Credit Reform: Appropriation of Negative Subsidy Receipts Raises
Questions (Letter Report, 09/26/94, GAO/AIMD-94-58).

As part of GAO's investigation of several highly technical issues
related to implementation of the Federal Credit Reform Act of 1990, this
report examines agencies' budgetary treatment of negative subsidies--in
which receipts exceed outlays--and whether this treatment could harm
program management and budgeting. GAO discusses how the Office of
Management and Budget has treated negative subsidies of the Federal
Housing Administration's Mutual Mortgage Insurance Fund and the
Export-Import Bank in the budget. GAO also notes the budget treatment of
the Government National Mortgage Association's negative subsidy
receipts. Further, the report discusses an alternative to appropriating
the present value of estimated negative subsidy receipts. Further, the
report discusses estimated negative subsidy receipts and the additional
legislative requirements imposed on the Federal Housing Administration's
Mutual Mortgage Insurance program.

--------------------------- Indexing Terms -----------------------------

 REPORTNUM:  AIMD-94-58
     TITLE:  Credit Reform: Appropriation of Negative Subsidy Receipts 
             Raises Questions
      DATE:  09/26/94
   SUBJECT:  Budget authority
             Appropriations
             Budget obligations
             Direct loans
             Budget receipts
             Subsidies
             Housing programs
             Exporting
             Credit
             Administrative costs
IDENTIFIER:  Mutual Mortgage Insurance Fund
             
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Cover
================================================================ COVER


Report to the Chairman, Committee on the Budget, U.S.  Senate

September 1994

CREDIT REFORM - APPROPRIATION OF
NEGATIVE SUBSIDY RECEIPTS RAISES
QUESTIONS

GAO/AIMD-94-58

Credit Reform


Abbreviations
=============================================================== ABBREV

  AFMD - Accounting and Financial Management Division
  AIMD - Accounting and Information Management Division
  FCRA - Federal Credit Reform Act
  FHA - Federal Housing Administration
  GAO - General Accounting Office
  GI/SRI - General Insurance and Special Risk Insurance Program
  GNMA - Government National Mortgage Association
  MMI - Mutual Mortgage Insurance
  OBRA - Omnibus Budget Reconciliation Act
  OMB - Office of Management and Budget

Letter
=============================================================== LETTER


B-255388

September 26, 1994

The Honorable Jim Sasser
Chairman, Committee on the Budget
United States Senate

Dear Mr.  Chairman: 

You requested that we evaluate several highly technical issues
related to implementation of the Federal Credit Reform Act of 1990
(Public Law 101-508).  This report, the fifth in a series,\1 responds
to your questions regarding agencies' budgetary treatment of negative
subsidies (in which receipts exceed outlays) and whether this
treatment could cause adverse effects on program management and
budgeting. 

You specifically asked how the Office of Management and Budget (OMB)
has treated negative subsidies of the Federal Housing
Administration's (FHA's) Mutual Mortgage Insurance (MMI) Fund and the
Export-Import Bank in the budget.  We also note the budget treatment
of the Government National Mortgage Association's (GNMA) negative
subsidy receipts.  Further, the report discusses an alternative to
appropriating the present value of estimated negative subsidy
receipts and the additional legislative requirements imposed on FHA's
MMI program. 


--------------------
\1 See the list of related GAO products on the last page of this
report. 


   RESULTS IN BRIEF
------------------------------------------------------------ Letter :1

The Federal Credit Reform Act does not explicitly address situations
in which credit programs may have negative subsidies.  Negative
subsidies occur when the present value of estimated cash inflows to
the government exceeds the present value of cash outflows.  In some
cases, the Congress has appropriated estimated negative subsidy
receipts.  FHA's MMI Fund and the GNMA received appropriations of
negative subsidy receipts for administrative costs. 

Before credit reform, most discretionary credit programs were placed
in revolving funds, and revenues were available without appropriation
to offset costs.  OMB guidance for implementing the Credit Reform Act
specifies that negative subsidy receipts are not available for
obligation until they have been appropriated and until the direct or
guaranteed loans that would create them have been disbursed. 
Therefore, under this guidance, appropriations of negative subsidy
receipts, unlike appropriations of general funds, do not make budget
authority immediately available for obligation.  This disconnect
between appropriations and available budget authority coupled with
the credit reform requirement that budget authority be available
before direct loans are obligated or loan guarantees are committed
may cause expenditure delays or reductions.  Further, this approach
also may create an incentive for estimates of negative subsidy
receipts to influence estimates of administrative costs, or vice
versa. 

Programs with both positive and negative subsidy direct loans and
loan guarantees, like the Export-Import Bank, present an additional
issue.  The Credit Reform Act calls for appropriating amounts equal
to estimated net subsidy costs (the estimated subsidy cost from
positive subsidy direct loans and loan guarantees offset by estimated
receipts from negative subsidy loans and loan guarantees).  With such
an appropriation (or, from another viewpoint, an appropriation equal
to estimated net outlays), an agency would not have sufficient budget
authority to make all subsidized loans.  For the Export-Import Bank,
the Congress has provided a general fund appropriation which exceeded
the gross subsidy costs of the President's proposed credit program,
thereby avoiding difficulties.  However, this practice does not
conform to the Credit Reform Act's emphasis on net costs. 

