The federal government subsidizes certain activities by assuming financial risk that would otherwise be borne by individuals, businesses or other organizations. Subsidyscope’s review of federal data shows that at least $7 billion in loans, through 12 federal direct loan programs and $284 million in loan guarantees, through four federal programs, went to nonprofits in fiscal year 2008, providing subsidies of at least $96 million and $18 million respectively.1

Subsidyscope refers to this method of providing subsidies as a “risk transfer.” By transferring risk from others to itself, the federal government encourages people to undertake activities they may not otherwise carry out. Such risk transfers are typically accomplished through government credit and insurance programs, such as the student loan program and federal deposit insurance.

The extent of a subsidy received under a credit or insurance program generally is the difference between the terms the recipient would get in a competitive market and those offered by the government. (See the discussion here for more detail on federal credit and insurance programs.) Federal direct loans and loan guarantees often operate similarly to tax expenditures in that there are multiple beneficiaries of this type of subsidy.

Some nonprofit organizations receive federal loans directly. For instance, nonprofit electric utilities receive loans from the U.S. Department of Agriculture’s Rural Development Electric Program (listed as Rural Electrification Loans and Loan Guarantees in Table 1 below). In other cases, the nonprofit may be a lender and the federal government guarantees payment of the loan on behalf of the borrower. For example, if a nonprofit organization provides a loan for a low-income family to buy a home and that loan is guaranteed by the federal government, it contains a subsidy. In both of these cases, the risk transfer benefits both the nonprofit and the family that receives the home paid for with a government guarantee.

Collecting federal data on risk transfer programs that benefit nonprofits is not a straightforward task. A recent Government Accountability Office (GAO) analysis indicates that records found at USAspending.gov for risk transfer programs are of particularly poor quality. GAO notes that amounts of loans or loan guarantees may not be consistently captured, federal agency staff may not be consistently marking funds as going to nonprofits and there may be missing data.2 For example, GAO notes that some agencies only report loan guarantees when a default occurs,3 which is a practice that will clearly lead to an understatement of federal subsidy costs.

Based on GAO’s assessment and our own analysis, Subsidyscope considers the results we present to underestimate the cost of subsidies provided to nonprofit organizations. First, the government does not include the cost of administering the loan (though this cost is accounted for elsewhere in the budget, it is not included in the subsidy cost of the credit). Second, the government—using methods required under credit reform legislation—does not include the cost of risk when calculating net present value. (See the discussion here on how the government calculates loan subsidies.) Further, Subsidyscope does not include loans or loan guarantees for students attending higher education institutions that may indirectly benefit nonprofit educational institutions, nonprofit third party lenders and nonprofit guarantors of student loans. (Subsidyscope will present more detail on student loans and loan guarantees when we examine the Education Sector in 2011.)

Table 1 below provides a list of programs through which the federal government made direct loans and loan guarantees to nonprofit organizations in fiscal year 2008. Tables 2 and 3 provide the number of loans or guarantees in each program, the total amount of those loans or guarantees and the government estimate of the total subsidy involved. Subsidyscope provides these data because they are the best available federal data on government risk transfers benefitting the nonprofit sector.

1. Subsidyscope analysis of data from USAspending.gov (formerly Federal Assistance Award Data System). See Tables 2 and 3 for calculations.
2. Government Accountability Office (GAO). “Significant Federal Funds Reach the Sector through Various Mechanisms, but More Complete and Reliable Funding Data Are Needed.” February 2009. Washington DC. p. 21.
3. Ibid, 17.