Credit Reform: Greater Effort Needed to Overcome Persistent Cost Estimation Problems
Published: 1998-03-30T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: Pursuant to a congressional request, GAO reported on the government's measurement of subsidy costs for federal direct loans and loan guarantees, focusing on whether: (1) agencies completed estimates and reestimates of subsidy costs; (2) GAO could readily discern any trends including improvements in subsidy estimates; (3) GAO could readily identify the causes for changes in subsidy estimates; and (4) 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.
section_title: What GAO Found
paragraphs: GAO noted that: (1) after over 6 years of experience with credit reform, agencies continue to have problems in estimating the subsidy cost of credit programs; (2) the lack of timely reestimates as well as the frequent absence of documentation and reliable information limit the ability of agency management, the Office of Management and Budget (OMB), and Congress to exercise intended oversight; (3) GAO found problems with the availability and reliability of subsidy estimates, reestimates, and supporting documentation in its cross-cutting review of 10 programs for fiscal years (FY) 1992 through 1998; (4) in the audits of the FY 1996 financial statements, three of the five largest credit agencies received disclaimers or qualified opinions related to their credit programs; (5) auditors were unable to find support for agency data on such items as delinquencies and prepayments for loans receivable and liabilities for loan guarantees; (6) problems with the reliability and validity of the underlying credit data raise questions about the basis for the subsidy estimates included in the budget; (7) GAO would expect to find that, for a given cohort, the annual changes in reestimates due to technical factors would be smaller; (8) because component data were not available, GAO could not determine whether this occurred; (9) however, GAO did note that overall subsidy rates for a given cohort varied widely; (10) GAO observed a similar pattern of fluctuations in subsidy estimates at the program level; (11) subsidy rate estimates for any given program continued to fluctuate widely from year to year with no pattern or particular trend; (12) 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; (13) however, available data were not sufficient to assess whether a credit program's budgetary treatment affected its initial subsidy estimates; (14) better information on factors underlying changes in subsidy rates is needed to identify and understand why these estimates change; (15) while OMB provides a user's guide and some training on the subsidy model, it has not provided agencies with clear definitions of each component or sufficient guidance on how to use the model; and (16) while no single agency is successful in all aspects of credit reform implementation, some progress is being made at each of the agencies studied.

section_title: Letter
paragraphs: The Federal Credit Reform Act of 1990 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.
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.
subsections: section_title: Background
paragraphs: There is a long history of problems with federal credit programs. We reported many of the problems, such as poor recordkeeping and cost data, prior to credit reform. 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.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 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 cohort 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 discretionary or mandatory 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. For discretionary programs this 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. 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.
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.
section_title: Objectives, Scope, and Methodology
paragraphs: 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 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. 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 report) were consolidated into two programs for fiscal year 1998 (a direct loan program and a loan guarantee program) 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.
section_title: Problems Persist With Agencies’ Estimates of Subsidy Cost
paragraphs: 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 of financial statements continue to show that serious problems remain. Effective implementation of credit reform is highly dependent on the availability of accurate data.
subsections: section_title: Subsidy Rate Estimates and Supporting Documentation Were Not Consistently Available
paragraphs: 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 programs 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 requires agencies to document subsidy estimation. 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.” 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.
section_title: Reliability of Some Subsidy Estimate Data Is Questionable
paragraphs: 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.
Three of the largest credit agencies, HUD, USDA, and Education, received disclaimers or qualified opinions 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. 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 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 agencies 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 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. 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, 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.
section_title: Subsidy Rates Generally Fluctuated
paragraphs: 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 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 analyzed 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 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 Account 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.
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. 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.
section_title: Available Data Not Sufficient to Assess Whether Budgetary Treatment Affected Initial Subsidy Estimates
paragraphs: 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 reestimate 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 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.
section_title: Lack of Reliable Component Data Hampers Ability to Determine the Causes of Changes in Subsidy Estimates
paragraphs: 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.
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. 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.
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.” 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 were unclear about what the data produced by the model represented. In an earlier report reviewing the credit subsidy model, 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.
section_title: Improvements Underway
paragraphs: 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,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. It also developed draft guidance 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.
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.
section_title: Conclusions
paragraphs: 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.
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.
section_title: Recommendations
paragraphs: 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.
section_title: Agency Comments and Our Evaluation
paragraphs: 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 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 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.)
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.
section_title: Background: Credit Reform
paragraphs: 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.
subsections: section_title: Credit Reform Was Designed to Remove Difficulties Caused by Cash Treatment
paragraphs: 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.
section_title: Credit Reform Was Designed to Allow Appropriate Cost Comparisons
paragraphs: 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.
section_title: Credit Reform Identifies the Government’s Cost of Credit Activities
paragraphs: 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.
section_title: Credit Programs Now Use Three Budgetary Accounts
paragraphs: 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 account. The financing account, which is nonbudgetary, 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.
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 authority 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.
section_title: OMB and Treasury Provide Implementation Guidance
paragraphs: 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. 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.
section_title: Implementation Guidance Has Changed
paragraphs: 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 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.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. 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.
section_title: Program Descriptions and Graphs of Estimated Subsidy Rates of Selected Programs
paragraphs: 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.
subsections: section_title: Farm Service Agency, U.S. Department of Agriculture
paragraphs: 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.
section_title: Rural Housing Service, U.S. Department of Agriculture
paragraphs: 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.
section_title: Federal Family Education Loan Program, Department of Education
paragraphs: 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.
