Financial aid for the auto industry
Today (December 5), CBO released a letter at the request of House Majority Leader Hoyer analyzing the budgetary effects of two legislative proposals: S. 3715, the Auto Industry Emergency Bridge Loan Act, as introduced on November 20, 2008; and draft legislation released by the House Committee on Financial Services (and posted on that committee’s Web site) on November 17, 2008.
Both proposals would authorize the federal government to provide up to $25 billion in “bridge loans” to support ongoing operations of automobile manufacturers and component suppliers. S. 3715 would rescind $7.5 billion of funds previously appropriated to the Department of Energy for loans to automakers and also appropriate $7.5 billion for the cost of “bridge loans” to support ongoing operations of eligible auto manufacturers and component suppliers. Repayments of bridge loans would be available to support new loans.
The draft legislation posted by the House Committee on Financial Services would require the Secretary of the Treasury to provide $25 billion in bridge loans to eligible auto manufacturers and component suppliers, to be administered under the Troubled Assets Relief Program (TARP) that was created by the Emergency Economic Stabilization Act of 2008 (Public Law 110-343).
Provisions related to the administration and financial terms of such loans are similar under the two proposals, but significant differences arise regarding their budgetary treatment and potential net impact on the federal budget. In particular, the subsidy costs of loans under S. 3715 would be calculated on a present value basis following the requirements of the Federal Credit Reform Act (FCRA), while loans made under TARP (as directed by the draft House legislation) would be calculated on a slightly different basis. Under TARP, subsidy costs would be calculated by adjusting the discounting called for in FCRA to account for the market risk associated with the loans. In contrast, FCRA discounting is done by using the relatively “risk-less” Treasury rate of borrowing. (That difference, and its impact on the net budget impact of the proposals is explained in more detail in the letter to Majority Leader Hoyer.)
Another key difference between the two proposals is that S. 3715 would allow loan repayments to be “revolved” into new loans. That provision would effectively raise the estimated subsidy rate of the initial loans under S. 3715 to 100 percent. That result occurs because repayments would automatically revolve into new loans without subsequent appropriation of any additional funding to cover the subsidy costs of those new loans, as would normally be required under FCRA. By making new loans with the repayments of the initial loans, the government would essentially be spending those receipts, thus adding to the subsidy costs of the initial loans.
A summary of CBO’s estimates for the two proposals is provided in the following table:
Legislative Proposal: |
S. 3715, as introduced |
House Committee on Financial Services Draft Legislation (November 17, 2008) |
Budgetary Treatment |
Federal Credit Reform Act |
Troubled Assets Relief Program (TARP) |
Estimated Subsidy Rate |
100% of loan level |
70% of loan level |
Budget Authority Needed to Fully Fund $25 Billion in Bridge Loans |
$25 billion |
$17.5 billion |
Budget Authority Available Under Proposal |
$7.5 billion |
$17.5 billion |
Estimated Loan Level Under Proposal |
$7.5 billion |
$25 billion |
Gross 10-Year Cost |
$7.5 billion |
$17.5 billion |
Offsets to Gross Cost |
$7.5 billion from rescission of funds for DOE section 136 loans |
$5 billion to $7.5 billion of estimated TARP outlays under current law |
Net 10-Year Cost |
No net cost |
$10 billion to $12.5 billion |
CBO also sent a letter today to Cong. John M. Spratt Jr., Chairman of the House Budget Committee, providing information on how two alternative scenarios to provide $34 billion in bridge loans to the auto industry would affect the federal budget. Under both scenarios, the loans would support firms’ ongoing operations and would carry interest rates of 5 percent for the first five years after disbursement and 9 percent thereafter. CBO’s estimates of the subsidy cost for providing $34 billion in bridge loans under the two scenarios specified by Chairman Spratt are summarized in the following table:
Legislative Proposal for $34 Billion in Bridge Loans: |
Appropriation of New Budget Authority |
Administer Loans Through the Troubled Assets Relief Program (TARP) |
Budgetary Treatment |
Federal Credit Reform Act |
TARP |
Estimated Subsidy Rate |
50% of loan principal |
70% of loan principal |
Budget Authority Needed to Fully Fund $34 Billion in Bridge Loans |
$17.0 billion |
$23.8 billion |
Gross 10-Year Budget Cost |
$17.0 billion |
$23.8 billion |
Offsets to Gross Cost From Anticipated Spending Under Current Law |
None |
$6.8 billion to $10.2 billion of estimated TARP outlays under current law |
Net 10-Year Budget Cost |
$17.0 billion |
$13.6 billion to $17.0 billion |
CBO estimates that the subsidy rate for bridge loans under standard credit reform accounting (following the requirements of FCRA) would be 50 percent. By comparison, we estimate a subsidy rate of 70 percent for providing such loans under TARP because that program’s accounting requires an adjustment to reflect market risk. Using those subsidy rates, CBO estimates a budget cost of $17.0 billion for the use of new budget authority (with FCRA accounting), and a net budget cost of $13.6 billion to $17.0 billion for use of existing TARP authority.