United States General Accounting Office

GAO Report to the Chairman, Committee on

the Budget, U.S. Senate

March 1998 CREDIT REFORM

Greater Effort Needed

to Overcome Persistent

Cost Estimation

Problems

GAO/AIMD-98-14

GAO United States

General Accounting Office

Washington, D.C. 20548

Accounting and Information

Management Division

B-277070 

March 30, 1998

The Honorable Pete V. Domenici

Chairman, Committee on the Budget

United States Senate

Dear Mr. Chairman:

The Federal Credit Reform Act of 19901

 was enacted to require that the

budget reflect a more accurate measurement of the government’s subsidy

costs for federal direct loans and loan guarantees and to permit better cost

comparisons both among credit programs and between credit and

non-credit programs. The credit subsidy cost is the government’s

estimated net cost, in present value terms, of direct or guaranteed loans

over the entire period the loans are outstanding. Because the government

now has over 6 years of experience with credit reform, you asked us to

determine (1) whether agencies completed estimates and reestimates of

subsidy costs, (2) whether we could readily discern any trends including

improvements in subsidy estimates, and (3) whether we could readily

identify the causes for changes in subsidy estimates. You also asked us

whether agencies with discretionary credit programs initially

underestimated credit subsidy costs in response to the incentive created

by the availability of permanent, indefinite budget authority for credit

reestimates.2

We reviewed subsidy estimates and supporting documentation prepared

for two domestic credit programs at each of the five largest credit

agencies—the Departments of Agriculture (USDA), Education, Housing and

Urban Development (HUD), and Veterans Affairs (VA), and the Small

Business Administration (SBA). Each of the agencies confirmed that the

reported data were an accurate reflection of the data they had. While we

did not independently verify that data, we found, and agency staff later

agreed, that there were problems with these data, as discussed later in the

report. The causes of changes in subsidy estimates reported in appendix II

are those identified by credit agencies’ staff.

Background There is a long history of problems with federal credit programs. We

reported many of the problems, such as poor recordkeeping and cost data,

1

Appendix I contains a summary discussion of credit reform requirements.

2

Initial estimates of subsidy costs compete under caps, while subsidy reestimates are covered by

permanent, indefinite budget authority.

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prior to credit reform.3 For example, we reported in November 1989 that

federal agencies’ long-standing deficiencies in financial management

systems and accounting procedures had precluded accurate,

comprehensive recording and reporting of the full extent of credit losses.4

Agencies have had perennial problems tracking loan payments due and

loan guarantees made in federal budgets. Also, prior to credit reform, the

cash-based budget distorted choices between direct loans and loan

guarantees. A direct loan initially looked like a grant since the budget

included as a cost the face value of a direct loan, ignoring that at least

some part of the loan would be repaid. Conversely, loan guarantees looked

free when they were made because the budget ignored the fact that some

would result in default costs. The Office of Management and Budget (OMB),

GAO, the Congressional Budget Office (CBO), and others reported on the

need to change the way credit programs were budgeted.

In response to these reports and a growing recognition of federal financial

management problems, the Congress enacted a series of laws designed to

improve financial management and the quality and use of cost data in

decision-making. To address the deficiencies in recognizing the cost of

credit programs, the Federal Credit Reform Act of 1990 was enacted as

part of the Omnibus Budget Reconciliation Act of 1990. Credit reform was

intended to ensure that the full cost of credit programs would be reflected

in the budget so that the executive branch and the Congress might

consider these costs when making budget decisions. Accounting standards

for credit programs were developed to be consistent with the intent of this

act. To address broader problems in federal financial management, the

Chief Financial Officers (CFO) Act of 1990 required the development and

maintenance of integrated agency accounting and financial management

systems, including financial reporting and internal controls, that provide

for development and reporting of cost information. The Government

Management Reform Act of 1994 expanded the CFO Act to provide for

audits of the annual financial statements of the 24 CFO agencies. The

largest credit programs are found in these agencies and audits include a

review of agencies’ subsidy estimates and actual loan performance data.

Accurate cost information also is key to improvements in the efficiency

and effectiveness of federal programs as envisioned by the Government

Performance and Results Act of 1993. The Debt Collection Act of 1982

provided for OMB to require agencies to report debt information to OMB and

3

Financial Management: Additional Actions Needed to Improve Federal Financial Management

Systems (GAO/AFMD-90-14, April 27, 1990) and Financial Audit: Veterans Administration’s Financial

Statements for Fiscal Years 1987 and 1986 (GAO/AFMD-89-23, November 30, 1988).

4

Federal Credit and Insurance: Programs May Require Increased Federal Assistance in the Future

(GAO/AFMD-90-11, November 16, 1989).

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to the Department of the Treasury. Finally, the Debt Collection

Improvement Act of 1996 expanded collection tools and authorities

available to agencies and called for centralized servicing of some debt.

Federal financial management, including credit program management,

continues to reap the benefits of these laws.

While all of these laws sought to improve federal financial management, a

major change for budgeting was the Federal Credit Reform Act included in

the Omnibus Budget and Reconciliation Act of 1990. This act changed the

budgetary treatment of credit programs so that their costs could be

compared more appropriately both with each other and with other federal

spending. Credit reform requires agencies to estimate the net cost to the

government over the full term of the credit of new direct or guaranteed

loans to be made in the budget year and to record that cost in the budget

on a present-value basis. Unless OMB approves an alternative proposal,

agencies are required to reestimate this cost annually as long as any loans

in the cohort5

 are outstanding. The Balanced Budget Act of 1997 amended

the Federal Credit Reform Act to simplify and clarify subsidy estimation

requirements. OMB also has simplified guidance for credit subsidy

estimation. Appendix I contains a more detailed description of credit

reform requirements and recent changes.

Credit programs may be either discretionary6

 or mandatory7 as defined in

the Budget Enforcement Act of 1990. Appropriations for the subsidy cost

of discretionary credit programs are counted under the discretionary

spending caps and so must compete with other discretionary programs for

the funding available under these limits. Like other mandatory programs,

mandatory credit programs receive automatic appropriations for whatever

amount of credit is needed to meet the estimated demand for services by

beneficiaries.

All credit programs automatically receive any additional budget authority

that may be needed to fund reestimates.8

 For discretionary programs this

5

A cohort includes those direct loans or loan guarantees of a program that are subsidized by an

appropriation for a given fiscal year even if disbursements occur in subsequent years.

6

Funding for discretionary spending programs is provided in appropriations acts.

7

Mandatory programs generally are entitlement programs for which the amount of funding depends on

eligibility and benefits rules contained in substantive law.

8

It was recognized that data were limited or unreliable in the early years of credit reform. This could

impede the ability of agencies to make reliable estimates. Permanent, indefinite budget authority for

upward reestimates of subsidy costs was provided. Agencies with discretionary credit programs then

could reestimate subsidy costs as required without being limited by the constraints of budgetary

spending limits.

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means there is a difference in the budget treatment of original subsidy cost

estimates and of subsidy cost reestimates. The original estimated subsidy

cost is counted under the discretionary caps, but any additional

appropriation for upward reestimates of subsidy cost is exempt from the

caps. This design could result in a tendency to underestimate the initial

subsidy costs of a discretionary program. Portraying a loan program as

less costly than it really is when competing for funds under the

discretionary caps means more or larger loans or loan guarantees could be

made with a given appropriation since the program then could rely on

automatic funding for subsequent reestimates to cover any shortfalls. This

built-in incentive is one reason to monitor subsidy reestimates. Monitoring

reestimates is a key control over tendencies to underestimate costs as well

as a barometer of the quality of agencies’ estimation processes.

The development of credit reform requirements reflects in part

decisionmakers’ interest in analyzing the causes of changes in subsidy

estimates. Understanding which of the components of subsidy

expense—interest, net defaults, fees and other collections, and other

subsidy costs—are the key drivers of reestimates can both improve the

quality of estimates and yield insights into program operations. OMB

developed and provided agencies with a computer model to calculate the

total estimated subsidy rate and the components of subsidy expense based

on agency-developed cash flow information. In the development of

accounting standards for credit programs, the Federal Accounting

Standards Advisory Board (FASAB) indicated that these data would be

valuable for making credit policy decisions, monitoring portfolio quality,

and improving credit performance.9

 Current accounting standards and OMB

guidance require agencies to recognize, and disclose in the financial

statement footnotes, the four components separately for the fiscal year

during which direct or guaranteed loans are disbursed. However, for

programs that disburse over more than 1 year, the current disclosure

aggregates subsidy component data for the current year with subsidy costs

from prior years. In addition, changes in law and program administration

often occur. Thus, loans disbursed from programs over multiple years

have different program characteristics and the current year’s financial

statement disclosures do not represent the program characteristics or

expenses of any given year of the program. Because the requirement in its

present form does not provide the kind of useful information that was

intended, FASAB now is considering revising these standards.

9

FASAB was created by OMB, Treasury, and GAO to consider and recommend accounting principles

for the federal government. It published Statement of Federal Financial Accounting Standards

(SFFAS) No. 2, Accounting for Direct Loans and Loan Guarantees, in July 1993.

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Agencies now have prepared eight budgets under credit reform

requirements and there should be 6 years of actual data available. Because

of different program requirements, resource and expertise levels, and

levels of commitment and interest, agencies have taken different

approaches to making subsidy estimates. Preparing subsidy estimates is

complex for a number of reasons, including projecting cash flows many

years into the future and assessing the effect of economic changes on a

particular program and its borrowers. Further, in some—if not

all—agencies, budget office staff must integrate information from staff and

systems in both the finance and program offices. While the present

value-based budgeting of credit reform is a major step forward, its success

depends heavily on the quality of these complex subsidy estimates. The

independent review of agency records and data in the annual financial

audit is an important step in monitoring the subsidy estimates and

improving their reliability.

When credit reform was enacted, it generally was recognized that agencies

did not have the capacity to implement fully the needed changes in their

accounting systems in the short run and that the transition to budgeting

and accounting on a present-value basis would be difficult. However,

policymakers expected that once agencies established a systematic

approach to subsidy estimation based on auditable assumptions, present

value-based budgeting for credit would provide them with significantly

better information than the former cash-based system. Despite the

difficulties with implementation, including current data problems, present

value-based reporting for credit avoids a number of the problems of cash

reporting. Therefore, we believe that making credit reform work is

important.

Results in Brief After over 6 years of experience with credit reform, agencies continue to

have problems in estimating the subsidy cost of credit programs. The lack

of timely reestimates as well as the frequent absence of documentation

and reliable information limit the ability of agency management, OMB, and

the Congress to exercise intended oversight. We found problems with the

availability and reliability of subsidy estimates, reestimates, and

supporting documentation in our cross-cutting review of 10 programs.

None of the 10 programs in our study had for our review all of the required

budget request, budget execution,10 and reestimate subsidy rates and

supporting documentation for fiscal years 1992 through 1998. While

10The budget execution estimate is made after an agency receives an appropriation and when the

agency obligates the government for a direct loan or makes a loan guarantee commitment.

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documentation generally is more available in recent years, the availability

of timely reestimates of subsidy rates did not improve over time. Of the 10

programs we examined, 8 either failed to do reestimates for certain years

or produced them too late to be included in the next budget formulation or

audit cycles. The subsidy costs of one program—the SBA Disaster Loan

Program—were not reestimated for budgets or the financial statement

audits during this period but were reestimated for the fiscal year 1999

Budget. The programs that did not make reestimates (HUD, USDA, and SBA)

all received waivers from OMB.

Data used as the basis for subsidy estimates were not always reliable. In

the audits of the fiscal year 1996 financial statements, three of the five

largest credit agencies received disclaimers or qualified opinions related to

their credit programs. Auditors were unable to find support for agency

data on such items as delinquencies and prepayments for loans receivable

and liabilities for loan guarantees. This also could reflect problems with

historical data since agencies with loan guarantee programs rely on

lenders or intermediaries for loan performance data. Moreover, we

found—and agency officials acknowledge—discrepancies between the

subsidy rates reported in the President’s Budget and those provided to us

by the agencies as well as discrepancies within the data provided to us by

the agencies. In other cases, agencies were unable to provide supporting

documentation for the numbers in the Budget.

Problems with the reliability and validity of the underlying credit data

raise questions about the basis for the subsidy estimates included in the

Budget. Agencies have had several years to obtain and refine historical

data and estimation methodologies. Over time, we would expect to find

that, for a given cohort, the annual changes in reestimates due to technical

factors would be smaller. Because component data were not available, we

could not determine whether this had occurred. However, we did note that

overall subsidy rates for a given cohort varied widely. For example,

estimates and reestimates of the fiscal year 1992 cohort of Education’s

Federal Family Education Loan Program (FFELP) changed direction each of

the 6 years for which we had data—estimated subsidy rates ranged from

26.30 percent to 16.99 percent.

We observed a similar pattern of fluctuations in subsidy estimates at the

program level. Subsidy rate estimates for any given program continued to

fluctuate widely from year to year with no pattern or particular trend. For

example, the subsidy estimates and reestimates of the fiscal years 1992

through 1997 cohorts in VA’s Loan Guaranty Direct Loan Financing

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Account11 changed direction in each of the 6 years of data and estimated

subsidy rates ranged from 4.80 percent to 1.18 percent. Subsidy rate

estimates can change for many reasons, including programmatic redesign

and changes in the economy. For example, a change in the discount rate

will cause the subsidy rate to change, even if the cash flows are

unaffected. Financial statement audit findings for the credit agencies we

reviewed would lead us to conclude that at least some of the fluctuations

are caused by weaknesses in agency data used to develop the cash flow

estimates.

The intersection of credit reform and the Budget Enforcement Act of

1990—that is, the fact that original subsidy appropriations must compete

under the discretionary caps while reestimates are outside them—may

offer an incentive for agencies with discretionary programs to

underestimate subsidy costs initially to permit more loans or loan

guarantees within a given appropriation level. If this incentive did not exist

and absent any overriding economic trend or revision of historical data,

one would expect reestimates to lower the original subsidy estimate as

often as they raise it, and the patterns would be similar for discretionary

and mandatory programs. However, available data were not sufficient to

assess whether a credit program’s budgetary treatment affected its initial

subsidy estimates. We found somewhat similar patterns when we

compared discretionary and mandatory programs.12 We found that the

estimated subsidy rates for 8 of the 15 discretionary cohorts increased in

the first reestimate following the initial appropriation, while first

reestimates for 7 of the 12 mandatory cohorts decreased. This result is not

conclusive. No real conclusions can be drawn from this observation about

whether some discretionary programs may have sought to benefit from

initially underestimating subsidy costs. Other factors such as changes in

the economy—especially in interest rates—data errors, or more historical

data may have contributed to changes in reestimates.

Better information on factors underlying changes in subsidy rates is

needed to identify and understand why these estimates change. In theory,

data on the four components of subsidy expense—interest, net defaults,

fees, and other subsidy costs—calculated by the OMB subsidy model as part

of the estimation process could be used to identify possible causes of

11These estimates and reestimates were completed for the fiscal year 1997 President’s Budget.

12Mandatory and discretionary programs are treated differently under the Budget Enforcement Act.

Discretionary programs compete under fixed-dollar caps. Mandatory credit programs are

automatically funded for whatever amount of credit is needed for a given program design and set of

program beneficiaries. As a result, for mandatory programs there would not be an incentive to initially

underestimate subsidy costs.

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changes. However, we could not perform such an analysis because

component data frequently were missing or inaccurate. Accordingly,

meaningful component data were not available to be used internally or by

OMB for budget formulation or program management.

While OMB provides a user’s guide and some training on the subsidy model,

OMB has not provided agencies with clear definitions of each component or

sufficient guidance on how to use the OMB subsidy model to correctly

calculate the components. If OMB did so, agency staff could improve the

consistency and accuracy of component data, making it useful for budget

decision-making and oversight as envisioned by budget and accounting

requirements. For example, we recently used the component data to

identify a large error in SBA’s subsidy estimates.13 Although SBA’s

component data were flawed, it provided a quick indication that there was

an error in the fiscal year 1997 subsidy estimates for the section 7(a)

General Business Loan Program. Correcting this error enabled SBA to

guarantee approximately $2.5 billion more in section 7(a) small business

loans. OMB and SBA officials acknowledged that better oversight and

improved internal controls at both OMB and SBA are needed to prevent

similar errors in the future.

While no single agency yet is successful in all aspects of credit reform

implementation, some progress is being made at each of the agencies we

studied. The increasing audit attention on credit budgeting and accounting

has focused efforts on improving subsidy estimation. Sustained greater

commitment by agency management is needed to continue this progress

and, to succeed, it is important that OMB continue to be a part of this effort.

Objectives, Scope,

and Methodology

The objectives of our work were to determine (1) whether agencies

completed estimates and reestimates of subsidy costs, (2) whether we

could readily identify any trends including improvements in subsidy

estimates as reported by the agencies, and (3) whether we could readily

identify the causes for changes in subsidy estimates. You also asked us

whether agencies with discretionary credit programs initially

underestimated credit subsidy costs in response to the incentive created

by the availability of permanent, indefinite budget authority for credit

reestimates. We selected a sample of 10 programs from the five agencies

with the largest domestic federal credit programs: the Departments of

Agriculture, Education, Housing and Urban Development, and Veterans

13Credit Subsidy Estimates for the Sections 7(a) and 504 Business Loan Programs

(GAO/T-RCED-97-197, July 16, 1997).

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Affairs, and the Small Business Administration. We generally selected

programs that have the most credit outstanding or highest loan levels.

Both direct loan and loan guarantee programs are represented. Table 1 in

the following discussion of the availability of subsidy estimates and

supporting documentation contains a list of the 10 programs we examined.

