Financial Commitments of Federal Credit and Insurance Programs, 2012 to 2021

Summary

The federal government operates credit programs that provide direct loans to borrowers and loan guarantees to private financial entities as well as insurance programs that offer coverage to citizens and businesses. The loans, guarantees, and insurance provided through those programs represent financial commitments that the government has made. Accurate measures of such commitments are necessary for a complete picture of the federal budget and helpful in understanding budgetary trade-offs that policymakers might face in the future. For example, when policymakers decide whether to support a private-sector activity through grants or by making loan guarantees, they may wish to consider both the expected cash flows of the loan guarantees (which form the basis for estimates of the costs of the guarantees) and the total commitment the government would be making.

In this report, the Congressional Budget Office uses publicly available information from federal agencies’ financial statements and other government reports to describe the size and nature of the federal government’s credit and insurance portfolio. The report generally covers the 10-year period ending in 2021; in some cases, data for the full period are unavailable, and fewer years are included in the analysis.

Federal loan guarantees and insurance coverage represent contingent liabilities—that is, they could result in net outflows of cash from the government depending on the outcome of various events. Similarly, direct loans could result in cash inflows that were larger or smaller than those reflected in the deficit in the year the loan was made. Thus, federal loans, loan guarantees, and insurance coverage increase the potential for deficits to be larger or smaller than expected. When rates of default on loans and loan guarantees or claims on insurance policies—such as those in deposit or flood insurance—are greater than anticipated, deficits can rise; when default rates are lower than expected or insurance claims are less than expected, deficits can fall. Administrative actions, such as the ones taken to suspend interest payments on student loans in response to the coronavirus pandemic, can also result in larger-than-­expected deficits.

The measures used in this report differ in two respects from the budget projections that CBO regularly publishes in The Budget and Economic Outlook. First, the projections in the Outlook provide baseline estimates of budgetary outcomes under current law over the next 10 years. Whereas those projections depend mainly on CBO’s assessment of the loans, loan guarantees, and insurance coverage that will be provided in the future, the values in this report are not CBO’s projections; rather, they measure the outstanding stock of loans, guarantees, and insurance coverage at the end of each of the past 10 years. Second, the Outlook discusses the spending and receipts associated with credit and insurance programs, whereas this report measures the balances of outstanding portfolios and allowances for losses by using accounting data supplied by other federal agencies. Those measures are only indirectly related to budgetary measures for credit programs and do not correspond to any value for insurance programs in the federal budget.

For this report, CBO divided the federal credit and insurance portfolio into six categories: housing and real estate programs, student loan programs, other credit programs, deposit insurance and orderly liquidation authority, insurance for private pensions, and flood and crop insurance.1 Using information available in agencies’ financial reports, CBO developed three measures of credit and insurance activity for this report—the covered amount, the net covered amount, and the allowance for losses. Those three measures were chosen for several reasons:

• To present the size and allocation of the federal government’s credit and insurance portfolio by program category,
• To measure the share of U.S. households’ total assets whose value is influenced by federal ownership and guarantees,
• To identify upper limits on credit and insurance programs’ potential effects on federal deficits and debt, and
• To highlight trends in each category and in individual programs.

Overview of the Federal Financial Portfolio in 2021

The sum of the outstanding balances of loans provided or guaranteed under federal credit programs and the insurance in force under federal insurance programs—that is, the covered amount for those programs—was $37.3 trillion in 2021. (The term “insurance in force” is used in this report to refer to either the total amount of assets or the total amount of liabilities on which there is an insurance policy or contract.)2 Approximately 70 percent of that covered amount was related to insurance in force under the Federal Deposit Insurance Corporation (FDIC), the National Credit Union Administration (NCUA), the Pension Benefit Guaranty Corporation (PBGC), and flood and crop insurance programs. The remaining amount was the face value of loans and loan guarantees issued under federal credit programs.

After adjustments to account for caps on guarantees and insurance coverage, previously recognized losses, and government resources available to cover future losses, the net covered amount for credit and insurance programs in 2021 was $24.5 trillion—$10.5 trillion in credit balances and $13.9 trillion in insurance coverage. The government recognized losses and liabilities totaling $0.4 trillion for credit programs and a liability of $0.1 trillion for insurance programs.

Housing and Real Estate Programs. The federal government supports housing finance by guaranteeing home mortgages through the Federal National Mortgage Association (Fannie Mae), the Federal Home Loan Mortgage Corporation (Freddie Mac), the Federal Housing Administration’s (FHA’s) Mutual Mortgage Insurance program, the Department of Veterans Affairs’ (VA’s) mortgage guarantee program, and several smaller mortgage programs administered by the Rural Housing Service (RHS). The government also provides liquidity to the housing market by purchasing mortgages, guaranteeing those loans, and selling them as mortgage-backed securities (MBSs) to investors through Fannie Mae and Freddie Mac.3

Over the past decade, the covered amount for direct loans and loan guarantees related to housing programs rose at an average annual rate of 4 percent, from $7.0 trillion in 2012 to $9.7 trillion in 2021. That increase was driven primarily by growth in the housing market. After adjustments to account for partial guarantees in some programs (such as those administered by VA and FHA) and previously recognized losses, the total net covered amount was $6.6 trillion in 2012 and $8.9 trillion in 2021. The allowance for losses in housing programs decreased from $175 billion in 2012 to $23 billion in 2021. In 2012, housing markets were still experiencing elevated default rates because of the 2007–2009 financial crisis. By contrast, default rates are historically low today.4

Student Loan Programs. The Department of Education provides three types of loans to help students finance their education: subsidized Stafford loans (which are available to undergraduate students), unsubsidized Stafford loans (which are available to undergraduate and graduate students), and PLUS loans (which are available to graduate students and to parents of certain undergraduate students).

