Risk & Compliance

Would House-Approved Bill Trim Federal Lending?

The proposed law would change the way the federal government accounts for credit programs, increase the reported budget deficit, and possibly even ...
Marielle SegarraMarch 2, 2012

The House has passed a bill that aims to change the way the government accounts for its credit programs and could trigger cutbacks in federal lending to businesses. The Budget and Accounting Transparency Act requires the government to calculate the amounts budgeted for credit programs using fair-value estimates, the same valuation method the private sector uses.

The Congressional Budget Office estimates the change would increase the reported cost of loan programs — and the reported federal budget deficit — by $55 billion in 2012. That means credit programs that appear deficit-neutral under current budgetary rules, or even some that appear to be raising money for the government, would head into the red. And going forward, budget estimates would always be higher than they would be under current accounting rules.

If the bill becomes law, federal loan programs would be valued at risk-adjusted discount rates, rather than Treasury discount rates. This would tack on a budget cost for market risk, or “the risk that the losses from default will vary with the state of the economy,” says Marvin Phaup, professor of public policy at George Washington University. Budget estimates already include a cost for the expected losses from default, but not for the cost of the market risk associated with those losses.

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Using risk-adjusted rates will allow the government to more accurately account for the risk of federal lending, said House Republican Conference chairman Jeb Hensarling (R-Tex.) in a speech on the House floor: “To help the economy . . . we have got to quit spending money we don’t have. The American people, job creators, have to be able to know that they have a fact-based budget.”

In demanding “no more Solyndras,” Hensarling suggested that the new budget estimates could push the federal government to more carefully scrutinize its lending practices and thereby avoid investments in companies like Solyndra, a solar-panel manufacturer that received a $535 million federal loan guarantee from the Department of Energy in 2009 and filed for Chapter 11 bankruptcy a little more than two years later.

Indeed, some worry that higher reported budget deficits would lead lawmakers to nix funding for other business loans and loan guarantees from such organizations as the Department of Agriculture and the Small Business Administration. In the short term, the proposed law would not directly affect the terms of the loans the government distributes or guarantees, because it allows lawmakers to raise caps on discretionary programs.

But in time the change could push the federal government to cut loan programs, some say. One industry group, the National Rural Electric Cooperative Assn. (NRECA), opposes the rule because it believes higher deficits will lead to a dip in the federal loan assistance that electric cooperatives receive through the Department of Agriculture.

“If enacted, this legislation will have a negative effect on the economy of rural America, raising electricity rates unnecessarily,” wrote NRECA CEO and former U.S. representative Glenn English (D–Okla.) in a letter to House Speaker John Boehner (R-Ohio). “The end result will be fewer loan dollars available to electric cooperatives to build, maintain, and improve the infrastructure needed to keep electricity safe, affordable, and reliable.”

Indeed, cutbacks on federal loan programs would be a logical result of a switch to using risk-adjusted rates, Phaup says. “That’s the whole point [of the bill]: to get Congress to change the decisions they make so that those are based on more comprehensive measures of the cost of whatever they’re doing.” Although the bill “was not intended to directly affect borrowers,” it may accomplish just that, by influencing “decision making within the federal government,” he says.

The Budget and Accounting Transparency Act has been referred to the Senate. A similar bill sponsored by Sens. Olympia Snowe (R–Maine) and Jeff Sessions (R–Ala.), the Honest Budget Act, was introduced in the Senate last fall. The Small Business Administration has declined to comment on the bill until it becomes law.