We requested that agencies provide budget data and information for the

selected programs for fiscal years 1992 through 1998. The data requested

included (1) descriptions of the credit program and highlights of program

changes over the years, (2) spreadsheets showing estimated or

reestimated cash flows of each cohort, (3) input to and output from OMB’s

credit subsidy model, and (4) documentation of agency efforts to revise

the subsidy estimation process. For each cohort in fiscal years 1992

through 1998, we extracted the subsidy rate estimates used in the

President’s budget request, budget execution, and all reestimates. These

data are included in appendix III.

Our work reports the subsidy rate data and documentation as provided by

the agencies. We interviewed staff who prepared the subsidy estimates

and obtained written confirmation from each agency that the data in the

tables in appendix III were accurate and represented all of the data the

agency had. However, we found problems with these data. While we did

not independently verify the accuracy of these data, we did compare the

budget request subsidy rates confirmed by the agencies to the rates

reported in the appropriate Budget Appendix and Budget Credit

Supplement. We found that agency-confirmed rates differed from the

Budget in nine instances although only three differences were greater than

half a percentage point.14 In two of these three instances, the agencies

later provided documentation to support the rates in the Budget. In the

third instance, we used the rate produced by the OMB subsidy model

because the agency’s cash flow spreadsheets best supported it. In addition,

we reviewed recent financial statement audit reports for these credit

agencies and programs as one gauge of the reliability of these data.

While we examined data for all 10 programs in the 5 credit agencies,

specific examples used in our work discuss only those programs or

agencies with comparable data. For example, we had comparable data

from only seven programs to use in our analysis of the most recent subsidy

estimates for the fiscal year 1992 and fiscal year 1998 cohorts. This is

because all of VA’s credit programs (including some not examined in this

14After conversations with agency staff about the other six instances where rates differed, we generally

decided to use the rates provided by the agencies because documentation was available to support

these rates.

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report) were consolidated into two programs for fiscal year 1998 (a direct

loan program and a loan guarantee program)15 and Education’s direct loan

program only began in fiscal year 1994.

We used the data in appendix III to try to identify trends in subsidy

estimates. Appendix II includes graphs of total subsidy rates by cohort for

nine programs and graphs profiling the subsidy rates of a given program

cohort over time for eight programs. We did not prepare either graph for

SBA’s Disaster Loan Program because SBA had not included subsidy

reestimates for any cohort in the President’s Budget prior to fiscal year

1999. We also did not profile a cohort of USDA’s Farm Operating Loans

because we did not have enough comparable data for our review.

To further understand the causes for changes in subsidy rates, we then

analyzed the four components of subsidy expense (interest, net defaults,

fees and other collections, and other subsidy costs) required to be

reported by SFFAS No. 2 and calculated by OMB’s subsidy model. We also

compared the budget execution estimate to the first reestimate for all

credit programs and analyzed whether there was a different pattern in the

direction of the reestimates for direct loan programs and loan guarantee

programs or for mandatory and discretionary programs.

Our work was conducted in Washington, D.C., from September 1996

through January 1998 in accordance with generally accepted government

auditing standards. We requested comments on a draft of this report from

the following officials or their designees: the Director of the Office of

Management and Budget, the Secretary of Agriculture, the Secretary of

Education, the Secretary of Housing and Urban Development, the

Administrator of the Small Business Administration, and the Acting

Secretary of Veterans Affairs. All of the entities provided written

comments, which are discussed in the “Agency Comments and Our

Evaluation” section and reprinted in appendixes IV through IX.

Problems Persist With

Agencies’ Estimates

of Subsidy Cost

In each of the agencies in our study, we found problems with the

availability of estimated subsidy rates and supporting documentation and

with the reliability of the subsidy rate estimates. In 8 of the 10 programs

we examined, agency staff either failed to do reestimates for certain years

or completed them too late to be included in the budget formulation or

audit cycles. While some progress has been made at some agencies, audits

15This consolidation of programs was authorized by the 1998 Department of Housing and Urban

Development, Department of Veterans Affairs, and Related Agencies Appropriations Act.

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of financial statements continue to show that serious problems remain.

Effective implementation of credit reform is highly dependent on the

availability of accurate data.

Subsidy Rate Estimates

and Supporting

Documentation Were Not

Consistently Available

Agencies did not have for our review all of the estimated subsidy rates and

supporting documentation for the seven budgets they prepared under

credit reform for fiscal years 1992 through 1998. Also, the availability of

subsidy rate estimates and reestimates generally did not improve over

time. All nine programs16 in existence in 1992 when credit reform became

effective had for our review budget request and budget execution subsidy

estimates for the first 2 years under credit reform—fiscal years 1992 and

1993. The first reestimates of subsidy cost should have been done for the

fiscal year 1994 Budget. Of the 10 programs we examined, 8 either failed to

do reestimates for certain years or produced them too late to be included

in budget formulation or audit cycles. Only five of the nine programs that

should have completed reestimates for the fiscal years 1994 and 1995

Budgets had them for our review. Starting with the fiscal year 1997 Budget,

OMB Circular A-11 provided that agencies could forgo completing

reestimates under certain circumstances. For fiscal years 1997 and 1998, 5

of the 10 programs made timely reestimates. One of the programs, SBA’s

Disaster Loans Program, did not have subsidy reestimates in the Budget

until the recently released fiscal year 1999 Budget. The programs that did

not make reestimates generally reported staff constraints in completing

reestimates while preparing their budget request or difficulties obtaining

data on which to base reestimates. All reported that they had received

waivers from OMB. We received written copies of OMB waivers to USDA and

HUD permitting late completion of estimates. While USDA’s waiver was

effective for fiscal year 1996 and future budgets, HUD’s waiver was only for

fiscal year 1997. HUD staff told us that OMB gave them waivers orally for

other years, and OMB did not disagree. SBA also told us that the waivers

were approved by OMB orally, and OMB agreed.

On the other hand, for estimates and reestimates that were made, the

availability of documentation has improved somewhat. In fiscal years 1996

through 1998, most programs did have documentation for estimates and

reestimates that were made. Recent credit reform guidance explicitly

16The William D. Ford Direct Loan Program was established in fiscal year 1994.

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requires agencies to document subsidy estimation.17 In the early years of

credit reform, fiscal years 1992 through 1995, most programs did not have

for our review supporting documentation for all completed budget

estimates and reestimates. An official at Education characterized early

credit program files as “woefully lacking.”18 HUD staff said that early credit

estimates were prepared by OMB staff and that HUD and OMB do not have

supporting documentation.

Table 1 shows, by program and fiscal year, whether agencies had for our

review all subsidy estimates for the budget request and budget execution,

made subsidy reestimates, and had supporting documentation for these

estimates that we requested for our review. A check indicates that the

agency had for our review all estimated rates, rates for reestimates they

made, and had all supporting documentation contained in output from the

OMB subsidy model and agency cash flow spreadsheets. It says nothing

about the quality of the data. We discuss in some detail our concerns

about data reliability later in this report.

17OMB Circular A-11 has required agencies to document how a credit program’s subsidy is calculated

since the 1995 version issued as guidance for preparation of the fiscal year 1997 Budget. SFFAS No. 2

discusses using a systematic methodology and creating and maintaining a consistent database; it does

not address documentation of the estimation process. An issue paper, Model Credit Program Methods

and Documentation for Estimating Subsidy Rates and the Model Information Store (96-CR-7, May 1,

1996), developed by the Government-wide Audited Financial Statements Task Force, Subgroup on

Credit Reform, discusses reasonable methods of estimating subsidy rates and recommends using an

auditable subsidy estimation procedure that formalizes and documents loan performance assumptions.

It discusses the advantages of a documented model—greater availability for update, more conducive

to review and comment, and more readily transferrable between analysts.

18Because we requested that agencies provide output from the OMB subsidy model and the underlying

cash flow spreadsheets as documentation of their subsidy estimates, the two Education programs are

shown in table 1 as having incomplete documentation in each year. Education uses the OMB subsidy

model earlier in its estimation process than other agencies, adjusting the results to develop the subsidy

rate used in the President’s Budget. Thus, Education’s OMB model output and cash flow spreadsheets

do not support the rates included in the Budget. Further, Education did not provide alternate

supporting documentation for those subsidy rates.

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Table 1: Budget Request and Budget Execution Subsidy Estimates, Reestimates, and Supporting Documentation

President’s Budget for Fiscal Year

Agency/Program (Loan type) 1992 1993 1994 1995 1996 1997 1998

USDA: Farm Service Agency,

Farm Operating Loans

Program (Direct)

USDA: Rural Housing Service,

Single Family Housing

Program (Direct)

√ √

Education: Federal Family

Education Loan Program,

Stafford Loans (Guarantee)

Education: Wm. D. Ford Direct

Loan Program, Stafford Loans

(Direct)

a a

HUD: Mutual Mortgage

Insurance Fund (Guarantee)

HUD: Housing Program’s

General and Special Risk

Insurance Fund Sect. 223(f)

Refinance (Guarantee)

SBA: 7(a) General Business

Loans Program (Guarantee)

√ √ √

SBA: Disaster Loans Program

(Direct)

VA: Guaranty and Indemnity

Fund (Guarantee)

√ √ √ √ √

VA: Loan Guaranty Direct Loan

(Direct)

√ √ √ √

Note: √ indicates agencies that had for our review (1) all estimated budget request and budget

execution subsidy rates and reestimated subsidy rates and (2) all supporting documentation from

OMB’s credit subsidy model and cash flow spreadsheets.

aThe William D. Ford Direct Loan Program was established in fiscal year 1994.

Reliability of Some Subsidy

Estimate Data Is

Questionable

The reliability of credit data is questionable for a number of reasons

including (1) the poor results of financial statement audits,

(2) discrepancies we found between subsidy rates reported in the

President’s Budget and the data confirmed to us by the agencies,

(3) subsidy rate estimates not always supported by documentation,

(4) acknowledgements from some staff that component data were

questionable, and (5) staff reports of difficulties with systems support.

First, financial statement audits raised questions about data reliability.

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Three of the largest credit agencies, HUD, USDA, and Education, received

disclaimers or qualified opinions19 on their fiscal year 1996 financial

statement audits, in part, because of problems associated with their credit

programs. HUD received a qualified opinion because the Federal Housing

Administration’s (FHA) credit-related accounts were not reported on the

present value basis required by SFFAS No. 2.20 Consequently, HUD’s Office of

the Inspector General (OIG) was unable to audit the credit-related account

balances. USDA’s OIG gave a qualified audit opinion on the fiscal year 1996

financial statements of the rural development mission area because it was

unable to obtain sufficient support for credit program receivables and

estimated losses on loan guarantees and the related credit reform program

subsidy and appropriated capital used. USDA’s Farm Service Agency Farm

Operating Loans were included as part of the consolidated audit of USDA’s

fiscal year 1996 financial statements which received a disclaimer of

opinion. The Farm Service Agency does not prepare separate financial

statements. Education received a disclaimer of opinion on the

department’s fiscal year 1996 financial statements because it was unable to

support the reasonableness of the amounts shown for loans receivable and

liabilities for loan guarantees. Education’s OIG also was unable to render an

audit opinion due to auditor concerns about the quality of the data

supporting subsidy estimates of the Federal Family Education Loan

Program. This could reflect problems with historical data since agencies

with loan guarantee programs rely on lenders or intermediaries for loan

performance data. In some cases, the auditors recommended that agencies

establish and document a process for the development of subsidy

estimates and make reestimation of subsidy costs a priority.

Although VA and SBA both received unqualified audit opinions on their

fiscal year 1996 financial statements, the auditors of these agencies

reported internal control weaknesses related to estimating credit

subsidies. For example, SBA’s auditors reported that the agency used

19A disclaimer of opinion on financial statements is issued whenever auditors are unable to satisfy

themselves that the overall financial statements are fairly presented. A disclaimer may arise because of

a severe limitation in the scope of the audit, perhaps due to a lack of documentation and/or

uncertainties about the amount of an item or outcome of a matter that materially affects financial

position. A qualified opinion on financial statements can be used only when the auditor believes that

the overall financial statements are fairly stated other than with regard to the noted qualification. The

qualification may result from a limitation on the scope of the audit, failure to follow generally accepted

accounting principles, use of different accounting principles during one of the years included in the

statements, or circumstances that prevented the auditor from knowing that the statements were fairly

presented.

20Because FHA is a government corporation, it reports costs in its financial statements in accordance

with private sector accounting standards. However, because FHA’s financial results are material to

HUD’s financial statements, it should comply with SFFAS No. 2 when it is included in HUD’s

consolidated financial statements. By not complying with credit reform’s accounting standards, HUD

is not accurately reporting the costs of its programs in its financial statements.

Page 14 GAO/AIMD-98-14 Credit Subsidy Estimates
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inconsistent and unreliable data to reestimate the Disaster Loan Program.

Because of the questionable data, OMB and SBA had not included any

reestimate of this program until the fiscal year 1999 Budget or the fiscal

year 1997 financial statements. In addition, VA’s auditors reported that the

agency does not efficiently and reliably accumulate the financial

information needed to comply with credit reform accounting requirements

and that significant credit reform-related adjustments were necessary to

the financial statements.

Second, we found discrepancies between the subsidy rates reported in the

President’s Budget and the data provided and confirmed to us by the

agencies21 in about 10 percent of our sample (7 of 68 rates). Some agencies

agreed, after we pointed out inconsistencies, that certain data they had

provided and certified as accurate in fact were not. Third, agencies also

had for our review subsidy rate estimates that were not always supported

by the documentation. For example, none of Education’s documentation

supported its estimated subsidy rates. Also, agencies, such as HUD, had

difficulty identifying the fiscal year of available subsidy rates and

documentation and whether the rates were budget execution estimates or

reestimates. Fourth, staff from seven of the eight programs whose

component data we were able to examine acknowledged that the data

were questionable. We found that component data were questionable

because they were not consistent with program characteristics. For

example, VA’s direct loan program showed the net default component as

negative because cash flows from loan sales were included with recoveries

from defaulted loans. As a result, recoveries exceeded defaults. To avoid

erroneously indicating that higher defaults would reduce the subsidy rate,

proceeds from loan sales should have been included with the “other cash

flow” component.

Fifth, and finally, data reliability depends in part on having adequate

information systems, and effective top management commitment is vital to

ensuring that these are provided. Today, as 4 years ago, staff in most

agencies we examined report difficulties with systems support. For

example, staff in three of the five agencies we reviewed—HUD, VA, and

USDA—reported inadequate actual data on loan performance and computer

systems support. These agencies have efforts underway to refine their data

and/or improve their estimation processes. Staff at USDA and VA have

worked with their offices of the inspector general or OMB to refine their

cash flow spreadsheets and reestimate calculations. HUD staff reported

21Although it is unclear without further investigation which rates were accurate, we generally included

in appendix III tables those rates provided by the agencies because they were supported by some

documentation.

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efforts underway to develop a new integrated accounting system and a

need to re-engineer budget and accounting processes.

Staff in the other two agencies—Education and SBA—told us that systems

support was not an issue and reported that credit reform implementation

has become a high-level priority for their agencies. Specifically, SBA

administrators had a commitment to meet the requirements of the Federal

Credit Reform Act and sought to improve their capacity to make better

subsidy cost estimates. Both agencies reported that they had developed

new computer systems, significantly refined their historical information

stores, and are using contractor support. Although upper-management

commitment is necessary, it does not result in instant improvement. Audits

continue to report problems at both agencies, both have difficulty

obtaining historical information, and SBA and others have identified errors

in SBA subsidy estimates.

OMB and credit agency staff acknowledge that budget and financial systems

for credit programs could have problems with conversions to the year

2000.22 In a February 1998 report on agencies’ progress in addressing Year

2000 conversion, OMB reported that SBA and VA were demonstrating

sufficient progress, USDA and HUD were making some progress but OMB still

had concerns, and Education was making insufficient progress. In

testimony in September 1997,23 we reported that the Veterans Benefits

Administration, where its housing credit programs are located, has

developed an agencywide plan and created a program management

organization but will need to strengthen management and oversight of

Year 2000-related activities to avert serious disruption of its ability to

disseminate benefits. Since our testimony, VA has taken action to address

some of our concerns.

Subsidy Rates

Generally Fluctuated

Over time, some fluctuation in subsidy rates would be expected within a

given group of loans or guarantees (a cohort) and among different cohorts

of the same program. Reasons include loans or guarantees made at

different interest rates than anticipated; programmatic redesign; better

22On January 1, 2000, computer systems worldwide could malfunction or produce inaccurate

information simply because the date has changed. Unless corrected, such failures could have a costly,

widespread impact. The problem is rooted in how dates are recorded and computed. For the past

several decades, systems have typically used two digits to represent the year—such as “97” for

1997—to save electronic storage space and reduce operating costs. In such a format, however, 2000 is

indistinguishable from 1900. This ambiguity could cause systems to malfunction in unforeseen ways or

to fail completely.

23Veterans Affairs Computer Systems: Action Underway Yet Much Work Remains To Resolve Year 2000

Crisis (GAO/T-AIMD-97-174, September 25, 1997).

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information on technical factors such as defaults, prepayments, and fees

from more actual experience; or unanticipated changes in the economy

including interest rate changes. Agencies have had several years to obtain

and refine historical data and estimation methodologies. Over time we

would expect to find that, for a given cohort, the annual changes in

reestimates due to technical factors would be smaller. We believe that

agencies can improve their abilities to forecast such factors as defaults,

recoveries, prepayments, and fee revenue through better modeling and

more and better historical data. As this improvement occurs, the

variability in the subsidy rate from year to year for a given cohort caused

by these factors (as opposed to economic factors such as interest) should

diminish. Because reliable component data were not available, we could

not readily determine whether this had occurred. However, total subsidy

estimates within a given cohort often varied widely over time. Moreover,

estimates for different cohorts within the same program also differed

widely. These sharp variations raise questions about the causes for these

changes and the reliability of the underlying data. The success of credit

reform budgeting relies on reasonable estimates informed by timely,

appropriate actual data.