The total balances of student loans increased from $0.9 trillion in 2012 to $1.6 trillion in 2021. In 2012, the government projected that outstanding student loans would result in a net gain of $29 billion. By 2021, student loans were projected to result in a loss of $329 billion, primarily because a larger percentage of students were repaying their loans through income-driven repayment plans, which are more costly to taxpayers. The values in this report are based on the program parameters that were in place before the Biden Administration announced on August 24, 2022, that most borrowers would be eligible for some student loan cancellation and that changes would be made to income-driven repayment plans.5

Other Credit Programs. The federal government provides loans and loan guarantees through many smaller credit programs offered by the Department of Agriculture, the Department of Energy, the Department of Transportation, the Export-Import Bank, and the Small Business Administration. From 2012 to 2021, the covered amount for direct loans and loan guarantees offered through those programs increased from $321 billion to $360 billion. After adjustments to account for partial guarantees in many of the programs and previously recognized losses, the total net covered amount was $277 billion in 2012 and $317 billion in 2021. The allowance for losses for other credit programs decreased from $27 billion in 2012 to $14 billion in 2021.

Deposit Insurance and Orderly Liquidation Authority. The Federal Deposit Insurance Corporation insures deposits in most U.S. banks. When necessary, it takes control of insolvent entities and manages them as a “receiver” to recover as much money as possible. Those recoveries are first used to pay the FDIC’s own expenses and then to fulfill other claims on the entities. The National Credit Union Administration performs a similar function for credit unions. It insures shares in most U.S. credit unions, which are tax-­exempt, and resolves failed entities. Over the past decade, domestic deposits covered by the FDIC and the NCUA increased from $9.9 trillion in 2012 to $19.4 trillion in 2021. After adjustments to account for uninsured amounts and previously recognized losses, the total net covered amount was $8.0 trillion in 2012 and $11.0 trillion in 2021. The allowance for losses was $4 billion in 2012, fell to less than $1 billion in 2015, and has continued to decrease since then, equaling just $0.2 billion in 2021. This report does not discuss the bank failures that occurred in March 2023, and the values shown do not account for the effects of those failures.6

The FDIC also has a special authority, known as orderly liquidation authority (OLA), that it can invoke to help maintain the stability of the U.S. financial system. That authority empowers the FDIC to manage the resolution of large financial institutions whose failure could threaten financial and economic stability. Although OLA represents a contingent liability and thus is included in this analysis, values are not provided for the covered amount, net covered amount, or allowance for losses for that authority because the universe of covered institutions is highly uncertain and the government does not guarantee that it will cover the losses of institutions that are liquidated under the authority.

Insurance for Private Pensions. The Pension Benefit Guaranty Corporation insures the pension benefits of more than 35 million people who participate in defined benefit pension plans operated by private-sector employers. The liabilities of those insured pension plans total $4.7 trillion; approximately $1.5 trillion of that amount is guaranteed and not covered by plan assets or previously recognized as losses. PBGC expects to pay $112 billion to cover the promised benefits of employees whose pension plan has been assumed by PBGC (that is, trusteed), is insolvent, or is expected to be trusteed or insolvent in the near future.

Flood and Crop Insurance. The federal government operates large specialty insurance programs to provide coverage for unique risks such as flooding, natural disasters, and crop failure and impairment. Those programs typically provide insurance in markets that would otherwise not be well-served by private insurers because of their risk profile or cost. The federal government provided insurance coverage totaling $1.5 trillion for flood and crop insurance programs in 2021 and expects to lose less than 1 percent of that amount.

Limitations of the Measures Used in This Report

This report is intended to give the Congress an overview of the financial liability the government bears through its credit and insurance programs by providing information about the size of those programs based on data from agencies’ financial reports. Those data represent only some of the information that policymakers would be likely to use to assess and improve the performance of those programs. The measures reported here do not include all the benefits or costs of government credit and insurance programs, nor do they capture the cost of market risk.7 Thus, the three measures are not sufficient for assessing how federal credit and insurance programs affect people’s economic well-being or how they contribute to economic stability.

Three Measures of Federal Financial Activities

This report describes the federal financial portfolio using three measures: the covered amount, the net covered amount, and the allowance for losses (see Figure S-1). (For a description of the data CBO used to determine the values of each measure, see Appendix A.) The accounting standards differ for credit and insurance programs, so accounting measures of the two types of programs are not generally combined. Consequently, this report presents totals for credit and insurance programs separately.

• The covered amount is equal to the face value of direct loans, loan guarantees, or insurance in force for each program. It represents the total amount of private activity that benefits from government financial support, even if the guarantee or insurance is partial or incomplete.
• The net covered amount is the guaranteed portion of the covered amount (subject to limits on the government’s payout), net of assets and fund balances available to cover future losses and losses that have already been accounted for. The measure does not account for any recoupments or for limitations on capacity to make payments under current law.8
• The allowance for losses (including the liability for losses) is a measure from an agency’s or program’s financial statements that identifies what that agency or program has recognized as losses due to default or insurance claims net of recoveries (or, for credit programs, net of all other future cash flows) associated with events that have already occurred or that are expected to occur in the future.

  Figure S-1.

  Relationship Between the Covered Amount, Net Covered Amount, and Allowance for Losses

  

  The covered amount is the largest measure of the financial portfolio, followed by the net covered amount, and the allowance for losses. The net covered amount is less than the covered amount because it accounts for guarantee limits, agency resources available to cover losses, and the allowance for losses. Those measures depend on several factors—including macroeconomic conditions, borrowers’ repayment rates, changes in federal policies, and the incidence of natural disasters—and thus vary every year.

  Notes

  Data source: Congressional Budget Office.

Covered Amount

The covered amount is the broadest measure of the federal financial portfolio because it represents the total amount of private activity that benefits from government financial support in credit and insurance programs. In CBO’s view, it is useful for measuring those programs’ impact on the overall economy. However, the covered amount does not account for the fact that not all loans or policies create losses for the government. Nor does it represent how much the government might ultimately be required to pay out, because even in a worst-case scenario, the government would pay only part of the covered amount. Additionally, the measure does not account for expectations of recoveries on defaulted loans and insurance policies.

