CRS ANALYZES BUSH ADMINISTRATION'S FEDERAL CREDIT REFORM PROPOSAL.

                          James M. Bickley

Credit reform would change the budgetary treatment of Federal direct loans and Federal guaranteed loans. The Federal Government reallocates credit according to public rather than market preferences. Federal credit recipients obtain funds on more favorable terms than they could receive from the private market.

In 1967, the President's Commission on Budget Concepts developed the concept of the unified budget which was comprehensive in coverage and used cash-basis accounting. The Commission stated that the two basic functions of the Federal budget are resource allocation and macroeconomic stabilization. The Commission maintained that the resource allocation function should include comparisons among Government programs and between the public and private sectors. The Commission proposed that the subsidies for direct loan programs be calculated and recorded in the budget as expenditures.

Currently, the unified budget measures the cost of Federal credit on a cash flow basis. Critics (including the Bush Administration) argue that the budgetary treatment of Federal credit does not reflect differences among Federal credit programs in such characteristics as interest rates, lengths of maturities, administrative costs, and default risks. Critics maintain that the appropriate budgetary measure of the costs of Federal credit is the present value of the subsidies to credit recipients in the fiscal year that the credit is advanced.

The Bush Administration's proposal is presented in most detail in the proposed Federal Credit Reform Act of 1989 (the Act). The Act would have Federal officials estimate credit subsidies based on the benefit to the borrower. These subsidies would measure the budgetary cost of Federal credit and would require annual appropriations. Two credit revolving funds would be established in the Treasury to finance credit flows.

Five policy issues concerning the Act are the use of market prices to measure credit subsidies, the exclusion of administrative expenses from subsidy costs, the lack of congressional oversight of subsidy estimates, the possibility of loan sales without recourse, and the inclusion of the nonsubsidized portion of credit in the deficit. Recent congressional proposals and proposals of the Congressional Budget Office and the General Accounting Office are consistent on most major issues with the proposal of the Bush Administration.

                          TABLE OF CONTENTS

The Federal Government reallocates credit according to public rather than market preferences. The Office of Management and Budget (OMB) defines Federal credit as Federal direct loans and Federal loan guarantees. A Federal direct loan is a cash payment to a borrower, secured by his promise to repay the U.S. Government. A Federal loan guarantee is a U.S. Government commitment to repay to the lender all or part of the principal and interest if the borrower defaults. At the end of fiscal year 1989, outstanding Federal direct loans totaled $207.2 billion and outstanding Federal guaranteed loans totaled $587.7 billion. ¹

Credit reform would change the budgetary treatment of Federal direct loans and Federal guaranteed loans. The purposes of this report are to explain the credit reform proposal of the Bush Administration and to examine relevant policy issues. In order to achieve these goals, it is necessary to initially discuss credit subsidies, the concept of the unified budget, the credit budget, and the conceptual background of the Bush Administration's proposal.

CREDIT SUBSIDIES

Federal credit recipients obtain funds on more favorable terms than they could receive from the private market. OMB describes subsidies from Federal direct loans as consisting of one or more of the following:

o Interest rates below commercial levels,

o Longer maturities than fully private loans,

o Deferral of interest,

o Allowance of grace periods,

o Waiver or reduction of loan fees,

o Higher loan amount in relation to the value of the underlying enterprise than a fully private loan, and

o Availability of funds to borrowers for purposes for which the private sector would not lend -- at virtually any interest rate under virtually any repayment terms. ²

The recipient of a Federal loan guarantee receives a subsidy because the Federal Government covers part or all of the default risk. Also, the Federal Government either does not levy a loan guarantee fee or charges a smaller fee than a private insurer would charge. Consequently, a lender can charge the borrower a lower interest rate. In addition, the Federal Government can pay to the lender part of the interest due on a guaranteed loan. ³ Thus, a Federal loan guarantee with a Federal interest payment can give any of the types of subsidies available through a Federal direct loan.

CONCEPT OF THE UNIFIED BUDGET

In 1967, the President's Commission on Budget Concepts produced a comprehensive report and detailed recommendations on implementing a unified budget. The Commission, created in March 1967, was instructed to make "a thorough and objective review of budgetary concepts." ⁴ The Commission stated that the two basic functions of the Federal budget are resource allocation and macroeconomic stabilization. ⁵ For resource allocation, the Commission believed that the budget should "provide the integrated framework for information and analyses from which the best possible choices can be made in allocating the public's money among competing claims." ⁶ This function of resource allocation should include comparisons among Government programs and between the public and private sectors. ⁷ For macroeconomic stabilization, the Commission maintained that the budget should contain detailed and accurate information in order to evaluate the effects of Federal fiscal activities. Furthermore, the budget should include data necessary to undertake discretionary countercyclical fiscal policy. ⁸

