Credit Reform:

Greater Effort Needed to Overcome Persistent Cost Estimation Problems

AIMD-98-14: Published: Mar 30, 1998. Publicly Released: Mar 30, 1998.

Additional Materials:

Contact:

Paul L. Posner
(202) 512-9573
contact@gao.gov

 

Office of Public Affairs
(202) 512-4800
youngc1@gao.gov

Pursuant to a congressional request, GAO reported on the government's measurement of subsidy costs for federal direct loans and loan guarantees, focusing on whether: (1) agencies completed estimates and reestimates of subsidy costs; (2) GAO could readily discern any trends including improvements in subsidy estimates; (3) GAO could readily identify the causes for changes in subsidy estimates; and (4) agencies with discretionary credit programs initially underestimated credit subsidy costs in response to the incentive created by the availability of permanent, indefinite budget authority for credit reestimates.

GAO noted that: (1) after over 6 years of experience with credit reform, agencies continue to have problems in estimating the subsidy cost of credit programs; (2) the lack of timely reestimates as well as the frequent absence of documentation and reliable information limit the ability of agency management, the Office of Management and Budget (OMB), and Congress to exercise intended oversight; (3) GAO found problems with the availability and reliability of subsidy estimates, reestimates, and supporting documentation in its cross-cutting review of 10 programs for fiscal years (FY) 1992 through 1998; (4) in the audits of the FY 1996 financial statements, three of the five largest credit agencies received disclaimers or qualified opinions related to their credit programs; (5) auditors were unable to find support for agency data on such items as delinquencies and prepayments for loans receivable and liabilities for loan guarantees; (6) problems with the reliability and validity of the underlying credit data raise questions about the basis for the subsidy estimates included in the budget; (7) GAO would expect to find that, for a given cohort, the annual changes in reestimates due to technical factors would be smaller; (8) because component data were not available, GAO could not determine whether this occurred; (9) however, GAO did note that overall subsidy rates for a given cohort varied widely; (10) GAO observed a similar pattern of fluctuations in subsidy estimates at the program level; (11) subsidy rate estimates for any given program continued to fluctuate widely from year to year with no pattern or particular trend; (12) the intersection of credit reform and the Budget Enforcement Act of 1990--that is, the fact that original subsidy appropriations must compete under the discretionary caps while reestimates are outside them--may offer an incentive for agencies with discretionary programs to underestimate subsidy costs initially to permit more loans or loan guarantees within a given appropriation level; (13) however, available data were not sufficient to assess whether a credit program's budgetary treatment affected its initial subsidy estimates; (14) better information on factors underlying changes in subsidy rates is needed to identify and understand why these estimates change; (15) while OMB provides a user's guide and some training on the subsidy model, it has not provided agencies with clear definitions of each component or sufficient guidance on how to use the model; and (16) while no single agency is successful in all aspects of credit reform implementation, some progress is being made at each of the agencies studied.

Recommendations for Executive Action

  1. Status: Closed - Implemented

    Comments: Agriculture provided a copy of its response to GAO on July 30, 1998. It says it has: (1) developed a work plan to ensure timely resolution of problems with historical documentation and re-estimates; (2) organized an intraagency task force with OMB participation to resolve issues concerning the estimation process; (3) completed FY 1997 reestimates for major programs that were included in audited financial statements; (4) developed historical data summaries and a database; (5) analyzed historical data and provided this to OIG; (6) developed a new cash flow model for community and utility programs; (7) contracted with NASS to assist in developing better measures of default and interest rate projections; and (8) participated in the pilot of the new balances approach to FY 1998 reestimates.

    Recommendation: The Secretaries of Agriculture, Education, Housing and Urban Development, and Veterans Affairs, and the Administrator, Small Business, should improve oversight of credit reform implementation, including ensuring that estimates are prepared accurately.

    Agency Affected: Department of Agriculture

  2. Status: Closed - Implemented

    Comments: On May 29, 1998, the Secretary of Education said that "we strongly agree with the report's emphasis on the importance of accurate, well-documented credit reform estimates" and said that Education has already taken a number of steps to improve its capabilities in this area. Education further said that over the past 5 years it has steadily increased staff, contractor, and system resources dedicated to developing accurate and timely estimates. It said that it recently formed a Cost Estimation and Analysis Division in the Budget Office to focus on credit estimates. It also stated that it has improved historical data and worked closely with auditors, OMB, GAO, CBO, and others to improve technical capabilities.

    Recommendation: The Secretaries of Agriculture, Education, Housing and Urban Development, and Veterans Affairs, and the Administrator, Small Business, should improve oversight of credit reform implementation, including ensuring that estimates are prepared accurately.