We analyzed the data from several perspectives:

• Comparing Estimated Subsidy Rates Over Time For a Given Cohort—In

the programs we examined, we found that reestimates often were large

and changed direction over time—increasing or decreasing estimated

subsidy cost. During the period of time between a given cohort’s budget

execution estimate and its most recent reestimate, we found that

reestimates generally fluctuated both up and down. A total of 74 percent of

the 23 cohorts we analyzed24 had at least one reestimate increasing the

subsidy rate and at least one reestimate that decreased the subsidy rate.

For example, estimates and reestimates of the fiscal year 1992 cohort of

Education’s FFELP program changed direction each of the 6 years of data,

estimated subsidy rates ranged from 26.30 percent to 16.99 percent. This

could result from any number of factors, including changes in assumptions

about cash flows as agencies gained experience in estimating subsidy rates

or developed better actual loan data, and changes in the timing of loan

activity or interest rates. Only VA’s Loan Guaranty Direct Loan Financing

Account did not have both increases and decreases in its subsidy estimate,

as shown in figure II.17. Graphs of selected cohorts are included in

appendix II. Viewed another way, we compared two specific subsidy rate

24We examined only cohorts for which we had at least three reestimates or budget execution estimates

and two reestimates.

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estimates—budget execution and the first reestimate—in eight programs

for which we had appropriate data (27 cohorts). We found that the first

reestimates of the subsidy rates were higher than the budget execution

rates for 13 cohorts and were lower for 14 cohorts. We also found that 15

of the 27 cohorts had changes of at least 20 percent—7 increases and 8

decreases. One cohort in the SBA 7(a) program increased by 126 percent.

• Comparing Estimated Subsidy Rates for Different Cohorts of a Given

Program—We also analyzed the estimated subsidy rates for a given

program by comparing the most recent estimates or reestimates for

different cohorts. For example, as shown in figure II.16, the subsidy

estimates and reestimates of the fiscal years 1992 through 1997 cohorts in

VA’s Loan Guaranty Direct Loan Financing Account25 changed direction in

each of the 6 years of data, and estimated subsidy rates ranged from

4.80 percent to 1.18 percent. We found that the fiscal year 1998 President’s

Budget showed that six of eight programs had a lower estimated subsidy

rate for their new fiscal year 1998 credit than they reestimated for their

fiscal year 1992 credit, the oldest cohorts in our study. Only HUD’s Federal

Housing Administration’s Mutual Mortgage Insurance Fund and VA’s Loan

Guaranty Direct Loan Financing Account had estimated subsidy rates for

fiscal year 1998 credit that were higher than the reestimates of the fiscal

year 1992 cohort. This relatively consistent pattern of lower estimated

subsidy rates in fiscal year 1998 may reflect changes in economic

conditions such as lower interest rates, data errors, and/or changes by

agencies designed to lower the subsidy cost such as increasing fees,

reducing the share of the loan receiving the government guarantee, and

improving debt collection. To determine the cause of specific subsidy rate

differences would require examining the detailed assumptions used to

estimate a program’s cash flows over the full term of the credit. Graphs of

the most recently estimated subsidy rates for all cohorts in 9 of the 10

programs in our sample are included in appendix II. SBA’s Disaster Loan

Program is not included because the agency had not reestimated the

program’s subsidy costs at the time of our review.

25These estimates and reestimates were completed for the fiscal year 1997 President’s Budget.

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• Comparison of Estimated Subsidy Rates for Direct Loans to Those for

Loan Guarantees—Loan type was not a predictor of whether subsidy rates

increased or decreased from the budget execution rate to the first

reestimate.26 For example, of the three direct loan programs and five loan

guarantee programs for which we had appropriate data, only one

program—VA’s Guaranty and Indemnity Fund guarantee program—did not

have at least one cohort with an upward reestimate and at least one cohort

with a downward reestimate.

Available Data Not

Sufficient to Assess

Whether Budgetary

Treatment Affected

Initial Subsidy

Estimates

To obtain some insight on the potential effect of credit reform’s automatic

appropriation (unconstrained by discretionary spending limits) for

reestimates, we compared the budget execution estimate to the first

reestimate27 for mandatory programs and for discretionary programs. As

explained previously, initial appropriations for discretionary programs

must compete with other programs for the specified amount of funding

available under the discretionary spending limits set in law. Mandatory

credit programs are automatically funded for whatever amount of credit is

needed for a given program design and set of program beneficiaries. Both

discretionary and mandatory credit programs automatically receive

funding for the cost of reestimates without regard to Budget Enforcement

Act limits. Thus, agencies with discretionary credit programs could benefit

from initially underestimating subsidy rates. If the pattern in the direction

of reestimates for discretionary and mandatory programs were the same, it

would be an indication that this provision of law was not affecting original

estimates. It may be difficult to determine whether agencies intentionally

underestimated subsidy costs in initial estimates given data unreliability

and the number of other factors (such as changes in interest rates or other

economic conditions) that could affect subsidy estimates and reestimates.

We do know of one instance in which the issue was raised. SBA, an agency

with discretionary credit programs, hired Price Waterhouse to conduct a

diagnostic review of SBA’s existing internal controls. This September 1997

study said that “the credit subsidy process is not viewed as a way of

assessing the future risk and costs of the program for management

purposes. Rather, the rate calculation is perceived [by SBA] to be a tool for

26This analysis is independent of whether the credit program is treated as discretionary or mandatory

in the budget.

27The first reestimates of subsidy rates are important because they are the first opportunity for

agencies to revise subsidy estimates used in budget execution and receive permanent, indefinite

budget authority for any increase. HUD’s Mutual Mortgage Insurance (MMI) program has an option to

use a different budgetary treatment specified in its authorizing legislation. As a policy decision with

OMB, MMI uses liquidating account reserves as envisioned in its authorizing legislation, not the

permanent, indefinite budget authority available under credit reform. See our earlier report

(GAO/AIMD-94-58, September 26, 1994) for a more detailed discussion of this issue.

Page 19 GAO/AIMD-98-14 Credit Subsidy Estimates
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gaming the congressional appropriations process.” In commenting on a

draft of this report, SBA officials disagreed with this conclusion. SBA

officials stated that the Price Waterhouse report was incorrect and, due to

its special nature, it was not corrected. In support of their position, SBA

officials cited the quality of their data and staff and SBA’s commitment to

have accurate and credible subsidy rates. However, we found, as

discussed earlier, an error in SBA’s subsidy estimation methodology and

that their component data were not always correct. Also, when we

discussed SBA’s concerns with a Price Waterhouse staff member, he stated

that its report was accurate for the period it covered, spring 1997. He

described its report as based on interviews and a review of

documentation.

The available data we were able to obtain were not sufficient to assess

whether a credit program’s budgetary treatment affected its initial subsidy

estimates. We found somewhat similar patterns when we compared

discretionary and mandatory programs. We found that the estimated

subsidy rates for 8 of the 15 discretionary cohorts increased in the first

reestimate following the initial appropriation, while first reestimates for 7

of the 12 mandatory cohorts decreased.

This result is not conclusive. No real conclusions can be drawn from this

observation about whether some discretionary programs may have sought

to benefit from initially underestimating subsidy costs. Any firm

conclusion about the reasons for reestimates would require better data

and more in-depth study. Other factors, such as changes in the

economy—including interest rates—or more historical data, may have

contributed to these reestimates. Further, as audits have demonstrated,

much of the data are not reliable. Also, sensitivity analyses and other

sources showing the key variables that affect subsidy rates were not

consistently available.

Lack of Reliable

Component Data

Hampers Ability to

Determine the Causes

of Changes in Subsidy

Estimates

Data on the four components of subsidy expense—interest costs, net

defaults, fees and other collections, and other subsidy costs—could be

used to examine the causes for changes in subsidy rate estimates. Ideally,

these data, calculated by the OMB subsidy model as part of the subsidy

estimation process, would provide a ready basis to analyze such changes

and thus identify possible policy responses. However, these component

data were frequently missing or inaccurate, and thus we were unable to

use them for identifying causes of changes in estimates.

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SFFAS No. 2 provides general definitions of these components and requires

agencies to disclose them in financial statements. The Federal Accounting

Standards Advisory Board commented on the importance of such data

stating that “the cost component information would be valuable for

making credit policy decisions, monitoring portfolio quality, and

improving credit performance. Information on interest subsidies and fees

would help in making decisions on setting interest rates and fee levels.

Information on default costs would help in evaluating credit performance.”

It also could be useful as a performance measure to comply with the

Government Performance and Results Act. With better data,

decisionmakers could compare these components across programs and

agencies to see the effect of programmatic differences.

The potential usefulness of the component data was recently

demonstrated by our analysis of SBA component data. Although SBA’s

subsidy component data were flawed, they still provided a quick indication

to GAO that there was an error in the fiscal year 1997 subsidy estimates for

the section 7(a) General Business Loan Program.28 Correcting this error

enabled SBA to guarantee approximately $2.5 billion more in section 7(a)

small business loans.29 OMB and SBA officials acknowledged that better

oversight and improved internal controls at both OMB and SBA are needed

to prevent similar errors in the future.

A model developed by OMB staff to calculate credit subsidies aggregates

detailed data on defaults, recoveries, prepayments, and other cash flows to

calculate the components of subsidy expense on a present-value basis. In

describing the OMB credit subsidy model, OMB guidance to agencies says

“use of a common subsidy model ensures comparability and uniformity

among all Federal credit program subsidy estimates.”30 However, VA, USDA,

SBA, and HUD did not distribute their cash flows consistently among the

components. OMB Circulars A-11 and A-34 did not provide definitions of the

subsidy components. The user’s guide for OMB’s subsidy model did not

provide sufficiently clear definitions of the components to ensure that the

components could be calculated accurately. Agency staff said they did not

have a clear understanding of the definitions and thus were unsure about

where the OMB model allocated detailed data for each of their program’s

cash flows in calculating the subsidy expense components. Agency staff

28Credit Subsidy Estimates for the Sections 7(a) and 504 Business Loan Programs

(GAO/T-RCED-97-197, July 15, 1997).

29Had the actual subsidy rate been known in advance, the Congress could have chosen whether to

provide the same amount of budget authority for a higher loan amount or to hold the loan amount

constant and provide less budget authority.

30OMB Circular A-34, section 12.7 (December 1995).

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were unclear about what the data produced by the model represented. In

an earlier report reviewing the credit subsidy model,31 we recommended

that OMB revise the model to specifically identify which data were used by

the model in the subsidy calculations.

Further, OMB did not require agencies to use the subsidy model at a

specific point in their estimation process as they are developing subsidy

estimates for their budget submissions. Education officials noted that,

with the participation and approval of OMB, Education uses the model as

an interim step in subsidy estimation, not at the end as do other agencies.

Education uses a methodology that makes minor adjustments to subsidy

rates produced by the model. As a result, Education staff did not provide

component data for its reestimated subsidy rates.

Clear definitions of each subsidy component and specific OMB instructions

and assistance to agencies in using its subsidy model could provide better

assurance of accurate and comparable component data. Since our

inquiries, staff at VA, USDA’s Rural Housing Service (RHS), and HUD worked

with OMB staff to clarify requirements and address problems with

component data.

Further, staff from five of eight programs whose component data we were

able to examine acknowledged that the data were questionable. We found

that component data were inaccurate because they were not consistent

with program characteristics. RHS staff said that, before fiscal year 1996,

the component data were incorrect because they adjusted underlying data

in using early versions of the OMB subsidy model that did not accommodate

their program characteristics. As discussed earlier, VA’s direct loan

program showed the net default component as negative in each of the 7

years that data were available. This erroneously indicates that higher

defaults would reduce the subsidy rate. Component data provided by the

agencies are shown in the tables in appendix III.

This potentially useful information was not understood by agencies, often

was unavailable, sometimes was not accurate, and thus was not used to

inform program management or budget decision-making. In a letter

responding to a recent GAO report on OMB’s subsidy model, OMB

acknowledged that it would be useful for the revised subsidy model to

have a facility to display, at the option of the user, the calculation of

subsidy percentages and components.

31Credit Reform: Review of OMB’s Credit Subsidy Model (GAO/AIMD-97-145, August 29, 1997).

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Improvements

Underway

There have been a number of recent efforts to clarify and simplify

implementation of the Credit Reform Act. The Balanced Budget Act of

1997 included some changes to the Credit Reform Act and OMB has

changed its guidance as well. OMB is piloting a new reestimation

methodology—called the “balances approach”—at HUD that it states will

simplify the process. However, this new approach does not calculate the

components of subsidy expense (interest, net defaults, fees and other

collections, and other subsidy costs) over the entire term of the loans as

does the current reestimate methodology. The data from which to

calculate components would remain available with the balances approach,

but what is lost is having the component data calculated as a part of the

reestimate process. Further, if there is no requirement to report or review

the data in that way, agencies would have less incentive than now to make

the calculations and use the data. OMB also is formulating a new approach

to discounting cash flows that it states will improve accuracy without

adding difficulty for agency staff.

The Credit Task Force of the Accounting and Auditing Policy Committee,32

which includes OMB, Treasury, credit agency participants, and GAO, has

been studying credit reform implementation in preparation for the first

audit of the fiscal year 1997 governmentwide consolidated financial

statements. The group has proposed guidance for agencies on methods

and documentation for estimating subsidy rates and creating a store of

historical data.33 It also developed draft guidance34 on preparing and

auditing subsidy estimates that will be useful for budget, accounting, and

auditing staff. The Credit Reform Committee of the Chief Financial

Officers’ Council also has devised ways agencies can simplify

implementation of credit reform.

Other resources are available to help agencies enhance their capacities to

make subsidy estimates. For example, OMB has provided short-term

technical assistance with estimation and modeling to VA, SBA, and HUD. As

those efforts continue, staff in agencies who report that they lack adequate

resources for research or systems development could adapt strategies or

data system formats that have been used successfully in other agencies.

32This task force formerly was known as the Subgroup on Credit Reform of the Government-wide

Audited Financial Statements Task Force.

33Government-wide Audited Financial Statements Task Force, Subgroup on Credit Reform, Model

Credit Program Methods and Documentation for Estimating Subsidy Rates and the Model Information

Store (96-CR-7, May 1, 1996).

34Government-wide Audited Financial Statements Task Force, Subgroup on Credit Reform, Preparing

and Auditing Direct Loan and Loan Guarantee Subsidies under the Federal Credit Reform Act

(96-CR-14, October 16, 1997).

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However, management-level commitment at all of the credit agencies and

OMB is critical to continuing these efforts and to ensuring that the

implementation of credit reform is an agency priority.

Conclusions Greater sustained commitment by management at OMB and the credit

agencies is needed to produce the useful data needed to fully implement

credit reform. Effective implementation requires timely, readily available,

accurate estimates that are comparable among credit programs. Although

there are indications that some agencies have taken this seriously,

problems with the availability and reliability of subsidy estimates continue

to permeate all agencies’ efforts at implementation. While agencies are

working to improve their subsidy estimation processes, agency staff

continue to report that credit reform implementation often is not a priority

of top management. This is indicated both by the failure to ask questions

about estimates in program and budget reviews and by the reported lack

of sufficient computer systems to support the subsidy estimation process.

Greater commitment by OMB and the credit agencies is needed to address

pervasive problems with the availability and reliability of subsidy estimate

data and documentation. Since agencies are most responsive to issues in

which there is demonstrated interest, continued oversight would increase

the likelihood that credit reform would be implemented as intended.

Better and more reliable data are needed to facilitate this oversight.

The availability of automatic funding for reestimates of subsidy costs

creates an incentive for agencies with discretionary programs to initially

underestimate subsidy costs. Whether or not agencies are responding to

this incentive is unclear. Because the data generally are not reliable and

because other factors, such as economic fluctuations (including changes

in the interest rate) could have caused changes in reestimates, more

in-depth study and better data would be needed to draw a firm conclusion.

Accurate, consistent data on subsidy expense components could be used

effectively by program managers and executive and congressional

decisionmakers as originally intended—to monitor program

implementation, consider program changes, and compare direct loan and

loan guarantee programs designed for the same purpose. Currently, data

are inaccurate or missing and agency staff said they do not understand the

data. Therefore, component data have not been available to inform

decision-making.

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While no single agency yet is successful in all aspects of credit reform

implementation, some progress is being made at each of the agencies we

studied. Over time, the scrutiny of financial statement audits will continue

to bring greater discipline to the estimation process and greater accuracy

to the reported subsidy costs.

Recommendations We recommend that the Secretaries of Agriculture, Education, Housing

and Urban Development, and Veterans Affairs, and the Administrator of

Small Business improve oversight of credit reform implementation,

including ensuring that (1) estimates are prepared accurately and

(2) documentation supporting subsidy estimates included in the budget

and financial statements is prepared and retained.

So that agency staff can aggregate data from their cash flows into the OMB

subsidy model accurately and consistently, we recommend that the OMB

Director ensure that OMB staff (1) provide detailed guidance and

definitions of the four subsidy components (interest, net defaults, fees and

other collections, and other subsidy costs) and (2) revise the OMB subsidy

model to provide agencies with the formula for calculating each

component. We also recommend that the OMB Director ensure, to the

extent possible, that agencies prepare accurate subsidy estimates, use

consistent definitions of subsidy components, and have appropriate

documentation.

Finally, we recommend that the OMB Director work toward identifying

ways OMB can further assist agencies to more rapidly and accurately

implement credit reform. These might include providing additional direct

assistance to the agencies, developing prototypes for estimating

methodologies, and prompting interagency forums for the exchange of

information on problems and best practice solutions by working level

staffs.

