Financial Management

The Rural Utilities Services (RUS) has exercised broad authority in restructuring the loans of two generation and transmission (G&T) borrowers, including acquisition of third-party non-RUS guaranteed debt, and providing significant concessions to the borrows, such as noninterest bearing notes, contingent payments, and forgiveness of federal government's losses. Although RUS generally followed its policies and procedures for restructuring loans of two financially troubled borrowers, GAO found one instance in which RUS' policies were not fully used and other instances in which procedures could be improved. RUS' procedures lack detailed written criteria for determining when a borrower should be added or removed from RUS' list of financially troubled borrowers. RUS estimated that it could lose approximately $185 million on loans restructured for the first borrower and between $110 and $120 million for the second borrower. The Rural Development Service (RD) did not include in the fiscal year 1999 financial reports the estimated loss of $185 million it anticipates will occur as a result of restructuring loans for one borrower, and included only $30 million of the estimated $110 to $120 million anticipated loss on the restructured loan for the other borrower. These errors occurred because the accounting department lacked documented procedures to ensure that debt forgiveness and losses resulting from restructuring loans were properly reported in the financial statements.

GAO noted that: (1) while RUS generally followed its policies and procedures for restructuring loans of two financially troubled borrowers, GAO found one instance where RUS' policies were not fully utilized and other instances where procedures could be improved; (2) RUS' procedures lack detailed written criteria for determining when a borrower should be added or removed from RUS' list of financially troubled borrowers; (3) RUS maintains this list to assist in minimizing the federal government's risk of loss by identifying those borrowers that require additional monitoring of their ability to repay the loans; (4) RUS properly carried out its loan restructurings under its debt settlement authority in accordance with the Federal Credit Reform Act of 1990 and OMB guidance; (5) under Credit Reform, loan restructurings are classified as either "workouts" or "modifications" and require significantly different accounting and budgetary treatment to accurately measure and report the costs associated with restructured loans; (6) OMB concluded that the costs of workouts are considered to be part of the costs of defaults and are not treated as modifications; (7) in this case, RUS restructured the loans of two financially troubled borrowers under its debt settlement authority to maximize its recovery in the face of imminent default; (8) RUS did not have to obtain new budget authority to cover the cost of the restructurings; (9) RUS' restructuring of the borrowers' loans resulted in new borrowing agreements that included significant concessions and forgiveness of interest; (10) these two borrowers had outstanding RUS debt of $331 million and $406 million, respectively, after their debt was restructured; (11) RUS estimated that it could lose approximately $185 million on loans restructured for the first borrower and between $110 and $120 million for the second borrower; (12) the Rural Development Service (RD) did not include in the fiscal year 1999 financial reports the estimated loss of $185 million it anticipates will occur as a result of restructuring loans for one borrower, and included only $30 million of the estimated $110 to $120 million anticipated loss on the restructured loan for the other borrower; (13) also, RD did not record in its accounting records a $7.2 million forgiveness of interest due to the agency as a result of restructuring one of the borrower's loans; and (14) these errors occurred because the accounting department lacked documented procedures to ensure that debt forgiveness and losses resulting from restructuring loans were properly reported in the financial statements.

Recommendations

Our recommendations from this work are listed below with a Contact for more information. Status will change from "In process" to "Open," "Closed - implemented," or "Closed - not implemented" based on our follow up work.

Director: Team: Phone: