Rural Utilities Service
Opportunities to Better Target Assistance to Rural Areas and Avoid Unnecessary Financial Risk Gao ID: GAO-04-647 June 18, 2004The Agriculture Department's Rural Utilities Service (RUS) makes loans and provides loan guarantees to improve electric service to rural areas. Beyond guaranteeing loans, under a yet-to-be-implemented provision of the 2002 Farm Bill, RUS is also to guarantee the bonds and notes that lenders use to raise funds for making loans for electric and telecommunications services. Fees on these latter guarantees are to be used for funding rural economic development loans and grants. GAO was asked to examine (1) the extent to which RUS' borrowers provide electricity service to nonrural areas and (2) the potential financial risk to taxpayers and amount of loans and grants that the guarantee fees will fund. GAO also identified an alternative for funding rural economic development.
While the Rural Electrification Act authorizes RUS' lending only in rural areas, borrowers that receive RUS loans and loan guarantees serve not only rural areas but also highly populated metropolitan areas. This condition stems from RUS' loan approval practices. RUS requires that borrowers serve rural areas when they apply for their first loans, but it approves subsequent loans without applying this criterion. Thus, RUS applies a "once a borrower, always a borrower" standard. Since the 1930s when the program began, substantial population growth has occurred in areas served by many RUS borrowers; 187 of the counties in which RUS borrowers provide service are in metropolitan areas with populations of 1 million or more. For example, three borrowers that received over $400 million in loans in fiscal years 1999 through 2003 distribute electricity in the immediate vicinity of Atlanta, Georgia. In contrast, about 24 percent of the counties served by RUS borrowers are completely rural, while the remainder have a mix of rural and urban populations. RUS estimates, in a worst-case scenario, that the requirement to guarantee lenders' debt could lead to taxpayer losses of $1.5 billion--and GAO estimated that in return for this risk, fees on the guarantees would add about $15 million per year in rural economic development loans and grants. RUS officials believe that while risks are involved, losses are unlikely given the past stability of both the electricity market and the lender that might receive the guarantees. Only one lender is both qualified and interested in obtaining these guarantees. According to financial rating services, that lender is well regarded, but worked through financial concerns in 2002 and 2003, and faces longer-term risks associated with the changes taking place in the electricity and telecommunications markets that it serves. Recognizing the risks of guaranteeing this lender's debt, RUS proposed certain risk mitigation requirements, such as a reserve against losses. However, the lender's officials have stated that RUS' proposed requirements would make the program unattractive. GAO identified an alternative with no additional taxpayer risk to add funds for rural economic development loans and grants. If RUS were authorized to charge borrowers a small loan-origination fee of one-fourth of 1 percent on loans it expects to make and guarantee in fiscal year 2005, $24 million in rural economic development loans and grants might be made available. This amount is almost equal to the level provided by USDA's 2005 budget request for rural economic development loans and grants, and would likely have a minimal cost impact on customers of distribution borrowers. This alternative would not include guarantees of lenders' debt. Furthermore, the lender expected to use the guarantees has indicated that, even without such guarantees, it expects to continue being very successful at accessing capital for lending.
RecommendationsOur 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:GAO-04-647, Rural Utilities Service: Opportunities to Better Target Assistance to Rural Areas and Avoid Unnecessary Financial Risk
This is the accessible text file for GAO report number GAO-04-647
entitled 'Rural Utilities Service: Opportunities to Better Target
Assistance to Rural Areas and Avoid Unnecessary Financial Risk' which
was released on July 06, 2004.
This text file was formatted by the U.S. General Accounting Office
(GAO) to be accessible to users with visual impairments, as part of a
longer term project to improve GAO products' accessibility. Every
attempt has been made to maintain the structural and data integrity of
the original printed product. Accessibility features, such as text
descriptions of tables, consecutively numbered footnotes placed at the
end of the file, and the text of agency comment letters, are provided
but may not exactly duplicate the presentation or format of the printed
version. The portable document format (PDF) file is an exact electronic
replica of the printed version. We welcome your feedback. Please E-mail
your comments regarding the contents or accessibility features of this
document to Webmaster@gao.gov.
This is a work of the U.S. government and is not subject to copyright
protection in the United States. It may be reproduced and distributed
in its entirety without further permission from GAO. Because this work
may contain copyrighted images or other material, permission from the
copyright holder may be necessary if you wish to reproduce this
material separately.
Report to the Chairman, Subcommittee on Energy Policy, Natural
Resources and Regulatory Affairs, Committee on Government Reform, House
of Representatives:
United States General Accounting Office:
GAO:
June 2004:
Rural Utilities Service:
Opportunities to Better Target Assistance to Rural Areas and Avoid
Unnecessary Financial Risk:
GAO-04-647:
GAO Highlights:
Highlights of GAO-04-647, a report to the Chairman, Subcommittee on
Energy Policy, Natural Resources and Regulatory Affairs, House
Committee on Government Reform
Why GAO Did This Study:
The Agriculture Department‘s Rural Utilities Service (RUS) makes loans
and provides loan guarantees to improve electric service to rural
areas. Beyond guaranteeing loans, under a yet-to-be-implemented
provision of the 2002 Farm Bill, RUS is also to guarantee the bonds
and notes that lenders use to raise funds for making loans for
electric and telecommunications services. Fees on these latter
guarantees are to be used for funding rural economic development loans
and grants. GAO was asked to examine (1) the extent to which RUS‘
borrowers provide electricity service to nonrural areas and (2) the
potential financial risk to taxpayers and amount of loans and grants
that the guarantee fees will fund. GAO also identified an alternative
for funding rural economic development.
