Credit Reform

The Federal Credit Reform Act of 1990 requires that the budget more accurately reflect the government's subsidy costs for federal direct loans and loan guarantees. The act also seeks to enable better cost comparisons both among credit programs and between credit and noncredit 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 that the loans are outstanding. This report discusses (1) whether agencies completed estimates and reestimates of subsidy costs; (2) whether GAO could readily discern any trends, including improvements in subsidy estimates; and (3) whether GAO could readily identify the causes for changes in subsidy estimates. GAO also discusses 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. GAO reviewed subsidy estimates and supporting documentation prepared for two domestic credit programs at the five largest credit agencies--the departments of Agriculture, Education, Housing and Urban Development, and Veterans Affairs, and the Small Business Administration.

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.

Recommendations

Our recommendations from this work are listed below with a Contact for more information. Status will change from "In process" to "Open," "Closed - implemented," or "Closed - not implemented" based on our follow up work.

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