The federal government has $3 trillion in taxpayer money tied up in loan programs. It is imperative that Congress use the best method to account for the risks inherent in these taxpayer-backed loans.

Ignoring the Risks to Taxpayers

Federal credit programs are often considered to provide a societal good, such as low-interest loans for college students to promote higher education or subsidies for U.S. exports provided in the form of taxpayer-backed loans from the recently expired Export–Import (Ex–Im) Bank.

Many of these loan programs are officially budgeted as making a profit for the government, on the assumption that the loans will be repaid with interest. The idea is that the government can provide beneficial services while also earning back the taxpayer money used to fund them—which sounds like a great deal.

The catch is that the Federal Credit Reform Act of 1990 (FRCA), which governs such programs, prevents Congress from considering the real cost of these programs. The FRCA accounting “method ignores the risk to taxpayers” by assuming that the loans have little risk of default, even during market downturns. When the market risk of these loans is factored into the equation, the “profitable” Ex–Im Bank actually has a projected cost of $2 billion over 10 years. Programs that have positive cash flows seem like good investments until they default, leaving taxpayers to cover the losses.

Fair-Value Accounting

Testimony in a recent hearing before the Joint Economic Committee discussed the relative merits of an accounting system for credit programs that incorporates the risk of issuing loans—known as fair-value accounting—as opposed to the current accrual system instituted by the FCRA. While the current version of accrual accounting assumes that the government’s investments are “just as safe and reliable as the payout on a U.S. Treasury bond,” fair-value accrual accounting recognizes that  real market risk is associated with the loans—risk that is assumed by taxpayers if a deal goes sour. Once this risk is added to the cost of the loans, it is evident that the programs aren’t as profitable as they claim.

Jason Delisle, director of the Federal Education Budget Project at New America, testified that the current FCRA system rewards risky investments because they translate to higher returns. For example, in an example given by Delisle, if the U.S. were to buy Greece’s debt, it would be recorded as an immediate profit for the government under the current accounting system. No rational politician would advocate this loan because they understand that it would be reckless. Yet the potential risks and costs of other loan programs are similarly ignored.

Congress’s Responsibility

With $3 trillion on the line and some programs recovering less than 40 cents per dollar, it is important that Congress understand the true costs of government credit programs.  Revealing the true costs of the programs could inspire reforms or cuts to programs where costs outweigh the supposed societal benefits. Instituting fair-value accounting would be an important first step toward eliminating imprudent loan programs.

Congress should closely scrutinize even “profitable” loan programs, always asking: Is this a proper function of the federal government? Would this be better managed at the private or local government level?

Moreover, none of these taxpayer-backed loans are included in the current national debt figure. Yet when the loans go into default, the government must borrow to honor its loan guarantees, and this borrowing is then recorded as part of the public debt.

The Case for Fair-Value Accounting
The case for fair-value accounting is simple. Members of Congress need a fair-value estimate so that they can make informed decisions on the practicality of government credit programs. As Senator Mike Lee (R–UT), principal organizer of the Joint Economic Committee hearing, stated, “We’re fooling ourselves with regard to a large sum of money.”

It’s time to stop.