Agency Comments

and Our Evaluation

OMB and each of the five credit agencies we examined commented on a

range of implementation problems and progress. OMB officials commented

that the report’s focus on subsidy estimation is valuable. However, OMB

officials stated that our analytical methodology was questionable because

the report did not distinguish between the effect of interest rates on initial

subsidy rates and the effect of default and other technical factors. Our

methodology was designed to isolate the effects of interest rates by using

component data and budget execution rates. It is true that interest rates

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would change each year even if the default and other technical

assumptions remain constant. Unfortunately, we could not isolate these

effects because agencies frequently did not provide these data or provided

inaccurate data. We used budget execution rates as the starting point for

our analyses. This reduced the effect of interest rate changes in the

months between budget request and budget execution.

OMB also stated that several of the report’s general conclusions about

subsidy estimates were not supported by the evidence. We disagree. First,

OMB officials noted that unless an adjustment is made for the effect of

different discount rates, it is impossible to draw valid conclusions about

the accuracy of subsidy rates by observing that they have fluctuated over

time. We did not draw conclusions about the accuracy of subsidy rates.

However, we did observe that the rates fluctuated over time and that some

fluctuation would be expected. We said in the report that the reliability of

credit data is questionable for a number of reasons. Our characterization

of the data was based primarily on results of the audits of the fiscal year

1996 financial statements as well as some discrepancies we identified

between rates provided to us by agencies and those reported in the

President’s Budget. Second, OMB officials said that we could not draw

conclusions about a program from the size or direction of subsidy

reestimates unless the effect of interest rate reestimates is removed. Our

report did not draw conclusions about programs from the size or direction

of subsidy reestimates. Third, OMB officials were concerned that our

discussion of the timing of reestimates could lead to the incorrect

conclusion that the budget formulation process for subsidy rates for new

loans is not being informed by the experience on existing loan cohorts. We

disagree. Such a conclusion regarding the effect of not performing

reestimates is, in fact, correct. Given that we found three of the five

agencies received waivers of the reestimate requirement, it would appear

that their budget formulation is not being informed by the most recent

experience on existing loan cohorts. (See appendix IV.)

Agriculture officials stated that the report’s comments and suggestions

will improve budget formulation and accounting for programs under credit

reform. They further stated that FSA is working to address the concerns

noted in the report. (See appendix V.)

Education officials strongly agreed with the report’s emphasis on the

importance of the Federal Credit Reform Act of 1990. Their comments

note that, over the past 5 years, Education has steadily increased staff,

contractor, and system resources dedicated to developing accurate and

Page 26 GAO/AIMD-98-14 Credit Subsidy Estimates
B-277070 

timely credit estimates. Education officials also raised a question about

their perception that our report implied that “significant shifts in subsidy

reestimates over time are necessarily a bad thing.” Our report did not

imply this. Rather, we said that over time, some fluctuation in subsidy

rates would be expected, some estimates varied widely, and these sharp

variations raise questions about the causes for these changes and the

reliability of the underlying data. Education officials also provided some

clarification of their use of the OMB subsidy model. (See appendix VI.)

HUD officials acknowledged that the agency has experienced some

reporting and estimation problems and stated that the agency has made

significant progress since the enactment of the Federal Credit Reform Act

of 1990. They noted that the draft report documents the difficulty that

virtually every agency is experiencing in dealing with credit reform

requirements. HUD officials stated that the problem with cost estimates has

less to do with the level of effort devoted to data collection and the

timeliness of reestimation than it has to do with inherent limitations of the

net present value technique in cost estimation. We agree that credit reform

has been a challenge to agencies. However, cash basis reporting for credit

programs, while easier to accomplish, does not reflect their costs. When

sufficient attention is devoted to net present value estimates of costs as

required under the Federal Credit Reform Act, these subsidy costs will be

a much better basis for budgeting. (See appendix VII.)

SBA officials’ expressed concern that we quoted a Price Waterhouse report

prepared at SBA’s request. SBA officials stated that the Price Waterhouse

report was incorrect and, due to its special nature, was not corrected. In

support of their position, SBA officials cited the quality of their data and

staff and SBA’s commitment to have accurate and credible subsidy rates.

However, as discussed earlier, we found an error in SBA’s subsidy

estimation methodology and that their component data were not always

correct. Also, when we discussed SBA’s concerns with a Price Waterhouse

staff member, he stated that its report is accurate for the period it covered,

spring 1997, and was based on interviews and a review of documentation.

SBA officials said their practices represent the leading edge of compliance

with the Federal Credit Reform Act and requested that we acknowledge

this if we agreed. Our report recognized that some progress in

implementation is being made at each of the agencies we studied, and we

specifically acknowledged SBA’s commitment and efforts to improve. (See

appendix VIII.)

Page 27 GAO/AIMD-98-14 Credit Subsidy Estimates
B-277070 

VA officials agreed with the report’s recommendations and provided their

insights regarding the complexities of credit estimation and its evolution

over the years at VA. They also provided some technical comments, which

we have addressed as appropriate. (See appendix IX.)

We are sending copies of this report to the Ranking Minority Member of

the Senate Committee on the Budget; the Chairman and Ranking Minority

Member of the House Committee on the Budget; the Director, Office of

Management and Budget; the Director, Congressional Budget Office; the

Secretaries of Agriculture, Education, and Housing and Urban

Development, and the Acting Secretary of Veterans Affairs; the

Administrator of Small Business; and interested congressional

committees. Copies also will be made available to others upon request.

This report was prepared under the direction of Christine Bonham,

Assistant Director, Budget Issues, who may be reached at (202) 512-9576.

Other major contributors to this report are listed in appendix X. Please

contact me at (202) 512-9142 if you or your staff have any questions

concerning the report.

Sincerely yours,

Susan J. Irving

Associate Director, Budget Issues

Page 28 GAO/AIMD-98-14 Credit Subsidy Estimates
Page 29 GAO/AIMD-98-14 Credit Subsidy Estimates
Contents

Letter 1

Appendix I 

Background: Credit

Reform

36

Appendix II 

Program Descriptions

and Graphs of

Estimated Subsidy

Rates of Selected

Programs

43

Appendix III 

Estimated Subsidy

Rates of Selected

Programs

64

Appendix IV 

Comments From the

Office of Management

and Budget

88

Appendix V 

Comments From the

Department of

Agriculture

94

Page 30 GAO/AIMD-98-14 Credit Subsidy Estimates
Contents

Appendix VI 

Comments From the

Department of

Education

98

Appendix VII 

Comments From the

Department of

Housing and Urban

Development

101

Appendix VIII 

Comments From the

Small Business

Administration

106

Appendix IX 

Comments From the

Department of

Veterans Affairs

111

Appendix X 

Major Contributors to

This Report

117

Related GAO Products 120

Tables Table 1: Budget Request and Budget Execution Subsidy

Estimates, Reestimates, and Supporting Documentation

13

Table III.1: USDA/FSA: Farm Operating Direct Loan Program

Subsidy Rates

68

Table III.2: USDA/RHS: Section 502 Single Family Housing Direct

Loan Program Subsidy Rates

70

Page 31 GAO/AIMD-98-14 Credit Subsidy Estimates
Contents

Table III.3: Education: FFELP/Stafford Guaranteed Loan Program

Subsidy Rates

72

Table III.4: Education: Ford/Stafford Direct Loan Program

Subsidy Rates

74

 Table III.5: HUD: Mutual Mortgage Insurance Fund (Section

203(b)) Guaranteed Loan Program Subsidy Rates

76

Table III.6: HUD/FHA: General and Special Risk Insurance Fund,

Multifamily Refinance 223(f), Guaranteed Loan Program Subsidy

Rates

78

Table III.7: SBA: 7(a) Guaranteed Loan Program Subsidy Rates 80

Table III.8: SBA: Disaster Direct Loan Program Subsidy Rates 82

Table III.9: VA/VBA: Guaranty and Indemnity Fund, Guaranteed

Loan Financing Account Subsidy Rates

84

Table III.10: VA/VBA: Loan Guaranty Direct Loan Financing

Account Subsidy Rates

86

Figures Figure I.1: Credit Reform Cash Flow Simplified 39

Figure II.1: USDA/FSA’s Farm Operating Direct Loan Program’s

Total Subsidy Rates, by Cohort—as Estimated for the FY 1998

President’s Budget

45

Figure II.2: USDA/RHS’ Section 502 Single Family Housing Direct

Loan Program’s Total Subsidy Rates, by Cohort—as Estimated

for the FY 1998 President’s Budget

47

Figure II.3: USDA/RHS’ Section 502 Single Family Housing Direct

Loan Program’s Total Subsidy Rates—Profile of the FY 1992

Cohort

47

Figure II.4: Education’s FFELP/Stafford Guaranteed Loan

Program’s Total Subsidy Rates, by Cohort—as Estimated for the

FY 1998 President’s Budget

49

Figure II.5: Education’s FFELP/Stafford Guaranteed Loan

Program’s Total Subsidy Rates—Profile of the 1992 Cohort

49

Figure II.6: Education’s Ford/Stafford Direct Loan Program’s

Total Subsidy Rates, by Cohort—as Estimated for the FY 1998

President’s Budget

51

Figure II.7: Education’s Ford/Stafford Direct Loan Program’s

Total Subsidy Rates—Profile of the FY 1994 Cohort

51

Figure II.8: HUD’s Mutual Mortgage Insurance Fund’s (203(b))

Guaranteed Loan Program’s Total Subsidy Rates, by Cohort—as

Estimated for the FY 1998 Budget Request and Reestimated for

the FY 1997 President’s Budget

53

Page 32 GAO/AIMD-98-14 Credit Subsidy Estimates
Contents

Figure II.9: HUD’s Mutual Mortgage Insurance Fund’s (203(b))

Guaranteed Loan Program’s Total Subsidy Rates—Profile of the

FY 1992 Cohort

53

Figure II.10: HUD/FHA’s General and Special Risk Insurance

Fund, Multifamily Refinance (223(f)) Guaranteed Loan Program’s

Total Subsidy Rates, by Cohort—as Estimated for the FY 1998

Budget Request and Reestimated for the FY 1997 President’s

Budget

55

Figure II.11: HUD/FHA’s General and Special Risk Insurance

Fund, Multifamily Refinance (223(f)) Guaranteed Loan Program’s

Total Subsidy Rates—Profile of the FY 1992 Cohort

55

Figure II.12: SBA’s 7(a) Program’s Total Subsidy Rates, by

Cohort—as Estimated for the FY 1998 President’s Budget

57

Figure II.13: SBA’s 7(a) Program’s Total Subsidy Rates—Profile

of the FY 1992 Cohort

57

Figure II.14: VA/VBA’s Guaranty and Indemnity Fund, Guaranteed

Loan Financing Account’s Total Subsidy Rates, by Cohort—as

Estimated for the FY 1997 President’s Budget

61

Figure II.15: VA/VBA’s Guaranty and Indemnity Fund, Guaranteed

Loan Financing Account’s Total Subsidy Rates—Profile of the FY

1992 Cohort

61

Figure II.16: VA/VBA’s Loan Guaranty Direct Loan Financing

Account’s Total Subsidy Rates, by Cohort—as Estimated for the

FY 1997 President’s Budget

63

Figure II.17: VA/VBA’s Loan Guaranty Direct Loan Financing

Account’s Total Subsidy Rates—Profile of the FY 1992 Cohort

63

Page 33 GAO/AIMD-98-14 Credit Subsidy Estimates
Contents

Abbreviations

CBO Congressional Budget Office

CFO Chief Financial Officer

FASAB Federal Accounting Standards Advisory Board

FFELP Federal Family Education Loan Program

FHA Federal Housing Administration

FSA Farm Service Agency

HUD Department of Housing and Urban Development

MMI Mutual Mortgage Insurance

OIG Office of the Inspector General

OMB Office of Management and Budget

RHS Rural Housing Service

SBA Small Business Administration

SFFAS Statement of Federal Financial Accounting Standards

USDA Department of Agriculture

VA Department of Veterans Affairs

VBA Veterans Benefits Administration

Page 34 GAO/AIMD-98-14 Credit Subsidy Estimates
Page 35 GAO/AIMD-98-14 Credit Subsidy Estimates
Appendix I 

Background: Credit Reform

The federal government uses direct loans and loan guarantees as tools to

achieve numerous program objectives, such as assistance to housing,

agriculture, education, small businesses, and foreign governments. At the

end of fiscal year 1996, the face value of the government’s direct loans and

loan guarantees totaled a reported $973 billion, of which $167 billion was

in direct loans and $806 billion was in loan guarantees.

After over 20 years of discussion about the shortcomings of using cash

budgeting for credit programs and activities, the Federal Credit Reform

Act of 1990 was enacted on November 5, 1990, as Title 13B of the Omnibus

Budget Reconciliation Act of 1990, Public Law 101-508. The Federal Credit

Reform Act changed the budget treatment of credit programs so that their

costs can be compared more accurately with each other and with the costs

of other federal spending. It also was intended to ensure that the full cost

of a credit program over its entire life would be reflected in the budget

when the loans were made so that the executive branch and the Congress

might consider that cost when making budget decisions.

In addition, it was recognized that credit programs had different economic

effects than most budget outlays, such as purchases of goods and services,

income transfers, and grants. In the case of direct loans, for example, the

fact that the loan recipient was obligated to repay the government over

time meant that the economic effect of a direct loan disbursement could

be much less than a noncredit budget transaction of the same dollar

amount. The change in economic behavior resulting from loan guarantees

occurred when the loan was made, not when the government’s cost was

included in the federal budget. Thus, for both direct loans and loan

guarantees the budget did not reflect the change in economic behavior.

Credit Reform Was

Designed to Remove

Difficulties Caused by

Cash Treatment

Before credit reform, it was difficult to make appropriate cost

comparisons between direct loan and loan guarantee programs and

between credit and noncredit programs. Credit reform requirements were

formulated to address the factors that caused this problem.

Two key principles of credit reform are (1) the definition of cost in terms

of the present value of cash flows over the life of a credit instrument and

(2) the inclusion in the budget of the costs of credit programs in the year

in which the budget authority is enacted and the direct or guaranteed

loans first may be disbursed.

Page 36 GAO/AIMD-98-14 Credit Subsidy Estimates
Appendix I 

Background: Credit Reform

Credit Reform Was

Designed to Allow

Appropriate Cost

Comparisons

Before credit reform, credit programs—like other programs—were

reported in the budget on a cash basis. This cash basis distorted costs and,

thus, the comparison of credit program costs with other programs

intended to achieve similar purposes, such as grants. It also created a bias

in favor of loan guarantees over direct loans regardless of the actual cost

to the government.

Loan guarantees appeared to be free in the short run while direct loans

initially appeared to be as expensive as grants because the budget did not

recognize that at least some of the guaranteed loans would default and

that some of the direct loans would be repaid.

For direct loans, the budget for most discretionary accounts used

revolving funds, which showed budget authority and outlays in the amount

that loan disbursements, in the current year, exceeded repayments

received from all past loans in that budget year. This cash approach

overstated direct loan costs in the initial years of a program when loan

disbursements were likely to be greater than repayments. Conversely, this

treatment understated costs in later years when loan repayments were

more likely to be much larger relative to disbursements. In contrast, for

loan guarantees, the budget did not record any outlays when the

guarantees were made (except the negative outlay resulting from any

origination fees), even though the program was likely to entail future

losses. Budget authority and outlays were recorded only when defaults

occurred.

Credit reform changed this treatment for direct loans and loan guarantees

made on or after October 1, 1991. It required that budget authority to cover

the cost to the government of new loans and loan guarantees (or

modifications to existing credit instruments) be provided before the loans,

guarantees, or modifications are made. Credit reform requirements

specified a net cost approach using estimates for future loan repayments

and defaults as elements of the cost to be recorded in the budget. This

puts direct loans and loan guarantees on an equal footing; it permits the

costs of credit programs to be compared with each other and with the

costs of non-credit programs when making budget decisions.

Page 37 GAO/AIMD-98-14 Credit Subsidy Estimates
Appendix I 

Background: Credit Reform

Credit Reform

Identifies the

Government’s Cost of

Credit Activities

Credit reform requirements separate the government’s cost of extending

or guaranteeing credit, called the subsidy cost, from administrative and

unsubsidized program costs. Administrative expenses receive separate

appropriations. They are treated on a cash basis and reported separately in

the budget. The unsubsidized portion of a direct loan is that which is

expected to be recovered from the borrower.

The Federal Credit Reform Act defines the subsidy cost of direct loans as

the present value of disbursements—over the loan’s life—by the

government (loan disbursements and other payments) minus estimated

payments to the government (repayments of principal, payments of

interest, other recoveries, and other payments). In making these

calculations, agencies must include the cost to the federal government of

borrowing the funds. The act defines the subsidy cost of loan guarantees

as the present value of cash flows from estimated payments by the

government (for defaults and delinquencies, interest rate subsidies, and

other payments) minus estimated payments to the government (for loan

origination and other fees, penalties, and recoveries).

Agencies prepare these cost estimates on a net present value basis as a

part of their budget request. For the budget years we reviewed, agencies

then recalculated the subsidy rate when they extended credit by updating

the approved rate for any changes in interest rates and legislation. They

make direct loans and loan guarantee commitments as possible under this

appropriation. Later, after the end of the fiscal year, agencies reestimate

subsidy costs based on actual experience and expected economic

changes.

Credit Programs Now

Use Three Budgetary

Accounts

The Federal Credit Reform Act set up a special budget accounting system

to record the budget information necessary to implement credit reform. It

provides for three types of accounts—program, financing, and

liquidating—to handle credit transactions.