    Agency Affected: Department of Education

  3. Status: Closed - Implemented

    Comments: A HUD official reported that, in response to the recommendations in this report, HUD has formed an intraagency team to address the quality of credit estimates and has undertaken a major effort to improve on credit reform compliance. It is redoing its 1997 balance sheet and auditing it. It wanted to begin the 1998 statements with a clean opinion on its FED-GAAP statements. It has done all reestimates and has revised certain basic calculations underlying the cost estimates.

    Recommendation: The Secretaries of Agriculture, Education, Housing and Urban Development, and Veterans Affairs, and the Administrator, Small Business, should improve oversight of credit reform implementation, including ensuring that estimates are prepared accurately.

    Agency Affected: Department of Housing and Urban Development

  4. Status: Closed - Implemented

    Comments: VA stated that it has met with the VA OIG and GAO to share an action plan that includes contracting for development and ongoing use of a commercially produced credit subsidy model. The model will include VA loan programs as well as the vendee loan sales (that have not previously been modeled). The contractor also will do budget formulation and finance work. VA said that it will respond to congressional committees in late 1998.

    Recommendation: The Secretaries of Agriculture, Education, Housing and Urban Development, and Veterans Affairs, and the Administrator, Small Business, should improve oversight of credit reform implementation, including ensuring that estimates are prepared accurately.

    Agency Affected: Department of Veterans Affairs

  5. Status: Closed - Implemented

    Comments: The SBA Administrator said that she fully concurs with the GAO recommendation. She said that she has paid "significant personal attention" to the implementation of credit reform since her arrival in February 1997. She said that the progress SBA has made is not fully reflected in GAO's report, citing the unqualified opinions on its FY 1996 and 1997 financial statements. She said that SBA recently developed a large historical database and has engaged industry experts to develop econometric models of its major loan programs.

    Recommendation: The Secretaries of Agriculture, Education, Housing and Urban Development, and Veterans Affairs, and the Administrator, Small Business, should improve oversight of credit reform implementation, including ensuring that estimates are prepared accurately.

    Agency Affected: Small Business Administration

  6. Status: Closed - Implemented

    Comments: Agriculture provided a copy of its response to GAO on July 30, 1998. It says it has: (1) developed a work plan to ensure timely resolution of problems with historical documentation and re-estimates; (2) organized an intraagency task force with OMB participation to resolve issues concerning the estimation process; (3) completed FY 1997 reestimates for major programs that were included in audited financial statements; (4) developed historical data summaries and a database; (5) analyzed historical data and provided this to OIG; (6) developed a new cash flow model for community and utility programs; (7) contracted with NASS to assist in developing better measures of default and interest rate projections; and (8) participated in the pilot of the new balances approach to FY 1998 reestimates.

    Recommendation: The Secretaries of Agriculture, Education, Housing and Urban Development, and Veterans Affairs, and the Administrator, Small Business, should improve oversight of credit reform implementation, including ensuring that documentation supporting subsidy estimates included in the budget and financial statements is prepared and retained.

    Agency Affected: Department of Agriculture

  7. Status: Closed - Implemented

    Comments: On May 29, 1998, the Secretary of Education said that "we strongly agree with the report's emphasis on the importance of accurate, well-documented credit reform estimates" and said that Education has already taken a number of steps to improve its capabilities in this area. Education further said that over the past 5 years it has steadily increased staff, contractor, and system resources dedicated to developing accurate and timely estimates. It said that it recently formed a Cost Estimation and Analysis Division in the Budget Office to focus on credit estimates. It also stated that it has improved historical data and worked closely with auditors, OMB, GAO, CBO, and others to improve technical capabilities.

    Recommendation: The Secretaries of Agriculture, Education, Housing and Urban Development, and Veterans Affairs, and the Administrator, Small Business, should improve oversight of credit reform implementation, including ensuring that documentation supporting subsidy estimates included in the budget and financial statements is prepared and retained.

    Agency Affected: Department of Education

  8. Status: Closed - Implemented

    Comments: A HUD official reports that, in response to the recommendations in this report, HUD has formed an intraagency team to address the quality of credit estimates and has undertaken a major effort to improve on credit reform compliance. It is redoing its 1997 balance sheet and auditing it. It wanted to begin the 1998 statements with a clean opinion on its fed-GAAP statements. It has done all reestimates and has revised certain basic calculations underlying the cost estimates.

    Recommendation: The Secretaries of Agriculture, Education, Housing and Urban Development, and Veterans Affairs, and the Administrator, Small Business, should improve oversight of credit reform implementation, including ensuring that documentation supporting subsidy estimates included in the budget and financial statements is prepared and retained.

    Agency Affected: Department of Housing and Urban Development

  9. Status: Closed - Implemented

    Comments: VA stated that it has met with the VA OIG and GAO to share an action plan that includes contracting for development and ongoing use of a commercially produced credit subsidy model. The model will include VA loan programs as well as the vendee loan sales (that have not previously been modeled). The contractor also will do budget formulation and finance work. VA said that it will respond to congressional committees in late 1998.

    Recommendation: The Secretaries of Agriculture, Education, Housing and Urban Development, and Veterans Affairs, and the Administrator, Small Business, should improve oversight of credit reform implementation, including ensuring that documentation supporting subsidy estimates included in the budget and financial statements is prepared and retained.

    Agency Affected: Department of Veterans Affairs

  10. Status: Closed - Implemented

    Comments: The SBA Administrator said that she fully concurs with the GAO recommendation. She said that she has paid "significant personal attention" to the implementation of credit reform since her arrival in February 1997. She said that the progress SBA has made is not fully reflected in GAO's report, citing the unqualified opinions on its FY 1996 and 1997 financial statements. She said that SBA recently developed a large historical database and has engaged industry experts to develop econometric models of its major loan programs.

    Recommendation: The Secretaries of Agriculture, Education, Housing and Urban Development, and Veterans Affairs, and the Administrator, Small Business, should improve oversight of credit reform implementation, including ensuring that documentation supporting subsidy estimates included in the budget and financial statements is prepared and retained.

    Agency Affected: Executive Office of the President: Office of Management and Budget

  11. Status: Closed - Implemented

    Comments: The SBA Administrator said that she fully concurs with the GAO recommendation. She said that she has paid "significant personal attention" to the implementation of credit reform since her arrival in February 1997. She said that the progress SBA has made is not fully reflected in GAO's report, citing the unqualified opinions on its FY 1996 and 1997 financial statements. She said that SBA recently developed a large historical database and has engaged industry experts to develop econometric models of its major loan programs.

    Recommendation: The Secretaries of Agriculture, Education, Housing and Urban Development, and Veterans Affairs, and the Administrator, Small Business, should improve oversight of credit reform implementation, including ensuring that documentation supporting subsidy estimates included in the budget and financial statements is prepared and retained.

    Agency Affected: Small Business Administration

  12. Status: Closed - Implemented

    Comments: OMB is developing a new credit subsidy calculator that should address some of these concerns. The new credit subsidy calculator was completed and is being used by agencies.

    Recommendation: So that agency staff can aggregate data from their cash flows into the OMB subsidy model accurately and consistently, the Director, OMB, should ensure that OMB staff provide detailed guidance and definitions of the four subsidy components (interest, net defaults, fees and other collections, and other subsidy costs).

    Agency Affected: Executive Office of the President: Office of Management and Budget

  13. Status: Closed - Implemented

    Comments: OMB has developed a new credit subsidy model that is expected to provide formulae for calculating subsidy components. It was released to agency staff for further testing. It will be used for preparation of the fiscal year 2001 budget. The new credit subsidy model is now being used by agencies.

    Recommendation: So that agency staff can aggregate data from their cash flows into the OMB subsidy model accurately and consistently, the Director, OMB, should ensure that OMB staff revise the OMB subsidy model to provide agencies with the formula for calculating each component.

    Agency Affected: Executive Office of the President: Office of Management and Budget

  14. Status: Closed - Implemented

    Comments: OMB has developed a new credit subsidy model that will assist agencies in preparing their original budget estimates. OMB staff are working with agency staff to ensure that guidance is clear and comprehensive. The new credit subsidy model is now being used by agencies.

    Recommendation: The Director, OMB, should ensure, to the extent possible, that agencies prepare accurate subsidy estimates, use consistent definitions of subsidy components, and have appropriate documentation.

    Agency Affected: Executive Office of the President: Office of Management and Budget

  15. Status: Closed - Implemented

    Comments: OMB has developed a new credit subsidy model and continues to work with agency staff in a number of ways such as assisting them in adopting the "balances approach" to credit subsidy re-estimates, testing the new credit subsidy model, and reviewing guidance for using the model. The new model is now being used by agencies.

    Recommendation: The Director, OMB, should work toward identifying ways OMB can further assist agencies to more rapidly and accurately implement credit reform. These might include providing additional direct assistance to the agencies, developing prototypes for estimating methodologies, and prompting interagency forums for the exchange of information on problems and best practice solutions by working level staffs.

    Agency Affected: Executive Office of the President: Office of Management and Budget

 

Explore the full database of GAO's Open Recommendations »

Sep 20, 2016

Sep 6, 2016

Aug 19, 2016

Aug 12, 2016

Jul 29, 2016

Jul 28, 2016

Jul 13, 2016

Jul 11, 2016

Jun 13, 2016

Looking for more? Browse all our products here