Page 31: of Maritime Reporter Magazine (August 2000)

U.S. Report • Legal

U.S. Vessel Loan Guarantees: Myths And Realities

In September 1993, as the Secretaries of Defense and Transportation announced a new commercial shipbuild- ing initiative, the President declared that "[shipbuilding is one of the keys to

America's national defense, and helping our shipbuilders succeed commercially is an important goal of defense conver- sion." A cornerstone of the 1993 Ship- building Initiative was the revival of the

Federal Ship Financing Program (com- monly known as the "Title XI Program" because its statutory authority is spelled out under Title XI of the Merchant

Marine Act, 1936). Administered by the

Maritime Administration ("MarAd") of the U.S. Department of Transportation, the program has prospered since 1993 under a rigorous review process mandat- ed by the Federal Credit Reform Act of 1990 ("FCRA").

Now, despite this success, the Title XI

Program struggles with a historic low level of funds due to a precipitous drop in annual appropriations in the last two years and an even lower recommenda- tion from the Administration for the coming year. There are certain miscon- ceptions or myths that have formed in official circles about the funding for this program. For Title XI appropriations to be restored to prior levels, these myths about how the program functions must be dispelled.

Background

Prior to the implementation of the

FCRA in the early 1990s, appropriations were not required for the issuance of a federal loan guarantee. However, thanks to the passage of the FCRA, the risk of default for every loan to be guaranteed by the U.S. Government must now be subsidized by appropriated dollars.

Therefore, funds have been appropriated annually for Title XI loan guarantee "subsidies" from fiscal year 1993 to the present. In recognition of the long-term nature of shipbuilding projects, appro- priations Acts do not require Title XI appropriations to be spent in a particular fiscal year but are carried forward from year to year until spent (such appropria- tions are called "no-year money").

Before a Title XI loan guarantee may be issued, MarAd and the Office of

Management and Budget evaluate the loan's default risk in light of a number of statutorily prescribed risk factors, and determine the amount of subsidy required. The most common subsidy cost of Title XI guarantees is five per- cent of the amount of the guarantee.

From 1993 to 1997, the annual appro-

August, 2000 priations to subsidize the default risk of

Title XI guarantees ranged between $50 million and $32 million. In the last two years, however, the annual level has dropped drastically to $6 million, a decrease of more than 80 percent. To make up just for the amount lost will require an appropriation of $84 million for FY 2001. Yet, regrettably, the Presi- dent's budget request for that year is only $2 million. This disturbing trend can be traced, at least in part, to various

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