The federal government is reportedly underestimating the costs of a loan program by $66 billion, according to a recent report from the Congressional Budget Office (CBO). The CBO found that the government’s method of cost estimation, which follows the Fair Credit Reform Act of 1990, is flawed and may not accurately reflect the true costs of the program.
The CBO suggests that using a fair value estimation method, which measures the current market value of government obligations, could provide a more accurate assessment of the program’s costs. Under the government’s current estimation method, cost estimates for new loans and loan guarantees issued in 2024 amount to $10.9 billion over their lifetime. However, using the fair value estimation method raises the cost to $76.7 billion, which is about seven times the federal estimate.
The largest discrepancy in cost estimates is seen in loan guarantees made by Freddie Mac and Fannie May, the U.S. Department of Housing and Urban Development’s loan guarantee program, and the Department of Education’s student loan program. According to the government’s method, these loans are estimated to save billions, while the fair value estimates suggest that they would cost billions. In the case of student loans alone, the difference between the two estimation methods amounts to $44.7 billion.
The fair value estimation method takes into account market risk, which considers macroeconomic conditions such as productivity and unemployment. The CBO argues that this method provides a more comprehensive measure than the government’s estimation method, as it captures real-world market risk.
The use of outdated accounting methods that fail to consider market risk could lead to a misrepresentation of the true cost of legislation. Lawmakers and their constituents need accurate information to make informed decisions about spending programs. The report from the CBO highlights the importance of using more accurate and comprehensive estimation methods to accurately assess the costs of government programs.
The findings of the CBO report raise concerns about the government’s transparency and its ability to accurately estimate costs. It is crucial for lawmakers to have access to reliable and accurate information when making budget decisions. Using outdated accounting methods only serves to obscure the true price tag of spending programs and can lead to fiscal irresponsibility.
This article emphasizes the need for a comprehensive reassessment of the government’s cost estimation methods. By incorporating fair value estimation, policymakers can gain a more accurate understanding of the costs associated with loan programs, ultimately leading to better-informed budgeting decisions. It is essential for the government to take the necessary steps to improve its accounting practices and ensure transparency in its budgeting processes.