Statement of G. Edward DeSeve
Controller and Acting Deputy Director for Management
Office of Management and Budget
before the
House Small Business Committee
July 16, 1997
Introduction
Chairman Talent, Congressman LaFalce, Members of the Committee, I
am Edward DeSeve,
Controller and Acting Deputy Director for Management of the Office of
Management and
Budget. I am here today representing OMB to discuss the error
recently found by the General
Accounting Office in the FY1998 subsidy estimate for the 7(a) loan
program; to describe the
important contribution of the Federal Credit Reform Act (FCRA) to more
accurate budgeting;
and to outline the significant ongoing improvements in the loan
subsidy cost estimates of the
Small Business Administration (SBA).
First, I would like to thank the Committee and GAO for pointing out
the computational error.
We at OMB and, as Administrator Alvarez will testify, SBA believe that
it is an extremely serious
matter and are taking steps to correct it. I accept the findings of
SBA's Inspector General that
both SBA and OMB share responsibility for the problem.
The 7(a) Miscalculation and Steps to Prevent Future
Errors
In April, you requested that the General Accounting Office (GAO)
review loan subsidy estimates
for the 7(a) general business loan guarantee program and the 504
certified development company
guarantee program. In particular, you asked about the recent changes
in the estimated subsidies
for these programs. The error in the calculation of the FY 1997 7(a)
loan subsidy estimate
discovered by GAO was an incorrect reference formula in one cell of a
summary spreadsheet.
The summary spreadsheets aggregate cashflow data to produce the single
subsidy estimate for the
7(a) program. GAO's and Administrator Alvarez' statements describe
the error in more detail.
We are pleased that the GAO review undertaken at your request found
the error so that it could
be corrected. All other reference formulas have been double-checked.
GAO and SBA confirmed
that the correct reference formulas were used in both the FY 1996 and
FY 1998 estimates.
Administrator Alvarez' testimony details the additional quality
control steps instituted by SBA to
prevent similar errors in the future -- enhanced internal quality
control, inspector general audits,
and reviews by outside expert consultants. OMB also will expand the
checks it makes of SBA
loan program subsidy calculations. An additional step we also are
considering is to complete
decisions about SBA credit subsidy estimates earlier in the annual
budget process to allow more
time for rechecking calculations before the President's Budget is
transmitted to Congress.
The Importance of Credit Reform
The Federal Credit Reform Act (FCRA) is a major force in improving
the accuracy of the Federal
Budget. The Budget now more accurately reflects the cost of loan
program spending decisions as
well as the impact of those programs on the economy. The credit
reform requirement to budget
for the cost of loan programs on a present value basis also has
removed score keeping distortions
that artificially influenced spending decisions -- particularly in
appropriations laws -- prior to
enactment of the FCRA. Perhaps most importantly, because the cost of
loan programs is
considered when credit decisions are initially made, Congress and the
President have the ability to
more effectively control credit costs.
Credit reform takes the best information available, at the time the
President's Budget is decided,
to measure the budget impact of Federal loan programs. It uses the
actual historical cash
transactions of loan programs to compare the net present value of
payments by the Government
(direct loan disbursements and guarantee claims, for example) with the
net present value of
receipts (such as loan repayments, fees, and recoveries). This allows
policy makers to make more
informed decisions about credit programs and to compare more
accurately the budget impact of
loan programs with other Federal expenditures.
Prior to the FCRA, the cost of Federal loan programs was very
uncertain. In many instances, it
took years for costs to be apparent. Loan defaults and guarantee
claims payments were reflected
in the Budget several years after loan disbursements and guarantee
commitments had been made.
The cost of interest subsidies were clear only after several years of
experience with market
interest rates. Loan program cost estimates are significantly more
accurate today because of the
analysis and improvements in loan databases made in response to the
FCRA. The error is an
aberration and does not undermine the progress made since credit
reform was enacted.
Improved Analysis and Information
You asked the GAO to review why the subsidy estimates for the 7(a)
and 504 programs have
changed. The concise answer is that they have improved because more
accurate and complete
historical data and analytical information became available. That is
an important conclusion of the
GAO review.
Prior to the FY 1997 Budget, the subsidy estimates for these
programs were based on samples of
loan data prepared shortly after the enactment of the FCRA.
Administrator Alvarez' statement
details the major undertaking completed by SBA in late 1995 to compile
and analyze the available
historical data for the 7(a) and 504 programs. This work directly led
to a significant improvement
in subsidy estimates. The prior estimates based on samples had
understated loan default rates and
overstated recoveries from loans in liquidation. OMB staff joined with
SBA last year to discuss
the results of that study with your predecessor, Chairwoman Meyers.
SBA has made substantial progress in compiling and using its
historical data to improve the
accuracy of subsidy estimates as required by the FCRA. However, as
Administrator Alvarez
notes, additional work remains. SBA's study stands out as an
excellent example of the benefits
that accrue from giving a high priority to the creation and
maintenance of loan databases and the
analysis of that data as required by the FCRA. Administrator Alvarez
has stated that continued
improvements in loan program databases and analysis are part of her
goal of making SBA a
leading edge financial institution. OMB will do all it can to support
that effort.
Other Federal agencies are engaged in ongoing improvements of their
loan program subsidy
estimates. For example, HUD is undertaking a major plan to integrate
its data systems, which will
result in significant improvements in its database and subsidy
estimates. In comparison to SBA's
major 1995 study, some agencies have accomplished incremental, annual
improvements in their
estimates. The degree of improvement varies from agency to agency and
program to program,
and we believe the changes required by the FCRA have been positive for
the Federal Budget
process.
Conclusion
I appreciate the opportunity to discuss these important issues with you and hope my statement has been helpful. I'll be glad to answer any questions.