Appropriating an amount equal to the estimated net subsidy cost along
with estimated negative subsidy receipts would conform to the Credit
Reform Act and OMB guidance but may not be a solution because, as
noted above in our discussion of appropriations for administrative
costs of FHA and GNMA, such appropriations do not provide budget
authority available for obligation under OMB guidance.  This approach
would introduce a timing issue because loans or loan guarantees with
negative subsidies would have to be disbursed before those with a
positive subsidy and at a level that would make enough budget
authority available for the agency to obligate planned subsidized
loans or loan guarantees. 

This potential for difficulties could be avoided by appropriating an
amount equal to the gross subsidy cost from general funds with
negative subsidy receipts used to reimburse the general fund.  For
fiscal years 1993 and 1994, the Export-Import Bank received an
appropriation of general funds in excess of its proposed gross
subsidy cost, thus avoiding the problem of insufficient available
budget authority. 

FHA's MMI Fund is covered both by the Federal Credit Reform Act and
by housing legislation, and the two are not entirely consistent.  The
housing legislation directs FHA to establish and maintain the net
worth of the Fund, financed by negative subsidy receipts, at a fixed
ratio to outstanding debt to cover losses.  Thus, post-credit reform
borrowers pay for losses from pre-credit reform guarantees and for
anticipated losses from their year's group of guarantees.  In
contrast, under credit reform, permanent indefinite budget authority
is provided to cover pre-credit reform losses that exceed liquidating
account balances.  The current budgetary treatment, whereby FHA holds
the required balances in the financing and liquidating accounts,
accommodates both laws. 

Negative subsidies were treated in the budgets of GNMA, FHA, and the
Export-Import Bank in accordance with appropriation, other statutory
and/or programmatic requirements, but were not consistent with credit
reform requirements.  Also, these negative subsidy programs have
different characteristics and statutory requirements which have led
to each being treated differently from the others. 


   BACKGROUND
------------------------------------------------------------ Letter :2

The Federal Credit Reform Act of 1990 was enacted to better capture
the government's cost of extending credit.  Through accounting and
budget changes, the budget now shows whether credit programs have a
cost to the government (a "positive" subsidy to borrowers), break
even (zero subsidy cost), or make a "profit" (a negative subsidy
cost) before administrative costs are considered.  Credit programs
have negative subsidies when the estimated cost to the government of
providing credit is less than the estimated collections from
repayments, interest, and fees, on a present value basis.\2 The cost
to the government is affected by the cost of borrowing (at Treasury's
rates) and the estimated risk of default.  In practical terms, a
negative subsidy occurs when the interest rate and/or fees charged to
the borrower are more than sufficient to cover the costs of the risk
of default. 

The Credit Reform Act does not explicitly refer to negative subsidies
although its definition of subsidy cost as a net amount implies that
it could be negative.  Furthermore, we found only one statement in
the congressional conference report in which the Congress considered
negative subsidies in enacting this law and it referred only to the
effect of negative subsidy programs on appropriations subcommittee
allocations under the congressional budget process.  After enactment
of the Credit Reform Act, the Office of Management and Budget (OMB)
provided implementation guidance for programs with negative
subsidies, and the Congress appropriated estimated negative subsidy
receipts to fund administrative costs of credit programs. 

The budgetary treatment of negative subsidy credit programs or
activities (whether direct loans or loan guarantees) is outlined in
OMB circulars A-11 and A-34 as follows: 

1. A special fund receipt and expenditure account, known as a
negative subsidy account, is to be established for credit programs
and activities with negative subsidies. 

2. An amount equal to the negative subsidy is to be obligated in the
financing account of the credit activity when a direct loan is
obligated or a loan guarantee commitment is made. 

3. An amount equal to the negative subsidy is to be paid from the
financing account to the negative subsidy account when the loan is
disbursed by the government (direct loan) or a third party
(guaranteed loan).  At that time, a proprietary receipt\3 is recorded
in the negative subsidy account which shows negative budget authority
in the amount of the estimated negative subsidy.  For loans disbursed
in several payments, receipts are created as the payments are made
and in proportion to the amount of the loan disbursement. 
Appropriations of receipts may not be obligated until the receipts
have actually been credited to the receipt account. 

4. These receipts are not available for obligation or expenditure
unless appropriated by law. 

Budgetary control on credit programs with negative subsidies is
imposed by the program limitation (contained in the annual
appropriations acts) that sets a maximum face value of credit that
may be extended by a program and by the requirement that negative
subsidy receipts be appropriated before they are available for
obligation.  For credit programs with positive subsidies, the level
of appropriated budget authority provides budgetary control because
programs must have budget authority available before they can
obligate a positive subsidy loan.  However, a budget authority limit
does not control negative subsidy programs because negative subsidy
loans do not require budget authority before they can be obligated;
rather, they generate negative budget authority which could be
appropriated to expand the program. 