What GAO Found:
While the Rural Electrification Act authorizes RUS‘ lending only in
rural areas, borrowers that receive RUS loans and loan guarantees serve
not only rural areas but also highly populated metropolitan areas. This
condition stems from RUS‘ loan approval practices. RUS requires that
borrowers serve rural areas when they apply for their first loans, but
it approves subsequent loans without applying this criterion. Thus, RUS
applies a ’once a borrower, always a borrower“ standard. Since the
1930s when the program began, substantial population growth has
occurred in areas served by many RUS borrowers; 187 of the counties in
which RUS borrowers provide service are in metropolitan areas with
populations of 1 million or more. For example, three borrowers that
received over $400 million in loans in fiscal years 1999 through 2003
distribute electricity in the immediate vicinity of Atlanta, Georgia.
In contrast, about 24 percent of the counties served by RUS borrowers
are completely rural, while the remainder have a mix of rural and urban
populations.
RUS estimates, in a worst-case scenario, that the requirement to
guarantee lenders‘ debt could lead to taxpayer losses of $1.5 billion”
and GAO estimated that in return for this risk, fees on the guarantees
would add about $15 million per year in rural economic development
loans and grants. RUS officials believe that while risks are involved,
losses are unlikely given the past stability of both the electricity
market and the lender that might receive the guarantees. Only one
lender is both qualified and interested in obtaining these guarantees.
According to financial rating services, that lender is well-regarded,
but worked through financial concerns in 2002 and 2003, and faces
longer-term risks associated with the changes taking place in the
electricity and telecommunications markets that it serves. Recognizing
the risks of guaranteeing this lender‘s debt, RUS proposed certain risk
mitigation requirements, such as a reserve against losses. However, the
lender‘s officials have stated that RUS‘ proposed requirements would
make the program unattractive.
GAO identified an alternative with no additional taxpayer risk to add
funds for rural economic development loans and grants. If RUS were
authorized to charge borrowers a small loan-origination fee of one-
fourth of 1 percent on loans it expects to make and guarantee in fiscal
year 2005, $24 million in rural economic development loans and grants
might be made available. This amount is almost equal to the level
provided by USDA‘s 2005 budget request for rural economic development
loans and grants, and would likely have a minimal cost impact on
customers of distribution borrowers. This alternative would not include
guarantees of lenders‘ debt. Furthermore, the lender expected to use
the guarantees has indicated that, even without such guarantees, it
expects to continue being very successful at accessing capital for
lending.
What GAO Recommends:
To better target RUS‘ lending, Congress may wish to consider specifying
that the rural area criterion apply to subsequent loans. To provide
added funding for rural economic development while avoiding risk,
Congress may wish to consider adding a small fee on electricity and
telecommunication loans, and repealing the debt guarantee provision.
USDA said that Congress has been aware of its lending practices but has
not changed them, and that its budget proposes borrowers recertify they
serve rural areas; it did not comment on GAO‘s rural development
funding suggestions.
www.gao.gov/cgi-bin/getrpt?GAO-04-647.
To view the full product, including the scope and methodology, click on
the link above. For more information, contact Larry Dyckman,
202-512-3841, dyckmanl@gao.gov.
[End of section]
Contents:
Letter:
Results in Brief:
Background:
RUS' Electricity Loans Are Often Made to Distribution Borrowers Serving
Highly Populated Metropolitan Areas:
Taxpayers Face Risk of Losses in Return for Loans and Grants Estimated
at about $15 Million Annually:
Alternative for Funding Loans and Grants without Additional Taxpayer
Risk:
Conclusions:
Matters for Congressional Consideration:
Agency Comments and Our Evaluation:
Appendix I: Objectives, Scope, and Methodology:
Appendix II: Customers and Examples of Urban Counties Served by RUS
Borrowers:
Appendix III: Comments from the U.S. Department of Agriculture:
GAO Comments:
Appendix IV: GAO Contacts and Staff Acknowledgments:
GAO Contacts:
Acknowledgments:
Tables:
Table 1: Electricity Loans Made or Guaranteed by RUS to Distribution
and Power Supply Borrowers, Fiscal Years 1999-2003:
Table 2: Rural-Urban Classification of Counties in the United States
and Those Served by Electric Distribution Borrowers That Received RUS
Direct or Guaranteed Loans, October 1, 1998, to September 30, 2003:
Table 3: Direct and Guaranteed Electricity Loans Made to Distribution
Borrowers from Fiscal Years 1999 through 2003, by Range of Residential
Customers Served:
Table 4: Population Profile of 12 Counties That Are Entirely or
Predominantly Served by Electric Cooperatives That Received RUS
Electricity Loans between Fiscal Years 1999 and 2003:
Abbreviations:
CFC: National Rural Utilities Cooperative Finance Corporation:
GAO: General Accounting Office:
RE Act: Rural Electrification Act of 1936, as amended:
RUS: Rural Utilities Service:
USDA: U.S. Department of Agriculture:
2002 Farm Bill: Farm Security and Rural Investment Act of 2002:
United States General Accounting Office:
Washington, DC 20548:
June 18, 2004:
The Honorable Doug Ose:
Chairman, Subcommittee on Energy Policy, Natural Resources and
Regulatory Affairs:
Committee on Government Reform:
House of Representatives:
Dear Mr. Chairman:
The U.S. Department of Agriculture's (USDA) Rural Utilities Service
(RUS) has rapidly increased its lending for electricity service
projects in recent years. In fiscal year 1999, RUS made loans and
provided guarantees on loans made by other lenders totaling $1.6
billion, while in fiscal year 2003, RUS made and guaranteed more than
twice that amount--about $4 billion. Overall, during fiscal years 1999
through 2003, RUS made or guaranteed $14.3 billion in loans for
electricity service.
Under the Rural Electrification Act of 1936, as amended (the RE Act),
RUS is authorized to make and guarantee such loans to furnish and
improve electric service in rural areas.[Footnote 1] For electricity
purposes, the act states that an area is rural if it is not part of
areas that the Bureau of the Census defines as urban--that is, densely
populated areas having 2,500 or more inhabitants.[Footnote 2] RUS
requires borrowers to establish that they serve rural areas when they
apply for their first loan. However, RUS' regulations and long-standing
practice allow borrowers to receive subsequent loans without having to
meet this test.[Footnote 3] Thus, RUS applies a "once a borrower,
always a borrower" standard.
