Credit Reform: Greater Effort Needed to Overcome Persistent Cost Estimation Problems

Highlights

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.

Recommendations

Recommendations for Executive Action

Agency Affected	Recommendation	Status
Department of Agriculture	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.	Closed – Implemented 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.
Department of Education	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.	Closed – Implemented 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.
Department of Housing and Urban Development	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.	Closed – Implemented 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.
Department of Veterans Affairs	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.	Closed – Implemented 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.
Small Business Administration	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.	Closed – Implemented 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.
Department of Agriculture	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.	Closed – Implemented 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.
Department of Education	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.	Closed – Implemented 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.
Department of Housing and Urban Development	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.	Closed – Implemented 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.
Department of Veterans Affairs	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.	Closed – Implemented 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.
Office of Management and Budget	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.	Closed – Implemented 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.
Small Business Administration	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.	Closed – Implemented 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.
Office of Management and Budget	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).	Closed – Implemented 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.
Office of Management and Budget	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.	Closed – Implemented 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.
Office of Management and Budget	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.	Closed – Implemented 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.
Office of Management and Budget	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.	Closed – Implemented 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.

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Topics

Auditing and Financial Management

Accounting proceduresAccounting standardsBudget administrationCreditDirect loansFinancial management systemsFinancial statement auditsFuture budget projectionsGovernment guaranteed loansLoan accounting systemsSubsidies