A more comprehensive discussion of the history and principles of
credit reform is in appendix I. 


--------------------
\2 Present value means the worth of future returns or costs in terms
of money paid today. 

\3 A proprietary receipt is a collection from outside the government,
deposited in a receipt account, that results from the government's
business-type or market-oriented activities.  Under credit reform,
the present value of the estimated receipt amount would be recorded
when the associated loan is disbursed. 


   SCOPE AND METHODOLOGY
------------------------------------------------------------ Letter :3

To attain our objectives, we (1) reviewed criteria such as relevant
sections of the Federal Credit Reform Act of 1990, relevant
appropriation and authorizing legislation, and OMB guidance, (2)
reviewed budget proposals and actions for fiscal years 1992 through
1995 for FHA, GNMA, and the Export-Import Bank and compared them with
the appropriate criteria mentioned above, (3) discussed and confirmed
the information above with OMB and Congressional Budget Office staff,
obtaining their rationales for budget proposals and actions, (4)
analyzed the information and supporting rationales, and (5)
recommended an alternative approach to the current practice of
appropriating present value based estimated negative subsidy receipts
that would avoid the potential for delays or reductions in planned
expenditures inherent in the current approach. 

We performed our work in Washington, D.C., from October 1992 through
April 1994 in accordance with generally accepted government auditing
standards. 


   APPROPRIATING PRESENT VALUED
   ESTIMATED NEGATIVE SUBSIDY
   RECEIPTS COULD CAUSE DELAYS OR
   REDUCTIONS IN PLANNED
   EXPENDITURES
------------------------------------------------------------ Letter :4

The Congress has appropriated present valued estimated negative
subsidy receipts to fund administrative, but not program, costs of
credit transactions.  Unlike appropriations of general funds,
appropriations of estimated negative subsidy receipts do not provide
budget authority immediately available for obligation.  Rather, OMB
guidance in Circular A-11 provides that an appropriation of budget
authority from negative subsidy receipts is available for obligation
only when, and if, negative subsidy receipts actually have been
credited to the receipt account--done when negative subsidy loans are
disbursed--during the budget year.  Therefore, in some, if not all,
cases these appropriations have been made both before the negative
subsidy receipts were transferred to the negative subsidy account and
before the action that would create them (that is, the loan
disbursement) would have occurred.  OMB points out that some ".  .  . 
situations may require an appropriation from the general fund
sufficient to permit obligations until adequate receipts are
available."\4

Appropriating present valued estimated negative subsidy receipts to
fund administrative costs has the advantage of showing the net cost
to the general fund.  However, it complicates a program manager's
administrative burden.  Such appropriations could require an agency
to delay some obligations for administrative expenditures to avoid
Antideficiency Act violations\5 if the pace of making budget
authority available for obligation (from disbursement of negative
subsidy loans) is slower than that for planned expenditures.  An
additional appropriation of general funds might be required to avoid
reducing administrative expenditures if the level of available budget
authority (by disbursement of negative subsidy loans) is insufficient
to cover necessary expenses.\6

Such delays or reductions could affect credit program operations
including credit extension, loan servicing, collection of delinquent
loans, and monitoring for compliance with laws and regulations. 
Further, this approach creates an incentive for estimates of negative
subsidy receipts to influence administrative cost estimates, or vice
versa.  When present value based estimates are used to fund current
expenditures, the expenditure will have been made by the time the
estimates may be proven incorrect.  General funds, from permanent
indefinite appropriations, would be required if re-estimates in
subsequent years show fewer present value based negative subsidy
receipts than expected. 

When the Congress has appropriated negative subsidy receipts for the
administrative cost of FHA's MMI Program and GNMA's credit program,
the appropriated amount has been based on present valued estimated
negative subsidy receipts from loans expected to be made in the
budget year.  For fiscal year 1994, the Congress appropriated
negative subsidy receipts for the administrative costs of FHA's MMI
Fund ($262.8 million) and of GNMA ($8 million).\7 The statutory
language does not indicate whether the Congress was aware that the
negative subsidy account might not contain cash receipts in the
amount specified at the time of appropriation.\8 However, as
explained earlier, the disconnect between appropriations of present
valued estimated negative subsidy receipts and the availability of
budget authority may cause delays or reductions in planned
expenditures. 


--------------------
\4 OMB Circular A-11, "Preparation and Submission of Budget
Estimates," Section 33.5(m), August 1993. 

\5 Section 1341 (a), title 31 U.S.C., the Antideficiency Act,
prohibits the making or authorizing of expenditures or obligations
which exceed the amount appropriated. 