Borrowers that receive RUS loans or guarantees on loans for electricity
service projects are primarily nonprofit cooperatives. Most of these
borrowers are "distribution borrowers" that use the loans to construct
and maintain the facilities that provide electricity to users; such
borrowers received $9 billion of the $14.3 billion in loans during the
period we examined. RUS also provides guarantees on loans to "power
supply borrowers," which received the remainder of the $14.3 billion to
finance the construction of electricity generation and transmission
facilities.
The Farm Security and Rural Investment Act of 2002--commonly referred
to as the 2002 Farm Bill--provides RUS with a new program
responsibility that would increase funds for rural economic development
loans and grants.[Footnote 4] It directs RUS to guarantee payments on
bonds or notes issued by cooperative or other nonprofit lenders, under
certain conditions, if the proceeds of the guaranteed bonds or notes
are used to make loans for the electricity or telecommunications
purposes of the RE Act, which can include refinancing, but not
electricity generation. A lender that receives such a guarantee would
pay an annual fee of three-tenths of 1 percent on the outstanding
guaranteed principal. These fees are to be used to fund rural economic
development zero-interest loans and grants that are available from
USDA's Rural Business-Cooperative Service, as well as to cover the
subsidy costs of the guarantees. The Rural Business-Cooperative Service
provides rural economic development loans and grants for financing
economic development and job creation projects in rural areas, such as
new business start-ups, existing business expansions, and community
improvement projects. RUS has issued proposed regulations on the
program and, as of mid-June 2004, was awaiting the completion of the
Office of Management and Budget's review of the proposed final
regulations for this program.
As we have previously reported, the federal government has had a long
and successful role in contributing to the development of the utility
infrastructure in the nation's rural areas. In the mid-1930s, when
federal assistance for rural utilities began, most utilities served
high-density areas and their service lines did not extend to farmers
and other rural residents. This, however, is no longer the case, and we
found that RUS lending practices can often result in loans to borrowers
serving heavily populated areas, and to borrowers capable of using
their own resources or of obtaining private sector loans to fund their
utility projects. To address these conditions, we presented options to
Congress for better targeting RUS' lending to rural areas and making
its loan programs more effective and less costly.[Footnote 5]
In this context, you asked us to examine (1) the extent to which RUS
distribution borrowers provide electricity service to nonrural areas
and (2) the potential financial risk to taxpayers of the 2002 Farm Bill
requirement to guarantee lenders' debts, and the amount of rural
economic development loans and grants that could be funded by fees on
the guarantees. In addition, we reviewed the RE Act to determine
whether there might be an alternative way to provide funds for rural
economic development loans and grants with less risk. In the course of
our work, we reviewed the RE Act and RUS' implementation policies,
financial reports on RUS loans for fiscal years 1999 through 2003, and
data on counties and metropolitan areas that the borrowers serve. We
used counties served by the distribution borrowers as an indicator of
areas being served by those borrowers that obtain RUS electricity
loans. We also reviewed the relevant portion of the 2002 Farm Bill, the
legislative record, and RUS' proposed program regulations and economic
analysis of guaranteeing lenders' debt. We conducted our work from
October 2003 to June 2004 in accordance with generally accepted
government auditing standards. Appendix I describes the scope and
methodology of our review in more detail.
Results in Brief:
While the RE Act authorizes RUS to make loans to assist in the
development of electric infrastructure only in rural areas, RUS
borrowers serve not only rural areas but also highly populated
metropolitan areas. This disparity between the act's requirement to
serve rural areas and its implementation results from RUS applying its
"once a borrower, always a borrower" standard, which allows borrowers
to continuously receive RUS assistance regardless of the extent of
population growth within their service territories. When we analyzed
the areas served by the 530 distribution borrowers that received RUS
loans or guarantees on loans over the 5 years of our analysis, we found
that 24 percent, or 485 of the 1,988 counties served by these
borrowers, are classified as being completely rural or having only
nominal urban populations. In contrast, 29 percent, or 581 of the
counties, are classified as being in metropolitan areas; and of these,
187, or 9 percent of the 1,988 counties, are in metropolitan areas with
populations of 1 million or more. For example, loans were made to
cooperatives that provide electricity in suburban Atlanta, Georgia, and
in the vicinity of Washington, D.C. Three cooperatives that provide
service in the immediate vicinity of Atlanta received a total of more
than $400 million in loans during this period, and one borrower in the
Washington, D.C., area received over $25 million in loans.
The 2002 Farm Bill requirement to guarantee lenders' debts could lead
in a worst-case scenario to taxpayer losses of $1.5 billion, according
to RUS' estimate. In return, fees on the guarantees could, we estimate,
provide only about $15 million annually in rural economic development
loans and grants. RUS based its estimate of maximum potential losses on
the assumption that it would guarantee $3 billion and recover at least
one half of that amount if the lender defaulted. RUS officials believe
that such losses are unlikely given the past stability of both the
electricity market and the one current lender that might receive the
guarantees. That lender is the National Rural Utilities Cooperative
Finance Corporation (CFC)--a privately owned cooperative lender, which
is highly rated and has had a favorable loan history going back over 30
years. However, in 2002 and 2003 three financial rating services
expressed concerns about certain financial weaknesses in its portfolio.
These services also noted that CFC faces some investment risks
associated with the volatility of natural gas prices, competition among
adjoining electric utility systems, and competition in the
telecommunications industry. In recognition of the risks of
guaranteeing lenders' debt, RUS has proposed to add certain risk
mitigation requirements, such as the establishment of a reserve against
losses, as conditions for obtaining the guarantees. In response, CFC
officials stated that CFC does not need the guarantees to secure
capital and that the proposed requirements would make the guarantees
unworkable for them.