Most insurance programs are structured as government corporations that pass the costs of coverage through to the industries that receive it, although in some cases—namely in times of severe losses— lawmakers have backstopped insurance programs with infusions from the Treasury’s general fund. Insurance programs generally cover costs through premiums and other assessments and, when those are insufficient, with money borrowed from the Treasury.9 For example, the FDIC has flexibility to adjust deposit insurance premiums, without additional action by the Congress, to cover the expected losses associated with its insurance, to build a reserve against greater-than-expected losses, and to recoup losses after they have taken place. In the past, following heavy losses that threatened the ability of insurance programs to continue paying claims in full, the Congress changed the law to raise the premiums of those programs that did not have the flexibility to do so themselves. In other cases, lawmakers passed losses on to taxpayers by transferring money from the general fund of the Treasury to the funds associated with the insurance program, or by forgiving amounts that the insurance funds had borrowed from the Treasury.

Net Covered Amount

The net covered amount is closely related to the contingent liability of the federal government—that is, the amount that it could owe depending on the outcome of future events. The net covered amount equals the covered amount minus amounts related to the following:

• Resources Available to Cover Losses. In years when premiums for insurance coverage exceed losses from insurance claims and administrative costs, government corporations, such as the FDIC, deposit the excess premiums in a government fund that can be used to pay future claims.10 Such deposits reduce the federal budget deficit in the year in which they are made. The balances of those funds represent the capacity to cover losses with resources that originated from premiums assessed on the covered industry rather than with revenues collected from taxpayers. When a government fund, such as the Deposit Insurance Fund (DIF), incurs expenses to resolve an institution, a net outlay is recorded in the budget, thereby raising the deficit.
• Risk Sharing. The government often shares risk in credit and insurance programs with private entities. For example, the mortgage guarantee program run by the Department of Veterans Affairs covers a maximum of 50 percent of the value of mortgages backed by the program, and the Small Business Administration’s 7(a) program guarantees up to 90 percent of loan balances.11 For those programs and others like them, the federal government would pay less than 100 percent of the covered amount in the event of a default or loss.
• Coverage Limits. In some cases, a statute sets a limit on government payouts. For example, under current law, the FDIC insures only up to $250,000 of an account owner’s deposits per institution.
• Allowance for Losses. Credit programs have an allowance for losses that is calculated on the basis of procedures specified by the Federal Credit Reform Act of 1990 (FCRA). The allowance for a given loan or loan guarantee is a measure of the amount, net of recoveries and other cash inflows to the government (such as interest payments and fees), that the agency is likely to lose, on average, as a result of default. For insurance programs, the allowance for losses—recorded and estimated in accordance with accounting standards—is based on the liability (net of offsetting recoveries) arising from imminent and highly probable claims as well as from losses associated with events that have already taken place. The losses included in the allowance for losses for credit programs have already been recognized in the budget, but the liabilities recorded in the allowance for losses for insurance programs have not. Although uncommon, the allowance for losses for credit programs can be negative when expected fees are greater than expected losses; negative values are excluded when calculating the net covered amount.

It is possible that the federal government could incur losses that were larger or smaller than expected. However, under no plausible scenario could the government lose all of the net covered amount, in part because claims and default rates are unlikely to ever reach 100 percent. In addition, the potential commitment of government programs is limited for the following reasons:

• Recoupment. The Congress requires that some programs recoup their losses through assessments or premiums on covered entities. For example, the FDIC effectively recoups losses covered by the DIF by setting premiums to maintain a target reserve ratio. And if the use of its orderly liquidation authority to resolve large financial institutions resulted in a loss, the FDIC would be required to recoup that money through assessments on other large financial institutions.12
• Limited Resources Under Current Law. Many insurance programs lack the authority or financial resources to pay out on all their commitments at once. For example, the FDIC can cover losses only up to the sum of the balance of the DIF and the agency’s indefinite borrowing authority of $100 billion.13 Likewise, PBGC can cover claims only until its trust and revolving funds have been exhausted.

Allowance for Losses

In addition to the covered and net covered amount, the report presents the allowance for losses for credit and insurance programs. The programs’ allowances for losses are not estimated by CBO; rather, they are estimated by the agencies that administer the programs. Those estimates reflect projections of default and of future insurance claims for outstanding credit and insurance obligations and are often probability-weighted among different economic scenarios.14 The allowances for losses are a very small share of the covered amount and do not indicate the amount the government might have to outlay under a specific economic scenario.

How the Measures in This Report Differ From Budgetary Estimates

This report presents measures of the federal financial portfolio for credit and insurance programs that are different from budgetary estimates. Unlike CBO’s baseline budget projections, the measures presented here reflect only outstanding loan cohorts; no attempt is made in this report to project future loan cohorts or insurance activity. The three measures discussed here complement budget projections and are useful indicators of the size and state of the federal credit and insurance portfolio.

Credit Programs. The accounting procedures currently used for credit programs in the federal budget are prescribed by the Federal Credit Reform Act of 1990.15 FCRA requires that the federal government estimate the cost of its loans and loan guarantees on a present-value basis. A present value is a single number that expresses the flows of current and expected future income or payments in terms of an equivalent lump sum received or paid at a specified time. That number depends on the discount rate, or rate of interest, that is used to translate future cash flows into current dollars. Under FCRA’s rules, the projected interest rates on Treasury securities with similar terms to maturity are used as the discount rates. For instance, the yield on a Treasury security maturing in one year would be used to discount cash flows one year from disbursement, a two-year rate would be used for cash flows two years from disbursement, and so on.

The expected future cash flows used to calculate the present value incorporate estimated default rates. For direct loans, expected future cash flows are equal to the principal and interest payments due minus the amount of expected defaults (net of recoveries); for loan guarantees, expected future cash flows are equal to guarantee payments for defaults (net of recoveries and fees).

