Non-Partisan Experts Support Fair-Value Estimates for Loan Programs

For the past two years, House Republicans included a provision in their budget resolution that allows lawmakers to use cost estimates for federal loan programs (e.g. student loans, Federal Housing Administration mortgage guarantees, etc.) that more closely match those done by private entities. Such “fair-value” estimates are a more comprehensive measure of costs, revealing that loan programs across the board impose greater risks and higher costs on taxpayers than official rules under the Federal Credit Reform Act of 1990 suggest. Democratic lawmakers haven’t supported fair-value accounting thus far, and President Obama’s 2013 budget includes several pages of subterfuge meant to cast doubt on the approach. Left-leaning think tanks oppose fair-value accounting, too.

Does that mean the debate over how to estimate the cost of federal loan programs just another partisan fight, a proxy war for the big ideological clashes between the two parties? Not at all. In fact, a number of non-partisans organizations agree that the official accounting rules are flawed and the fair-value approach is a better measure.

For example, an August 2012 background paper from the Federal Reserve Bank of Kansas City discusses the budgetary costs of the federal student loan program and points out that official accounting rules, “do not reflect the risk that default rates could be higher than projected… and underestimate the cost of the student loan program.” The Kansas City Fed goes on to say that fair-value accounting for loan programs is a “more widely accepted accounting methodology.”

A prestigious group of economists also weighed in on the issue earlier this month. The Financial Economists Roundtable concluded (without a dissenting vote) that accounting rules under the Federal Credit Reform Act are flawed and that fair-value accounting better measures the costs of government loan programs. The group writes that the current accounting approach, “fails to account for the costs of the risks associated with government credit assistance—namely, market risk, prepayment risk, and liquidity risk … [t]hose costs must ultimately be borne by taxpayers, just as they must be borne by the equity holders (owners) of private lenders that make private loans.” The group explains that the Federal Credit Reform Act, “should be amended to require an approach to cost estimation that fully recognizes the cost of risk in the government’s credit programs… [which] can be accomplished by the use of discount rates that capture all risks borne by taxpayers, and in particular by the use of discount rates consistent with market-based or fair value estimates of cost.”

The Federal Reserve Bank of Kansas City and the Financial Economists Roundtable are both echoing what another non-partisan organization has been explaining to policymakers for some time now. Twice this year the Congressional Budget Office published papers on fair-value accounting for federal loan programs. The agency does not mince words on the fair-value issue:

In CBO’s view, Federal Credit Reform Act-based cost estimates do not provide a full accounting of what federal credit programs actually cost the government because they do not incorporate the full cost of the risk associated with the loans… Fair-value accounting recognizes market risk—the component of financial risk that remains even after investors have diversified their portfolios as much as possible, and that arises from shifts in current and expected macroeconomic conditions—as a cost to the government.

Even if it is Republican lawmakers who have taken up the mantle of reform for fair-value estimates, the non-partisan views of organizations like the CBO, the Federal Reserve Bank of Kansas City, and the Financial Economists Roundtable should make it clear that this is hardly a one-sided partisan issue. Consequently, if Democratic lawmakers and left-leaning think tanks continue to defend flawed cost estimates in spite of the growing support for fair-value accounting—and for no other reason than because they see an advantage in understating the cost of federal programs—it will be clear who the real partisans are.

Jason Delisle is the Director of the Federal Education Budget Project at the New America Foundation.