\6 This problem is unlikely to arise with either FHA or GNMA because
their operating expenses are paid from the department-level salaries
and expenses account of the Department of Housing and Urban
Development, and approximately half of the funds in that account are
appropriated from the general fund.  The account likely contains
sufficient funds to support FHA and GNMA operations until negative
subsidy loans are disbursed. 

\7 For fiscal year 1994, GNMA's fee collections, interest, and other
income were expected to exceed expenses by $16 million for
post-credit reform loan guarantees.  This amount was not to be paid
to the negative subsidy account as required by credit reform guidance
in OMB's Circular A-11 but was to be retained in the financing
account to cover future year expenses and as a reserve against losses
that may be incurred on guarantees. 

\8 The FHA appropriation specifies that approximately $262.8 million
is "to be derived from the {negative subsidy} loans receipt account. 
.  ." and the GNMA appropriation specifies that approximately $8
million is "to be derived from the {negative subsidy} loan receipt
account.  .  .  ."


   CREDIT REFORM REQUIREMENTS
   COULD CAUSE UNEXPECTED
   DIFFICULTIES FOR PROGRAMS WITH
   A MIX OF POSITIVE AND NEGATIVE
   SUBSIDY CREDIT
------------------------------------------------------------ Letter :5

In accordance with the Credit Reform Act, OMB guidance stipulates
that the budget authority needed for a credit program or activity is
to be based on the net subsidy cost of the budget year's credit
transactions--the gross subsidy cost from positive subsidy loans
offset by the "profit" from negative subsidy credit.  However, to
allow credit obligations and commitments up to authorized program
limitations, a program with both positive and negative subsidies must
have an appropriation of budget authority equal to the gross subsidy
cost.  This is because a credit program must have available for
obligation a level of budget authority equal to the subsidy cost
before obligating a direct loan or making a commitment for a loan
guarantee.  For programs with both positive and negative subsidies,
budget authority based on the net subsidy cost would not be
sufficient to make all planned positive subsidy direct loans and loan
guarantees. 

A hypothetical example involving a credit program comprised of two
$100 loans, one with a positive subsidy of 10 percent, the other with
a negative subsidy of 5 percent, demonstrates this point.  If the
program received an appropriation equal to the net subsidy cost ($5),
program officials could obligate only the negative subsidy loan
because that does not require budget authority.  They would not be
able to obligate the positive subsidy loan costing $10 because doing
so would result in a violation of the Antideficiency Act--obligating
$10 rather than the $5 that had been appropriated. 

An appropriation equal to the gross subsidy cost may be derived from
general funds equal to the gross subsidy cost ($10), or from general
funds equal to the net subsidy cost ($5) plus an appropriation of the
expected negative subsidy receipts ($5).  While the second option may
more accurately reflect the expected cost to the government,
appropriation of present valued estimated negative subsidy receipts
could cause delays or reductions in planned expenditures because,
according to OMB guidance, the appropriation does not provide budget
authority available for obligation. 

For fiscal year 1993, the Congress authorized a higher program
limitation ($15.5 billion) than requested in the President's budget
and appropriated $757 million from general funds, more than the gross
subsidy cost of the requested credit program.  This provided
sufficient budget authority for the Export-Import Bank to provide
more credit than it had planned.  Further, because none of the
present value based estimated negative subsidy receipts was
appropriated, the potential for delays or reductions in planned
expenditures was avoided.  For fiscal year 1994, the Congress
continued to provide an appropriation from general funds but did not
specify a program limitation, thus allowing the Bank to make an
unlimited amount of negative subsidy loans and loan guarantees.  By
appropriating general funds that covered the full cost of the Bank's
proposed credit program for both years, the estimated costs were
reported on a gross basis since estimated receipts were not offset
against estimated program costs. 


   AN ALTERNATIVE APPROACH TO
   APPROPRIATING NEGATIVE SUBSIDY
   RECEIPTS
------------------------------------------------------------ Letter :6

Appropriating general funds for all administrative and subsidy costs
of a credit program and using negative subsidy receipts to reimburse
the general fund have an advantage over appropriating negative
subsidy receipts.  General fund appropriations would be available
immediately, thus avoiding the delays or reductions in planned
expenditures that could arise from the disconnect between
appropriation of present value based estimated negative subsidy
receipts and the availability of budget authority for obligation. 
Credit program managers would not need to make program decisions
based on whether loans generating negative subsidies already had been
made.  However, this alternative could misrepresent the net cost of a
credit program because negative subsidy receipts would be offset
against the appropriations bill as a whole, rather than against the
credit program. 


   PROGRAM LEGISLATION MAY REQUIRE
   BUDGET TREATMENT DIFFERENT FROM
   CREDIT REFORM
------------------------------------------------------------ Letter :7

The housing legislation that established reserve requirements for the
FHA's MMI Fund is reconcilable with credit reform requirements. 
Under the housing legislation, unanticipated losses from credit
extended before October 1, 1991, are to be financed through fees paid
by later borrowers; however, under credit reform, the taxpayer
finances such losses through permanent indefinite budget authority. 
FHA has effectively resolved these different requirements by using
the premiums to raise the balances in the financing and liquidating
accounts toward the required reserve level. 

