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. 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. Objectives, Scope, and Methodology

The objectives of our work were to determine (1) whether agencies completed estimates and reestimates of subsidy costs, (2) whether we could readily identify any trends including improvements in subsidy estimates as reported by the agencies, and (3) whether we could readily identify the causes for changes in subsidy estimates. You also asked us whether agencies with discretionary credit programs initially underestimated credit subsidy costs in response to the incentive created by the availability of permanent, indefinite budget authority for credit reestimates. We requested that agencies provide budget data and information for the selected programs for fiscal years 1992 through 1998. Problems Persist With Agencies’ Estimates of Subsidy Cost

In each of the agencies in our study, we found problems with the availability of estimated subsidy rates and supporting documentation and with the reliability of the subsidy rate estimates. Reliability of Some Subsidy Estimate Data Is Questionable

The reliability of credit data is questionable for a number of reasons including (1) the poor results of financial statement audits, (2) discrepancies we found between subsidy rates reported in the President’s Budget and the data confirmed to us by the agencies, (3) subsidy rate estimates not always supported by documentation, (4) acknowledgements from some staff that component data were questionable, and (5) staff reports of difficulties with systems support. 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. Over time we would expect to find that, for a given cohort, the annual changes in reestimates due to technical factors would be smaller. Because 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. 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. The availability of automatic funding for reestimates of subsidy costs creates an incentive for agencies with discretionary programs to initially underestimate subsidy costs. 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. 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. At the same time, OMB has drafted revised guidance to credit agencies. Further, changes in assumptions cause the subsidy rate for a cohort of loans to fluctuate from year to year, not reestimates. 9. 10. 6. 4. 6. 7. 8. 10. 11. 12. 13. 14. 15. 16. A recorded menu will provide information on how to obtain these lists.
Why GAO Did This Study

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.

What GAO Found

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.