That present value of a loan is referred to as its subsidy cost and is recorded in the budget in the year the loan is disbursed. The subsidy cost is reesti­mated each year on the basis of data for the cash flows received to date and updated assumptions about future cash flows. (The discount rates used for reestimates are the same as those used at the time of disbursement.) The difference between the reestimated subsidy cost and the most recent subsidy cost is recorded in the budget, and thus affects the deficit, in the year of the reestimate. Through that process, by the end of a loan’s term, all cash flows associated with the loan will have been reflected in the annual deficits recorded since it was originated. The same process applies to loan guarantees.

This report captures the realized deficit effects of outstanding cohorts of direct loans and loan guarantees with two measures calculated using FCRA procedures and reported on financial statements: the allowance for losses for direct loans and the liability for loan guarantees (collectively referred to in this report as the allowance for losses). For direct loans, the allowance for losses is the difference between the face value of the loan and the amount the financing account owes the Treasury.16 For loan guarantees, the liability measures the amount of losses incorporated in past deficits through financing account transactions and interest. Those amounts are based on loans that have already been disbursed and include defaults that have already occurred and those that are projected to occur on such loans. The covered amount is equal to the face value of outstanding direct loans and loan guarantees, and the net covered amount is equal to the guaranteed portion of the covered amount minus the allowance for losses.

For credit programs, the subsidy cost and the allowance for losses are related to each other. Suppose that an agency disburses a $10 billion loan with an expected default rate (net of recoveries) of 10 percent. Principal and interest are due two years later at an interest rate that equals the rate on Treasury securities. The face value of the loan is $10 billion, the allowance for losses is $1 billion (10 percent of $10 billion), and the financing account owes the Treasury $9 billion. The allowance for losses matches the amount of loss ($1 billion) that has already been incorporated in the deficit. Suppose that, after one year, the default rate on the loan is revised downward to 6 percent, for a reestimated subsidy cost of $0.6 billion (6 percent of $10 billion). The amount that the financing account owes the Treasury is revised upward to $9.4 billion, and the deficit decreases by $0.4 billion (the original subsidy cost of $1 billion minus the reestimated subsidy cost of $0.6 billion). Suppose that, at the same time, a second loan is disbursed for $20 billion with an estimated default rate of 5 percent and a subsidy cost of $1 billion. The face value of the loans is now $30 billion, and the subsidy cost is $1.6 billion (the reestimated subsidy cost of $0.6 billion for the first loan plus the subsidy cost of $1 billion for the second loan). The amount that the financing account owes the Treasury is now $28.4 billion, equal to the difference between the face value of the loans and the subsidy cost. The allowance for losses thus reconciles the face value and financing account balance for all outstanding loans made in the current year and all previous years. However, the allowance for losses has no relationship to the subsidy cost of future cohorts (estimates of which are incorporated in CBO’s baseline budget projections) because it measures only past cohorts.

Insurance Programs. Unlike federal credit programs, federal insurance programs are budgeted for on a cash basis, where the program’s effect on the budget deficit is measured as the difference between cash inflows and outflows in the current year.17 Cash-basis estimates of how future deficits would be affected are based on anticipated cash inflows and outflows and are limited to 10 years into the future.

This report captures the allowance for losses for insurance programs with a measure of programs’ liabilities that is reported by agencies on their financial statements. That measure represents imminent and highly probable losses not yet incurred (as projected by the administering agency) and claims that are associated with past events but not yet paid. Unlike the FCRA measures used with credit programs, those liability measures are not related to budget projections, which account for losses beyond those that are probable and imminent. The covered amount is a measure of the total insurance in force. The net covered amount is equal to the guaranteed portion of the covered amount (subject to limits on the government’s payout) minus the allowance for losses and asset and fund balances that are available to cover losses.

Measures of Financial Activities and Federal Debt

Measures of federal debt are often used to understand the federal government’s overall financial position. The three main measures of federal debt—debt held by the public, debt net of financial assets, and gross debt—incorporate components of the covered amount, net covered amount, and allowance for losses (see Appendix B).

• When a direct loan is made, debt held by the public rises by the amount that is disbursed to the borrower, all other revenues and spending being equal.
• Debt net of financial assets incorporates the allowance for losses in credit programs.
• Gross debt reflects the balance of Treasury securities held by government accounts, such as the Deposit Insurance Fund, that record collections and expenditures. Treasury securities held by government accounts represent amounts that the Treasury owes to parts of the government as opposed to the public. In the case of insurance programs, those holdings of Treasury securities originated with premiums collected by the program. Holdings in government accounts and other agency resources are subtracted from the covered amount to calculate the net covered amount.

Overview of the Federal Financial Portfolio in 2021

   

Housing and Real Estate Programs

The federal government’s housing and real estate portfolio includes direct loans and loan guarantees made by Fannie Mae, Freddie Mac, the Federal Housing Administration (which is part of the Department of Housing and Urban Development), the Department of Veterans Affairs, and the Rural Housing Service (which is part of the Department of Agriculture).

Under current law, the federal government’s financial support for Fannie Mae and Freddie Mac is capped by the Department of the Treasury’s authority to purchase senior preferred stock of the two government-sponsored enterprises (GSEs), leaving the private sector responsible for any losses the GSEs incur that exceed the Treasury’s purchasing authority.18 At the end of September 2021, $254 billion of the Treasury’s available authority remained unused.19 The exhibits in this report do not account for restrictions on the Treasury’s borrowing authority.

CBO excludes guarantees provided by the Government National Mortgage Association (Ginnie Mae) from the financial activities presented in this report because they are incremental guarantees on loans already included in the totals for loans guaranteed by FHA, VA, and RHS.    

Student Loan Programs

The Department of Education operates two programs that provide loans to borrowers interested in pursuing a postsecondary education. The agency extends loans directly to borrowers through the William D. Ford Federal Direct Loan Program. The Federal Family Education Loan Program guaranteed student loans made by private lenders until it was discontinued on June 3, 2010. The program stopped issuing new guarantees on that date and has been winding down since then.

