Since the mid-1980s, budget experts have debated whether the best method of measuring the subsidy cost of federal credit (direct loans or loan guarantees) is the cost to the government or the fair value cost. Federal credit is direct loans and loan guarantees. The cost to the government would reflect the actual budget cost measured by discounting of expected cash flows associated with each program at the interest rate on risk-free Treasury securities. The measure of the cost to the government would place the cost of federal credit on the same basis as a grant or a tax expenditure; consequently, policymakers would have an incentive to use the most appropriate means to cover the cost of a government program. The fair value cost estimate would equal the cost that the credit recipient would have had to pay to borrow on the private credit market. The fair value cost estimate would include market risk and reflect the opportunity cost of shifting capital from the private sector to the public sector, thus reflecting the social cost of the programs. Proponents argue that the social cost rather than the budgetary cost should be used to allocate resources between the public and private sectors. This debate has yet to be resolved. The U.S. government uses federal credit to allocate financial capital to a range of areas including home ownership, student loans, small business, agriculture, and energy. A direct loan is "a disbursement of funds by the government to a nonfederal borrower under a contract that requires the repayment of such funds with or without interest." A loan guarantee is "a pledge with respect to the payment of all or part of the principal or interest on any debt obligation of a non-federal borrower to a non-federal lender." At the end of FY2011, outstanding federal direct loans totaled $838 billion and outstanding guaranteed loans totaled $2,017 billion. Thus, at the end of FY2011, outstanding federal credit totaled $2.855 trillion. The weak economy and expansionary monetary policy caused low nominal Treasury interest rates from FY2009 to FY2011. Consequently, the use of Treasury interest rates in the cost-to-the-government measure resulted in aggregate costs of federal credit of negative $19 billion for FY2009, negative $20 billion for FY2010, and negative $41 billion for FY2011. These negative costs reduced the sizes of the federal deficits. In contrast, the aggregate cost of federal credit averaged $3.1 billion annually for FY1998-FY2008. Arguably, these negative aggregate costs of federal credit over the past three fiscal years have contributed to the debate about changing to fair value budgeting. In the 112 th Congress, six bills have been introduced that would provide for calculation of subsidy costs using fair value accounting: companion bills S. 1651 / H.R. 3414 (Honest Budget Act), H.R. 3581 (Budget and Accounting Transparency Act of 2011), H.R. 3844 (Honest Budget Act of 2012), House Fiscal Year 2012 Budget Resolution ( H.Con.Res. 34 , 112 th Congress), and House Fiscal Year 2013 Budget Resolution ( H.Con.Res. 112 , 112 th Congress). Before FY1992, federal credit programs were measured on an annual cash flow basis. Under this arrangement, a new federal direct loan was treated as a budget outlay in the current fiscal year, and repayments of principal and payments of interest were treated as offsetting collections (negative outlays) in the fiscal years in which they were repaid. If a loan recipient paid a fee, this fee was also treated as an offsetting collection. Loan defaults reduced repayments of principal and interest, and therefore offsetting collections. Administrative expenses were reported as outlays. In a given fiscal year, the budgetary cost of a loan program, not the individual loans, was its net cash flow. This equaled new loans made plus any administrative expenses associated with these loans (rarely recognized in the loan accounts) less any loan fees, repayments of principal, and payments of interest. The federal acceptance of a contingent liability when a loan guarantee was provided was not included in the federal budget because no cash flow occurred. The administrative costs of a guarantee program were outlays in the fiscal year in which they occurred. Some guarantee programs charge fees to the recipient, and these fees were considered offsetting collections. Any federal outlays necessary to compensate lenders for any default losses covered by a federal guarantee were not shown in the budget until they were actually paid. Using the old cash-flow method, it was often difficult for policymakers to accurately monitor and therefore make informed decisions about federal credit. In addition, administrators at agencies could understate costs by using various budgetary techniques. One of these was generating "savings" from the fees on increased volumes of new guarantees while ignoring the increase in expected losses and offsetting the (cash) cost of new direct loans with current year collections from old loans. To