Housing legislation enacted concurrently with the Credit Reform Act
in another section of the Omnibus Budget Reconciliation Act of 1990
(OBRA 1990) directed the Secretary to establish an MMI Fund reserve
at a specified level high enough to ensure the Fund's actuarial
soundness.\9 This section of OBRA 1990 also established a premium
schedule under which future borrowers will provide funds to increase
the Fund balances to achieve and maintain the required reserve level. 
The Secretary is authorized to adjust premiums and to suspend
distributions to past borrowers to ensure that the required reserve
level is reached and maintained. 

The Credit Reform Act, also contained in OBRA 1990, requires that
each year's credit transactions be grouped separately and that a
credit subsidy appropriation be obtained to cover their cost.  OMB
staff report that FHA will draw on the permanent indefinite budget
authority under credit reform to cover unanticipated losses from
post-credit reform transactions.  However, credit reform and the
housing legislation differ on the financing source for losses from
transactions made prior to October 1, 1991.  The Credit Reform Act
provides that pre-credit reform borrowers would finance losses to the
extent that funds are available in the liquidating account and the
taxpayer would cover any excess losses through the permanent
indefinite budget authority.  The housing legislation provides that
fees from current and pre-credit reform borrowers held as part of the
required reserve would cover losses on pre-credit reform
transactions. 

OMB and FHA have dealt with the differing requirements of the two
laws by building balances in the financing and liquidating accounts
toward the required reserve level.  In fiscal year 1992, FHA
transferred $505 million in negative subsidy receipts from the
financing account to the liquidating account.  This transfer, along
with the subsidy receipts retained in the financing account for
estimated defaults on loans to be made in fiscal year 1992, began
building the MMI Fund to the required reserve level.  In fiscal year
1993, $1.4 billion of negative subsidy receipts was added to the
liquidating account's balance.  The President's fiscal year 1995
budget estimates that $1.1 billion in negative subsidy receipts will
be paid to the liquidating account in fiscal year 1994 and $1.4
billion in fiscal year 1995 to build the fund balance toward the
reserve level required to be achieved by November 2000. 

When possible, two provisions of law dealing with the same matter
should be reconciled to the greatest extent practical to give maximum
effect to both since it is presumed that a consistent body of law was
intended.  This principle is especially relevant when the Congress
enacts both provisions at the same time in the same legislative
vehicle--in this case in the Omnibus Budget Reconciliation Act of
1990.  In our view, the capital reserve requirements and the
requirements of credit reform are reconcilable.  When drafting the
Credit Reform Act, the Congress did not exempt the MMI fund from
credit reform requirements.  At the same time, the Congress
recognized that under credit reform, excesses in some accounts would
be transferred to the General Fund of the Treasury.  However, the
conference report accompanying the final version of the Credit Reform
Act also stated that these excesses would not include "balances
necessary to maintain adequate reserves, achieve mandated capital
levels, or preserve the mutuality of certain credit programs."\10
Moreover, the Congress, in the same statute, required FHA to maintain
a certain reserve level.  In our opinion, FHA's approach of dividing
the reserve between the credit reform financing and liquidating
accounts is a reasonable approach to reconciling the differing
statutory requirements. 

While this treatment is reasonable, the FHA credit accounts differ in
certain respects from other credit accounts.  First, estimated
negative subsidy receipts were paid from the financing account to the
liquidating account instead of to a negative subsidy account as
specified by credit reform requirements.  Second, FHA transferred a
present value amount, to be based on estimates, from the financing
account to the liquidating account which the Credit Reform Act
defines as cash based.  Third, the practice of shifting funds
received from current loans to cover default costs of pre-credit
reform loans breaches the strict wall in the Credit Reform Act that
separates credit transactions made before October 1, 1991, from those
made later.  On the other hand, the Congress established the MMI Fund
reserve so that premiums paid by current FHA borrowers would finance
losses of pre-credit reform MMI loan guarantees. 


--------------------
\9 OBRA 1990, 12 U.S.C.  1711 (f)(1), requires that FHA achieve and
maintain the economic net worth of the Fund, defined as the current
cash available to the Fund plus the net present value of future cash
flows, at or greater than 2 percent of the remaining obligation on
outstanding mortgages by November 2000. 

\10 H.  Rept.  101-964. 


   CONCLUSIONS
------------------------------------------------------------ Letter :8

Appropriating present valued estimated negative subsidy receipts, as
done currently to fund administrative costs in FHA's MMI Program and
GNMA, may cause delays or reductions in planned expenditures.  This
could happen if budget authority made available for obligation,
according to OMB guidance, by disbursement of negative subsidy loans
does not keep pace with planned expenditures.  An additional
appropriation of general funds may be needed to avoid program
reductions when the level of negative subsidy loan disbursement is
insufficient to make available for obligation the amount of budget
authority needed for administrative expenditures.  Such an approach
also may create incentives for estimates of negative subsidy receipts
to influence estimates of expenditures, or vice versa. 