The direct loan program makes loans to eligible undergraduate, graduate, and professional students to help pay for education expenses and tuition. Depending on the undergraduate borrower’s financial need, the Department of Education may not charge interest on the loan while the borrower is in school or during deferment periods.

The values in this report for the covered amount, net covered amount, and allowance for losses are based on program parameters in place before the Biden Administration’s announcement on August 24, 2022, about student loan cancellation, payment suspensions, and a new income-driven repayment plan. That executive action will make borrowers with an individual income of less than $125,000 or a household income of less than $250,000 eligible for up to $20,000 in student loan cancellation; it also suspended payments and interest accruals on student loans.20

Under the Administration’s proposed income-driven repayment plan, borrowers will pay 5 percent of their discretionary income monthly on their undergraduate loans and 10 percent on their graduate loans.21 (Currently, borrowers in income-driven repayment plans pay 10 percent for all loans.) In addition, after 10 years of repayment, those borrowers who originally borrowed $12,000 or less will be eligible for forgiveness. Under the new plan, discretionary income is defined as income above 225 percent of the federal poverty guidelines, whereas currently it is defined as income above 150 percent of those guidelines. Furthermore, under the new plan, unpaid interest will not accrue.    

Other Credit Programs

The federal government provides loans and loan guarantees through many smaller credit programs unrelated to housing and real estate or student loans. Those programs typically receive annual appropriations that support a relatively stable amount of credit activity and subsidy cost. The agencies discussed in this section—the Department of Agriculture, the Department of Energy, the Department of Transportation, the Export-Import Bank (Ex-Im Bank), and the Small Business Administration (SBA)—account for most of the credit programs not discussed in other sections of this report.22

The covered amount for the other credit programs is the outstanding balance of direct loans and loan guarantees issued by the agencies. The allowance for losses, which is measured on a FCRA basis, equals the allowance for losses on direct loans plus the liability for loan guarantees. The net covered amount equals the guaranteed portion of the covered amount minus the allowance for losses.     

Deposit Insurance and Orderly Liquidation Authority

The federal government runs insurance programs to help maintain the stability of the financial system. The Federal Deposit Insurance Corporation operates the Deposit Insurance Fund to insure deposits and resolve failed banks. Similarly, the National Credit Union Administration operates the Share Insurance Fund (SIF) to insure credit union members’ shares (that is, deposits) and resolve failed credit unions. Orderly liquidation authority, which was established by the Dodd-Frank Wall Street Reform and Consumer Protection Act, empowers the FDIC to liquidate large financial institutions whose failure could pose a systemic risk to the economy and financial stability. Those institutions include commercial banks, investment banks, and nonbank financial institutions such as insurers.

FDIC’s Deposit Insurance

The FDIC insures deposits up to $250,000 for individual accounts and up to $500,000 for joint accounts. That insurance is automatic for any deposit account opened at an FDIC-insured bank. In the event of a bank failure, the FDIC uses the DIF balance to pay insurance to depositors up to the insurance limit.23 The DIF is funded primarily by assessments (insurance premiums) on the total liabilities of FDIC-insured institutions. The FDIC sets a target reserve ratio—equal to the ratio of the DIF balance to insured deposits—that is designed to restore and maintain a positive fund balance for the DIF even during a banking crisis and to achieve steady assessment rates throughout any economic cycle. In 2021, the reserve ratio was 1.27 percent—­8 basis points below the target reserve ratio of 1.35 percent.24

The covered amount for the DIF is the sum of all domestic deposits at banks insured by the FDIC. The net covered amount equals total insured deposits minus the DIF balance, assessments receivable, and the allowance for losses. (Total insured deposits are less than total domestic deposits because not all domestic deposits are insured.) The allowance for losses is equal to the sum of the contingent liability for anticipated failures of FDIC-insured institutions, guarantee payments, and litigation losses.25 The allowance for losses is very small (less than $4 billion annually) compared with the covered amount because, historically, few banks fail each year.

NCUA’s Share Insurance

Similar to the FDIC’s deposit insurance, the NCUA’s share insurance provides credit union members with up to $250,000 in total coverage for their shares in individual accounts and up to $500,000 for joint accounts. The NCUA’s share insurance also offers up to $250,000 in additional coverage for individual and Keogh retirement accounts and for revocable and irrevocable trusts.

The SIF is capitalized through credit union funds held on deposit and retained earnings. The NCUA Board establishes a desired equity ratio to protect against unexpected losses from the failure of credit unions. That ratio is calculated as the ratio of the contributed capital from credit union members (equal to 1 percent of member deposits) plus the cumulative results of operations to the aggregate amount of the insured shares in all insured credit unions. In December 2021, the equity ratio was 1.26 percent—7 basis points below the desired level of 1.33 percent.

The covered amount is the total amount of members’ shares insured by the NCUA. The net covered amount equals total insured shares minus the SIF balance, receivables due from insured credit unions, and the allowance for losses. The allowance for losses is equal to the amount of insurance and guarantee program liabilities.26 The allowance for losses is small (less than $1 billion annually) compared with the covered amount because few credit unions are liquidated or placed into conservatorship by the NCUA each year.

Orderly Liquidation Authority

Orderly liquidation authority empowers the FDIC to manage the resolution of large financial institutions—including businesses that own or are affiliated with banks and other financial companies that are not banks but that perform some of the functions of banks—outside the typical bankruptcy process. That authority can be invoked when other resolution mechanisms are insufficient to restore financial stability.