Credit obligations and commitments made on or after October 1,

1991—the effective date of credit reform—use only the program and

financing accounts. The program account receives separate appropriations

for administrative and subsidy costs of a credit activity and is included in

budget totals. When a direct or guaranteed loan is disbursed, the program

account pays the associated subsidy cost for that loan to the financing

Page 38 GAO/AIMD-98-14 Credit Subsidy Estimates
Appendix I 

Background: Credit Reform

account. The financing account, which is nonbudgetary,1 is used to record

the cash flow associated with direct loans or loan guarantees over their

lives. It finances loan disbursements and the payments for loan guarantee

defaults with (1) the subsidy cost payment from the program account,

(2) borrowing from the Treasury, and (3) collections received by the

government. Figure I.1 diagrams this cash flow.

Figure I.1: Credit Reform Cash Flow Simplified

1

Nonbudgetary accounts may appear in the budget document for information purposes, but are not

included in the budget totals for budget authority or budget outlays. They do not belong in the budget

because they show only how something is financed, and do not represent the use of resources.

Page 39 GAO/AIMD-98-14 Credit Subsidy Estimates
Appendix I 

Background: Credit Reform

If subsidy cost calculations are accurate, the financing account will break

even over time as it uses its collections to repay its Treasury borrowing.

Direct loans and loan guarantees made before October 1, 1991, are

reported on a cash basis in the liquidating account. This account continues

the cash budgetary treatment used before credit reform. It has permanent

indefinite budget authority2

 to cover any losses. Excess balances are

transferred periodically—at least annually—to the Treasury.

In addition to the three accounts specified in the Federal Credit Reform

Act, OMB has directed that discretionary credit programs or activities with

negative subsidies must have special fund receipt accounts. These

accounts hold receipts generated when the program or activity shows a

profit or when a downward reestimate of subsidy costs indicates that the

financing account balance is too high. OMB guidance provides that

discretionary programs cannot use these receipts unless they are

appropriated, while mandatory programs may use the receipts without

appropriation action.

OMB and Treasury

Provide

Implementation

Guidance

OMB and the Department of the Treasury provide guidance on

implementing credit reform. OMB’s written guidance is contained primarily

in OMB Circulars A-11, A-34, and A-129.3 OMB also has issued memorandums

to provide additional implementation guidance addressing specific

situations. Treasury’s guidance is provided in materials such as Basic

Transactions Relating to Guaranteed Loans and Subsidies, which contains

a number of illustrative cases developed by its Financial Management

Service and distributed to agencies as examples of how to account for

credit reform transactions. Accounting guidance, consistent with the

intent of the Federal Credit Reform Act, is found in Accounting for Direct

Loans and Loan Guarantees, Statement of Recommended Accounting

Standards, Number 2. This guidance was developed by the Federal

Accounting Standards Advisory Board (FASAB) and approved in July 1993,

by OMB, the Department of the Treasury, and GAO.

2

Permanent budgetary authority is available as a result of permanent legislation and does not require

annual appropriation. Indefinite budget authority is budget authority of an unspecified amount of

money.

3

OMB Circular A-11, Preparation and Submission of Budget Estimates; OMB Circular A-34, Instructions

on Budget Execution; and OMB Circular A-129, Managing Federal Credit Programs.

Page 40 GAO/AIMD-98-14 Credit Subsidy Estimates
Appendix I 

Background: Credit Reform

Implementation

Guidance Has

Changed

Fiscal year 1998 is the seventh year that credit programs have been

required to comply with credit reform. Agencies that operate credit

programs and those that provide implementation guidance—OMB and

Treasury—have had to address a variety of situations for which the

Federal Credit Reform Act does not provide explicit direction. OMB and

Treasury have refined their guidance to agencies based on greater

experience with the processes and data requirements for implementing

credit reform and on more information on agencies’ limitations and

abilities.

The Balanced Budget Act of 1997 amended the Federal Credit Reform Act

to clarify and simplify the requirements for subsidy cost estimation.

Among other changes, the Federal Credit Reform Act was amended to

require agencies to make loans and guarantees using the technical

assumptions such as default, recoveries, and fees included in the

President’s Budget for the year in which funds are obligated. As a result,

the dollar amount of loans approved by the Congress will not be increased

or decreased by subsequent changes to technical assumptions. The act

also was amended to require agencies to return to the Treasury any excess

funds in accounts for pre-1992 credit, and to change budgetary treatment

of credit from the Federal Financing Bank.

At the same time, OMB has drafted revised guidance to credit agencies. The

changes include eliminating the requirement to reestimate annually the

change in subsidy cost due to changes in interest rates as disbursements

are made for a cohort’s loans and loan guarantees. Instead, agencies are

required to do only one interest rate reestimate when the cohort is

90 percent disbursed. Interest rate reestimates before a cohort is fully

disbursed are of questionable validity since the discount rate will continue

to change. The reestimates thereby cause large swings in subsidy

estimates with no value added to management decision-making or the

reliability of budgetary or financial reporting. OMB also has developed an

alternative, simplified method for agencies to calculate

reestimates—called the “balances approach.” This new approach, which is

being tested at HUD, looks forward, projecting and discounting remaining

cash flows from a cohort and comparing them to the current balance owed

to Treasury. The method used to date looks both backward and forward,

requiring agencies to revise estimates of all cash flows for a cohort—those

that already have occurred and those in the future. However, this new

approach does not calculate the components of subsidy expense (interest,

net defaults, fees and other collections, and other subsidy costs) for the

entire term of the loans as does the current methodology. The data from

Page 41 GAO/AIMD-98-14 Credit Subsidy Estimates
Appendix I 

Background: Credit Reform

which to calculate components would remain available with the balances

approach, but what is lost is having the component data calculated as a

part of the reestimate process. Further, if there is no requirement to report

or review the data in that way, agencies would have less incentive than

now to make the calculations and use the data.

Several interagency groups also reviewing agencies’ implementation and

the current requirements of credit reform have made recommendations

that have been adopted or endorsed by OMB and Treasury. The Credit

Reform Committee of the Chief Financial Officers Council has

recommended certain actions that would simplify budget execution and

accounting. The Credit Task Force of the Accounting and Auditing Policy

Committee (formerly the Credit Subgroup of the Government-wide

Audited Financial Statements Task Force) has issued three papers. The

first outlines an ideal model for estimating and documenting subsidy rates.4

The paper recognizes that credit agencies are many years away from being

able to implement such a method, but discusses reasonable methods for

subsidy rate estimation and discusses the types of actual loan data that

might be maintained to support agency subsidy estimates. The second

paper provides draft guidance for agencies’ budget and accounting staff

and auditors for preparing and auditing direct loan and loan guarantee

subsidy estimates.5

 The third paper outlines recommended changes in the

accounting standards for direct loans and loan guarantees and

interpretations of the standards on the display of the components of

subsidy expense.6

4

Model Credit Program Methods and Documentation for Estimating Subsidy Rates and the Model

Information Store, Government-wide Audited Financial Statements Task Force, Subgroup on Credit

Reform (96-CR-7, May 1, 1996).

5

Preparing and Auditing Direct Loan and Loan Guarantee Subsidies Under the Federal Credit Reform

Act, Government-wide Audited Financial Statements Task Force, Subgroup on Credit Reform

(96-CR-14, October 16, 1997). In October 1997, this paper was submitted to the Accounting and

Auditing Policy Committee for official release as a Technical Interpretation.

6

Disclosure Requirements for Credit Subsidy Expense Issue Paper, Government-wide Audited

Financial Statements Task Force, Credit Subgroup. In September 1997, this paper was submitted to the

Accounting and Auditing Policy Committee for review and recommendation to FASAB.

Page 42 GAO/AIMD-98-14 Credit Subsidy Estimates
Appendix II 

Program Descriptions and Graphs of

Estimated Subsidy Rates of Selected

Programs

This appendix provides a brief description of the programs we selected,

indicates whether the program is discretionary or mandatory, illustrates

changes in the programs’ estimated subsidy rates from two perspectives,

and includes a brief explanation of the more significant changes in rates as

provided by agencies.

The first graph for a program shows the most recently estimated total

subsidy rates for each year’s cohort of credit. These figures provide a

snapshot of agencies’ most recent estimates of the government’s subsidy

expense for these credit programs. Differences in the subsidy rate

estimates for the different cohorts of a program may be due to improved

estimates (perhaps from greater experience) or to changes in program

characteristics or economic conditions.

The second graph for a program profiles the estimated subsidy rates of a

given cohort over time. We graphed the fiscal year 1992 cohorts because

they were more likely to have the most extensive subsidy reestimate data.

We graphed fiscal year 1994 data for Education’s Ford Direct Loan

Program because the program began in that year and, therefore, it is the

first year for which data were available. These figures depict changes over

time in the agencies’ knowledge about the cost of loans funded in a given

fiscal year. Estimated subsidy rates for some programs have greater

variability, as seen in the different vertical scales of the graphs.

We did not prepare either the total estimated subsidy rate or the cohort

profile graphs for SBA’s Disaster Loan Program. We did not prepare the

cohort profile for the USDA/Farm Service Agency (FSA) Farm Operating

Loan Program. Neither of the agencies provided sufficient and/or

consistent data.

The figures in this appendix are based on data as reported and verified by

agencies. We did not independently verify the accuracy of these data. The

data points used to create these figures are shown in bold on the tables in

appendix III.

Page 43 GAO/AIMD-98-14 Credit Subsidy Estimates
Appendix II 

Program Descriptions and Graphs of

Estimated Subsidy Rates of Selected

Programs

Farm Service Agency,

U.S. Department of

Agriculture

Farm Operating, Direct Loans, Discretionary 

Loans are made to family farmers who are unable to obtain credit from

private and cooperative sources for farm operating purposes such as

purchasing livestock, poultry, and farm ranch equipment; purchasing feed,

seed, or fertilizer; meeting other farm or ranch operating expenses; and

paying family living expenses. The use of loan funds is intended to help

provide farmers with the opportunity to conduct successful farm

operations.

Agency budget officials attributed the relatively large drop in subsidy rates

between the fiscal year 1997 budget execution estimate and the fiscal year

1998 budget request to the spread between the interest rates charged to

borrowers and Treasury interest rates that represent the agency’s cost of

capital. The spread in interest rates increased nearly 100 percent for fiscal

year 1998. Further, a program change for fiscal year 1998 reduced

write-offs without acquired property by more than 50 percent. (See figure

II.1.)

Because of changes over time in the way the FSA’s Farm Operating

estimated subsidy rate data were aggregated, we were not able to graph a

profile of an individual cohort over time.

Page 44 GAO/AIMD-98-14 Credit Subsidy Estimates
Appendix II 

Program Descriptions and Graphs of

Estimated Subsidy Rates of Selected

Programs

Figure II.1: USDA/FSA’s Farm

Operating Direct Loan Program’s Total

Subsidy Rates, by Cohort—as

Estimated for the FY 1998 President’s

Budget

Page 45 GAO/AIMD-98-14 Credit Subsidy Estimates
Appendix II 

Program Descriptions and Graphs of

Estimated Subsidy Rates of Selected

Programs

Rural Housing

Service, U.S.

Department of

Agriculture

Single Family Housing, Direct Loans, Discretionary

Single family loans are made to very low- and low-income families who are

without adequate housing and cannot obtain credit from other sources.

Funds may be used to build, purchase, repair, or refinance homes in rural

areas. Borrowers are required to “graduate” from the direct loan program

when their incomes are sufficient to afford credit from the private sector.

For figure II.2, agency staff attributed the relatively large drop in subsidy

rates between “Reestimated FY 1995” and “FY 1996 Execution” primarily

to the decrease in Treasury discount interest rates and the increase in

borrower interest rates. This increase in borrower interest rates is due to a

change in the Rural Housing Service’s (RHS) regulations in fiscal year 1996

which reduced the payment assistance to borrowers.

Figure II.3 is influenced by P.L. 102-142, §742, which required execution

rates to be at or below the rates published in the President’s fiscal year

1992 Budget. The agency used the rate in the President’s Budget because

rates based on actual data would have been higher. In effect, the estimated

subsidy rate was limited by law. According to agency staff, this resulted in

a large first reestimate of fiscal year 1992 subsidy expense.

Page 46 GAO/AIMD-98-14 Credit Subsidy Estimates
Appendix II 

Program Descriptions and Graphs of

Estimated Subsidy Rates of Selected

Programs

Figure II.2: USDA/RHS’ Section 502

Single Family Housing Direct Loan

Program’s Total Subsidy Rates, by

Cohort—as Estimated for the FY 1998

President’s Budget

Figure II.3: USDA/RHS’ Section 502

Single Family Housing Direct Loan

Program’s Total Subsidy

Rates—Profile of the FY 1992 Cohort

Page 47 GAO/AIMD-98-14 Credit Subsidy Estimates
Appendix II 

Program Descriptions and Graphs of

Estimated Subsidy Rates of Selected

Programs

Federal Family

Education Loan

Program, Department

of Education

Stafford, Guaranteed Loans, Mandatory

The Federal Family Education Loan Program (FFELP) is intended to

encourage private lending to vocational, undergraduate, and graduate

students enrolled at eligible postsecondary institutions to help pay for

educational expenses. The loans are insured by a state or private nonprofit

guaranty agency and reinsured by the federal government. Generally, a

borrower is not required to make any payments on the principal while still

in school.

As shown in figure II.4, a relatively large decrease in the estimated subsidy

rate occurred between the rate used for fiscal year 1997 budget execution

and the rate requested in the President’s fiscal year 1998 Budget.

According to Department of Education staff, this decrease was due

primarily to (1) decreases in interest rates from when the reestimates were

calculated to when the budget request was formulated and (2) legislative

proposals included in the budget request.

For figure II.5, Education staff attributed the relatively large increase from

the third reestimate to the fourth reestimate of the fiscal year 1992

cohort’s subsidy rate to a new reestimate methodology that showed higher

defaults. The fifth reestimate used a methodology that showed defaults

comparable to those in the third reestimate.

Page 48 GAO/AIMD-98-14 Credit Subsidy Estimates
Appendix II 

Program Descriptions and Graphs of

Estimated Subsidy Rates of Selected

Programs

Figure II.4: Education’s FFELP/Stafford

Guaranteed Loan Program’s Total

Subsidy Rates, by Cohort—as

Estimated for the FY 1998 President’s

Budget

Figure II.5: Education’s FFELP/Stafford

Guaranteed Loan Program’s Total

Subsidy Rates—Profile of the 1992

Cohort

Page 49 GAO/AIMD-98-14 Credit Subsidy Estimates
Appendix II 

Program Descriptions and Graphs of

Estimated Subsidy Rates of Selected

Programs

Ford Direct Loan

Program, Department

of Education

Stafford, Direct Loans, Mandatory

To help defray costs of education at a participating school, loans are made

directly from the federal government to vocational, undergraduate, and

graduate students. Generally, a borrower is not required to make any

payments on the principal while still in school.

For figure II.6, Department of Education staff explained that the drop in

estimated subsidy rates between the latest reestimate for fiscal year 1996

and fiscal year 1997 budget execution was due primarily to decreases in

interest rates from when the reestimates were calculated to when the

budget request was formulated. Because of programmatic design, small

changes in interest rates result in relatively larger changes in subsidy rates

for direct loans than for loan guarantees.

For figure II.7, the subsidy estimate increased in the second reestimate

and decreased in the third reestimate. Education staff said they used a

different methodology for the second reestimate that showed higher

defaults. They attributed the decrease between the second and third

reestimates of the fiscal year 1994 cohort to using a methodology that

showed defaults comparable to those in the first reestimate.

Page 50 GAO/AIMD-98-14 Credit Subsidy Estimates
Appendix II 

Program Descriptions and Graphs of

Estimated Subsidy Rates of Selected

Programs

Figure II.6: Education’s Ford/Stafford

Direct Loan Program’s Total Subsidy

Rates, by Cohort—as Estimated for the

FY 1998 President’s Budget

Figure II.7: Education’s Ford/Stafford

Direct Loan Program’s Total Subsidy

Rates—Profile of the FY 1994 Cohort

Page 51 GAO/AIMD-98-14 Credit Subsidy Estimates
Appendix II 

Program Descriptions and Graphs of

Estimated Subsidy Rates of Selected

Programs

Housing Programs,

Department of

Housing and Urban

Development

Federal Housing Administration (FHA) Mutual Mortgage Insurance

Fund, Section 203(b), Guaranteed Loans, Discretionary

To help people become homeowners, HUD provides insurance to lenders

against losses on mortgage loans. These mortgage loans may be used to

finance the purchase of one-to-four family housing that is proposed, under

construction, or existing, as well as to refinance indebtedness on existing

housing.

As shown in figure II.8, there was a relatively large increase in the

reestimated subsidy rates (in this case, a smaller negative subsidy)

between the fiscal year 1994 and 1995 cohorts. According to HUD officials,

this increase was driven primarily by an increase in total claim

rates—from 4.95 percent for the fiscal year 1994 cohort in the 1998 Budget

to 8.01 percent for the fiscal year 1995 cohort in the 1998 Budget.

Page 52 GAO/AIMD-98-14 Credit Subsidy Estimates
Appendix II 

Program Descriptions and Graphs of

Estimated Subsidy Rates of Selected

Programs

Figure II.8: HUD’s Mutual Mortgage

Insurance Fund’s (203(b)) Guaranteed

Loan Program’s Total Subsidy Rates,

by Cohort—as Estimated for the FY

1998 Budget Request and Reestimated

for the FY 1997 President’s Budget

Figure II.9: HUD’s Mutual Mortgage

Insurance Fund’s (203(b)) Guaranteed

Loan Program’s Total Subsidy

Rates—Profile of the FY 1992 Cohort

Page 53 GAO/AIMD-98-14 Credit Subsidy Estimates
Appendix II 

Program Descriptions and Graphs of

Estimated Subsidy Rates of Selected

Programs

Housing Programs,

Department of

Housing and Urban

Development

FHA General and Special Risk Insurance Fund, Multifamily

Refinance 223(f), Guaranteed Loans, Discretionary

Lenders are insured against loss on the purchase or refinance of existing

multifamily housing projects. Only rental housing projects not requiring

substantial rehabilitation are eligible.