The Commission debated the appropriate methodology for including Federal credit in the unified budget. The Commission and the Brookings Institution jointly sponsored a seminar on budget concepts. Four papers were presented on the treatment of loans and financial transactions. One paper by the staff of the President's Commission on Budget Concepts stated that:

Probably no problem the President's Commission on Budget Concepts faces is more important or difficult than the need to reach sound conclusions and recommendations about the treatment of loans and financial transactions in the President's budget statement. ⁹

The Commission proposed that the unified budget summary consist of four parts. The second part; RECEIPTS, EXPENDITURES, AND LENDING, would have two accounts, and these accounts would be used for the calculation of the unified budget surplus or deficit. These two accounts would be the receipt-expenditures account and the loan account.

The receipt-expenditure account would include as expenditures two components of loan subsidies. First, the interest component of a loan subsidy would count as an expenditure. This interest component of a loan subsidy would measure the present value of the difference between the interest cost of borrowing by the Treasury and the interest cost to the loan recipient. ¹⁰

If, for example, the Federal Government lends $100 for 40 years on an amortized basis at an interest rate of two percent, but would have to pay five percent to borrow the money from the public for the same term of years, that "loan" is worth only $63 -- not $100. . . . The difference of about $37 represents a Federal payment . . . comparable to an ordinary Government expenditure rather than a loan. ¹¹

The second loan subsidy component proposed by the Commission for inclusion in the expenditure account was a risk factor measured by expected losses. The Commission stated that the loss experience of old established loan programs would assist in determining expected losses for these loan programs. For new loan programs, the determination of expected losses would be more difficult. The Commission warned that Government officials might be reluctant to forecast heavy defaults, even if available evidence justified this expectation. ¹²

The Commission recommended that two types of loans be included in the expenditure account and not in the loan account, at least for the time being. First, the Commission proposed that loans made on noncommercial terms should be included in expenditures. The Commission stated that "certain foreign loans" were examples of loans made on a noncommercial term "in part because experience is inadequate to determine an appropriate allowance for losses." ¹³ Second, the Commission maintained that loans that were more like transfer payments should be included in the expenditure account. The Commission stated that examples were "nonrecourse loans extended to farmers by the Commodity Credit Corporation where there is no obligation to repay either principal or interest if the farmer calculates that he would be better off forfeiting the commodities he has posted as collateral than repaying the loan." ¹⁴

The separate loan account would include loan disbursements, loan repayments, and net lending. Net lending would equal loan disbursement less loan repayments. The sum of the receipt-expenditure account surplus (or deficit) and net lending would equal the unified budget surplus or deficit.

The Commission proposed that the three other parts of the Budget summary would be APPROPRIATIONS; MEANS OF FINANCING; and OUTSTANDING FEDERAL SECURITIES and FEDERAL LOANS, END OF YEAR. ¹⁵ The Commission stated that

It does not appear necessary for the Congress to appropriate separately for the subsidy elements on the one hand and the pure loan amounts on the other. Such a separation can be done administratively -- on a consistent basis for all loan programs and shown in the budget without requiring a new or more complicated structure of appropriations. . . . ¹⁶

The Commission maintained that the selling of certificates of participation in a pool of loans should be a means of financing, and, consequently, should not be included in the unified budget surplus or deficit. ¹⁷ The Commission proposed that direct loans outstanding and guaranteed loans outstanding be shown in the fourth part of the budget summary. In table 1 of the appendix, the Commission's recommended budget summary is shown with the actual budget data for fiscal year 1966.

INITIAL TREATMENT OF CREDIT

Before fiscal year 1969, the Federal Government primarily had relied on the administrative budget which included receipts and expenditures of Federal funds but excluded operations of Federal trust funds. In the fiscal year 1969 budget, the Johnson Administration adapted the unified budget concept but with some structural differences from the proposal of the Commission. The Johnson Administration did not include direct loan subsidies in the expenditures account. The Johnson Administration argued that direct loan subsidies could not be included because the Federal Government did not have adequate information and methods necessary to measure the dollar value of subsidies. ¹⁸ The Johnson Administration included in the expenditure account lending programs that were either similar to grants or were not made on a commercial basis. ¹⁹

The fourth part of the budget summary proposed by the Commission was outstanding Federal securities and Federal loans which included data on both direct loans outstanding and guaranteed loans outstanding. For this fourth part, the Johnson Administration substituted outstanding debt which omitted data on direct loans outstanding and guaranteed loans outstanding. ²⁰ The Johnson Administration's budget summary with actual figures for fiscal year 1967 is shown in table 2 of the appendix.

