Eno Transportation Weekly
CBO Says Fair Value Accounting Would Greatly Increase Cost of TIFIA, WIFIA Loans
June 7, 2019
A new report issued May 30 by the nonpartisan Congressional Budget Office says that if the federal government were to start using “fair value accounting” to estimate the “market risk” of federal loan programs, the cost to the government of making a TIFIA surface transportation loan would increase nearly fivefold – and the cost of making a loan under the new WIFIA water infrastructure loan program would increase twenty-five-fold.
Current standards for accounting for federal loans and loan guarantees are set forth in the Federal Credit Reform Act of 1990 (FCRA). The CBO report says that, unlike FCRA estimates, fair-value accounting “estimates the market value of the government’s obligations by accounting for market risk. Market risk is the component of financial risk that remains even after investors have diversified their portfolios as much as possible; it arises from shifts in macroeconomic conditions, such as productivity and employment, and from changes in expectations about future macroeconomic conditions. Investors demand additional compensation for taking on market risk—additional, that is, in comparison with the expected return from Treasury securities, which are regarded as risk-free…In CBO’s view, fair-value estimates are a more comprehensive measure than FCRA estimates of the costs of federal credit programs and therefore help lawmakers better understand the advantages and drawbacks of various policies.”
The cost of a loan to the federal government is measured as a percentage of the face value of the loan – what percent of the face value of the loan does Congress have to set aside, via appropriations or other budget authority, to account for the default risk, interest differential, and fees associated with the loan? Each year, the Office of Management and Budget issues a document called the Federal Credit Supplement that lists these factors for each loan program. For TIFIA loans, OMB estimates (using FCRA procedures) that the cost of a TIFIA loan made during FY 2020 will be 5.72 percent of the face value, so by using $57.2 million in TIFIA contract authority, the Department of Transportation could make a $1 billion TIFIA loan. Of that 5.72 percent, 5.57 percent is the default risk and 0.14 percent is the interest differential.
CBO, on the other hand, says that by using fair-value accounting, the cost of a TIFIA loan should be 27.82 percent of the face value, which would make a $1 billion TIFIA loan cost the government $278.2 million in contract authority. The entire difference is due to the different measure of default risk, not any interest differential.
For the WIFIA program, the cost of a loan as measured by OMB is a measly 0.91 percent – $9.1 million in appropriations to the EPA for the program could support a $1 billion WIFIA loan. But CBO says that if fair-value accounting was used, the cost of that loan would skyrocket to 22.59 percent of the face value of the loan, requiring $225.9 million in appropriations to support a $1 billion loan.
The Federal Railroad Administration’s RRIF loan program works a bit differently – loan applicants are required to pay the subsidy cost of the loan in fees, which results in zero net cost to the federal government. For FY 2020, the OMB estimates show that the actual cost of a RRIF loan using FCRA accounting is 4.16 percent of the face value, which is offset by a -0.59 percent interest differential and by fees that total 3.57 percent of the face value, netting to zero. CBO says that the fees charged would have to be increased to 14.2 percent of the loan face value (which would make the RRIF program even more useless than it already is).
Congress would have to pass a law to substitute fair-value accounting of federal loans for the current FCRA system, and since overall, it would cost the federal government money, it probably won’t happen. But the report is a warning that the default risks of federal loan programs are not being taken seriously enough by federal policymakers.