Boeing relies heavily on Export-Import loans to make sales overseas. (REUTERS/Randall Hill)

“Can you guess how much the #ExImBank costs U.S. taxpayers?”

“Over the past two decades, Ex-Im has actually generated a surplus of nearly $7 billion for American taxpayers.”

–U.S. Chamber of Commerce, post on Twitter, March 31, 2015

The battle in Congress has begun over whether to kill a taxpayer-funded agency that gives loans to American exporters.

The Export-Import Bank’s charter expires June 30. We will be following this debate, and will look at claims made on both sides. We welcome reader suggestions.

The bank’s supporters — including the Chamber of Commerce — contend the bank has generated a profit for taxpayers, and that it doesn’t cost taxpayers anything to operate it. The chamber’s tweet caught our attention. It’s a quiz for the Twitterverse: How much does it cost taxpayers to run the bank? If you guessed $97,000, $6 million or $2 billion, you’re wrong, it says. In fact, it costs $0, and “over the past two decades, Ex-Im has actually generated a surplus of nearly $7 billion for American taxpayers,” according to the tweet.

Wondering how there there can be an estimate of $0 versus $2 billion? This is a classic case of how numbers can change dramatically depending on the accounting measure used. Let’s dig into it.

The Facts

The Chamber’s source is the bank’s annual report, which describes the bank as an independent agency that operates “at no cost to U.S. taxpayers.” The report says the bank generated a surplus of $674.7 million for U.S. taxpayers..

In other calculations of this claim (which the Chamber also has used), the bank has generated $7 billion for taxpayers since 1992. Proponents of the bank use these figures to show the program actually makes a profit for taxpayers. But there are a lot of technical elements of the Export-Import Bank’s reserves and fee structure going on here. That means for every $1 that taxpayers spent for the program, they received $1.71 over 23 years.

The 71 cents comprises any excess money the bank had after the loan is repaid and the borrower did not default. The majority of it comes from fees charged to other companies, according to the agency.

Part of it comes from “negative subsidy” receipts, which is not exactly a “profit” as the public commonly understands it. It refers to a budgetary method to track savings that occurred because the government had estimated a higher cost for the loan. The Export-Import Bank sets aside reserves to cover expected losses. If the loan does not default and is repaid, the agency sends all excess money to the Treasury, as required. (The technical details of negative subsidies are available here.)

In 2013, the Government Accountability Office found it “reasonable” for the Export-Import Bank to report that it had sent more money to the Treasury than it was appropriated. According to the agency, it has operated since 2007 on a fees-only basis, and is not actually using taxpayer money to fund loans.

There is a lot of complex information over how costs and revenues are calculated with the Export-Import Bank. The most important thing that explains the dramatically different calculations is that there are two types of accounting measures being used: one that the federal government currently uses, and one that congressional budget analysts prefer. The Congressional Budget Office believes the latter method, called fair value accounting, is a more accurate way to estimate the cost of the loans to American taxpayers.

Under the former calculation, the bank’s six largest credit programs would generate $14 billion if the program were reauthorized, from fiscal years 2015 to 2024. This method is almost always lower than calculations under the latter, which shows the bank would cost the government $2 billion over the same period.

The first calculation follows the rules established by the Federal Credit Reform Act of 1990, which required the government to record the present value of the projected lifetime cost of the loan. So the cost of the loan needs to be recorded in the federal budget using the interest rates on Treasury securities of the year that the loan was made. (The Fact Checker has explored this in depth.) This is how agency officials have calculated the $7 billion “surplus” figure.

Both calculations use the same projected cash flows that the bank reported for the administration’s 2015 budget. The difference is that fair-value accounting accounts for “market risk.” That refers to the risks that the government is exposed to because of other things happening in the economy, such as productivity and employment. When the economy is weak, borrowers default on their debt obligations more frequently, and the government is exposed to more risk, according to the CBO. So the market risks associated with loans are effectively passed on to taxpayers. Taxpayers — as in, the investors — would view that risk as having a cost, the CBO says.

Those who want the bank to be reauthorized say it is an unfair accounting method to use for Export-Import loans, because it tries to compare the program to the risks that private investors would face. Yet there is no comparable loan program in the private market — which is why the Export-Import Bank exists in the first place, they say. Critics also say that it overestimates default rates, which leads to unrealistically high projections. And they say it captures “costs,” not “losses,” and gives a misleading impression to the public.

The last Congress voted to switch to fair value accounting for the federal budget. Republicans are expected to continue pushing for the switch.

Office of Management and Budget analysts have said that neither method accurately captures the cost of federal credit programs on taxpayers. “The fair rate of return would equal the Treasury rate plus the portion of the yield spread that is relevant to taxpayers,” they wrote in the fiscal 2013 budget analysis.

In a 2014 testimony to the House Financial Services Committee, CBO Director Douglas Elmendorf acknowledged there are drawbacks to both accounting methods. But he argued that the differences between the federal government and private investors don’t change the fact that when the government makes financial transactions “whose returns are correlated with the performance of the economy,” taxpayers face costly risks.

Taking account how the public assesses financial risks is a more useful method than current federal standards because it helps policymakers understand the trade-offs between policies when some of them involve market risks, Elmendorf said in his testimony.

“When the government finances a risky loan by selling a Treasury security, it is effectively imposing risk on some members of the public: If such a loan is repaid as expected, the interest and principal payments cover the government’s obligation to the holder of the Treasury security, but if the borrower defaults, the obligation to the security holder must be paid for either by raising taxes or by cutting other spending,” according to the testimony.

“Ex-Im has not cost taxpayers a dime. Using the accounting method required by Congress, it has returned money to the Treasury — a ‘negative subsidy’— for two decades,” according to a Chamber spokesperson who declined to be identified.

The Pinocchio Test

The Fact Checker obviously takes no position on which accounting method the government should use. The CBO — considered the “gold standard” in Washington — appears to have taken a strong stance for using fair-value accounting, especially when it comes to Export-Import Bank loans. The government is not a private financial institution, and therefore operates on different budgeting standards. It would be unfair to penalize the Export-Import Bank for following the current accounting measures required by law. However, the CBO makes a valid argument that when it comes to loans that use taxpayer money, policymakers can never be too cautious by factoring in market risks or hidden costs to the taxpayer.

That the Export-Import Bank costs $0 to the taxpayer is an oversimplification. There is so much happening in that figure, including the calculation of “negative subsidies,” which is not the same as the type of profits that taxpayers commonly would think of when they see such a tweet. Plus, the “cost” to the taxpayers varies by billions of dollars depending on the accounting method used.

The more complex the topic, the more susceptible it is to spin the issue and mislead the average reader or Twitter user without any context. This is a highly complicated topic, with both sides jumping to flash warnings about exactly how much this agency is costing or not costing taxpayers. But for those not in the fact-checking business, it’s easy to click through a user-friendly and digestible tweet like this and move on. We will be looking at other claims made on this topic, from both critics and supporters of Export-Import Bank.

Accurately simplifying this esoteric topic to four clicks on a tweet is just not possible, and trying to do so is, frankly, irresponsible.

Two Pinocchios

 


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