CURRENT TREATMENT OF CREDIT

Currently, the unified budget summary includes only receipts, outlays, and the budget surplus or deficit. Net lending is contained in outlays including the net lending from loans that are either more like transfers or made on a noncommercial basis. Loan subsidies are not included as outlays. The other three parts of the unified budget summary proposed by the Johnson Administration are not included in the budget summary but are presented in separate tables elsewhere in the budget. ²¹

The Federal unified budget uses cash-basis accounting. A new Federal direct loan is treated as a budget outlay in the current fiscal year, and future repayments of principal and interest are treated as offsetting collections (negative outlays) in the future fiscal years in which they occur. If a loan recipient pays a fee, this fee is treated as an offsetting collection. Loan defaults negate repayments of principal and interest. Administrative expenses are on- budget outlays. The total budgetary cost of a particular loan program in a given fiscal year is net cash flow which equals new loans made plus any administrative expenses associated with these loans less any loan fees and repayments of both principal and interest from previous loans.

The Federal acceptance of a contingent liability when a loan guarantee is extended is not included in the unified budget because no cash flow occurs. The administrative costs of a guarantee program are outlays in the fiscal year in which they occur. Some guarantee programs charge fees to the recipient, and these fees are considered offsetting collections. Federal outlays are necessary to compensate lenders for any default losses covered by a Federal guarantee. Thus, although the contingent liability of a Federal guarantee may not raise outlays in the year it is advanced, outlays in future years may rise substantially because of default losses.

Critics of the current budgetary treatment of Federal credit (including the Bush Administration, the Congressional Budget Office, and the General Accounting Office) charge that the current Federal budgetary procedures give inadequate measures of the resources used by particular credit programs. Cash-basis accounting does not reflect differences among Federal credit programs in such characteristics as interest rates, lengths of maturities, administrative costs, and default risks. Thus, current budgetary procedures are of limited value in comparing costs among credit programs and with outlays of other programs. The Bush Administration, the Congressional Budget Office (CBO), and the General Accounting Office (GAO) argue that the appropriate budgetary measure of the costs of Federal credit is the present value of the subsidies to credit recipients in the fiscal year that the credit is advanced.

CREDIT BUDGET

In January 1980, the Reagan Administration introduced a Federal credit budget to help control the growth of Federal credit. The credit budget measures direct loan obligations and loan guarantee commitments. Federal credit is measured at the time that the Government signs a binding contract to provide credit assistance. Initially the credit budget consisted of nonbinding targets. Currently, limitations in the credit budget are included in the budget resolution, and annual appropriation acts make most of these limitations binding. ²² Credit budget limits would apply to agencies' gross credit volume under the credit reform as proposed by the Bush Administration.

Before the passage of Gramm-Rudman-Hollings (G-R-H) in 1985, the credit budget provided limited control of extensive off-budget financing of Federal credit through the Federal Financing Bank. ²³ The FFB, a financial intermediary within the United States Treasury, was established in 1973 to lower the cost of agencies' credit operations and permit the coordination of agencies' issuance of debt with regular Treasury debt sales. ²⁴ G-R-H incorporated into agencies' accounts all transactions by the FFB on behalf of Federal agencies, thereby bringing the transactions on-budget.

CONCEPTUAL BACKGROUND OF THE ADMINISTRATION'S PROPOSAL

Although the credit budget has improved credit accountability, the credit budget does not measure or limit the size of subsidies. The Bush Administration maintains that the inclusion of credit subsidies in the unified budget would place Federal credit flows on a grant equivalent basis. Each agency would pay the value of its credit subsidies into a Federal revolving fund. Each agency's payment would be classified as an outlay of the agency. Federal credit programs could be compared on a dollar-for-dollar basis with expenditures for noncredit programs. Furthermore, cost-benefit analysis could be more easily used to evaluate specific Federal credit programs.

In 1983, two different proposals, the Appropriations Plan and the Market Plan, were formulated to measure and include credit subsidies in the unified budget. ²⁵ Concepts from each of these plans have been incorporated into the Administration's credit reform proposal.

APPROPRIATIONS PLAN

The Appropriations Plan would establish a National Loan Fund (the Fund). Administrators at the Fund would estimate the subsidy value of proposed credit for each program. Each agency would receive appropriated funds for each credit program to finance credit subsidies. The estimated subsidy value of a direct loan would equal the difference between the face value of the loan and the estimated market value of the loan asset. The market value of the loan asset would equal the present value of the estimated flow of repayments of principal and interest. The Fund would finance the nonsubsidized portion of an agency's direct loan by borrowing from the Federal Financing Bank. The agency would finance the subsidized portion of a direct loan from its appropriated funds. The subsidy value of a loan guarantee would equal the estimated cost of a single-payment insurance premium charged by a private insurer that would be needed to guarantee a similar loan in the private sector. This subsidy would be financed by the agency from appropriated funds. Agencies would handle all paperwork connected with their credit programs. ²⁶

Hence, the Appropriations Plan would measure all credit subsidies by the estimated market prices. These subsidies would be included in the agency's account and the unified budget deficit. The nonsubsidized portion of a loan would be recorded as a means of financing of the Fund and would count towards the budget deficit.

