Increasing reliance has been placed on federal government-backed private loan guarantees as a vehicle to fund private business enterprise. These types of loans mask the true cost of certain programs and create risky future financial liabilities for taxpayers. Lawmakers generally ignore the costs of these loan guarantees to the Federal Government, and the potential impact on the federal deficit when these loans default is not fully considered at the implementation phase.

• Legislation providing emergency assistance to the steel industry was enacted in August, 1999.[1] This legislation created a loan guarantee board to oversee the administering of federal loans to the industry. In the fiscal year 2004 budget request, the Bush administration slashed the $26 million in funding for the Emergency Steel Loan Guarantee Program.[2] The administration cited low demand for the program and “[m]oreover, one of the two guarantees issued, a $110 million loan to Geneva Steel, is already in default, leaving taxpayers to pick up the loss.”[3] In October, 2002, the Steel Manufacturers Association urged the Emergency Steel Guarantee Loan Board to reject loan applications from domestic steel companies near financial collapse or in bankruptcy. The Steel Manufacturers Association stated, “[t]he only way the US and other world steel producers will resolve the crisis of excess, uneconomic capacity overhanging world steel, is to let market forces close down inefficient producers.”[4

• Between August 1999 and August 2002, the Small Business Administration held six asset loan sales, selling about 140,000 loans with total unpaid balances of about $5.6 billion. The General Accounting Office found accounting and budgeting errors in the loan sales that could seriously affect the reported results in SBA’s financial statements.[5] In her May 2003 congressional testimony, Linda Calbom of the GAO reported on serious accounting errors with the Small Business Administration’s disaster assistance and business loans. These problems “point to an overall lack of financial accountability at SBA.”[6] Accounting records associated with SBA’s first five loan sales indicate a loss of $1.5 billion. While the SBA has taken some corrective action on their internal data management, the GAO concluded that SBA “may find it difficult to fully sustain the progress it has made.”[7] 

• The biofuels industry also has a history with defaulted loan guarantees, something that should be considered as communities across the country are seeing plans for ethanol and biodiesel put on hold due to a glut in production, concerns about land and water degradation, and low ethanol prices. One study,[8] looking at ethanol industry loan guarantees up to 1988 administered by the federal Farmers Home Administration and Department of Energy, categorizes 12 defaulted loans under guarantee where federal dollars were outright lost, or operations were taken over by a federal agency. The original guaranteed amount of these 12 defaulted loans was over $334 million. As Congress continues the push for more domestic agriculture-based fuels the need for careful progress is even greater. The President’s 2008 budget request for the Department of Energy calls for $9 billion in additional loan guarantee authority and $8.4 million to run the Loan Guarantee office. This is on top of the billions of loan guarantees included in the 2006 and 2007 budgets[9].

• The Maritime Administration's (MARAD) Title XI Loan Guarantee Program assists private companies to finance the construction of double-hull oil tankers, passenger ferries, cruise ships, and offshore drilling rigs, or the modernization of U.S. Shipyards.[10] The program authorizes the federal government to guarantee payment of interest and principal of loans made by shipbuilders. The initial intent of this program was to assist a beleaguered U.S. commercial fleet and to modernize U.S. shipyards. However, in the last five years the program has been mired with loan default after loan default. Between 1998 and 2002, nine loans have defaulted at a total cost of $402 million to U.S. taxpayers.[11]

• Another massive default could be on the horizon:  MARAD approved $140 million in loan guarantees for the Hawaii Superferry for two 350-foot catamarans, on the condition that the state gives all governmental and environmental clearances, including confirmation that there was no need for an environment assessment.[12] A Maui judge ruling recently said that the brand new Hawaii Superferry cannot operate while the state prepares an environmental assessment.[13] If the Superferry leaves Hawaii, as has been threatened because of its inability to operate, taxpayers would be responsible if the company defaults on loans backed up by the loan guarantee issued by MARAD for vessel construction.[14] 

• The Small Reclamation Projects Act was authorized in 1956 to provide loans to construct smaller irrigation projects of less than $10 million. The purpose of the Act was to supplement Federal reclamation law and provide Federal financial assistance for smaller irrigation projects.   A 1991 report prepared by the Interior Inspector General concluded that there are sufficient non-Federal funding sources available for these types of projects. The Inspector General said if these funding sources were used to supplement or supplant government loans, the government could achieve significant cost savings.[15] The terms and conditions of the existing Small Reclamation Projects Act loan program are difficult to justify. The Small Reclamation Projects Act was authorized when the Bureau of Reclamation was actively engaged in the construction of large irrigation projects.

• Congress temporarily provided the airline industry with loan guarantees after September 11, 2001.[16] Congress required the Air Transportation Stabilization Board to find evidence of damage due to September 11 before granting loan guarantees. In December 2002, the board rejected United Airline’s bid for $1.8 billion in federal loan guarantees stating that the plan, “submitted by the company is not financially sound.  This plan does not support the conclusion that there is a reasonable assurance of repayment and would pose an unacceptably high risk to U.S. taxpayers.”[17] A United Airlines request to reconsider in 2004 was also denied. At that time, Edward M. Gramlich, Chairman of the Air Transportation Stabilization Board said that “the Loan Board has a responsibility to taxpayers, and…Given our conclusion that the business plan submitted by the company is financially unsound, I believe it best not to approve the United proposal.”[18] In contrast, the present loan guarantees language in the energy bill provide no guidance for issuing loans, no repayment requirements or time limits, and no parameters for interest rates.