Figure II.10 shows a sharp decline in estimated subsidy rates for this

program between the budget execution rates in fiscal years 1996 and 1997.

According to HUD officials, this decline reflects the use of updated

assumptions in fiscal year 1997. These new assumptions incorporated an

additional 5 years of performance data as well as the initial experience of

FHA’s mortgage sales.

As shown in figure II.11, there was a sharp drop between the second and

third reestimated subsidy rates of the fiscal year 1992 cohort. HUD officials

attributed this downward shift to a lower estimate for defaults and a

higher estimate for fees.

Page 54 GAO/AIMD-98-14 Credit Subsidy Estimates
Appendix II 

Program Descriptions and Graphs of

Estimated Subsidy Rates of Selected

Programs

Figure II.10: HUD/FHA’s General and

Special Risk Insurance Fund,

Multifamily Refinance (223(f))

Guaranteed Loan Program’s Total

Subsidy Rates, by Cohort—as

Estimated for the FY 1998 Budget

Request and Reestimated for the FY

1997 President’s Budget

Figure II.11: HUD/FHA’s General and

Special Risk Insurance Fund,

Multifamily Refinance (223(f))

Guaranteed Loan Program’s Total

Subsidy Rates—Profile of the FY 1992

Cohort

Page 55 GAO/AIMD-98-14 Credit Subsidy Estimates
Appendix II 

Program Descriptions and Graphs of

Estimated Subsidy Rates of Selected

Programs

Small Business

Administration

7(a) General Business, Guaranteed Loans, Discretionary

Lenders are guaranteed against loss from loans to small businesses that

are unable to obtain financing in the private credit market but can

demonstrate the ability to repay loans. Guaranteed loans are made

available to low-income business owners or businesses located in areas of

high unemployment; nonprofit sheltered workshops and other similar

organizations that produce goods or services; and to small businesses

being established, acquired, or owned by handicapped individuals.

For figure II.12, Small Business Administration (SBA) officials attributed

the increase in reestimated subsidy rates between fiscal years 1994 and

1995 primarily to an increase in the assumed purchase rate from

16.85 percent to 17.25 percent. The purchase rate is the percent of

remaining principal and interest on defaulted guaranteed loans that SBA

expects to pay in claims from lenders. The following year’s decrease, they

explained, resulted primarily from the imposition of new and/or modified

program fees.

For figure II.13, SBA officials explained that the changes in subsidy rates

estimated for the fiscal year 1992 cohort were due in part to changes in the

discount rate and in part to differences between anticipated and actual

purchase activity, fee collections, and recoveries.

Page 56 GAO/AIMD-98-14 Credit Subsidy Estimates
Appendix II 

Program Descriptions and Graphs of

Estimated Subsidy Rates of Selected

Programs

Figure II.12: SBA’s 7(a) Program’s

Total Subsidy Rates, by Cohort—as

Estimated for the FY 1998 President’s

Budget

Figure II.13: SBA’s 7(a) Program’s

Total Subsidy Rates—Profile of the FY

1992 Cohort

Page 57 GAO/AIMD-98-14 Credit Subsidy Estimates
Appendix II 

Program Descriptions and Graphs of

Estimated Subsidy Rates of Selected

Programs

Small Business

Administration

Disaster, Direct Loans, Discretionary

Loans are made to homeowners, renters, businesses of all sizes, and

nonprofit organizations that have suffered uninsured physical property

loss as a result of a disaster in an area declared eligible for assistance by

the President or SBA. The loans may be used to repair and/or replace

property to predisaster conditions.

SBA did not provide sufficient data on this program to allow us to graph

either the total subsidy rate estimates for each cohort or a profile of an

individual cohort.

Page 58 GAO/AIMD-98-14 Credit Subsidy Estimates
Appendix II 

Program Descriptions and Graphs of

Estimated Subsidy Rates of Selected

Programs

Page 59 GAO/AIMD-98-14 Credit Subsidy Estimates
Appendix II 

Program Descriptions and Graphs of

Estimated Subsidy Rates of Selected

Programs

Veterans Benefits

Administration,

Department of

Veterans Affairs

Guaranty and Indemnity Fund, Guaranteed Loans, Mandatory

These loans assist veterans and certain others in obtaining credit for the

purchase, construction, or improvement of homes on more favorable

terms than are generally available to nonveterans. Lenders are guaranteed

partial repayment of loans made to these individuals.

As shown in figure II.14, a relatively sharp decline in reestimated subsidy

rates occurred from the fiscal year 1993 cohort to the fiscal year 1995

cohort. Department of Veterans Affairs (VA) staff attributed this decline

primarily to changes in foreclosure rates, discount rates, and funding fees,

as well as the application of actual cohort data.

Figure II.15 shows a decline between the third and fourth reestimates of

the fiscal year 1992 cohort. VA officials said this decline was a result of

increased inflows from recoveries and the effect of having more actual

cohort data.

Page 60 GAO/AIMD-98-14 Credit Subsidy Estimates
Appendix II 

Program Descriptions and Graphs of

Estimated Subsidy Rates of Selected

Programs

Figure II.14: VA/VBA’s Guaranty and

Indemnity Fund, Guaranteed Loan

Financing Account’s Total Subsidy

Rates, by Cohort—as Estimated for the

FY 1997 President’s Budget

Figure II.15: VA/VBA’s Guaranty and

Indemnity Fund, Guaranteed Loan

Financing Account’s Total Subsidy

Rates—Profile of the FY 1992 Cohort

Note: Fiscal year 1992 budget execution estimates were calculated quarterly. Therefore, the data

provided were not comparable to the other reported data and were not graphed.

Page 61 GAO/AIMD-98-14 Credit Subsidy Estimates
Appendix II 

Program Descriptions and Graphs of

Estimated Subsidy Rates of Selected

Programs

Veterans Benefits

Administration,

Department of

Veterans Affairs

Loan Guaranty Direct Loans, Mandatory

This program makes home loans on favorable terms to members of the

general public—both veterans and nonveterans—purchasing a VA-owned

property. These properties include homes that VA has acquired as a result

of foreclosures on VA guaranteed loans.

Figure II.16 shows that a dramatic drop in reestimated subsidy rates

occurred between the fiscal years 1994 and 1995 cohorts. According to VA

staff, this decrease is associated primarily with the inclusion of actual

cohort data as well as a significant increase in the estimated proceeds

from loan sales.

Page 62 GAO/AIMD-98-14 Credit Subsidy Estimates
Appendix II 

Program Descriptions and Graphs of

Estimated Subsidy Rates of Selected

Programs

Figure II.16: VA/VBA’s Loan Guaranty

Direct Loan Financing Account’s Total

Subsidy Rates, by Cohort—as

Estimated for the FY 1997 President’s

Budget

Figure II.17: VA/VBA’s Loan Guaranty

Direct Loan Financing Account’s Total

Subsidy Rates—Profile of the FY 1992

Cohort

Note: Fiscal year 1992 budget execution estimates were calculated quarterly. Therefore, the data

provided were not comparable to the other reported data and were not graphed.

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Appendix III 

Estimated Subsidy Rates of Selected

Programs

This appendix presents a summary of the completeness of estimated

subsidy rate data and supporting documentation provided by each agency.

The estimated subsidy rates, as reported and confirmed by each agency,

are also shown for the 10 programs. We did not examine the quality of the

data underlying the subsidy estimates or the agencies’ estimation process.

We determined whether the budget request estimate, the budget execution

estimate, and all reestimates for each fiscal year were supported by output

from OMB’s credit subsidy model and cash flow spreadsheets. Table 1

summarizes the completeness of these data. Although we did not examine

the data quality, some quality issues jumped out. We found 11 instances

where data confirmed by agencies did not agree with those reported in the

President’s Budget or Credit Supplement. When questioned about this,

agencies provided additional data supporting the President’s Budget in

four instances. For the remaining seven cases, we show the estimated

subsidy rates that were supported in agency documentation.

We also did not evaluate the timeliness or frequency of the reestimates.

Currently, agencies do not necessarily reestimate prior year cohorts on the

same schedule. According to the June 23, 1997, version of OMB Circular

A-11, section 33.5(s), “Reestimates must be made at the beginning of each

fiscal year, as long as any loans in the cohort are outstanding, unless a

different plan is approved by OMB.” In other words, the first reestimate of

the fiscal year 1996 cohort generally should be included in the fiscal year

1998 budget request. OMB has permitted some agencies to vary from this

schedule. USDA, for example, received a waiver from OMB allowing its

reestimates to be prepared in the middle of the fiscal year rather than the

beginning. Therefore, updated cost information from USDA’s first

reestimate of the fiscal year 1996 cohort would not be included in the

budget submission until the fiscal year 1999 budget request.

Although we did not independently verify the data provided by agencies,

the numerous modified audit opinions these agencies have received on

their credit programs, the discrepancies we found between the Budget and

the data provided to us by the agencies, and other work we have done1

raise serious concerns about the quality of the data. For example, USDA’s

Office of the Inspector General (OIG) rendered a qualified opinion on the

fiscal year 1996 financial statements of the rural development mission area

1

For example, see HUD Management: FHA’s Multifamily Loan Loss Reserves and Default Prevention

Efforts (GAO/RCED/AIMD-95-100, June 5, 1995); Small Business Administration: Credit Subsidy

Estimates for the Sections 7(a) and 504 Business Loan Programs (GAO/T-RCED-97-197, July 16, 1997);

and Homeownership: Appropriations Made to Finance VA’s Housing Program May Be Overestimated

(GAO/RCED-93-173, September 8, 1993).

Page 64 GAO/AIMD-98-14 Credit Subsidy Estimates
Appendix III 

Estimated Subsidy Rates of Selected

Programs

because the OIG was not able to obtain sufficient, competent evidence to

support the agency’s credit program receivables and estimated losses on

loan guarantees and the related credit program subsidy and appropriated

capital used. For fiscal year 1996, Education’s OIG also was unable to

render an audit opinion on the department’s credit activities due to auditor

concerns about the integrity of the data supporting estimates of the

Federal Family Education Loan Program. HUD received a qualified audit

opinion from its OIG in fiscal year 1996 because FHA’s credit-related

accounts were not converted to a present value basis, as required by the

Statement of Federal Financial Accounting Standards, No. 2, Accounting

for Direct Loans and Loan Guarantees. Consequently, the OIG was unable

to audit the credit-related account balances.

Tables III.1 through III.10 present the subsidy rate estimates reported and

confirmed by each agency. The columns represent each budget year—1992

through 1998—since credit reform was enacted. Each table is horizontally

divided into five sections. The top section of each table shows the total

subsidy rate estimated and reestimated for each cohort, as calculated at

different points in time. The four bottom sections represent the

components of subsidy expense—interest, net defaults, fees and other

collections, and other subsidy costs.2

 These four components add to the

total subsidy rate.

The following is an excerpt of the top section from table III.3, presented to

illustrate how subsidy rate data are arrayed. Because the bottom sections

organizationally mirror the top section, only the top section is shown in

this example.

2

The fourth component category, other subsidy costs, primarily reflects estimated prepayments.

Page 65 GAO/AIMD-98-14 Credit Subsidy Estimates
Appendix III 

Estimated Subsidy Rates of Selected

Programs

Cohorts

Total Subsidy Rate (in percent)

Time of estimate FY 92 FY 93 FY 94 FY 95 FY 96 FY 97 FY 98

Request 22.60 17.60 14.24 15.31 22.84 19.77 15.09

Execution 22.60 17.60 15.59 15.31 22.84 22.75

Reestimate 1 16.99 17.55 17.07 23.09 19.55

Reestimate 2 18.73 18.90 22.13 20.60

Reestimate 3 17.78 22.74 20.00

Reestimate 4 26.30 18.96

Reestimate 5 17.74

The seven columns labeled “Cohorts” contain the available budget request,

budget execution, and reestimated subsidy rates for the credit funded by

appropriations in the indicated fiscal year. The left-hand column contains

the type of estimate prepared and gives some indication about when the

estimate was calculated. Thus, the first row, labeled “Request,” shows the

subsidy rate used to prepare the budget year request for that fiscal year. In

the sample table above, the fiscal year 1992 budget request used an

estimated subsidy rate of 22.60 percent. Reading down the fiscal year 1992

column, the budget execution rate shows the subsidy rate estimated for

the fiscal year 1992 cohort after the beginning of fiscal year 1992—after

the appropriation was received but before loans were made. Reestimate

data are shown in the order in which they were prepared.

The shaded cells represent estimates that will be made in the future when

future budgets are prepared (e.g., the budget execution estimate for fiscal

year 1998 and the first reestimate of fiscal year 1997 should have been

done for the fiscal year 1999 budget.) The numbers from these tables that

support the graphs in appendix II are shown in bold.

For cells that are neither shaded nor filled in with data, the estimated

subsidy rate was not provided. The absence of the data might reflect

incomplete agency files or indicate that the agency did not prepare

estimates. Notes to the tables provide additional explanatory information

in some instances when data were not provided.

OMB has periodically released updated versions of its credit subsidy model.

Several of these versions aggregated the component data differently. For

example, early versions of the model combined the two components “Fees

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Estimated Subsidy Rates of Selected

Programs

and Other Collections” and “Other Subsidy Costs.” We showed all

comparable data provided by the agencies.

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Estimated Subsidy Rates of Selected

Programs

Table III.1: USDA/FSA: Farm Operating

Direct Loan Program Subsidy Rates

Cohorts

(In percent)

Time of

Estimate FY92 FY93 FY94 FY95 FY96 FY97 FY98

Total Subsidy Rate

Request a a a a 13.70 13.29 6.57

Execution ab ab ab a 12.98 12.59

Reestimate 1 a a 14.05 13.07

Reestimate 2 a 10.51 14.18

Reestimate 3 8.96 10.72

Reestimate 4 14.32

Reestimate 5

aUSDA provided subsidy rate estimates that were divided into four sub-risk categories. Therefore,

the data were not comparable to the other reported data and were not included in this table.

bUSDA provided quarterly subsidy rate estimates. Therefore, the data were not comparable to the

other reported data and were not included in this table.

Page 68 GAO/AIMD-98-14 Credit Subsidy Estimates
Appendix III 

Estimated Subsidy Rates of Selected

Programs

Cohorts

(In percent)

Time of

Estimate FY92 FY93 FY94 FY95 FY96 FY97 FY98

Interest Component of Subsidy Expense

Request a a a a 1.14 –0.73 0.16

Execution ab ab ab a 1.04 –0.39

Reestimate 1 a a 1.13 0.25

Reestimate 2 a –2.39 0.89

Reestimate 3 –1.86

Reestimate 4 3.95

Reestimate 5

Net Defaults Component of Subsidy Expense

Request a a a a 12.59 13.85 6.23

Execution ab ab ab a 11.96 12.84

Reestimate 1 a a 12.56 12.72

Reestimate 2 a 13.08 12.66

Reestimate 3 12.84

Reestimate 4 12.75

Reestimate 5

Fees Component of Subsidy Expense

Request a a a a –21.43 –23.75 –21.76

Execution ab ab ab a –20.37 –21.83

Reestimate 1 a a –21.72 –21.56

Reestimate 2 a –26.55 –18.40

Reestimate 3 –24.24

Reestimate 4 –8.51

Reestimate 5

All Other Component of Subsidy Expense

Request a a a a 21.40 23.92 21.93

Execution ab ab ab a 20.35 21.96

Reestimate 1 a a 22.08 21.67

Reestimate 2 a 26.37 19.04

Reestimate 3 23.98

Reestimate 4 6.12

Reestimate 5

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Appendix III 

Estimated Subsidy Rates of Selected

Programs

Table III.2: USDA/RHS: Section 502

Single Family Housing Direct Loan

Program Subsidy Rates Cohorts

(In percent)

Time of

Estimate FY92 FY93 FY94 FY95 FY96 FY97 FY98

Total Subsidy Rate

Request 22.64 24.35 20.02 9.20 20.99 8.30 12.81

Execution 22.64 a a 24.36 14.30 14.18

Reestimate 1 27.16 19.73 23.07 23.66

Reestimate 2 23.81 20.12 22.60

Reestimate 3 24.31 18.90

Reestimate 4 24.78

Reestimate 5

aUSDA provided quarterly subsidy rate estimates. Therefore, the data were not comparable to the

other reported data and were not included in this table.

bComparable data for “Fees” and “Other Subsidy Cost” components were not provided.