MARKET PLAN

The Market Plan would modify the Appropriations Plan, requiring the Fund to sell all new Federal loans and to reinsure all new loan guarantees. An agency could direct the Fund to make loans and then sell these loans to private investors. Alternatively, an agency could require the Fund to purchase the agency's loans from its revolving fund. The Fund would then be required to sell these loans. The Fund could sell pass-through securities that would allow private investors to receive repayments of principal and interest collected on a pool of an agency's loans. Because of Federal subsidies, the market price of a loan would be well below its face value. Consequently, the agency would have to pay the Fund for losses incurred from loan sales. The Fund would purchase private insurance to cover the default risk of agency loan guarantees. Agencies would be required to reimburse the Fund for the cost of private insurance. ²⁷

Thus, the Market Plan would differ from the Appropriations Plan in the methodology of determining credit subsidies. Under the Appropriations Plan, administrators of the Fund would estimate subsidies, but the Market Plan would rely on actual market transactions to determine credit subsidies.

ADMINISTRATION'S PROPOSAL

The Bush Administration's proposal for credit reform is the same as the final proposal for credit reform of the Reagan Administration. ²⁸ On January 17, 1989, the most detailed presentation of this credit reform proposal, the Federal Credit Reform Act of 1989 (the Act), was transmitted by OMB to the Congress. On February 27, 1989, the Act was introduced in the House of Representatives as H.R. 1127 by Representative Gradison with eight co-sponsors. On March 15, 1989, the Act was introduced as S. 584 in the Senate by Senator Heinz. The Bush Administration endorsed the Act when it was introduced in Congress and continues to support its passage. ²⁹

PROPOSED FEDERAL CREDIT REFORM ACT OF 1989

The Federal Credit Reform Act of 1989 has the following six purposes:

measure accurately the benefits of Federal credit programs, place the cost of credit programs on a budgetary basis equivalent to other Federal spending, encourage the delivery of benefits in the form most appropriate to the needs of beneficiaries, improve the allocation of resources among credit programs and between credit and other Federal spending, establish in the Department of the Treasury two Federal credit revolving Funds, and modify the legislative and executive budgetary processes to carry out these purposes. ³⁰

The Act defines credit subsidies as "the net present value, based on a comparable market discount rate, of the difference in cost to the borrower between the direct loan or guaranteed loan and alternative private financing" ³¹ If credit recipients are charged fees then subsidy estimates must be adjusted downwards to account for these fees. ³²

Direct Loan Programs

The Act would create the Direct Loan Fund to finance all new direct loans. The Act would require a Federal agency to include in its budget proposal the planned level of new direct loan obligations and the estimated amount of the associated subsidies. ³³ A Federal agency could not obligate the Direct Loan Fund to make a direct loan obligation unless funds have been appropriated, or are available on a permanent basis, or "a limitation has been enacted in an annual appropriations act on the use of funds otherwise available to the Federal agency for the subsidy." ³⁴ The Act provides for "current indefinite budget authority for the subsidies associated with entitlements." ³⁵

When a direct loan is obligated, the Federal agency must obtain an estimate of the subsidy. This estimate would be made either by the Secretary of the Treasury or by the agency at the discretion of the Secretary and under guidelines set by the Secretary. ³⁶ The amount of the estimated subsidy would be a direct obligation of the agency and a reimbursable obligation of the Direct Loan Fund. The nonsubsidized portion of the direct loan; that is, the difference between the face value of the loan and the estimated subsidy, would be a direct obligation of the Direct Loan Fund. At the time the direct loan is disbursed by the Direct Loan Fund, the Federal agency would pay the subsidy portion of the loan into the Direct Loan Fund. This financial procedure would not affect the authority of the Federal agency to administer its direct loan program. ³⁷

The Secretary of the Treasury would manage the Direct Loan Fund. The Secretary could "for the purpose of validating the subsidy estimate, and after consultation with the agency, direct the Federal agencies to sell newly made loans without recourse." ³⁸ If the Federal Government sells a loan without recourse then the buyer accepts full responsibility for any defaults in the repayment of principal and interest. As manager of the Direct Loan Fund, the Secretary would receive into the Fund direct loan subsidy payments from Federal agencies, repayments of principal and interest, fees, proceeds from the sale of new direct loans, and proceeds from the sale of collateral received from defaulted loans. ³⁹ The Act would not affect those direct loans obligated prior to its enactment. ⁴⁰