We identified an alternative way to raise funds for the Rural Business-
Cooperative Service's rural economic development program that avoids
the additional risks involved in providing guarantees on lenders' debt,
in the event that the lender debt guarantee requirement is not
implemented. If RUS started charging borrowers a loan-origination fee
of, for example, 25 basis points (one-fourth of 1 percent) on loans
made and guaranteed in fiscal year 2005, there is the potential to fund
an additional $24 million in rural economic development loans and
grants. This program level, which is more than the level of loans and
grants that would result under the new guarantee program, is almost
equal to the budget level that the Rural Business-Cooperative Service
requested for 2005. Adopting this alternative would require changing
the RE Act, which states that RUS is not allowed to charge a loan-
origination fee on its electricity or telecommunications loans. Such a
fee, which is consistent with fees charged on some other USDA loans,
would likely have a minimal effect on many of the customers of RUS
distribution borrowers. RUS officials agreed that this alternative
would be a feasible way to fund rural economic development loans and
grants. The alternative would not include guarantees of debt for CFC.
Moreover, CFC officials said that they have been and expect to continue
to be very successful at securing capital for lending to rural
utilities, even without such guarantees.
To better target RUS' lending to borrowers serving rural areas,
Congress could consider specifying that the criterion defining rural
areas applies to both initial and subsequent loans. In addition, to
provide additional funds for rural economic development loans and
grants without risk to taxpayers, Congress could consider authorizing a
small loan-origination fee on RUS' electricity and telecommunications
loans while repealing the provision in the RE Act to guarantee the debt
of lenders.
In commenting on a draft of this report, USDA did not express agreement
or disagreement with our matters for congressional consideration. USDA
stated that Congress has not accepted previous recommendations made by
us and others to address its practice of lending to borrowers once an
initial borrowing relationship was established. However, USDA noted
that the President's budget contains a proposal that borrowers
recertify they serve rural areas, not urban or suburban areas. We
believe that this proposal may provide a starting point for improving
the focus of this program. USDA also said that our report did not
provide an accurate picture of the extent to which RUS borrowers serve
consumers who are not in rural areas, and disagreed with our use of the
Economic Research Service's county classification system in performing
our analysis. We believe that our analyses provide insights into areas
being served by RUS borrowers, and that our use of the Economic
Research Service's classification system is reasonable. Our purpose was
to describe the characteristics of areas served by RUS electricity
distribution borrowers, and the Economic Research Service's
classification system is useful for that purpose. Furthermore, the
population has increased in many areas served by RUS distribution
borrowers that originally qualified for loans under the requirement
that they serve sparsely populated rural areas. Also, during our
review, RUS officials agreed that many of its borrowers would no longer
meet the RE Act population test for service to rural areas if that
criterion were applied.
USDA asked that the report be revised to distinguish between criticism
of the legislation authorizing the new guarantee program and RUS'
efforts to implement the program. In our view, our report supports the
purpose of the legislation and does not criticize RUS' implementation;
it provides an alternative for funding rural economic development that
avoids risk. Our report describes the results of RUS' economic analyses
of the legislation, and states factually that RUS' economic analysis
did not include a discussion of risks facing CFC in the electricity and
telecommunications markets. Our report also describes RUS' proposals to
address the risks involved in guaranteeing lenders' debts.
Background:
In 1935, the Rural Electrification Administration was created by
executive order to make loans to electrify rural America. RUS was
established by the Federal Crop Insurance Reform and Department of
Agriculture Reorganization Act of 1994 to replace this agency and now
administers the electricity program.[Footnote 6] It is located in
USDA's Rural Development mission area.[Footnote 7]
RUS' loans for electricity purposes are made primarily to nonprofit
cooperatives. Cooperatives are organizations owned by their customers
and operated for the benefit of those using their services. The
customers elect boards of directors responsible for policy and
operations. Most RUS-financed utility systems have a two-tiered
structure covering electricity distribution and power supply. Retail
customers are members of the distribution cooperative that provides
electricity directly to their homes and businesses. Most distribution
cooperatives, in turn, are members of power supply cooperatives, which
generate and transmit electricity to their members.
Currently, RUS makes three types of direct loans for electricity
purposes. These direct loans are (1) hardship rate loans with a 5
percent interest rate made to borrowers that have a relatively high
cost of providing service, as indicated by a high average revenue per
kilowatt-hour sold, and that serve customers with below-average income,
or at the discretion of RUS' Administrator; (2) municipal rate loans
with an interest rate tied to an index of municipal borrowing rates,
resulting in interest rates ranging from 1.1 percent to 4.6 percent
during the first quarter of calendar year 2004; and (3) Treasury rate
loans with an interest rate matching the government's cost of money,
which ranged from 1.2 percent to 4.4 percent in mid-March 2004. In
addition to making direct loans, RUS places a USDA 100 percent
repayment guarantee on loans made by the Treasury's Federal Financing
Bank, which makes loans at an interest rate equal to the Treasury's
cost of money plus one-eighth of 1 percent, as well as on loans made by
CFC and by CoBank--a member bank of the Farm Credit System, which is a
government-sponsored enterprise. Most borrowers seeking a loan
guaranteed by RUS choose to have the loan made by the Federal Financing
Bank because of lower interest rates than those available from the
other lenders.
The outstanding principal owed by borrowers with RUS direct and
guaranteed loans totaled $28.3 billion as of September 30, 2003: $9.5
billion in direct loans, $15.3 billion in guaranteed loans made by the
Federal Financing Bank, $0.4 billion in guaranteed loans made by CFC,
$0.2 billion in guaranteed loans made by CoBank, and $2.9 billion in
restructured loans.[Footnote 8] During fiscal years 1999 through 2003,
RUS made or provided guarantees on 936 electricity loans, which totaled
more than $14.3 billion.[Footnote 9] Table 1 shows the level of loans
for each type of electricity loan.
