because grant recipients generally do not need 

to repay the government in future years and hence there 

are few preservation expenses associated with most grants. 

Comparing FCRA and Fair-Value Costs 

for Selected Federal Credit Programs

In a few cases, the law has required the use of fair-value 

accounting in the federal budget process: The law that 

created the Troubled Asset Relief Program, for example, 

specifies the use of a fair-value approach.14 A different law 

requires that funds committed to certain International 

Monetary Fund lending facilities receive fair-value treatment.15 In addition, CBO has used a fair-value approach 

to incorporate the costs of Fannie Mae and Freddie Mac 

into its baseline budget projections since those companies 

were placed into federal conservatorship.16

CBO also has provided supplementary information to 

the Congress about the fair-value costs of certain federal 

credit and insurance programs and how those costs 

compare with FCRA-based costs. Several years ago, for 

example, the agency provided fair-value estimates for the 

Small Business Administration’s 7(a) program and for 

activities of the Pension Benefit Guaranty Corporation, 

among others.17 Most recently, CBO has prepared fairvalue estimates for the federal direct and guaranteed 

student loan programs, the Department of Energy’s program to guarantee loans for the construction of nuclear 

power plants, and the Federal Housing Administration’s 

single-family mortgage insurance program.

Student Loans

In 2011, the total amount outstanding for federal direct 

and guaranteed student loans exceeded $700 billion. Federal student loans expose the government to losses from 

defaults, and they involve significant administrative 

expenses for origination, servicing, and collection on 

defaults; at the same time, the government collects fees 

and interest from borrowers. As with other types of 

credit, student loans are exposed to market risk, meaning 

that default rates tend to be higher, and recoveries 

smaller, when the economy is weak and the losses are 

most costly. 

CBO compared the cost of the federal student loan 

programs on a FCRA versus a fair-value basis in a 2010 

study.18 CBO calculated that, on average over the 2010–

2020 period, a representative loan issued in the direct student loan program would have a negative subsidy rate of 

9 percent under FCRA (thereby reducing the deficit) but 

a positive subsidy rate of 12 percent on a fair-value basis. 

13. Section 504(f) of FCRA, 2 U.S.C. §661c (f) (2006). 

14. In particular, the legislation stated that the estimated cost of the 

program’s obligations must be recorded in the budget on a FCRA 

basis rather than a cash basis but that the discount rate must be 

adjusted for the market cost of risk. (See section 123 of the Emergency Economic Stabilization Act of 2008, Division A of Public 

Law 110-343, 122 Stat. 3765, 3790.)

15. Title XIV of the Supplemental Appropriations Act, 2009, 

P.L.111-32, 123 Stat. 1859, 1916.

16. See Congressional Budget Office, CBO’s Budgetary Treatment of 

Fannie Mae and Freddie Mac, Background Paper (January 2010). 

17. See Congressional Budget Office, Federal Financial Guarantees 

Under the Small Business Administration’s 7(a) Program (October 

2007); The Risk Exposure of the Pension Benefit Guaranty Corporation (September 2005); and Estimating the Value of Subsidies for 

Federal Loans and Loan Guarantees (August 2004).

18. See Congressional Budget Office, Costs and Policy Options for 

Federal Student Loan Programs (March 2010); and the letter to the 

Honorable Judd Gregg about the budgetary impact of the President’s proposal to alter federal student loan programs (March 15, 

2010).
12 FAIR-VALUE ACCOUNTING FOR FEDERAL CREDIT PROGRAMS MARCH 2012

CBO

Loan Guarantees for Nuclear Power Plant 

Construction

The Energy Policy Act of 2005 established incentives to 

encourage private investment in new technology, including advanced nuclear energy facilities.19 In return for a 

loan guarantee, the Department of Energy can charge 

project sponsors a fee to recoup the guarantee’s estimated 

budgetary cost, which, on a FCRA basis, is likely to be 

well below the fair-value cost. To date no loans have been 

guaranteed under the program, although there are several 

active applications. 