Loan Guarantee Programs

The Act treats the financing of new loan guarantee commitments in a parallel procedure to that of new direct loan obligations. The Act would create the Guaranteed Loan Fund to finance all new guaranteed loan commitments. The Act would require a Federal agency to include in its budget proposal the level of new loan guarantee commitments and the estimated amount of the associated subsidies. ⁴¹ A Federal agency could not commit the Guaranteed Loan Fund to a guarantee loan commitment "unless funds have been appropriated, or are available on a permanent indefinite basis, to the Federal agency for the subsidy or a limitation has been enacted in an annual appropriations act on the use of funds otherwise available to the Federal agency for the subsidy." ⁴² The Act provides for "current indefinite budget authority for the subsidies associated with entitlements." ⁴³

When a loan guarantee commitment is made, the Federal agency must obtain an estimate of the subsidy. The Secretary of the Treasury would make this estimate or the Federal agency would make this estimate at the discretion of the Secretary and under guidelines set by the Secretary. The amount of the estimated subsidy would be an obligation of the Federal agency. When the guaranteed loan is made, the associated subsidy would be paid by the Federal agency to the Guarantee Loan Fund. This Act would not affect the authority of a Federal agency to administer a loan guarantee program. ⁴⁴

The Secretary of the Treasury would manage the Guaranteed Loan Fund. As manager of the Guaranteed Loan Fund, the Secretary would receive into the Fund loan guarantee payments from Federal agencies, loan guarantee fees, proceeds from the sale of collateral obtained from defaults on guaranteed loans, and repayments of principal and interest on loans acquired from defaults. ⁴⁵ The Act does not authorize the Secretary of the Treasury to validate the subsidy estimate of a loan guarantee by purchasing reinsurance from the private sector. This differs from the Secretary's authority to sell direct loans. But the Act states that "in the event that any newly made guaranteed loans are reinsured, these estimates of the subsidy may take into consideration the cost of reinsurance, net of fees and premiums." ⁴⁶

The Secretary would credit interest on the reserves of the Guaranteed Loan Fund using an interest rate based on the average time that the reserves will be held and the current yield on marketable U.S. obligations of comparable maturities. The Secretary would monitor accounting practices and debt collection efforts of each Federal agency. ⁴⁷ The Act will not affect loan guarantees committed prior to its enactment. ⁴⁸

Deposit Insurance Agencies

The Act would require that the Federal Deposit Insurance Corporation, the National Credit Union Administration, the Pension Benefit Guaranty Corporation, the Securities and Exchange Commission, and the Federal Savings and Loan Insurance Corporation include in their budget proposals estimated subsidy costs of their proposed direct loan obligations and proposed loan guarantee commitments. ⁴⁹ But deposit insurance agencies, unlike other agencies, would not be required to obtain appropriations or other budgetary resources for the subsidy value of deposit insurance.

POLICY ISSUES

There are five policy issues concerning Federal credit reform in the Federal Credit Reform Act of 1989. First, the Act uses the concept of estimated or actual market prices to measure credit subsidies. According to this concept, the subsidy would equal the difference for the credit recipient between his hypothetical cost on private financial markets and his actual cost. The Bush Administration argues that it "would use private market equivalents in order to estimate the subsidy, both because they are comparatively objective and because the subsidy defined in this way is the best estimate of the effect of the credit program on resource allocation." ⁵⁰

For fiscal year 1991, the Office of Management and Budget has made estimates of Federal credit subsidies using the concept of market prices. OMB estimates that the subsidy costs for direct loan obligations will be $1,839.5 million or 31.8 percent of direct loan obligations. ⁵¹ OMB estimates that subsidy costs for guaranteed loan commitments will be $9,494.5 million or 4.5 percent of guaranteed loan commitments. ⁵²

The alternative measure of credit subsidies would be the cost to the Government. This would equal the difference in present value terms between anticipated outlays and receipts discounted at the Treasury's borrowing rate. GAO recommends that subsidy estimates should be based on the cost to the Government because "the budget should report only direct budgetary costs." ⁵³ In its most recent report on Federal credit, CBO is ambivalent about the use of Treasury rates to discount risky cash flows and to measure credit subsidies. ⁵⁴ The President's Commission on Budget Concepts, which developed the concept of the unified budget, recommended that Treasury borrowing rates be used to measure loan subsidies. ⁵⁵

Second, the Act's estimates of subsidies exclude administrative expenses. The accounting systems in many agencies are unable to accurately measure administrative expenses of credit programs; consequently, GAO excludes administrative expenses from its definition of credit subsidies. But CBO maintains that administrative expenses should be measured using guidelines and should be included in subsidy costs. ⁵⁶ Federal grants do not include administrative expenses; hence, it can be argued that the exclusion of administrative expenses for credit subsidies will place them on a grant equivalent basis.