Table 1: Electricity Loans Made or Guaranteed by RUS to Distribution
and Power Supply Borrowers, Fiscal Years 1999-2003:
Dollars in millions.
Loan type: Direct: Hardship rate;
Total number of loans: 106;
Total dollar amount of loans: $558.4;
Average dollar amount of loans: $5.3.
Loan type: Direct: Municipal rate;
Total number of loans: 175;
Total dollar amount of loans: $1,485.6;
Average dollar amount of loans: $8.5.
Loan type: Direct: Treasury rate;
Total number of loans: 166;
Total dollar amount of loans: $2,400.0;
Average dollar amount of loans: $14.5.
Subtotal direct;
Total number of loans: 447;
Total dollar amount of loans: $4,444.0;
Average dollar amount of loans: $9.9.
Loan type: Guaranteed: Made by the Federal Financing Bank;
Total number of loans: 472;
Total dollar amount of loans: $9,637.9;
Average dollar amount of loans: $20.4.
Loan type: Guaranteed: Made by CFC;
Total number of loans: 17;
Total dollar amount of loans: $262.1;
Average dollar amount of loans: $15.4.
Subtotal guaranteed;
Total number of loans: 489;
Total dollar amount of loans: $9,900.0;
Average dollar amount of loans: $20.2.
Total number of loans: 936;
Total dollar amount of loans: $14,344.0;
Average dollar amount of loans: $15.3.
Source: GAO analysis of RUS data.
Note: RUS did not make Treasury rate loans in fiscal years 1999 and
2000. Also, the agency did not provide guarantees on CFC loans in
fiscal years 2002 and 2003 or on CoBank loans during this 5-year
period. Distribution borrowers received 444 direct loans totaling more
than $4.4 billion and 420 guaranteed loans totaling more than $4.5
billion. Power supply borrowers received 3 direct loans totaling $21.4
million and 69 guaranteed loans totaling $5.4 billion.
[End of table]
As we have reported in the past, RUS has had problems with some
borrowers. During fiscal years 1999 through 2003, RUS wrote off more
than $3.2 billion on loans to three borrowers--$3 billion and $73.2
million for two borrowers under bankruptcy liquidation and $159.3
million for a borrower with unsecured debt. Also, it wrote off $7.2
million for another borrower that had been restructured.
The Rural Business-Cooperative Service, which like RUS, is in USDA's
Rural Development mission area, operates loan and grant programs that
are intended to assist in the business development of the nation's
rural areas and the employment of rural residents. Among these programs
is the rural economic development program, which is authorized by
section 313 of the RE Act, 7 U.S.C. § 940c. Under the program, the
Rural Business-Cooperative Service makes direct loans to entities that
have outstanding RUS electricity or telecommunications loans or to
former RUS borrowers that repaid their electricity loans early at a
discount. Rural economic development loans are not available to former
RUS borrowers that repaid their loans with scheduled payments.
All rural economic development loans are made for relending, and the
loan funds are targeted to specific projects. Rural economic
development loan funds are deposited into a fund that a RUS borrower
has established, and the RUS borrower then relends the money to other
borrowers, which may be any public or private organization or other
legal entity, for an economic development and job creation project.
Such projects include new business creation, existing business
expansion, community improvements, and infrastructure development.
Rural economic development loan funds, however, cannot be used for
certain purposes, including the RUS borrowers' electricity or
telecommunications operations or a community's television system or
facility, unless tied to an educational or medical project.
The Rural Business-Cooperative Service also provides rural economic
development grants to RUS utility borrowers to establish revolving loan
funds to promote economic development in rural areas. The revolving
loan funds provide capital to nonprofit entities and municipal
organizations to finance community facilities that promote job creation
or education and training to enhance a marketable job skill or that
extend or improve medical care.
An unusual source of funding is available for rural economic
development loans and grants. The RE Act provides that RUS' electricity
and telecommunications borrowers can make advance payments on their RUS
loans, referred to as "cushion-of-credit" payments, and earn interest
at a rate of 5 percent on the advance payments. The Rural Business-
Cooperative Service is allowed to use the differential between the
earnings on these advance payments and the 5 percent interest to cover
the subsidy costs of rural economic development loans and the cost of
rural economic development grants. During fiscal years 1999 through
2003, the Rural Business-Cooperative Service made 233 rural economic
development loans, which totaled $82.5 million. Also, 117 rural
economic development grants were made, which totaled $24.6 million. On
average, the loan amounts were about $354,000 and the grant amounts
were about $211,000. The outstanding principal owed by borrowers with
rural economic development loans totaled $155.2 million as of September
30, 2003.
RUS' Electricity Loans Are Often Made to Distribution Borrowers Serving
Highly Populated Metropolitan Areas:
Although the RE Act requires that borrowers serve rural areas, RUS
borrowers serve not only rural areas but also highly populated
metropolitan areas.[Footnote 10] This situation results from RUS
applying its "once a borrower, always a borrower" standard, which
allows borrowers to continuously receive RUS assistance regardless of
the extent of population increases within their service territories.
Since the electricity program began in the 1930s, substantial
population growth has occurred in the areas served by many RUS
borrowers. We analyzed the areas served by the 530 distribution
borrowers that received RUS loans or guarantees on loans between
October 1, 1998, and September 30, 2003.[Footnote 11] These borrowers
serve customers in part or all of 1,988 counties in 46 states, and they
received 864 RUS loans or guarantees on loans during this period valued
at almost $9 billion.
Overall, RUS distribution borrowers provide service in more than half
the counties in the country that are classified as metropolitan. In
general, these metropolitan areas contain a substantial core
population, together with adjacent communities having a high degree of
social and economic integration with the core. About 29 percent, or 581
of the 1,988 counties served partly or completely by RUS borrowers, are
in metropolitan areas; and, in fact, 9.4 percent, or 187 of the 1,988
counties, are in metropolitan areas with populations of 1 million or
more. The following examples illustrate cooperatives whose service
territories include highly populated areas.