Page 70 GAO/AIMD-98-14 Credit Subsidy Estimates
Appendix III 

Estimated Subsidy Rates of Selected

Programs

Cohorts

(In percent)

Time of

Estimate FY92 FY93 FY94 FY95 FY96 FY97 FY98

Interest Component of Subsidy Expense

Request 28.67 23.08 5.23 27.29 9.63 15.69

Execution a a 27.94 17.06 17.01

Reestimate 1 30.49 22.28 24.91 27.62

Reestimate 2 28.21 23.08 25.80

Reestimate 3 29.00 22.41

Reestimate 4 27.51

Reestimate 5

Net Defaults Component of Subsidy Expense

Request 1.68 1.48 5.20 0.26 1.59 1.12

Execution a a 1.13 1.08 1.20

Reestimate 1 1.05 1.60 1.34 1.19

Reestimate 2 0.91 1.52 0.95

Reestimate 3 0.73 0.57

Reestimate 4 0.93

Reestimate 5

Fees Component of Subsidy Expense

Request b –10.10 –16.46 –7.98 –7.74 –7.10

Execution a a –12.59 –10.63 –7.12

Reestimate 1 ab –13.46 –33.63 –5.75

Reestimate 2 –9.63 –13.50 –13.31

Reestimate 3 –9.88 –13.59

Reestimate 4 –10.09

Reestimate 5

All Other Component of Subsidy Expense

Request b 5.56 15.22 1.41 4.83 3.09

Execution a a 7.89 6.79 3.09

Reestimate 1 b 9.32 30.46 0.59

Reestimate 2 4.33 9.01 9.15

Reestimate 3 4.45 9.51

Reestimate 4 6.43

Reestimate 5

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Estimated Subsidy Rates of Selected

Programs

Table III.3: Education: FFELP/Stafford

Guaranteed Loan Program Subsidy

Rates Cohorts

(In percent)

Time of

Estimate FY92 FY93 FY94 FY95 FY96 FY97 FY98

Total Subsidy Rate

Request 22.60 17.60 14.24 15.31 22.84 19.77 15.09

Execution 22.60 17.60 15.59 15.31 22.84 22.75

Reestimate 1 16.99 17.55 17.07 23.09 19.55

Reestimate 2 18.73 18.90 22.13 20.60

Reestimate 3 17.78 22.74 20.00

Reestimate 4 26.30 18.96

Reestimate 5 17.74

Note: According to officials from Education, they do not use the OMB credit subsidy model as the

final step in the subsidy estimation process, as is done in other agencies. Education uses it at an

earlier point in the process—before adjustments are made for external factors. Therefore, output

from this model did not reflect data used to prepare the budget request and budget execution

estimated subsidy rates. Reestimates, however, are not adjusted and thus reflect the results from

OMB’s model.

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Appendix III 

Estimated Subsidy Rates of Selected

Programs

Cohorts

(In percent)

Time of

Estimate FY92 FY93 FY94 FY95 FY96 FY97 FY98

Interest Component of Subsidy Expense

Request 15.58 18.14 15.85 10.35

Execution 11.31 15.58 18.14 15.85

Reestimate 1

Reestimate 2

Reestimate 3

Reestimate 4

Reestimate 5

Net Defaults Component of Subsidy Expense

Request 6.76 8.47 7.85 6.81

Execution 8.06 6.76 8.47 9.46

Reestimate 1

Reestimate 2

Reestimate 3

Reestimate 4

Reestimate 5

Fees Component of Subsidy Expense

Request –3.78 –3.77 –4.86 –3.45

Execution –4.89 –3.78 –3.77 –3.50

Reestimate 1

Reestimate 2

Reestimate 3

Reestimate 4

Reestimate 5

All Other Component of Subsidy Expense

Request –3.25 0.00 0.93 1.39

Execution 1.11 –3.25 0.00 0.94

Reestimate 1

Reestimate 2

Reestimate 3

Reestimate 4

Reestimate 5

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Estimated Subsidy Rates of Selected

Programs

Table III.4: Education: Ford/Stafford

Direct Loan Program Subsidy Rates

Cohorts

(In percent)

Time of Estimate FY94 FY95 FY96 FY97 FY98

Total Subsidy Rate

Request 11.39 14.45 16.54 10.17 14.65

Execution 12.42 14.45 16.54 10.38

Reestimate 1 18.59 17.38 14.40

Reestimate 2 19.47 15.47

Reestimate 3 14.29

Notes: (1) The Ford Direct Loan Program was established in fiscal year 1994. (2) According to

officials from Education, they do not use the OMB credit subsidy model as the final step in the

subsidy estimation process, as is done in other agencies. Education uses it at an earlier point in

the process—before adjustments are made for external factors. Therefore, output from this model

did not reflect data used to prepare the budget request and budget execution estimated subsidy

rates. Reestimates, however, are not adjusted and thus reflect the results from OMB’s model.

Page 74 GAO/AIMD-98-14 Credit Subsidy Estimates
Appendix III 

Estimated Subsidy Rates of Selected

Programs

Cohorts

(In percent)

Time of Estimate FY94 FY95 FY96 FY97 FY98

Interest Component of Subsidy Expense

Request 9.68 12.64 3.16 8.20

Execution 9.39 9.68 12.64 3.16

Reestimate 1

Reestimate 2

Reestimate 3

Net Defaults Component of Subsidy Expense

Request 7.59 6.88 9.56 8.13

Execution 8.76 7.59 6.88 9.56

Reestimate 1

Reestimate 2

Reestimate 3

Fees Component of Subsidy Expense

Request –3.53 –4.00 –3.95 –2.95

Execution –6.45 –3.53 –4.00 –3.95

Reestimate 1

Reestimate 2

Reestimate 3

All Other Component of Subsidy Expense

Request 0.72 1.03 1.41 1.28

Execution 0.72 0.72 1.03 1.62

Reestimate 1

Reestimate 2

Reestimate 3

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Estimated Subsidy Rates of Selected

Programs

Table III.5: HUD: Mutual Mortgage

Insurance Fund (Section 203(b))

Guaranteed Loan Program Subsidy

Rates

Cohorts

(In percent)

Time of

Estimate FY92 FY93 FY94 FY95 FY96 FY97 FY98

Total Subsidy Rate

Request –2.60 –2.70 –2.79 –2.78 –2.77 –2.33 -2.62

Execution -2.60 –2.57 –2.79 –1.95 -2.77 -2.88

Reestimate 1 -2.84 –3.67 –3.40 -1.79

Reestimate 2 -2.78 -3.49 -3.15

Reestimate 3 -3.10

Reestimate 4

Reestimate 5

aComparable data for “Fees” and “Other Subsidy Cost” components were not provided.

Page 76 GAO/AIMD-98-14 Credit Subsidy Estimates
Appendix III 

Estimated Subsidy Rates of Selected

Programs

Cohorts

(In percent)

Time of

Estimate FY92 FY93 FY94 FY95 FY96 FY97 FY98

Interest Component of Subsidy Expense

Request 0.00 0.00 0.00 0.00 0.00

Execution 0.00 0.00 0.00 0.00

Reestimate 1 0.00 0.00 0.00 0.00

Reestimate 2 0.00 0.00 0.00

Reestimate 3 0.00

Reestimate 4

Reestimate 5

Net Defaults Component of Subsidy Expense

Request 2.49 2.26 1.70 1.85 1.46

Execution 2.49 2.26 1.84 1.70

Reestimate 1 2.33 1.40 1.40 2.18

Reestimate 2 1.88 1.40 1.26

Reestimate 3 1.71

Reestimate 4

Reestimate 5

Fees Component of Subsidy Expense

Request a a –5.24 –5.21 –4.88

Execution a a –4.69 –5.24

Reestimate 1 a –5.92 –5.42 –5.10

Reestimate 2 –5.72 –5.72 –5.14

Reestimate 3 –5.92

Reestimate 4

Reestimate 5

All Other Component of Subsidy Expense

Request a a 0.78 1.03 0.81

Execution a a 0.90 0.78

Reestimate 1 a 0.84 0.62 1.13

Reestimate 2 1.06 0.82 0.72

Reestimate 3 1.11

Reestimate 4

Reestimate 5

Page 77 GAO/AIMD-98-14 Credit Subsidy Estimates
Appendix III 

Estimated Subsidy Rates of Selected

Programs

Table III.6: HUD/FHA: General and

Special Risk Insurance Fund,

Multifamily Refinance 223(f),

Guaranteed Loan Program Subsidy

Rates

Cohorts

(In percent)

Time of

Estimate FY92 FY93 FY94 FY95 FY96 FY97 FY98

Total Subsidy Rate

Request 1.51 2.98 3.14 3.20 2.30 –0.79 -0.75

Execution 1.51 2.98 3.34 3.40 2.51 -0.79

Reestimate 1 1.91 3.04 1.49 1.67

Reestimate 2 1.91 0.71

Reestimate 3 -0.21

Reestimate 4

Reestimate 5

aComparable data for “Fees” and “Other Subsidy Cost” components were not provided.

Page 78 GAO/AIMD-98-14 Credit Subsidy Estimates
Appendix III 

Estimated Subsidy Rates of Selected

Programs

Cohorts

(In percent)

Time of

Estimate FY92 FY93 FY94 FY95 FY96 FY97 FY98

Interest Component of Subsidy Expense

Request 0.00 0.00 0.00 0.00 0.00 0.00

Execution 0.00 0.00

Reestimate 1 0.00 0.00 0.00

Reestimate 2 0.00 0.00

Reestimate 3 0.00

Reestimate 4

Reestimate 5

Net Defaults Component of Subsidy Expense

Request 7.39 7.64 7.82 7.24 5.21 5.02

Execution 7.39 5.21

Reestimate 1 7.55 6.85 7.27

Reestimate 2 6.78 5.96

Reestimate 3 5.52

Reestimate 4

Reestimate 5

Fees Component of Subsidy Expense

Request a a –4.62 –4.94 –6.00 –5.77

Execution a –6.00

Reestimate 1 –4.51 –4.44 –4.54

Reestimate 2 –4.88 –5.25

Reestimate 3 –5.73

Reestimate 4

Reestimate 5

All Other Component of Subsidy Expense

Request a a 0.00 0.00 0.00 0.00

Execution a 0.00

Reestimate 1 0.00 –0.92 –1.06

Reestimate 2 0.00 0.00

Reestimate 3 0.00

Reestimate 4

Reestimate 5

Page 79 GAO/AIMD-98-14 Credit Subsidy Estimates
Appendix III 

Estimated Subsidy Rates of Selected

Programs

Table III.7: SBA: 7(a) Guaranteed Loan

Program Subsidy Rates

Cohorts

(In percent)

Time of

Estimate FY92 FY93 FY94 FY95 FY96 FY97 FY98

Total Subsidy Rate

Request 0.60 1.35 2.35 2.73 2.01 2.68 1.80

Execution 4.85 5.21 2.15 2.74 1.06 2.54

Reestimate 1 4.94 4.97 2.91 2.97 2.40

Reestimate 2 3.83 3.67 2.70 3.61

Reestimate 3

Reestimate 4

Reestimate 5

Page 80 GAO/AIMD-98-14 Credit Subsidy Estimates
Appendix III 

Estimated Subsidy Rates of Selected

Programs

Cohorts

(In percent)

Time of

Estimate FY92 FY93 FY94 FY95 FY96 FY97 FY98

Interest Component of Subsidy Expense

Request 0.00 0.00 0.00 0.00

Execution 0.00 0.00 0.00 0.00

Reestimate 1 0.00 0.00 0.00 0.00 0.00

Reestimate 2 0.00 0.00 0.00 0.00

Reestimate 3

Reestimate 4

Reestimate 5

Net Defaults Component of Subsidy Expense

Request 5.13 5.08 8.25 5.33

Execution 4.88 5.07 5.51 8.05

Reestimate 1 6.79 6.95 4.82 5.51 5.88

Reestimate 2 5.73 5.68 4.68 5.61

Reestimate 3

Reestimate 4

Reestimate 5

Fees Component of Subsidy Expense

Request –2.52 –3.22 –5.57 –3.53

Execution –2.87 –2.47 –4.57 –5.50

Reestimate 1 –1.85 –1.97 –2.18 –2.81 –3.48

Reestimate 2 –1.85 –2.01 –1.98 –2.00

Reestimate 3

Reestimate 4

Reestimate 5

All Other Component of Subsidy Expense

Request 0.11 0.15 0.00 0.00

Execution 0.13 0.15 0.12 0.00

Reestimate 1 0.00 0.00 0.27 0.27 0.00

Reestimate 2 0.00 0.00 0.00 0.00

Reestimate 3

Reestimate 4

Reestimate 5

Page 81 GAO/AIMD-98-14 Credit Subsidy Estimates
Appendix III 

Estimated Subsidy Rates of Selected

Programs

Table III.8: SBA: Disaster Direct Loan

Program Subsidy Rates

Cohorts

(In percent)

Time of

Estimate FY92 FY93 FY94 FY95 FY96 FY97 FY98

Total Subsidy Rate

Request 22.50 8.21 12.79 12.67 8.46 7.90 11.44

Execution 33.93 20.58 22.99 31.54 28.08 20.02

Reestimate 1

Reestimate 2

Reestimate 3

Reestimate 4

Reestimate 5

aComparable data for “Fees” and “Other Subsidy Cost” components were not provided.

Page 82 GAO/AIMD-98-14 Credit Subsidy Estimates
Appendix III 

Estimated Subsidy Rates of Selected

Programs

Cohorts

(In percent)

Time of

Estimate FY92 FY93 FY94 FY95 FY96 FY97 FY98

Interest Component of Subsidy Expense

Request –3.61 –1.57 0.89

Execution 9.70 19.61 15.46 11.91

Reestimate 1

Reestimate 2

Reestimate 3

Reestimate 4

Reestimate 5

Net Defaults Component of Subsidy Expense

Request 11.00 9.46 11.15

Execution 19.00 11.93 12.31 10.85 11.58 8.10

Reestimate 1

Reestimate 2

Reestimate 3

Reestimate 4

Reestimate 5

Fees Component of Subsidy Expense

Request –1.46 0.00 0.00

Execution a a –1.74 0.00 –1.58 0.00

Reestimate 1

Reestimate 2

Reestimate 3

Reestimate 4

Reestimate 5

All Other Component of Subsidy Expense

Request 2.54 0.00 –0.59

Execution a a 2.72 1.08 2.62 0.00

Reestimate 1

Reestimate 2

Reestimate 3

Reestimate 4

Reestimate 5

Page 83 GAO/AIMD-98-14 Credit Subsidy Estimates
Appendix III 

Estimated Subsidy Rates of Selected

Programs

Table III.9: VA/VBA: Guaranty and

Indemnity Fund, Guaranteed Loan

Financing Account Subsidy Rates Cohorts

(In percent)

Time of

Estimate FY92 FY93 FY94 FY95 FY96 FY97 FY98

Total Subsidy Rate

Request 1.15 1.82 1.36 1.18 1.56 1.47 0.49a

Execution b b 1.36 1.18 1.56 0.49ac

Reestimate 1 2.26 1.11 0.98 0.69 0.42a

Reestimate 2 2.30 1.44 1.16 0.78a

Reestimate 3 2.35 1.77 0.98a

Reestimate 4 1.01 1.14a

Reestimate 5 1.15a

aVA has consolidated its loan guarantees into one account and its direct loans into another

(Public Law 105-65). The fiscal year 1998 Budget was prepared on this basis. Thus, data for the

fiscal year 1998 request, the fiscal year 1997 budget execution estimate, and associated

reestimates of prior years included in this table are not comparable with other data shown.

bSubsidy rate estimates were calculated quarterly; therefore, the data provided were not

comparable to the other reported data and were not included.

cVA consolidated its programs midway through fiscal year 1997. The rate of 1.47 percent was

effective from October 1996 through March 1997. From April through September 1997, the

consolidated fiscal year 1998 rate of 0.49 percent was used.

Page 84 GAO/AIMD-98-14 Credit Subsidy Estimates
Appendix III 

Estimated Subsidy Rates of Selected

Programs

Cohorts

(In percent)

Time of

Estimate FY92 FY93 FY94 FY95 FY96 FY97 FY98

Interest Component of Subsidy Expense

Request 0.00 0.00 0.00 0.00 0.00a

Execution 0.00 0.00 0.00 0.00ac

Reestimate 1 0.00 0.00 0.00a

Reestimate 2 0.00 0.00 0.00a

Reestimate 3 0.00 0.00 0.00a

Reestimate 4 0.00 0.00a

Reestimate 5 0.00a

Net Defaults Component of Subsidy Expense

Request 4.38 3.31 3.86 3.95 2.60a

Execution 4.38 3.31 3.86 2.60ac

Reestimate 1 2.69 2.99 2.45a

Reestimate 2 3.06 2.77 2.64a

Reestimate 3 4.33 3.04 2.41a

Reestimate 4 2.66 2.03a

Reestimate 5 2.54a

Fees Component of Subsidy Expense

Request –2.11 –1.64 –1.87 –1.95 –1.91a

Execution –2.11 –1.64 –1.87 –1.91ac

Reestimate 1 –1.45 –1.95 –1.84a

Reestimate 2 –1.19 –1.38 –1.78a

Reestimate 3 –1.09 –0.87 –1.40a

Reestimate 4 –1.08 –0.87a

Reestimate 5 –1.08a

All Other Component of Subsidy Expense

Request –0.92 –0.50 –0.43 –0.52 –0.20a

Execution –0.92 –0.50 –0.43 –0.20ac

Reestimate 1 –0.27 –0.35 –0.19a

Reestimate 2 –0.43 –0.24 –0.08a

Reestimate 3 –0.90 –0.39 –0.03a

Reestimate 4 –0.57 –0.03a

Reestimate 5 –0.32a

Page 85 GAO/AIMD-98-14 Credit Subsidy Estimates
Appendix III 

Estimated Subsidy Rates of Selected

Programs

Table III.10: VA/VBA: Loan Guaranty

Direct Loan Financing Account

Subsidy Rates Cohorts

(In percent)

Time of

Estimate FY92 FY93 FY94 FY95 FY96 FY97 FY98

Total Subsidy Rate

Request 11.28 8.35 2.34 2.34 3.11 1.56 2.36a

Execution b b 2.34 2.34 3.11 2.61ac

Reestimate 1 3.90 1.09 3.17 1.18 1.76a

Reestimate 2 3.90 1.27 4.80 1.38a

Reestimate 3 4.11 3.52 2.05a

Reestimate 4 4.38 0.41a

Reestimate 5 0.21a

aVA has consolidated its loan guarantees into one account and its direct loans into another

(Public Law 105-65). The fiscal year 1998 Budget was prepared on this basis. Thus, data for the

fiscal year 1998 request, fiscal year 1997 budget execution estimate, and associated reestimates

of prior years included in this table are not comparable with other data shown.

bSubsidy rate estimates were calculated quarterly; therefore, the data provided were not

comparable to the other reported data and were not included.

cVA consolidated its programs midway through fiscal year 1997. The rate of 1.56 percent was

effective from October 1996 through March 1997. From April through September 1997, the

consolidated fiscal year 1998 rate of 2.61 percent was used.