Third, the executive branch would make all subsidy estimates without any explicit provision for congressional or public oversight. Since the estimation of subsidies is at least partially subjective, the executive branch might consciously or subconsciously overestimate subsidies of credit programs which it opposed and underestimate subsidies of credit programs which it favored. Hence, it can be argued that should this approach be adopted, legislative guidance should be specific enough to allow rigorous congressional oversight.

Fourth, as previously indicated, the Act gives the Secretary of the Treasury the authority to validate the estimates of loan subsidies by directing Federal agencies to sell newly made loans without recourse. ⁵⁷ Critics of nonrecourse sales make two arguments. Nonrecourse loan sales eliminate Federal discretion to ease repayment conditions for borrowers because the buyers of the loans are responsible for collecting owed repayments of principle and interest. In past years, the Federal Government has rescheduled repayments, imposed moratoriums on collections, and even forgiven some debts during periods of unusual financial distress of borrowers.

Another critical argument is that loan sales without recourse will not maximize net revenues. GAO concluded that the Federal Government would maximize net revenues on some loan sales if the U.S. Government provided at least partial recourse and purchased private insurance to cover potential losses. Congress has advocated the maximization of net revenues in the short-run by insisting that the Federal Government retain the risk of default on portfolios "sold." ⁵⁸

Fifth, the Act would record the nonsubsidized portion of credit above the deficit line; that is, the nonsubsidized portion would be included in the calculation of the deficit. The nonsubsidized portion would be financed through the two new credit revolving funds housed in the U.S. Treasury. The credit subsidies would be included in program accounts of agencies. This procedure would not change the current measure of the deficit because the sum of the subsidized and nonsubsidized portions of credit would equal cash flow.

In the current unified budget, GAO would include the nonsubsidized portion of Federal credit above the deficit line. GAO believes that

credit reform can, and should be, implemented in a way that does not change the overall Federal deficit. The budget should continue to generally reflect the total cash flows to and from the public so that the close link between the Federal deficit and the Government's borrowing needs is maintained. ⁵⁹

But GAO also advocates restructuring the current unified budget into operating and capital parts. "The operating budget would include the new subsidy accounts while the capital budget would include the financing accounts." ⁶⁰ Unless the Federal Government adapts capital budgeting, however, the current unified budget is most relevant to this discussion.

CBO considered the cases for above the line and below the line treatment of the nonsubsidized portion of Federal credit and found possible advantages in both. CBO maintains that above the line treatment would make the deficit closer to Federal borrowing requirements, reduce the significance of subsidy cost errors on the deficit, and reduce the incentives to underestimate subsidy costs. ⁶¹ CBO argues that the below the line treatment would achieve more fully the goal of comparable budgetary treatment for cash and credit programs, report cash flows in financing accounts in a manner consistent with their economic effects, and replicate the budgetary consequences of the market-based plan on the deficit. ⁶²

In its most recent report on Federal credit, CBO concluded that recording the nonsubsidized portion below the line is the better policy. ⁶³ But, in recent congressional testimony, CBO's position was modified. Robert D. Reischauer, Director of CBO, stated that

It seems prudent to reserve the decision to move the financing accounts below the deficit line until experience has been gained in estimating subsidy costs. This step will dampen the incentive to underestimate subsidy costs and initially leave the deficit unaffected by credit reform. ⁶⁴

Although some differences exist among recent proposals for credit reform in recent legislation and proposals supported by the Bush Administration, CBO, and GAO, it can be argued that these proposals are consistent on major issues. ⁶⁵ These recent credit reform proposals would measure the costs of new direct loan obligations and loan guarantee commitments by their estimated subsidy costs, and funds would have to be appropriated for these estimated subsidy costs. ⁶⁶ According to Charles A. Bowsher, Comptroller General of the United States, "the areas of agreement outweigh any differences among these proposals and provide a sound basis for moving ahead with needed reform." ⁶⁷

APPENDIX

            TABLE 1. RECOMMENDED SUMMARY OF THE PRESIDENT'S

           TABLE 2. SUMMARY OF THE BUDGET AND FINANCIAL PLAN

Source: U.S. Executive Office of the President. Office of Management and Budget. Budget of the United States Government, Fiscal Year 1969. Washington, U.S. Govt. Print. Off., 1968. p. 10.

             TABLE 3. ESTIMATED SUBSIDY COSTS FOR FY 1991

/b/ Weighted average.

Source: U.S. Executive Office of the President. Office of Management and Budget. Budget of the United States Government, Fiscal Year 1991. Washington, U.S. Govt. Print. Off., 1990. p. 245.