The current congressional practice of providing to the Export-Import
Bank a general fund appropriation which exceeds the gross subsidy
cost of its proposed credit program avoids the difficulties posed by
the credit reform requirement for an appropriation to equal cost
(defined as a net amount).  While this appropriation level also could
have been provided from a combination of general funds and negative
subsidy receipts, appropriating estimated negative subsidy receipts
could cause delays or reductions in planned expenditures.  Regardless
of the source of the funding, however, the appropriation must at
least equal the gross subsidy cost for the Export-Import Bank to be
able to complete all planned positive subsidy transactions, subject
to the program limitation. 

FHA's MMI Fund currently is subject to two different statutory
regimes--the Credit Reform Act of 1990 and the OBRA 1990 housing
provisions.  Credit reform provides a permanent appropriation to
cover losses from credit transactions made prior to October 1, 1991,
when liquidating account balances are insufficient, while housing
provisions require that the Fund's reserve be used.  Although either
approach alone could be used to finance losses, OMB and FHA have
implemented these statutes in a way that reasonably accommodates
both. 


   RECOMMENDATIONS TO THE CONGRESS
------------------------------------------------------------ Letter :9

To avoid the potential for appropriations of estimated negative
subsidy receipts to cause delays or reductions in planned
expenditures which may occur under OMB's reasonable implementing
guidance, we recommend that the Congress appropriate only general
funds for all subsidy and administrative costs of credit programs,
using negative subsidy receipts to reimburse the general fund. 

We recommend that the Congress amend the Credit Reform Act to require
the appropriation of an amount equal to the gross subsidy cost for
credit programs with both positive and negative subsidy components. 


   AGENCY COMMENTS AND OUR
   EVALUATION
----------------------------------------------------------- Letter :10

OMB provided comments on a draft of this report.  In addition, some
technical comments were transmitted informally and have been
incorporated where appropriate. 

OMB agreed with our recommendation to appropriate general funds for
the subsidy costs of credit programs as an appropriate budgetary
treatment for credit programs with a mixture of positive and negative
subsidies.  We did not limit this treatment only to programs with a
mixture of positive and negative subsidies or only to the subsidy
cost.  It could be used for all credit programs with negative subsidy
receipts, including those with entirely negative subsidy costs, and
would apply to administrative costs as well as subsidy costs.  OMB
said that because delays in obligations are currently not a problem
for the two programs (FHA's MMI and GNMA) operating with entirely
negative subsidies, the delay problem currently exists only for
programs with a mixture of positive and negative subsidies.  We would
not apply this treatment to FHA's MMI program because of the
additional requirements in the housing authorization sections of OBRA
1990. 

OMB also said that "although it was not strictly consistent with a
narrowly interpreted definition of cost in the FCRA [Federal Credit
Reform Act], appropriations were requested, enacted, and executed for
EXIM Bank on a gross basis, while offsetting the appropriations
action with the negative subsidy receipts.  This method was developed
to resolve the types of problems that GAO lists in this report."

Although the amount requested may have been equal to the gross
subsidy cost and OMB may have treated the appropriation as if it were
a gross amount during budget execution, the appropriation language in
both the OMB request and the enacted appropriation specified that the
appropriation was for the "cost" of the credit program as "defined in
section 502 of the Congressional Budget Act of 1974." This section
says ".  .  .  the term 'cost' means the estimated long-term cost to
the Government of a direct loan or loan guarantee, calculated on a
net present value basis.  .  .  ." We recommended that the Congress
consider changing the Credit Reform Act to address this problem which
is discussed earlier in our report and acknowledged by OMB. 

OMB concurred with our conclusion that OMB and FHA have implemented
different statutory provisions from the Credit Reform Act and the
housing sections of the OBRA 1990 in a way that reasonably
accommodates both laws. 


--------------------------------------------------------- Letter :10.1

We will send copies of this report to the Acting Director of the
Office of Management and Budget, the Director of the Congressional
Budget Office, the Secretary of Treasury, the Secretary of Housing
and Urban Development, the President of the Government National
Mortgage Association, the President and Chairmen of the EXIM Bank,
the Chairman and the ranking minority members of the Senate Committee
on Appropriations and the House Committee on Appropriations.  We also
will make copies available to others upon request. 

Please contact me at (202) 512-9142 if you or your staff have any
questions.  Major contributors to this report are listed in appendix
II. 

Sincerely yours,

Susan J.  Irving
Associate Director
Budget Issues


BACKGROUND:  CREDIT REFORM
=========================================================== Appendix I

This background appendix also will be a part of two other reports on
credit reform implementation:  the use of estimated future credit
savings to offset current spending\1 and an evaluation of decisions
to include certain programs under the Federal Credit Reform Act.\2


--------------------
\1 See Credit Reform:  Speculative Savings Used to Offset Current
Spending Increase Budget Uncertainty (GAO/AIMD-94-46, March 18,
1994). 