CBO has estimated the costs of guarantees for nuclear 

power plant construction using projects’ credit ratings to 

derive expected default rates and risk-adjusted discount 

rates.20 In all cases, the estimated subsidy rate was significantly higher on a fair-value basis than on a FCRA basis, 

but the difference between the subsidy rates varied widely 

with a project’s credit rating and the amounts expected to 

be recovered in the event of a default. If the risk associated with a guaranteed loan for plant construction was in 

the range of risks posed by bonds rated A (less risky) and 

bonds rated BB (riskier), then CBO’s estimate of the 

budgetary cost on a FCRA basis ranged from 1 percent to 

6 percent of the loan’s principal amount. In contrast, 

under the same circumstances, CBO’s estimate of the 

budgetary cost on a fair-value basis ranged from 9 percent 

to 21 percent of the loan’s principal. 

FHA’s Single-Family Mortgage Guarantees

FHA’s single-family mortgage insurance program is 

aimed at extending access to home ownership to people 

who lack the savings, credit history, or income to qualify 

for a conventional mortgage. Under FHA’s program, 

the government insures 15- and 30-year fixed- and 

adjustable-rate mortgages for home purchases or for refinancing; in exchange, the borrower pays an origination 

fee and annual premiums on the insurance policy. In 

2011, the outstanding stock of single-family mortgage 

guarantees insured by FHA totaled almost $1.2 trillion. 

CBO has compared the FCRA and fair-value costs projected for FHA’s single-family program in 2012, which 

CBO estimated would guarantee $233 billion in mortgages. To compute the fair value of the guarantees, CBO 

relied primarily on the market pricing of private mortgage insurance and on estimates of the fair value of the 

mortgage guarantees made by Fannie Mae and Freddie 

Mac.21 Under FCRA accounting, CBO estimated a 

negative subsidy rate for FHA single-family home loan 

guarantees of 1.9 percent, producing budgetary savings of 

$4.4 billion in 2012. On a fair-value basis, however, 

CBO estimated that those guarantees would have a positive subsidy rate of 1.5 percent, and the program would 

have a cost of $3.5 billion. 

21. In the market for private mortgage insurance (PMI), competing 

private insurers publicly quote prices for guarantees of mortgages 

that are comparable (after some adjustments) with those guaranteed by FHA. FHA absorbs all of the losses on the mortgages it 

insures, whereas on mortgages covered by PMI, the mortgage 

insurers cover losses up to some maximum and the remaining 

losses are covered by Fannie Mae and Freddie Mac. Therefore, the 

fair value of FHA insurance can be inferred from the sum of the 

value of the PMI premiums and the fair value of premiums 

charged by Fannie Mae and Freddie Mac. See Congressional 

Budget Office, “Accounting for FHA’s Single-Family Mortgage 

Insurance Program on a Fair-Value Basis,” attachment to a letter 

to the Honorable Paul Ryan (May 18, 2011). 

19. Title XVII of the Energy Policy Act of 2005, 42 U.S.C. §16511–

16516 (2006 & Supp.).

20. See Congressional Budget Office, Federal Loan Guarantees for the 

Construction of Nuclear Power Plants. CBO did not analyze any 

specific projects. As of April 2011, the Department of Energy, 

which administers the program, had received 19 applications for 

loan guarantees on $188 billion of debt for the construction of 

14 nuclear power plants. Of that number, only one application 

has been reported to be close to completion.

Deborah Lucas, formerly of CBO’s Financial Analysis 

Division and currently a consultant to the agency, and 

Mark Hadley, CBO’s general counsel, prepared the 

report under the supervision of Damien Moore. Comments were provided by Michael Deich of the Gates 

Foundation, Christian Leuz of the University of Chicago Booth School of Business, and George Pennacchi 

of the University of Illinois. The assistance of external 

reviewers implies no responsibility for the final product, 

which rests solely with CBO. This report and other 

CBO publications are available on the agency’s Web site 

(www.cbo.gov).

Douglas W. Elmendorf 

Director