Fair-Value Budgeting: Practical Issues: Working Paper 2021-08
Working Paper
This paper explores the practical questions raised by fair-value budgeting: Which government activities would benefit from it? How might it be used? How can agencies estimate fair value without observing market prices for government risks?
Fair-value budgeting represents a more comprehensive measure of cost for government activities than the measure required under current law. However, fair-value budgeting raises practical questions: Which government activities would benefit from fair-value estimates? How might they be used? How can agencies estimate fair value without observing market prices for government risks? The use of fair value could depend on three criteria:
Commitment, whether the government makes commitments that it cannot shed through future legislation;
Feasibility, whether fair-value costs can be estimated with accuracy; and
Relevance, whether fair-value estimates convey meaningful additional information about costs.
Federal credit programs fulfill all three criteria in that they involve binding contractual commitments, their fair-value cost can be estimated with established methods, and the fair-value cost estimates for credit programs often differ in sign and magnitude from official cost estimates. The estimation of fair value for credit programs is subject to uncertainty because of the reliance on private proxies and the difficulty in disentangling credit risk and liquidity premiums. Nonetheless, fair-value estimates offer useful additional information to supplement official estimates.