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The Federal Credit Reform Act of 1990 (FCRA) changed the budgetary accounting for federal direct and guaranteed loans from a cash basis to an accrual basis. That shift requires that the government's expected losses from such loans--because of defaults and interest rate subsidies--be recognized in the budget when the credit is extended. The FCRA specifies that uncertain future cash flows associated with such loans be converted (discounted) to their present values using the interest rates on Treasury securities.

With credit-reform rules having been in effect for more than a decade, the Chairman of the House Budget Committee has asked the Congressional Budget Office (CBO) to reexamine the provisions of the FCRA with an eye toward identifying possible improvements in, and extensions of, that accrual basis of budgetary accounting. This study--which is one part of CBO's response to that request--focuses on using commercial interest rates, which incorporate risk, instead of risk-free Treasury rates to measure the cost of federal credit programs.

Deborah Lucas, Marvin Phaup, and Ravi Prasad prepared this report under the direction of Roger Hitchner of CBO's Microeconomic and Financial Studies Division. (Ravi Prasad, now with Bank of America Securities, contributed to this study while serving as a consultant to CBO.) Kim Cawley, Paul Cullinan, Robert Dennis, Peter Fontaine, Kathy Gramp, Arlene Holen, Albert Metz, Elizabeth Robinson, Robert Sunshine, David Torregrosa, Eric Wang, and Thomas Woodward of CBO contributed helpful comments on earlier drafts, and Wendy Kiska provided technical assistance. Susan Woodward of Sand Hill Econometrics and Michael Falkenheim, Robert Kilpatrick, and Sangkyun Park of the Office of Management and Budget reviewed earlier versions of this report; Robert McDonald of Northwestern University offered technical advice. (The assistance of such external participants implies no responsibility for the final product, which rests solely with CBO.)

Christian Spoor edited the study, and John Skeen proofread it. Maureen Costantino produced the cover and prepared the report for publication. Lenny Skutnik printed the initial copies, and Annette Kalicki prepared the electronic versions for CBO's Web site.

Douglas Holtz-Eakin
Director
August 2004