* Three cooperatives that received loans during the fiscal year 1999
through 2003 period provide electricity in the immediate vicinity of
Atlanta, Georgia. These three borrowers received a total of more than
$400 million of loans during this period.
* A Maryland electric distribution cooperative that serves
approximately 115,000 residential customers in four counties in the
vicinity of Washington, D.C., received over $25 million in loans in
fiscal years 1999 and 2001. Three of these counties are in a
metropolitan area with a population of more than 1 million people.
* A Florida cooperative that serves roughly 150,000 customers in parts
of five counties that are located to the north of Tampa received RUS
loans in fiscal years 2000 and 2002 totaling $66 million. Four of these
counties have a population of more than 100,000 residents, including
two with a population of more than 300,000.
On the other hand, about 24 percent, or 485 of the 1,988 counties
served by RUS borrowers are completely rural or have only nominal urban
populations. The remaining counties are in nonmetropolitan areas, but
with urban populations of 2,500 or more.[Footnote 12] Table 2 shows the
classifications of the counties being served partly or completely
through RUS electricity loans.
Table 2: Rural-Urban Classification of Counties in the United States
and Those Served by Electric Distribution Borrowers That Received RUS
Direct or Guaranteed Loans, October 1, 1998, to September 30, 2003:
Classification categories: Counties in metropolitan (metro) areas:
Counties in metro areas with population of 1 million or more;
Counties served by RUS distribution borrowers: Number: 187;
Counties served by RUS distribution borrowers: Percent of total: 9.4%;
Counties in the United States: Number: 413;
Counties in the United States: Percent of total: 13.1%.
Classification categories: Counties in metropolitan (metro) areas:
Counties in metro areas with population of 250,000 to 1 million;
Counties served by RUS distribution borrowers: Number: 177;
Counties served by RUS distribution borrowers: Percent of total: 8.9%;
Counties in the United States: Number: 325;
Counties in the United States: Percent of total: 10.3%.
Classification categories: Counties in metropolitan (metro) areas:
Counties in metro areas with population of less than 250,000;
Counties served by RUS distribution borrowers: Number: 217;
Counties served by RUS distribution borrowers: Percent of total: 10.9%;
Counties in the United States: Number: 351;
Counties in the United States: Percent of total: 11.2%.
Classification categories: Counties in metropolitan (metro) areas:
Subtotal;
Counties served by RUS distribution borrowers: Number: 581;
Counties served by RUS distribution borrowers: Percent of total: 29.2%;
Counties in the United States: Number: 1,089;
Counties in the United States: Percent of total: 34.7%.
Classification categories: Counties in nonmetropolitan areas with an
urban population of 2,500 or more: Urban population of 20,000 or more,
adjacent to a metro area;
Counties served by RUS distribution borrowers: Number: 139;
Counties served by RUS distribution borrowers: Percent of total: 7.0%;
Counties in the United States: Number: 218;
Counties in the United States: Percent of total: 6.9%.
Classification categories: Counties in nonmetropolitan areas with an
urban population of 2,500 or more: Urban population of 20,000 or more,
not adjacent to a metro area;
Counties served by RUS distribution borrowers: Number: 55;
Counties served by RUS distribution borrowers: Percent of total: 2.8%;
Counties in the United States: Number: 105;
Counties in the United States: Percent of total: 3.3%.
Classification categories: Counties in nonmetropolitan areas with an
urban population of 2,500 or more: Urban population of 2,500 to less
than 20,000, adjacent to a metro area;
Counties served by RUS distribution borrowers: Number: 421;
Counties served by RUS distribution borrowers: Percent of total: 21.2%;
Counties in the United States: Number: 609;
Counties in the United States: Percent of total: 19.4%.
Classification categories: Counties in nonmetropolitan areas with an
urban population of 2,500 or more: Urban population of 2,500 to less
than 20,000, not adjacent to a metro area;
Counties served by RUS distribution borrowers: Number: 307;
Counties served by RUS distribution borrowers: Percent of total: 15.4%;
Counties in the United States: Number: 450;
Counties in the United States: Percent of total: 14.3%.
Classification categories: Counties in nonmetropolitan areas with an
urban population of 2,500 or more: Subtotal;
Counties served by RUS distribution borrowers: Number: 922;
Counties served by RUS distribution borrowers: Percent of total: 46.4%;
Counties in the United States: Number: 1,382;
Counties in the United States: Percent of total: 44.0%.
Classification categories: Counties in nonmetropolitan areas with an
urban population of less than 2,500: Completely rural or less than
2,500 urban population, adjacent to a metro area;
Counties served by RUS distribution borrowers: Number: 169;
Counties served by RUS distribution borrowers: Percent of total: 8.5%;
Counties in the United States: Number: 235;
Counties in the United States: Percent of total: 7.5%.
Classification categories: Counties in nonmetropolitan areas with an
urban population of less than 2,500: Completely rural or less than
2,500 urban population, not adjacent to a metro area;
Counties served by RUS distribution borrowers: Number: 316;
Counties served by RUS distribution borrowers: Percent of total: 15.9%;
Counties in the United States: Number: 435;
Counties in the United States: Percent of total: 13.8%.
Classification categories: Counties in nonmetropolitan areas with an
urban population of less than 2,500: Subtotal;
Counties served by RUS distribution borrowers: Number: 485;
Counties served by RUS distribution borrowers: Percent of total: 24.4%;
Counties in the United States: Number: 670;
Counties in the United States: Percent of total: 21.3%.
Classification categories: Total;
Counties served by RUS distribution borrowers: Number: 1,988;
Counties served by RUS distribution borrowers: Percent of total:
100.0%;
Counties in the United States: Number: 3,141;
Counties in the United States: Percent of total: 100.0%.
Source: GAO analysis of RUS data and USDA's Economic Research Service
rural-urban classification codes.