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.
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.
section_title: Housing Programs, Department of Housing and Urban Development
paragraphs: 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.
section_title: Small Business Administration
paragraphs: 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.
section_title: Small Business Administration
paragraphs: 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.
section_title: Veterans Benefits Administration, Department of Veterans Affairs
paragraphs: 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.
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.
section_title: Estimated Subsidy Rates of Selected Programs
paragraphs: 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 doneraise 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 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. 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.
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 and Other Collections” and “Other Subsidy Costs.” We showed all comparable data provided by the agencies. (In percent)
USDA 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.
USDA provided quarterly subsidy rate estimates. Therefore, the data were not comparable to the other reported data and were not included in this table. (In percent)
Interest Component of Subsidy Expense Net Defaults Component of Subsidy Expense Fees Component of Subsidy Expense All Other Component of Subsidy Expense Reestimate 5 (In percent)
USDA provided quarterly subsidy rate estimates. Therefore, the data were not comparable to the other reported data and were not included in this table.
Comparable data for “Fees” and “Other Subsidy Cost” components were not provided. (In percent)
Interest Component of Subsidy Expense Net Defaults Component of Subsidy Expense Fees Component of Subsidy Expense All Other Component of Subsidy Expense Reestimate 5 (In percent)
17.74 (In percent)
Interest Component of Subsidy Expense Net Defaults Component of Subsidy Expense Fees Component of Subsidy Expense All Other Component of Subsidy Expense Reestimate 5 (In percent)
14.29 (In percent)
Interest Component of Subsidy Expense Net Defaults Component of Subsidy Expense Fees Component of Subsidy Expense All Other Component of Subsidy Expense Reestimate 3 (In percent)
Comparable data for “Fees” and “Other Subsidy Cost” components were not provided. (In percent)
Interest Component of Subsidy Expense Net Defaults Component of Subsidy Expense Fees Component of Subsidy Expense All Other Component of Subsidy Expense Reestimate 5 (In percent)
Comparable data for “Fees” and “Other Subsidy Cost” components were not provided. (In percent)
Interest Component of Subsidy Expense Net Defaults Component of Subsidy Expense Fees Component of Subsidy Expense All Other Component of Subsidy Expense Reestimate 5 (In percent)
Reestimate 5 (In percent)
Interest Component of Subsidy Expense Net Defaults Component of Subsidy Expense Fees Component of Subsidy Expense All Other Component of Subsidy Expense Reestimate 5 (In percent)
Comparable data for “Fees” and “Other Subsidy Cost” components were not provided. (In percent)
Interest Component of Subsidy Expense Net Defaults Component of Subsidy Expense Fees Component of Subsidy Expense All Other Component of Subsidy Expense Reestimate 5 (In percent)
Subsidy rate estimates were calculated quarterly; therefore, the data provided were not comparable to the other reported data and were not included.
VA 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. (In percent)
Interest Component of Subsidy Expense Net Defaults Component of Subsidy Expense Fees Component of Subsidy Expense All Other Component of Subsidy Expense –0.32(In percent)
Subsidy rate estimates were calculated quarterly; therefore, the data provided were not comparable to the other reported data and were not included.
VA 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. (In percent)
section_title: Comments From the Office of Management and Budget
paragraphs: The following are GAO’s comments on the Office of Management and Budget’s March 11, 1998, letter.
subsections: section_title: GAO Comments
paragraphs: 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 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.
section_title: Comments From the Department of Agriculture
paragraphs: The following are GAO’s comments on the Department of Agriculture’s March 11, 1998, letter.
subsections: section_title: GAO Comments
paragraphs: 1. Report text was revised to reflect the agency’s comment.
section_title: Comments From the Department of Education
paragraphs: The following are GAO’s comments on the Department of Education’s March 5, 1998, letter.
subsections: section_title: GAO Comments
paragraphs: 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.
section_title: Comments From the Department of Housing and Urban Development
paragraphs: The following are GAO’s comments on the Department of Housing and Urban Development’s March 4, 1998, letter.
subsections: section_title: GAO Comments
paragraphs: 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.
section_title: Comments From the Small Business Administration
paragraphs: The following are GAO’s comments on the Small Business Administration’s March 5, 1998, letter.
subsections: section_title: GAO Comments
paragraphs: 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. 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.
section_title: Comments From the Department of Veterans Affairs
paragraphs: The following are GAO’s comments on the Department of Veterans Affairs’ March 11, 1998, letter.
subsections: section_title: GAO Comments
paragraphs: 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.
section_title: Major Contributors to This Report
subsections: section_title: Accounting and Information Management Division, Washington, D.C.
section_title: Office of the General Counsel, Washington, D.C.
section_title: Related GAO Products
paragraphs: 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).
The first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary. VISA and MasterCard credit cards are accepted, also. Orders for 100 or more copies to be mailed to a single address are discounted 25 percent.
U.S. General Accounting Office P.O. Box 37050 Washington, DC  20013 Room 1100 700 4th St. NW (corner of 4th and G Sts. NW) U.S. General Accounting Office Washington, DC Orders may also be placed by calling (202) 512-6000  or by using fax number (202) 512-6061, or TDD (202) 512-2537.
Each day, GAO issues a list of newly available reports and testimony.  To receive facsimile copies of the daily list or any list from the past 30 days, please call (202) 512-6000 using a touchtone phone.  A recorded menu will provide information on how to obtain these lists.