remedy these problems, Congress and the executive branch debated options to convert the budgetary treatment of federal credit from cash flow accounting to accrual accounting (measuring the cost over the life of the loan or loan guarantee). One of the primary decisions concerned whether the cost of federal credit should be measured by the "cost to the government" or the "fair value" cost. The cost to the government approach reflects the actual budget cost measured by "discounting of expected cash flows at the interest rate on risk-free Treasury securities (the rate at which the government borrows money)." For a loan program, these credit flows consist of "disbursements by the government (loan disbursement and other payments) minus estimated payments to the government (repayment of principal, payments of interest, and other payments) after adjusting for projected defaults, prepayments, fees, penalties, and other recoveries." For a loan guarantee program, these credit flows are "estimated payments by the government (for defaults and delinquencies, interest rate subsidies, and other payments) minus estimated payment to the government (for loan origination and other fees, penalties, and recoveries)." The cost to the government concept would measure the subsidy cost in an equivalent budgetary method for a grant or a tax expenditure. Thus, a policymaker would not have any incentive to favor one type of assistance over another because credit, grants, and tax expenditures would all be measured by the cost to the government. An alternative would be to use the fair value cost, which would equal the cost that the credit recipient would have had to pay to borrow on the private credit market. In other words, the fair value cost is based on the price investors would be willing to pay to purchase federal direct loan assets or reinsure federal loan guarantees. The fair value cost includes market risk and reflects the opportunity cost of shifting capital from the private sector to the public sector. On November 5, 1990, President George H. W. Bush signed P.L. 101-508 , 104 Stat. 1388, the Omnibus Budget Reconciliation Act of 1990 (OBRA90). The legislation added a new title to the Congressional Budget Act, Title V, the Federal Credit Reform Act of 1990 (FCRA). Beginning with FY1992, FCRA changed the methodology in the unified budget for measuring and reporting the cost of federal direct loans and federal loan guarantees from cash flow to accrual accounting, using the cost to the government concept. Whether the cost to the government or the fair value cost is most appropriate is still debated, however, and the question remains unresolved. This report gives a chronological examination of this debate since the 1980s. In August 1984, the Office of Management and Budget (OMB) issued a revised version of its Circular A-70, Policies and Guidelines for Federal Credit Programs , which included the requirement that federal agencies calculate and transmit data to OMB on the subsidy cost of all of their direct loan and loan guarantee programs. The method used to measure subsidy costs was specified as comparing private financing terms with those of federal credit. Since 1984, these agency data were used to report subsidy costs in Special Analysis F, "Federal Credit Programs," in the President's budget documents. On December 12, 1985, the passage of the Gramm-Rudman-Hollings (G-R-H) Act, Balanced Budget and Emergency Deficit Control Act of 1985 ( P.L. 99-177 ), 99 Stat. 1037, required that all new direct loans and loan guarantees be on-budget. Prior to G-R-H, many new direct loans and loan guarantees were recorded off-budget. With the passage of G-R-H, Congress and the executive branch became more interested in possible budgetary reforms to improve the recording of federal credit in the budget. One of the major issues was measuring the subsidy costs of federal credit. This new interest prompted both proposed legislation and research in legislative and executive branch agencies and the academic community. In February 1987, the Reagan Administration proposed extensive credit reform in its FY1988 Budget. The Administration's proposals were introduced in the House as H.R. 1754 and the Senate as S. 745 , the Federal Credit Reform Act of 1987. Senators Lawton Chiles and Pete Domenici extensively revised the Reagan proposal. Their proposal was included as an amendment to H.J.Res. 324 to raise the debt limit as it passed the Senate on July 31, 1987, but was eliminated by the conference agreement. The Administration's proposal measured the subsidy cost as the dollar benefit to the borrower, while the Chiles-Domenici proposal measured subsidy cost as the dollar cost to the federal government. Furthermore, the two proposals differed in their methods of determining the value of subsidy costs. The Administration proposed to sell most loans on private credit markets. The value of a loan's subsidy cost would equal the difference between its face value and its selling price.