             TABLE 4. ESTIMATED SUBSIDY COSTS FOR FY 1991

Source: U.S. Executive Office of the President. Office of Management and Budget. Budget of the United States Government, Fiscal Year 1991. Washington, U.S. Govt. Print. Off., 1990. p. 246.

SELECTED BIBLIOGRAPHY

Fontenrose, Richard. Federal credit reform. Government accountants journal, v. 38, summer 1989: 25-32.

H.J. Res. 324, 100th Congress, 1st Session, July 31, 1987. p. 82-98.

H.R. 1127, Federal Credit Reform Act of 1989, 101st Congress, 1st Session, February 27, 1989. 21 p.

H.R. 3929, Budget Process Reform Act of 1990, 101st Congress, 2nd Session, January 31, 1990. p. 47-53.

President's Commission on Budget Concepts. Staff papers and other materials reviewed by the President's Commission. Washington, U.S. Govt. Print. Off., October 1967. 512 p.

Report of the President's Commission on Budget Concepts. Washington, U.S. Govt. Print. Off., 1967. 345 p.

S. 584, Federal Credit Reform Act of 1989, 101st Congress, 1st Session, March 15, 1989. 21 p.

U.S. Congress. House. Committee on the Budget. Hearings of Task Force on Urgent Fiscal issues. Federal credit reform. April 11, 1990.

U.S. Congressional Budget Office. Budgeting for Eximbank: a case study of credit reform. Washington, January 1990. 61 p.

__ Credit reform: comparable budget costs for cash and credit. Washington, December 1989. 119 p.

__ New approaches to the budgetary treatment of Federal credit assistance. Washington, March 1984. 84 p.

U.S. Executive Office of the President. Office of Management and Budget. Budget of the United States Government, fiscal year 1988. Washington, U.S. Govt. Print. Off., 1987. p. 2-42 to 2-44.

__ Budget of the United States Government, fiscal year 1990. Washington, U.S. Govt. Print. Off., 1989. p. 2-38 to 2-40, p. 6- 9 to 6-33.

__ Budget of the United States Government, fiscal year 1991. Washington, U.S. Govt. Print. Off., 1990. 1,569 p.

__ Special analysis F, Federal credit programs, budget of the United States Government, fiscal year 1988. Washington, U.S. Govt. Print. Off., 1987. 79 p.

__ Special analysis F, Federal credit programs, budget of the United States Government, fiscal year 1990. Washington, U.S. Govt. Print. Off., 1989. 92 p.

U.S. General Accounting Office. Budgetary treatment of Federal credit programs. Washington, April 1989. 28 p.

__ Loan asset sales: OMB policies will result in program objectives not being fully achieved. Washington, September 1986. 25 p.

U.S. Library of Congress. Congressional Research Service. Credit reform: Chiles-Domenici proposal contrasted with Reagan proposal, by James M. Bickley. [Washington] November 19, 1987. 7 p. (Report no. 87-939 E)

__ Credit reform proposal of the Reagan Administration: analysis and policy issues, by James M. Bickley. [Washington] May 26, 1987. 14 p. (Report no. 87-456 E)

__ The Federal Financing Bank: background, operations, and budget status, by James M. Bickley. [Washington] May 19, 1984. 31 p. (Report no. 84-83 E)

² U.S. Executive Office of the President. Office of Management and Budget. Special Analysis F, Federal Credit Programs, Budget of the United States Government, Fiscal Year 1988. Washington, U.S. Govt. Print. Off., 1987. p. F32.

³ Ibid., p. F33.

⁴ U.S. President's Commission on Budget Concepts. Report of the President's Commission on Budget Concepts. Washington, U.S. Govt. Print. Off., 1967. p. 105.

⁵ Ibid., p. 14.

⁶ Ibid., p. 16.

⁷ Ibid.

⁸ Ibid., p. 18.

⁹ U.S. President's Commission on Budget Concepts. Loans, Participation Certificates, and the Financing of Budget Deficits. In: Staff Papers and Other Materials Reviewed by the President's Commission. Washington, U.S. Govt. Print. Off., October 1967. p. 297.

¹⁰ Report of the President's Commission on Budget Concepts, p. 51.

¹¹ Ibid.

¹² Ibid., p. 52.

¹³ Ibid., p. 51-52.

¹⁴ Ibid., p. 51.

¹⁵ Ibid., p. 84-85.

¹⁶ Ibid., p. 53-54.

¹⁷ Ibid., p. 54.

¹⁸ U.S. Executive Office of the President. Office of Management and Budget. Budget of the United States Government, Fiscal Year 1969. Washington, U.S. Govt. Print. Off., 1968. p. 525.

¹⁹ Ibid., p. 49

²⁰ Ibid., p. 10.

²¹ OMB, U.S. Budget, FY 1991, p. A27.