The FDIC is responsible for resolving failed banks by using the DIF to cover deposits and by liquidating banks’ assets to pay liabilities other than deposits. In the event of the failure of a large, systemically important financial institution (SIFI), both the DIF and the FDIC’s orderly liquidation authority would be used to resolve the failed institution.27

In this report, CBO does not provide values for the covered amount, net covered amount, or allowance for losses for OLA because the universe of covered institutions is highly uncertain and the government does not guarantee that it will cover the losses of institutions that are liquidated under the authority. Since its inception in 2011, OLA has not been invoked to resolve the failure of a covered financial institution. If the FDIC uses funds from the OLA, it will recover those funds by selling some or all of the failing institution’s assets, such as one or more of its lines of business or, in the case of a holding company, its subsidiaries. If the proceeds from those sales are not sufficient to recoup the FDIC’s costs, then the FDIC will assess fees on other financial institutions for a limited period to recover its net loss.28   

Insurance for Private Pensions

The Pension Benefit Guaranty Corporation is a federal agency responsible for insuring the benefits of more than 35 million people who participate in defined benefit pension plans provided by private employers.29 The agency insures two types of defined benefit plans: single-employer and multi­employer plans. Single-employer plans are the responsibility of a single sponsoring firm. Multiemployer plans typically are collectively bargained and offered jointly by two or more unrelated employers, usually in the same industry, such as construction or transportation.

PBGC provides insurance to participants by assuming responsibility—subject to limits on the amount guaranteed—for unfunded pension liabilities (the difference between a plan’s insured liabilities and its assets) when the plan’s sponsor cannot meet its pension obligations. In such cases, PBGC pays benefits directly to participants (in the single-employer program) or provides financial assistance to the plan (in the multiemployer program). PBGC’s resources available to pay claims include the assets of terminated plans (in the single-employer program) and premiums paid by insured plans, including accumulated interest. If those funds are insufficient for PBGC to meet the entirety of its insurance obligations, it will not be able to pay full insured benefits under current law.

Although PBGC has no legal claim on the general fund of the Treasury, the American Rescue Plan Act of 2021 authorized special financial assistance to critically underfunded multiemployer plans.30 That assistance, which PBGC estimates will total $82.3 billion, is paid from the general fund.31 If that assistance is insufficient, lawmakers may have to choose between changing the law again to provide the resources necessary to ensure that beneficiaries receive the full amount of their federally insured pension benefits or seeing beneficiaries lose part of their benefits.32

PBGC’s covered amount equals the present value of vested liabilities of insured pension plans. (Vested liabilities are pension benefits that participants have worked long enough to receive and are not subject to forfeiture, though they may not be fully guaranteed by PBGC.) The net covered amount is the guaranteed portion of the covered amount minus pension plans’ assets and the net position of each program, where the net position is equal to the difference between PBGC’s assets and liabilities.33 The allowance for losses for the single-employer program equals the present value of future benefits; for the multiemployer program, it is the present value of nonrecoverable future financial assistance. Both values are reported by PBGC in the statements of financial position that it publishes for the two programs. The allowance for losses includes unfunded liabilities for pension plans that are trusteed, insolvent, or likely to become trusteed or insolvent within 10 years.34

The most recent data available for the total liabilities of pension plans (the covered amount) are for 2018. To estimate the covered amount for private pension plans for 2019 to 2021, CBO applied a net asset return of 2 percent per year to total plan assets and maintained a ratio of total plan assets to total plan liabilities equal to that for 2018. Additionally, to estimate the net covered amount, CBO applied an average guarantee percentage of 75 percent for all years.

The covered and net covered amounts are reported on a “plan year” basis for ongoing plans, where the plan year is the calendar year of the beginning of the reporting period. For example, plan year 2018 includes reporting periods that begin in any month during calendar year 2018. CBO adopts the plan year as the fiscal year in this report. The allowance for losses is reported by fiscal year.

For a brief discussion of federal liabilities for civilian and military retirement benefits, see Appendix C. Under current law, there is no federal insurance for state and local pension plans, so those plans are not discussed in this report. Any federal coverage of those plans would require legislative action.    

Flood and Crop Insurance

The federal government operates large specialty insurance programs to provide coverage for unique risks such as flooding, natural disasters, and crop failure and impairment. Those programs typically provide insurance in markets that, because of their risk profile or cost, would otherwise not be well-served by private insurers.

The National Flood Insurance Program (NFIP) was established by the National Flood Insurance Act of 1968 and was most recently reauthorized by the Biggert-Waters Flood Insurance Reform Act of 2012. The program serves two general purposes: to offer flood insurance for properties with significant flood risk and to promote floodplain management. Communities that volunteer to participate in the NFIP have access to federal flood insurance and must meet certain requirements, such as adopting minimum standards for building codes. The NFIP also seeks to reduce flood risk by offering mitigation grants to certain properties that are deemed likely to incur damage.35

The Congress established the federal crop insurance program in 1938 to help agricultural producers recover from the Great Depression and the Dust Bowl. In 1980, to encourage producers to participate in the insurance program and reduce their reliance on other federal programs that provided compensation for disaster-related losses for free, lawmakers expanded the program to cover more crops and regions and introduced subsidies for insurance policies. The Federal Crop Insurance Act of 1980 also created a public-private partnership with private insurance companies to sell and service the policies subject to the terms established by the Federal Crop Insurance Corporation. Subsequent legislation increased the subsidies and expanded the role of the private sector. Today, the program offers policies that cover losses associated with most natural causes; those policies are sold and serviced by private insurance companies. Of the more than 100 crops insured under the program, 4 crops—corn, soybeans, wheat, and cotton—account for about three-quarters of the enrolled acreage and four-fifths of the claims paid.36 

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Appendix AFinancial Portfolio Definitions by Sector

The three measures used in this report to describe the government’s financial portfolio—the covered amount, the net covered amount, and the allowance for losses—are derived from information reported by agencies in their financial statements and in other reports and data releases. The information provided varies by agency. Below, the Congressional Budget Office identifies the accounting terms or concepts reported by individual agencies that it used to calculate the three measures (see Table A-1).