Page 86 GAO/AIMD-98-14 Credit Subsidy Estimates
Appendix III 

Estimated Subsidy Rates of Selected

Programs

Cohorts

(In percent)

Time of

Estimate FY92 FY93 FY94 FY95 FY96 FY97 FY98

Interest Component of Subsidy Expense

Request –17.90 –9.77 –14.76 –18.21 –17.32a

Execution –17.90 –9.77 –14.76

Reestimate 1 –12.39 –11.35 –11.11a

Reestimate 2 –9.33 –12.39 –11.35a

Reestimate 3 –13.20 –9.33 –12.39a

Reestimate 4 –11.04 –9.34a

Reestimate 5 –10.99a

Net Defaults Component of Subsidy Expense

Request –71.22 –71.77 –66.50 –73.08 –69.54a

Execution –71.22 –71.77 –66.50

Reestimate 1 –69.41 –71.82 –74.86a

Reestimate 2 –77.86 –67.81 –86.92a

Reestimate 3 –77.51 –75.55 –83.47a

Reestimate 4 –77.33 –90.97a

Reestimate 5 –81.19a

Fees Component of Subsidy Expense

Request –3.87 –3.83 –3.68 –3.92 –3.80a

Execution –3.87 –3.83 –3.68

Reestimate 1 –3.79 –3.80 –0.88a

Reestimate 2 –4.06 –3.76 –0.90a

Reestimate 3 –1.92 –4.01 –0.88a

Reestimate 4 –1.92 –1.05a

Reestimate 5 –1.11a

All Other Component of Subsidy Expense

Request 95.33 87.72 88.05 96.77 93.02a

Execution 95.33 87.72 88.05

Reestimate 1 88.76 88.16 88.61a

Reestimate 2 92.53 88.76 100.55a

Reestimate 3 96.74 92.41 98.78a

Reestimate 4 94.66 101.77a

Reestimate 5 93.50a

Page 87 GAO/AIMD-98-14 Credit Subsidy Estimates
Appendix IV 

Comments From the Office of Management

and Budget

Note: GAO comments

supplementing those in the

report text appear at the

end of this appendix.

See comment 1.

Page 88 GAO/AIMD-98-14 Credit Subsidy Estimates
Appendix IV 

Comments From the Office of Management

and Budget

See comment 2.

See comment 3.

See comment 4.

See comment 5.

See comment 6.

Now on p. 17.

Page 89 GAO/AIMD-98-14 Credit Subsidy Estimates
Appendix IV 

Comments From the Office of Management

and Budget

See comment 7.

See comment 8.

See comment 9.

Now on p. 24.

Page 90 GAO/AIMD-98-14 Credit Subsidy Estimates
Appendix IV 

Comments From the Office of Management

and Budget

See comment 10.

Page 91 GAO/AIMD-98-14 Credit Subsidy Estimates
Appendix IV 

Comments From the Office of Management

and Budget

The following are GAO’s comments on the Office of Management and

Budget’s March 11, 1998, letter.

GAO Comments 1. See “Agency Comments and Our Evaluation” section of the report.

2. We did not draw conclusions about the accuracy of subsidy rates from

our observation that subsidy rates have fluctuated over time. Our report

stated that the reliability of credit data was questionable for a number of

reasons. Our characterization of the data was based primarily on results of

the audits of the fiscal year 1996 financial statements as well as some

discrepancies we identified between rates provided to us by agencies and

those reported in the President’s Budget.

3. The report does not propose a causal relationship between reestimates

and subsidy rate fluctuations. Further, changes in assumptions cause the

subsidy rate for a cohort of loans to fluctuate from year to year, not

reestimates.

4. We did not assess whether any assumptions used in subsidy rate

estimation were accurate. Further, we did not draw conclusions about a

program from the size or direction of subsidy reestimates. We

acknowledged that the fluctuations in subsidy rates could be due to credit

extended at different interest rates than anticipated or to unanticipated

changes in the economy, as well as other factors. We clarified the report

language to state that interest rate changes are an example of such

unanticipated economic changes.

5. Report text revised to clarify that the patterns are similar.

6. We compared the subsidy rate estimated for budget execution against

the first subsidy reestimate for the following reasons. First, we used

budget execution (rather than budget request) because it eliminated the

effect of interest rate changes in the months between when the budget

request rate was formulated and the time the government is obligated or

committed for the loans. Second, credit reform guidance requires agencies

to have appropriations of budget authority to cover the full estimated net

present value cost of outstanding credit. Third, we used the first

reestimate because if an agency sought to benefit from initially

underestimating subsidy costs and there was oversight by OMB to ensure

that agencies have sufficient appropriations of budget authority, the

Page 92 GAO/AIMD-98-14 Credit Subsidy Estimates
Appendix IV 

Comments From the Office of Management

and Budget

agency would have to obtain budget authority to cover the shortfall as

soon as possible—that is, in the first reestimate.

7. Given that three of the five agencies received waivers of the reestimate

requirement, it would appear that their budget formulation is not being

informed by the most recent experience on existing loan cohorts. The

Credit Task Force of the Accounting and Auditing Policy Committee,

which includes OMB and GAO representation, proposed that agencies that

have OMB approval be allowed to use a combination of actual and

projected data as the basis for reestimates. By allowing agencies to begin

the reestimation process earlier, this approach should reduce the need for

waivers—permitting agencies to use more recent actual data to inform

budget formulation and to include them in the President’s Budget and

financial statement audits.

8. We agree that this would be useful information. However, we could not

obtain sufficient component data from agencies to evaluate whether

subsidy estimation has improved over time, as indicated by smaller annual

changes in reestimates due to technical factors. Our report does include a

section discussing a number of recent efforts to clarify and simplify

implementation of the Credit Reform Act. In other ongoing work, we are

evaluating data reliability, barriers to credit reform implementation, and

agency plans to overcome those barriers. We will also report on notable

best practices in credit agencies as appropriate.

9. We do not dispute that OMB staff devote a substantial amount of time to

credit issues. However, our conclusion that greater sustained commitment

is needed reflects our concerns about the availability and reliability of

credit data despite the fact that agencies now have prepared eight budgets

since credit reform became effective for fiscal year 1992. Further,

component data were not used to inform program management or budget

decision-making.

10. OMB’s attachment containing specific comments has not been included,

but our report has been modified as appropriate to reflect the comments

contained in the attachment.

Page 93 GAO/AIMD-98-14 Credit Subsidy Estimates
Appendix V 

Comments From the Department of

Agriculture

Note: GAO comments

supplementing those in the

report text appear at the

end of this appendix.

Page 94 GAO/AIMD-98-14 Credit Subsidy Estimates
Appendix V 

Comments From the Department of

Agriculture

Page 95 GAO/AIMD-98-14 Credit Subsidy Estimates
Appendix V 

Comments From the Department of

Agriculture

See comment 1.

Now on p. 46.

Page 96 GAO/AIMD-98-14 Credit Subsidy Estimates
Appendix V 

Comments From the Department of

Agriculture

The following are GAO’s comments on the Department of Agriculture’s

March 11, 1998, letter.

GAO Comments 1. Report text was revised to reflect the agency’s comment.

Page 97 GAO/AIMD-98-14 Credit Subsidy Estimates
Appendix VI 

Comments From the Department of

Education

Note: GAO comments

supplementing those in the

report text appear at the

end of this appendix.

See comment 1.

Page 98 GAO/AIMD-98-14 Credit Subsidy Estimates
Appendix VI 

Comments From the Department of

Education

See comment 2.

See comment 3.

Page 99 GAO/AIMD-98-14 Credit Subsidy Estimates
Appendix VI 

Comments From the Department of

Education

The following are GAO’s comments on the Department of Education’s

March 5, 1998, letter.

GAO Comments 1. See “Agency Comments and Our Evaluation” section of the report.

2. The report text was clarified to reflect Education’s comment.

3. Education provided all total subsidy rate estimates we requested but did

not provide subsidy components for each of these rates. Moreover,

although Education explained why the requested documentation—OMB

model output—would not be helpful, it did not provide alternative

supporting documentation.

Page 100 GAO/AIMD-98-14 Credit Subsidy Estimates
Appendix VII 

Comments From the Department of Housing

and Urban Development

Note: GAO comments

supplementing those in the

report text appear at the

end of this appendix.

See comment 1.

Page 101 GAO/AIMD-98-14 Credit Subsidy Estimates
Appendix VII 

Comments From the Department of Housing

and Urban Development

See comment 2.

See comment 3.

Page 102 GAO/AIMD-98-14 Credit Subsidy Estimates
Appendix VII 

Comments From the Department of Housing

and Urban Development

Now on p. 4.

See comment 4.

See comment 5.

Page 103 GAO/AIMD-98-14 Credit Subsidy Estimates
Appendix VII 

Comments From the Department of Housing

and Urban Development

See comment 3.

See comment 6.

Page 104 GAO/AIMD-98-14 Credit Subsidy Estimates
Appendix VII 

Comments From the Department of Housing

and Urban Development

The following are GAO’s comments on the Department of Housing and

Urban Development’s March 4, 1998, letter.

GAO Comments 1. An explanation of agencies’ reported need for waivers has been added

to the report.

2. The report was clarified to specify that agencies can improve their

ability to forecast defaults, recoveries, prepayments, and fee revenue

through better modeling and more and better historical data.

3. Our report acknowledges the implementation difficulties involved with

credit reform. However, once agencies establish a systematic approach to

subsidy estimation based on auditable assumptions, present-value-based

budgeting for credit will provide significantly better information than the

former cash-based system.

4. Our statement that causes for changes in estimates cannot readily be

identified was based on the fact that much of the component data that

would point to causes for such changes was missing, inaccurate, or

inconsistent with other data reported by agencies.

5. We clarified the report to indicate that the patterns were similar and that

the data were inconclusive. As the report states, any firm conclusion about

the reasons for changes in reestimates would require better data and more

in-depth study.

6. HUD’s attachment containing technical comments/corrections has not

been included, but our report has been modified as appropriate to reflect

the comments contained in the attachment.

Page 105 GAO/AIMD-98-14 Credit Subsidy Estimates
Appendix VIII 

Comments From the Small Business

Administration

Note: GAO comments

supplementing those in the

report text appear at the

end of this appendix.

See comment 1.

Now on pp. 19-20.

See comment 2.

See comment 3.

See comment 4.

Page 106 GAO/AIMD-98-14 Credit Subsidy Estimates
Appendix VIII 

Comments From the Small Business

Administration

See comment 5.

See comment 6.

See comment 7.

See comment 8.

Now on p. 2.

See comment 9.

Now on p. 3.

See comment 10.

See comment 11.

Now on p. 6.

See comment 12.

Now on p. 8.

See comment 13.

See comment 14.

Now on p. 9.

Page 107 GAO/AIMD-98-14 Credit Subsidy Estimates
Appendix VIII 

Comments From the Small Business

Administration

See comment 15.

See comment 16.

Now on p. 10.

See comment 17.

Now on p. 10.

Page 108 GAO/AIMD-98-14 Credit Subsidy Estimates
Appendix VIII 

Comments From the Small Business

Administration

The following are GAO’s comments on the Small Business Administration’s

March 5, 1998, letter.

GAO Comments 1. See “Agency Comments and Our Evaluation” section of the report. The

report text also was clarified to reflect SBA’s position and our evaluation.

2. See “Agency Comments and Our Evaluation” section of the report.

3. Data specific to individual agencies are shown in tables contained in

appendix III. In other ongoing work, we are evaluating data reliability,

barriers to credit reform implementation, and agency plans to overcome

those barriers. We also will report on notable best practices in credit

agencies as appropriate.

4. Throughout our report, we cite changes in economic conditions and/or

interest rates as the first item in a list of possible causes of changes in

subsidy rates, thus emphasizing their importance.

5. See “Agency Comments and Our Evaluation” section of the report.

6. See comment 3. The results of the February 1998 meetings will be

considered in a future report on this work.

7. While a comparison of modeling methodologies used by the five credit

agencies would be interesting, it is outside the scope of this report.

8. A review of the adequacy of accounting standards and budget guidance

was outside the scope of this report. However, in other ongoing work, we

are evaluating barriers to credit reform implementation and agency plans

to overcome those barriers. The adequacy of accounting standards and

budget guidance, if identified as barriers, would be considered in that

work. Further, as we noted in our report, changes to accounting standards

and budget guidance for credit programs are being considered.

9. A brief discussion of these changes is contained in appendix I.

10. Recognition that SBA reestimated the Disaster Loan Program for the

fiscal year 1999 budget was added to the “Results in Brief” section.

11. The report text was revised as suggested.

Page 109 GAO/AIMD-98-14 Credit Subsidy Estimates
Appendix VIII 

Comments From the Small Business

Administration

12. Appendix III includes tables by agency and program that illustrate

where component data were unavailable.

13. Our report does address oversight by OMB. The Subgroup on Credit

Reform of the Government-wide Audited Financial Statements Task Force

(now the Credit Task Force of the Accounting and Auditing Policy

Committee) has been working on data collection, analysis, and

documentation issues for several years and has proposed guidance.

14. Recent financial statement audit reports cited in our report text have

raised questions about data reliability. Our report also describes

discrepancies between data in the President’s Budget and data provided

and confirmed by agencies.

15. We agree that poor document retention is one cause of differences

between agency-confirmed rates and those reported in the President’s

Budget.

16. The data provided by SBA does not permit us to prepare graphs similar

to other programs. We graphed estimated subsidy rates from two

perspectives. The first graph (for example, see figure II.12) showed the

most recently estimated total subsidy rate for each year’s cohort of

credit—the rates for all of the outstanding cohorts were calculated and

based on historical and economic data updated as of the same point in

time. Using the budget execution rates as suggested by SBA would not be a

similar approach because the rates were calculated at different points in

time. The second graph (for example, see figure II.13) showed the

estimated and reestimated subsidy rates for a given cohort over time

beginning with budget execution. It would not be possible to do this for

the Disaster Loan Program since SBA provided only the initial rate graphed

in this analysis.

17. Specific support exists on pp. 10 through 16.

Page 110 GAO/AIMD-98-14 Credit Subsidy Estimates
Appendix IX 

Comments From the Department of

Veterans Affairs

Note: GAO comments

supplementing those in the

report text appear at the

end of this appendix.

Page 111 GAO/AIMD-98-14 Credit Subsidy Estimates
Appendix IX 

Comments From the Department of

Veterans Affairs

Page 112 GAO/AIMD-98-14 Credit Subsidy Estimates
Appendix IX 

Comments From the Department of

Veterans Affairs

Now on p. 13.

See comment 1.

Page 113 GAO/AIMD-98-14 Credit Subsidy Estimates
Appendix IX 

Comments From the Department of

Veterans Affairs

Page 114 GAO/AIMD-98-14 Credit Subsidy Estimates
Appendix IX 

Comments From the Department of

Veterans Affairs

See comment 2.

Now on p. 7.

See comment 2.

Now on p. 16.

See comment 2.

Now on p. 25.

See comment 3.

Now on p. 61.

See comment 2.

Now on pp. 84 and 86.

Page 115 GAO/AIMD-98-14 Credit Subsidy Estimates
Appendix IX 

Comments From the Department of

Veterans Affairs

The following are GAO’s comments on the Department of Veterans Affairs’

March 11, 1998, letter.

GAO Comments 1. We revised table 1 to show that VA had provided all requested rates and

documentation for fiscal years 1992 and 1993. We made the change for

fiscal year 1992 because VA stated that the cash flows showing only 5 of

the 15 years of the credit maturity represented all of the output created by

the OMB/VA model for that year. For fiscal year 1993, VA provided only one

of the four quarterly execution cash flows requested. However, we

discussed VA’s comments with VA staff who told us that they did not revise

the cash flows for each of the four quarters of fiscal year 1993.

2. Report text was revised.

3. Account title was revised.

Page 116 GAO/AIMD-98-14 Credit Subsidy Estimates
Appendix X 

Major Contributors to This Report

Accounting and

Information

Management Division,

Washington, D.C.

Christine Bonham, Assistant Director

Carolyn Litsinger, Senior Evaluator-in-Charge

Carol Henn, Senior Evaluator

Office of the General

Counsel, Washington,

D.C.

Charles Roney, Assistant General Counsel

Edda Emmanuelli-Perez, Attorney Advisor

Page 117 GAO/AIMD-98-14 Credit Subsidy Estimates
Page 118 GAO/AIMD-98-14 Credit Subsidy Estimates
Page 119 GAO/AIMD-98-14 Credit Subsidy Estimates
Related GAO Products

Veterans Affairs Computer Systems: Action Underway Yet Much Work

Remains to Resolve Year 2000 Crisis (GAO/T-AIMD-97-174, September 25,

1997).

Credit Reform: Review of OMB’s Credit Subsidy Model (GAO/AIMD-97-145,

August 29, 1997).

Credit Subsidy Estimates for the Sections 7(a) and 504 Business Loan

Programs (GAO/T-RCED-97-197, July 15, 1997).

Debt Collection: Improved Reporting Needed on Billions of Dollars in

Delinquent Debt and Agency Collection Performance (GAO/AIMD-97-48,

June 2, 1997).

Credit Reform: Case-by-Case Assessment Advisable in Evaluating

Coverage, Compliance (GAO/AIMD-94-57, July 28, 1994).

Federal Credit Programs: Agencies Had Serious Problems Meeting Credit

Reform Accounting Requirements (GAO/AFMD-93-17, January 6, 1993).

(935217) Page 120 GAO/AIMD-98-14 Credit Subsidy Estimates
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