²² U.S. Executive Office of the President. Office of Management and Budget. Special Analysis F, Federal Credit Programs, Budget of the United States Government, Fiscal Year 1990. Washington, U.S. Govt. Print. Off., 1989. p. F4.

²³ Gramm-Rudman-Hollings is the frequently used name for the Balanced Budget and Emergency Deficit Control Act of 1985 (P.L. 99- 177).

²⁴ U.S. Library of Congress. Congressional Research Service. The Federal Financing Bank: Background, Operations, and Budget Status. Report No. 84-83 E, by James M. Bickley. Washington, 1984. 31 p.

²⁵ In 1983, the first version of the Appropriations Plan was proposed by David G. Mathiason, Deputy Associate Director for Budget Review, Office of Management and Budget. The Market Plan was proposed in: U.S. Congressional Budget Office. New Approaches to the Budgetary Treatment of Federal Credit Assistance. Washington, U.S. Govt. Print. Off., 1984. p. 57-61. (Hereinafter referred to as CBO, New Approaches to the Budgetary Treatment of Federal Credit Assistance.)

²⁶ Ibid., p. 52-55.

²⁷ Ibid., p. 57.

²⁸ OMB, U.S. Budget, FY 1991 p. 244.

²⁹ Telephone interview with OMB official on March 14, 1990.

³⁰ H.R. 1127, Federal Credit Reform Act of 1989, 101st Congress, 1st Session, February 27, 1989. p. 2. (Hereinafter referred to as the Act.)

³¹ Ibid., p. 4.

³² Ibid., p. 4.

³³ Ibid., p. 6.

³⁴ Ibid.

³⁵ Ibid., p. 16.

³⁶ Ibid., p. 6.

³⁷ Ibid., p. 7.

³⁸ Ibid., p. 10.

³⁹ Ibid., p. 10-11.

⁴⁰ Ibid., p. 21.

⁴¹ Ibid., p. 8.

⁴² Ibid.

⁴³ Ibid., p. 17.

⁴⁴ Ibid., p. 8-9.

⁴⁵ Ibid., p. 11.

⁴⁶ Ibid., p. 5

⁴⁷ Ibid., p. 12-13.

⁴⁸ Ibid., p. 21.

⁴⁹ The Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (FIRREA) abolished the Federal Savings and Loan Insurance Corporation and replaced it with three entities. These three entities were the Resolution Trust Corporation, the FSLIC Resolution Fund (under FDIC management), and the Savings Association Insurance Fund. For an explanation of these entities, see: OMB, U.S. Budget, FY 1991, p. 251.

⁵⁰ U.S. Executive Office of the President. Office of Management and Budget. Budget of the United States Government, Fiscal Year 1990. Washington, U.S. Govt. Print. Off., 1989, p. 244.

⁵¹ For a breakdown of estimated subsidy costs for direct loan obligations by agency and program, see table 3 in the appendix.

⁵² For a breakdown of estimated subsidy costs for guaranteed loan commitments by agency and program, see table 4 in the appendix.

⁵³ U.S. General Accounting Office. Budgetary Treatment of Federal Credit Programs. Washington, April 1989. p. 4.

⁵⁴ U.S. Congressional Budget Office. Credit Reform: Comparable Budget Costs for Cash and Credit. Washington, U.S. Govt. Print. Off., 1989. p. 69. (Hereinafter referred to as CBO, Credit Reform.)

⁵⁵ Report of the President's Commission on Budget Concepts, p.51.

⁵⁶ CBO Credit Reform, p. 38.

⁵⁷ The Act, p. 10.

⁵⁸ U.S. General Accounting Office. Loan Asset Sales: OMB Policies Will Result In Program Objectives Not Being Fully Achieved. Washington, September 1986. p. 24-25.

⁵⁹ GAO, Budgetary Treatment of Federal Credit Programs, p. 8.

⁶⁰ Ibid., p. 24.

⁶¹ CBO, Credit Reform, p. 52-53.

⁶² Ibid., p. 53-55

⁶³ Ibid., p. 69.

⁶⁴ Statement of Robert D. Reischauer, Director of the Congressional Budget Office, before the Task Force on Urgent Fiscal Issues, House Committee on the Budget, April 11, 1990. p. 11.

⁶⁵ In addition to the Federal Credit Reform Act of 1989, recent legislation includes the following: H.R. 3929, Budget Process Reform Act of 1990, 101st Congress, 2nd Session, January 31, 1990, p. 47-53; and H.J. Res. 324, 100th Congress, 1st Session, July 31, 1987, p. 82- 98.

⁶⁶ Statement of Charles A. Bowsher, Comptroller General of the United States, before the Task Force on Urgent Fiscal Issues, House Committee on the Budget, April 11, 1990. p. 13.

⁶⁷ Ibid., p. 14.