Appendix BFinancial Activities and Federal Debt

Financial activities are contingent liabilities that might add to the federal government’s cash outflows, and thus to the amount that it needs to borrow, if greater-than-expected losses occur. To some degree, expected and potential losses are already reflected in measures of federal debt.

The principal measure of federal debt used by the Congressional Budget Office is debt held by the public, which encompasses securities issued by the Treasury to finance the government’s activities. Two other measures are debt net of financial assets and gross debt. Debt net of financial assets equals debt held by the public minus the value of the government’s holdings of financial assets, such as direct loans. Gross debt includes both debt held by the public and debt held in other government accounts, such as the Social Security trust funds and the Federal Deposit Insurance Corporation’s (FDIC’s) Deposit Insurance Fund. Of the three measures, debt net of financial assets is the smallest, and gross debt, the largest. Accordingly, debt net of financial assets incorporates the least amount of expected potential losses, and gross debt, the most.

Resources to cover losses (for credit programs) or pay claims (for insurance programs) are incorporated in a measure of debt if the losses could be covered without increasing the measure of debt. The government’s capacity to pay for losses related to direct loans, loan guarantees, other credit guarantees, and insurance programs derives from several types of sources that are reflected in federal debt to different degrees. For example, the amounts that agencies expect to lose on outstanding loans and loan guarantees are included in debt net of financial assets, whereas most of the resources available to pay the Pension Benefit Guaranty Corporation’s (PBGC’s) obligations are not reflected in any measure of federal debt.

Greater-than-expected losses would affect measures of debt in varying ways. If agencies were to lose the remaining balance of their direct loans, debt held by the public would not immediately rise. Debt net of financial assets would rise, however, and if the value of all assets was lost—if all loans were written off, for example—that measure of debt would match debt held by the public because the government would no longer expect to receive a cash inflow from financial assets. Over time, debt held by the public would be increased by the loss of loan repayments.

For Fannie Mae, Freddie Mac, and most insurance programs, the government does not, under current law, have the authority to cover losses or pay claims on the entire covered amount that is guaranteed or insured. (That amount is shown in the first column of each table.) Loan guarantees, the commitments made to Fannie Mae and Freddie Mac, and insurance programs all introduce the potential for losses that exceed the amounts incorporated in debt held by the public. Typically, insurance programs have assets in government accounts, which are reflected in gross debt, that can cover some of the losses they might incur.

Direct Loans

The face value of direct loans (which is the covered amount) is reflected in debt held by the public because the government has disbursed those amounts. Debt net of financial assets is calculated by subtracting the value of financial assets (including direct loans) held by the government from debt held by the public. The value of direct loans equals the face value of the loans minus the allowance for losses estimated under the Federal Credit Reform Act of 1990 (FCRA). If the government finances loans by issuing Treasury debt, debt net of financial assets increases by an amount equal to the face value of the loans minus the estimated value of the loans under FCRA; that amount equals the allowance for losses. (If the amount is negative, it represents a projected gain and thus decreases debt net of financial assets.)

Debt held by the public is $1.6 trillion higher than it would be if the government did not offer direct loans because of the need to borrow cash to make those loans—most of which are student loans (see Table B-1). The estimated value of direct loans is $1.3 trillion—the $1.6 trillion face value minus an allowance for losses of $0.3 trillion. Payments of principal and interest on the loans are projected to offset payments of principal and interest on the Treasury securities that make up that $1.3 trillion. If, hypothetically, all direct loans were canceled, debt net of financial assets would immediately increase by $1.3 trillion, but debt held by the public would not change at that moment (though it would increase over time).

Loan Guarantees

Because private lenders finance the loans that the government guarantees, debt held by the public does not increase by the amounts of those loans. Rather, when a loan guarantee is issued, the government may collect an upfront fee that lowers debt held by the public. Debt net of financial assets, however, is affected by the estimated net cost of the guarantees. Agencies that issue loan guarantees record a liability on their financial statements equal to the present value of the cost of future claims (that is, projected defaults net of recoveries) minus annual guarantee fees. That liability reduces the value of financial assets and thus adds to debt net of financial assets. Still, very little of the $2.3 trillion in loan guarantees outstanding at the end of 2021 is reflected in any measure of federal debt.

Loan guarantee programs have authority to pay claims for the full guarantee amount—beyond the amount of an agency’s existing resources—without further Congressional approval. When claims are paid, debt held by the public increases by the amount paid. The effect on debt net of financial assets depends on whether actual guarantee claims exceed the amounts previously accounted for as the liability for loan guarantees. If claims are greater than the recorded liability, the value of financial assets will diminish, and debt net of financial assets will increase.

The Federal Housing Administration’s (FHA’s) Mutual Mortgage Insurance program has access to the Capital Reserve Account, a government fund that holds claims on the U.S. Treasury that are included in gross debt but not debt held by the public. That fund had a balance of $94 billion at the end of 2021, an amount that represents the accumulated value of past negative subsidies with interest.1

Other Credit Assistance

The Department of the Treasury’s support for Fannie Mae and Freddie Mac consists of agreements to purchase preferred stock from those companies if their net worth falls below zero. Similar to a loan guarantee, that commitment does not affect the current value of debt held by the public, and no government funds are available to cover any future payments by the Treasury. Thus, none of the three measures of debt incorporate the remaining authorization to purchase up to $254 billion of preferred stock. Fannie Mae and Freddie Mac have set aside an additional $11 billion as an allowance for loan losses to cover the cost of the guarantee. Also, Fannie Mae’s and Freddie Mac’s capital serves as a buffer against credit losses. Combined, their net worth was $67 billion at the end of 2021. Fannie Mae’s and Freddie Mac’s total resources to cover credit losses thus amounted to $78 billion.