[End of table]
RUS officials pointed out that many metropolitan areas contain rural
sections. In addition, they agreed that its borrowers now provide
service to a mix of areas including rural areas and heavily populated
areas, and that many of its borrowers would not meet the population
criterion of the RE Act if it were applied. RUS officials also told us
that they had drafted legislation consistent with the President's
fiscal year 2005 budget, which would require borrowers to recertify
that they are serving rural areas, rather than urban or suburban areas.
Taxpayers Face Risk of Losses in Return for Loans and Grants Estimated
at about $15 Million Annually:
RUS estimated that guarantees on lenders' debt under the 2002 Farm Bill
provision could result in losses of up to $1.5 billion on guarantees of
$3 billion, although RUS does not expect such losses. RUS officials
believe that while risks are involved, losses are unlikely given the
past stability of both the electricity market and the lender that might
receive the guarantees. In return for taxpayers assuming the risks of
guaranteeing payment on $3 billion of debt, we estimated that the fees
paid on the guarantees would only fund $15 million in rural economic
development loans and grants annually. The one cooperative lender that
is currently qualified and interested in obtaining a guarantee on its
debt generally has had a favorable financial history going back over 30
years. However, the lender faces risk associated with the electricity
and telecommunications markets. Recognizing risks to taxpayers, RUS
proposed to add certain risk mitigation requirements, but the lender
commented that these requirements would make the guarantees unworkable.
Financial Losses Estimated by RUS. Under the debt guarantee program,
taxpayers would be at risk for the value of guaranteed debts. RUS
estimated this value at $3 billion in an economic analysis of the
program.[Footnote 13] The estimate was based on the act specification
that the full guarantee level is the amount of principal owed on loans
that eligible lenders had made concurrently with RUS' electricity and
telecommunications loans. Although taxpayers would be at risk for the
full amount, RUS estimated that in the event of a default, likely
maximum losses could be as much as $1.5 billion. This maximum is based
on the expectation that the government could recover at least one-half
of defaulted amounts. The $3 billion amount is approximately the amount
of concurrent loans that RUS has made in conjunction with CFC, the only
lender currently qualified and interested in participating in the
program.[Footnote 14] RUS identified CoBank as the only other lender
that would be eligible for the guarantees.[Footnote 15] However, CoBank
is part of a government-sponsored enterprise, and CoBank does not need
the guarantees and does not plan to participate in the program,
according to CoBank officials.
Although RUS does not believe CFC will default on the guaranteed bonds
or notes, there would be a subsidy cost, according to Congressional
Budget Office and RUS officials.[Footnote 16] However, RUS has not
completed a subsidy cost estimate for the program. In addition, RUS'
economic analysis did not discuss CFC's financial history, its current
condition, or the risks in the electricity and telecommunication
markets in which CFC operates.
Fees on Guarantees Could Provide about $15 Million Annually in Rural
Economic Development Loans and Grants. We estimated that in return for
the risk to taxpayers, fees on the guarantees could provide about $15
million annually of additional loans and grants through the Rural
Business-Cooperative Service's rural economic development program. Our
calculation is based on the $3 billion guarantee level RUS identified,
the details provided in the act about the annual fees that would be
paid by a lender receiving a guarantee, and the use of the funds
generated by the fee. The act provides that a lender receiving a RUS
guarantee would pay an annual fee of 30 basis points (three-tenths of 1
percent)[Footnote 17] based on the amount of unpaid principal on the
bonds or notes that are guaranteed, and that at least two-thirds of the
funds collected are to be used for rural economic development loans and
grants.[Footnote 18] The other one-third can be used for the cost
associated with providing guarantees. On the basis of a $3 billion
guarantee level, 30 basis points would yield fees of $9 million, of
which $6 million would be available for rural economic development
loans and grants. Of this, we assumed that $4 million would be used for
additional grants, which is equal to the amount of grants in the Rural
Business-Cooperative Service's fiscal year 2004 budget. We assumed the
remaining $2 million would be used to subsidize additional loans. Based
on the fiscal year 2004 subsidy rate for the rural economic development
program of 18.6 percent, a $2 million level would provide about $11
million in additional rural economic development loans.
Lender That Likely Would Receive Guarantees Has Successful History but
Faces Some Risks. CFC has had a solid operating record for over 30
years, a high rating, and CFC officials said that CFC does not require
federal guarantees on debt to raise capital for lending. While
recognizing CFC's financial strength, in February 2004, its president
noted that CFC had possibly faced some of the most difficult times in
its history. In early 2002, CFC's long-term debt ratings had been
downgraded by three credit rating services (Moody's Investors Service,
Fitch Ratings, and Standard & Poor's) and the services also rated CFC
as having a negative outlook.[Footnote 19] Subsequently, these services
raised CFC's outlook to stable because CFC had taken various positive
actions including restructuring $1 billion of loans for its largest
borrower, which was emerging from bankruptcy; reducing its exposure to
speculative-grade telecommunications loans; reducing its reliance on
short-term debt; and increasing its loan loss reserves to $565
million.[Footnote 20]
Even as the rating services raised CFC's outlook, they cautioned about
certain risks. For example, one rating service stated that half of
CFC's 10 largest borrowers exhibit speculative-grade characteristics.
Each also expressed concern about CFC's concentration in the
electricity and telecommunications markets. One service cited the
probability that natural gas prices will be volatile, and another
stated that cooperatives operating in service territories adjacent to
lower-cost systems might eventually be forced to compete. While most
cooperatives have avoided competition, CFC has a fund to help defend
its member cooperatives against territorial threats. In addition, one
ratings service stated that competition from wireless carriers is a
longer-term threat to rural telecommunications systems. CFC officials
recognized that there are business risks in CFC's loan portfolio that
they continually address but said they believe the risks of the loan
guarantee program are very low given CFC's stable financial history,
its access to capital markets, the restriction preventing lenders from
using the proceeds of their guaranteed debt to fund electricity
generation, and the relatively small portion of CFC's overall loan
portfolio that the guarantee would cover.
