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GAO Agrees: Current Accounting Method Beats Fair Value Approach

“The Current Method To Estimate Credit Subsidy Costs Is More Appropriate for Budget Estimates Than A Fair Value Approach.”  The title of today's report by the Government Accountability Office (GAO) says it all.

Currently, the federal government shows the actual amounts the government spends and receives on its loan and loan guarantee programs.  Unlike with other programs, under the Federal Credit Reform Act (FCRA) the government records an estimate of its ultimate costs (or gains) up front, when the loan or guarantee is issued, rather than spread over time.  (It later corrects its books if the cash flow turns out different from expected.)  But up front or not, the budget ultimately records actual costs or savings.

An alternative approach, called “fair value” accounting, would likewise show the expected gain or loss up front.  But it would add an extra “cost” or “market risk premium” — an amount that the government never actually pays anyone — to reflect the fact that the expected cash flow is worth less to private, loss-averse markets than to the government. 

As we’ve written here, here, and here, we think the budget should reflect actual payments to and from the government, no more and no less, so we support the current method.  Today, GAO agreed; it wrote:

The additional market risk recognized under the fair value approach does not reflect additional cash costs beyond those already recognized by FCRA.  The introduction of market risk into subsidy costs under the fair value approach would (1) be inconsistent with long-standing federal budgeting practices primarily based on cash outlays; (2) be inconsistent with the budgetary treatment of similarly risky programs; (3) introduce transparency and verification issues with respect to inclusion of a noncash cost in budget totals; and (4) involve significant implementation issues, such as the need for additional agency resources. Consequently, GAO does not support the use of the fair value approach to estimate subsidy costs for the budget and believes the current FCRA methodology is more appropriate for this purpose as it represents the best estimate of the direct cost to the government and is consistent with current budgetary practices.

And it concluded:

GAO believes the current FCRA methodology is more appropriate to estimate credit program subsidy costs for the budget.  The construction, use, and interpretation of the federal budget as a system of primarily cash accounts have been the norm for decades. . . .  Although the fair value approach may be useful to decision makers for evaluating the costs against the benefits of federal credit programs in that it accounts for market risks beyond those risks already recognized under FCRA, and the provision of this type of information is consistent with OMB’s guidance . . . requiring biennial reviews of credit programs, it is not appropriate for use in estimating credit subsidy costs for the budget.