Insurance Programs

The resources to pay claims under federal insurance programs come from sources that affect federal debt in differing ways (see Table B-2):

• Some resources are invested in Treasury securities and thus are reflected in gross debt (but not debt held by the public). They include Treasury securities held in the FDIC’s Deposit Insurance Fund, the National Credit Union Administration’s (NCUA’s) Share Insurance Fund, PBGC’s revolving funds, and the National Flood Insurance Fund.
• Some resources to pay claims derive from other assets held by the agencies’ funds and from sources outside of the agencies; those resources are not reflected in any measure of federal debt. They include cash balances, receivables from insured financial institutions, the net position of PBGC (after subtracting the balance of the revolving funds), and assets of ongoing pension plans.
• Some of the government’s capacity to pay for losses derives from agencies’ authority to spend more than could be covered by those resources; most of that additional spending would add to federal debt. That authority includes the remaining borrowing authority of the FDIC’s Deposit Insurance Fund and the NCUA’s Share Insurance Fund, additional appropriations for special financial assistance to multiemployer pension plans, the amount of non-Treasury securities held by PBGC’s revolving funds, and authority to pay crop insurance claims in excess of the fund’s balance.

  Table B-2.

  Agencies’ Capacity to Pay Claims of Insurance Programs, 2021

  Billions of Dollars

  

  Notes

  Data source: Congressional Budget Office, using Special Financial Assistance by PBGC, 87 Fed. Reg. 40968 (July 8, 2022), https://tinyurl.com/236mhd5t; Department of the Treasury, U.S. Treasury Monthly Statement of the Public Debt (September 2021), Table III, https://tinyurl.com/bd9dej3j; Federal Insurance & Mitigation Administration, The Watermark, vol. 16 (Fourth quarter, fiscal year 2021), https://tinyurl.com/3j65znyb (PDF); and the data sources for specific programs identified in the exhibits. Except where noted below, all values shown are based on data reported by federal agencies; they are not CBO’s estimates. See www.cbo.gov/publication/58614#data.

  a. Includes the value of Treasury securities held by the Federal Deposit Insurance Corporation’s (FDIC’s) Deposit Insurance Fund, the National Credit Union Administration’s (NCUA’s) Share Insurance Fund, the Pension Benefit Guaranty Corporation’s (PBGC’s) revolving funds, and the National Flood Insurance Fund.

  b. Includes receivables from insured financial institutions, the net position of PBGC (after subtracting the balance of the revolving funds), and assets of ongoing pension plans.

  c. Includes the remaining borrowing authority of the Deposit Insurance Fund and Share Insurance Fund, additional appropriations for special financial assistance to multiemployer pension plans, the value of non-Treasury securities held by PBGC’s revolving funds, and the authority to pay crop insurance claims in excess of the fund balance.

  d. Includes the FDIC’s Deposit Insurance Fund and the NCUA’s Share Insurance Fund. These values do not account for the FDIC’s orderly liquidation authority.

  e. CBO used data reported for 2018 (the latest data available) to estimate the guaranteed amount for insurance for private pensions and the value of pension plan assets (included in “Resources Not Incorporated in Any Measure of Federal Debt”).

Gross debt includes some government holdings of Treasury securities that are dedicated to covering losses in insurance programs. In total, such funds amount to $186 billion. Together, the FDIC (in its Deposit Insurance Fund) and the NCUA (in its Share Insurance Fund), for example, hold $134 billion in Treasury securities. Those securities are included in gross debt and are available to pay claims. They account for more than half of the two agencies’ total capacity—$251 billion—to pay claims; the remaining capacity stems almost entirely from $106 billion in borrowing authority. By contrast, most of the resources to pay claims for pension insurance come from the assets of terminated pension plans, which are not reflected in federal debt.

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Appendix CFederal Civilian and Military Retirement

Most retired federal workers receive defined benefit pensions based on formulas that account for retirees’ salary history and years of service. Two major programs provide such annuities to civilian workers: the Federal Employees Retirement System (FERS) and the older Civil Service Retirement System (CSRS), which has been closed to new employees since 1983 and is winding down.1

Most federal workers also participate in the Thrift Savings Plan (TSP), a defined contribution plan similar to a 401(k) plan used in the private sector. The government and employees contribute to individual TSP accounts that are owned and controlled by the employees. In retirement, former employees can receive payments from those accounts.

In general, federal workers covered by FERS are automatically enrolled in the TSP (although they can later opt out). Agencies make automatic contributions to those employees’ accounts and match the employees’ contributions up to a specified limit. Federal workers covered by CSRS may participate in the TSP, but they do not receive contributions from their agency. After making any required contributions to the TSP, the government has no further obligations regarding benefits from the plan.

Military personnel who serve long enough to qualify for retirement benefits (usually 20 years) receive pensions paid by the Military Retirement Fund of the Department of Defense.2 Unlike federal civilian workers, service members are not required to contribute monetarily to their future pension benefits. In addition, military personnel have been able to participate in the TSP since 2001, although they were not eligible to receive matching contributions from their employer until 2018.

In 2018, military agencies began implementing a new retirement plan, the Blended Retirement System (BRS). That plan combines the TSP—now with matching employer contributions—and retirees’ monthly pension benefits, which are smaller than they were for earlier military retirees. Personnel who entered the armed services after December 31, 2017, are automatically enrolled in the BRS; personnel who had 12 or fewer years of service on that date could opt in to the new system. Under the BRS, annuitants can choose to receive part of their pension benefits as a lump-sum payment, an option not available to federal civilian retirees.

The total amount of liabilities continues to decline in CSRS and to increase in FERS as the defined-benefit CSRS winds down (see Figure C-1). The total amount of unfunded liabilities in CSRS remained about the same ($0.8 trillion) from 2012 to 2020, though unfunded liabilities’ share of total liabilities increased from 65 percent in 2012 to 81 percent in 2020.3 During that period, unfunded liabilities in the Military Retirement Fund fell from $1.1 trillion (or 75 percent of total liabilities) in 2012 to $0.9 trillion (or 48 percent) in 2021. Currently, FERS is mostly funded, CSRS is mostly unfunded, and military retirement is about half-funded.4

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