\2 See Credit Reform:  Case-by-Case Assessment Advisable in
Evaluating Coverage, Compliance (GAO/AIMD-94-57, July 28, 1994). 


------------------------------------------------------- Appendix I:0.1

The federal government uses direct loans and loan guarantees as tools
to achieve numerous program objectives such as assistance to housing,
agriculture, education, small businesses, and foreign governments. 
At the end of fiscal year 1993, the face value of the government's
direct loans and loan guarantees totaled a reported $861 billion, of
which $201 billion was in direct loans and $660 billion was in loan
guarantees. 

After over 20 years of discussion about the shortcomings of using
cash budgeting for credit programs and activities, the Federal Credit
Reform Act of 1990 was enacted on November 5, 1990, as Title 13B of
the Omnibus Budget Reconciliation Act of 1990, Public Law 101-508. 
The Credit Reform Act changed the budget treatment of credit programs
so that their costs can be compared more accurately with each other
and with the costs of other federal spending.  It also was intended
to ensure that the full cost of credit programs over their entire
lives would be reflected in the budget when the loans were made so
that the executive branch and the Congress might consider that cost
when making budget decisions. 

In addition, it was recognized that credit programs had different
economic effects than most budget outlays, such as purchases of goods
and services, income transfers, and grants.  In the case of direct
loans, for example, the fact that the loan recipient was obligated to
repay the government over time meant that the economic impact of a
direct loan disbursement could be much less than other budget
transactions of the same dollar amount. 

CREDIT REFORM WAS DESIGNED TO
REMOVE DIFFICULTIES CAUSED BY CASH
TREATMENT

Before credit reform, it was difficult to make appropriate cost
comparisons between direct loan and loan guarantee programs and
between credit and noncredit programs.  Credit reform requirements
were formulated to address the factors that caused this problem. 

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 are disbursed. 

CREDIT REFORM WAS DESIGNED TO
ALLOW APPROPRIATE COST COMPARISONS

Before credit reform, credit programs--like other programs--were
reported in the budget on a cash basis.  This cash basis distorted
costs and, thus, the comparison of credit program costs with other
programs intended to achieve similar purposes, such as grants.  It
also created a bias in favor of loan guarantees over direct loans. 

Loan guarantees appeared to be free in the short run while direct
loans appeared to be very expensive because the budget did not
recognize that at least some of the loan guarantees would default and
that some of the direct loans were to be repaid. 

For direct loans, the budget for most discretionary accounts used
revolving funds which showed budget authority and outlays in the
amount that loan disbursements in the current year exceeded
repayments received from all past loans in that budget year.  This
cash approach overstated direct loan costs in the initial years of a
program when loan disbursements were likely to be greater than
repayments.  Conversely, this treatment understated costs in later
years when loan repayments were more likely to be much larger
relative to disbursements.  Cash-based budgeting did not recognize
that at least a portion of the loan outlays would be repaid in the
future.  In contrast, for loan guarantees, the budget did not record
any outlays when the guarantees were made (except the negative outlay
resulting from any origination fees), even though they were likely to
entail future losses.  Budget authority and outlays were recorded
only when, and if, defaults occurred. 

Credit reform changed this treatment for direct loans and loan
guarantees made on or after October 1, 1991.  It required that budget
authority to cover the cost to the government of new loans and loan
guarantees (or modifications to existing credit instruments) be
provided before the loans, guarantees, or modifications are made. 
Credit reform requirements specified a net cost approach using
estimates for future loan repayments and defaults as elements of the
cost to be recorded in the budget.  This puts direct loans and loan
guarantees on an equal footing; it permits the costs of credit
programs to be compared with each other and with the costs of
noncredit programs when making budget decisions. 

CREDIT REFORM IDENTIFIES THE
GOVERNMENT'S COST OF CREDIT
ACTIVITIES

Credit reform requirements separate the government's cost of
extending or guaranteeing credit, called the subsidy cost, from
administrative and unsubsidized program costs.  Administrative
expenses receive separate appropriations.  They are treated on a cash
basis and reported separately in the budget.  The unsubsidized
portion of a direct loan is that which is expected to be recovered
from the borrower. 

The Credit Reform Act defines the subsidy cost of direct loans as the
present value of disbursements--over the loan's life--by the
government (loan disbursements and other payments) minus estimated
payments to the government (repayments of principal, payments of
interest, and other payments) after adjusting for projected defaults,
prepayments, fees, penalties, and other recoveries.  It defines the
subsidy cost of loan guarantees as the present value of cash flows
from estimated payments by the government (for defaults and
delinquencies, interest rate subsidies, and other payments) minus
estimated payments to the government (for loan origination and other
fees, penalties, and recoveries).  In making these calculations,
agencies must include the cost to the federal government of borrowing
the funds. 

According to OMB guidance, credit programs have a positive subsidy,
that is, they lose money, when the present value of estimated
payments by the government exceeds the present value of estimated
receipts.  Conversely, negative subsidy programs are those in which
the present value of estimated collections is expected to exceed the
present value of estimated payments; in other words, the programs
make money (aside from administrative expenses). 

CREDIT PROGRAMS NOW USE THREE
BUDGETARY ACCOUNTS

The Credit Reform Act set up a special budget accounting system to
record the budget information necessary to implement credit reform. 
It provides for three types of accounts--program, financing, and
liquidating--to handle credit transactions. 

Credit obligations and commitments made on or after October 1,
1991--the effective date of credit reform--use only the program and
financing accounts.  The program account receives separate
appropriations for administrative and subsidy costs of a credit
activity and is included in budget totals.  When a direct or
guaranteed loan is disbursed, the program account pays the associated
subsidy cost for that loan to the financing account.  The financing
account, which is nonbudgetary,\3 is used to record the cash flow
associated with direct loans or loan guarantees over their lives.  It
finances loan disbursements and the payments for loan guarantee
defaults with (1) the subsidy cost payment from the program account,
(2) borrowing from the Treasury, and (3) collections received by the
government.  Figure I.1 diagrams this cash flow. 

   Figure I.1:  Credit Reform Cash
   Flow Simplified

   (See figure in printed
   edition.)

If subsidy cost calculations are accurate, the financing account will
break even over time as it uses its collections to repay its Treasury
borrowing. 

Direct loans and loan guarantees made before October 1, 1991, are
reported on a cash basis in the liquidating account.  This account
continues the cash budgetary treatment used before credit reform.  It
has permanent indefinite budget authority\4 to cover any losses. 
Excess balances are transferred periodically--at least annually--to
the Treasury. 

In addition to the three accounts specified in the Credit Reform Act,
OMB has directed that credit programs or activities with negative
subsidies must have special fund receipt accounts to hold receipts
generated when the program or activity shows a profit.  OMB guidance
provides that these funds cannot be used unless appropriated. 

OMB AND TREASURY PROVIDE
IMPLEMENTATION GUIDANCE

OMB and the Department of the Treasury provide guidance on
implementing credit reform.  OMB's written guidance is contained
primarily in OMB Circulars A-11, A-34, and A-129.\5 OMB also has
issued memoranda to provide additional implementation guidance
addressing specific situations.  The Treasury's guidance is provided
in materials such as Basic Transactions Relating to Guaranteed Loans
and Subsidies (April 30, 1992) which contains a number of
illustrative cases developed by its Financial Management Service and
distributed to agencies as examples of how to account for credit
reform transactions. 

INDIVIDUAL PROGRAM CHARACTERISTICS
RAISE CREDIT IMPLEMENTATION
QUESTIONS

Fiscal year 1994 is the third year that credit programs have been
required to comply with credit reform.  Both agencies that operate
credit programs and those that provide implementation guidance--OMB
and Treasury--have had to address a variety of situations for which
the Credit Reform Act does not provide explicit direction.  Questions
have arisen and continue to arise as the agencies implement credit
reform.  Several groups have been created, such as the Federal Credit
Policy Working Group and the Credit Reform Steering Committee, to
address these implementation issues and questions. 


--------------------
\3 Nonbudgetary accounts may appear in the budget document for
information purposes but are not included in the budget totals for
budget authority or budget outlays.  They do not belong in the budget
because they show only how something is financed, and do not
represent the use of resources. 

\4 Permanent budgetary authority is available as a result of
permanent legislation and does not require annual appropriation. 
Indefinite budget authority is budget authority of an unspecified
amount of money. 

\5 OMB Circular A-11 is titled "Preparation and Submission of Budget
Estimates"; Circular A-34 is titled "Instructions on Budget
Execution"; Circular A-129 is titled "Managing Federal Credit
Programs."


MAJOR CONTRIBUTORS TO THIS REPORT
========================================================== Appendix II

ACCOUNTING AND INFORMATION
MANAGEMENT DIVISION, WASHINGTON,
D.C. 

Christine Bonham, Assistant Director
Carolyn Litsinger, Evaluator-in-Charge

OFFICE OF THE GENERAL COUNSEL

Charles Roney, Assistant General Counsel
Bertram Berlin, Assistant General Counsel
Carlos Diz, Attorney-Advisor




RELATED GAO PRODUCTS
============================================================ Chapter 0

Credit Reform:  Case-by-Case Assessment Advisable in Evaluating
Coverage, Compliance (GAO/AIMD-94-57, July 28, 1994). 

Credit Reform:  Speculative Savings Used to Offset Current Spending
Increase Budget Uncertainty (GAO/AIMD-94-46, March 18, 1994). 

Federal Credit Reform:  Information on Credit Modifications and
Financing Accounts (GAO/AIMD-93-26, September 30, 1993). 

Federal Credit Programs:  Agencies Had Serious Problems Meeting
Credit Reform Accounting Requirements (GAO/AFMD-93-17, January 6,
1993). 
