Legislative Change Needed To Improve Budget Treatment of Certificates of Beneficial Ownership

PAD-80-32: Published: Apr 9, 1980. Publicly Released: Apr 9, 1980.

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The Farmers Home Administration (FmHA) administers three public enterprise revolving funds which are largely financed through the sale of interest bearing Certificates of Beneficial Ownership (CBO's). A number of undesirable consequences result from the legal requirement that FmHA record the sale of CBO's as a sale of assets in the budget. The reporting procedure the FmHA is required to use (1) does not conform to established reporting principles, (2) results in an understatement of FmHA and Federal outlays, and (3) creates inconsistency in the budget. As a result proceeds from the sale of CBO's are recorded as an offsetting collection, which is deducted from outlays and reduces the requirement for budget authority at the account level.

Treating the sale of CBO's as an asset sale runs counter to reporting principles established by the 1967 President's Commission on Budget Concepts. The Commission recommended that the certificates be treated as a means of financing, not as an offset to expenditures which operates to reduce a budget deficit. The Commission concluded that CBO's and Certificates of Beneficial Interest should be treated as a debt instrument. Recording the sale of certificates as an offsetting collection results in an understatement of outlays, not only in the FmHA accounts, but also in the aggregate Federal outlay figure. The current reporting procedure creates another problem because it enables FmHA to control the level of offsetting collections. FmHA exercises control through discretionary decisions to defer or accelerate the sale of CBO's. The FmHA control over offsetting collections, combined with the fact that an increase in offsetting collections reduces the reported level of outlays, has important ramifications. From an accounting standpoint, the effect of this would be to increase the recorded level of assets and liabilities in the financial statement of the three revolving funds. The President's Commission stated that the budget should provide information for an informed assessment by citizens of the Government's stewardship of the public's money and resources. The Commission further stated that the budget should provide aggregate figures that provide an accurate measurement of the scope of overall Government financial activities.

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