In its proposed regulations, RUS included certain risk mitigation
measures including requirements for a bankruptcy trust, pledges of
collateral, a 5 percent limit on cash patronage refunds,[Footnote 21]
and the use of certain standards that apply to depository financial
institutions. CFC, the National Rural Electric Cooperative Association,
and others commented that these proposals would make the program
unworkable, and that the only requirement authorized by the act is that
the securities of the lender receiving a guarantee be investment grade.
Also, CFC stated that the ratings of the nationally recognized
financial ratings services should be sufficient to assure its credit
quality, and that if its financial rating becomes downgraded below
investment grade, then that event could reasonably trigger RUS to
partially limit its distribution of patronage capital. As of mid-June
2004, RUS officials said they were awaiting the completion of the
Office of Management and Budget's review of the proposed final
regulations for the program.
Alternative for Funding Loans and Grants without Additional Taxpayer
Risk:
We developed an alternative approach that could provide funding for
rural economic development loans and grants without added risk to
taxpayers. Specifically, if Congress amended the RE Act to provide for
RUS to charge a loan-origination fee on its direct and guaranteed
electricity and telecommunications loans, and repealed the new lender
debt guarantee requirement, the resulting funds from the loan-
origination fee could be targeted to the rural economic development
loan and grant program. Doing so would accomplish the stated purpose of
the debt guarantee program--that is, to provide an alternative funding
source for the Rural Business-Cooperative Service's rural economic
development loans and grants--while avoiding additional risk to
taxpayers.
RUS' fiscal year 2005 budget request is for slightly more than $3.1
billion in electricity and telecommunications loans, and the Rural
Business-Cooperative Service's request is for $25 million in rural
economic development loans and $4 million in grants. At RUS' 2005
lending level, if RUS started charging a loan-origination fee of 25
basis points (one-fourth of 1 percent), the fee could result in an
additional $7.8 million in funds to support rural economic development
loans and grants, which, we estimate, could amount to an additional
$20.4 million in loans and $4 million in grants. In effect, such an
increase would be more than an 80 percent increase in the level of
rural economic development loans and a doubling in the level of rural
economic development grants that the Rural Business-Cooperative Service
proposes making in fiscal year 2005, recognizing that different
electricity and telecommunications loan levels would result in varying
amounts of funds.
The appropriate fee level would, in part, be based on amounts that are
needed to fund rural economic development loans and grants. Since
enactment of the 2002 Farm Bill, millions of dollars have become
available for this purpose through interest earnings on the cushion-of-
credit payments on loans by RUS electricity and telecommunications
borrowers. While the Rural Business-Cooperative Service had $6.9
million at the start of fiscal year 2002 to cover the subsidy costs of
rural economic development loans and the cost of grants, by the start
of fiscal year 2004, the amount had increased to $40.2 million--roughly
six times the estimated cost for the program in fiscal year 2004.
The impact of a loan-origination fee would likely be relatively minor
for many of the customers of the distribution borrowers that receive
RUS' loans. For example, during fiscal year 1999 through 2003, RUS made
or guaranteed 864 electricity loans to distribution borrowers; 264
borrowers received one loan and 266 borrowers received more than one
loan over this period. If a 25 basis point fee had been charged on
these distribution loans and fully passed on to the borrowers'
customers, we estimate that the average one-time cost for the customers
would have been approximately $2.39.[Footnote 22] Such a fee would be
consistent with the fees charged on some other USDA loans. In
comparison, USDA charges a loan-origination fee of 2 percent on
guaranteed business and industry loans, 1 percent on guaranteed water
and waste disposal loans, and 1 percent on most guaranteed farm
ownership and operating loans.
Although this alternative does not provide for guarantees on CFC's
debt, CFC's access to capital for financing projects would not be
jeopardized. CFC's history and financial reports show that CFC is
capable of raising the capital required for financing projects. In
CFC's 2003 annual report, CFC reported that it had about $21 billion in
loans outstanding, including $16.4 billion in electricity loans and
$4.9 billion in telecommunications loans. CFC stated that despite
significant short-term financing risk in energy trading and power
marketing, it has continued to be successful in securing long-term
sources of capital. For example, CFC reported that it had sold bonds in
Australia, which demonstrates its ability to raise capital in major
money centers of the world. CFC also reported that just after the 2003
fiscal year ended, it had access to $3.9 billion through revolving
credit lines.
We discussed the guarantee provision and our alternative option with
RUS officials. RUS' Administrator and officials commented that they had
originally viewed the provision to guarantee lenders' debt as
unnecessary because appropriations could be made available for funding
the rural economic development program. Nevertheless, they stated that
they are now engaged in implementing the guarantee provision. They
agreed that the alternative option we raised is consistent with the
loan-origination fees USDA places on some other loans, would be a
feasible way to fund rural economic development loans and grants, and
would likely have a very small effect on the customers of borrowers
that receive RUS loans.
Conclusions:
The rural electricity program is no longer operated in a manner fully
consistent with the concept of service to rural areas. RUS policies
allowing loans and guarantees to be provided to borrowers whose
customer base has grown significantly and that provide service in urban
metropolitan areas go beyond the original intent of the program.
Consequently, the program's focus on service to rural residents has
been blurred, and the federal goals now being served by the program are
not fully transparent. Better targeting of loans to borrowers that
provide service in rural areas would result in more consistent use of
RUS' funds and reduce the government's lending costs. Such targeting
could be accomplished by recognizing that there have been population
increases in previously rural areas and applying a population criterion
to both initial and subsequent loans, thereby ensuring that lending
remains focused on rural areas.
We are also concerned about the proposed guarantee of lenders' debt
because it would unnecessarily increase taxpayer risk. Guarantees on
lenders' debt are not needed to raise capital for lending to
electricity service providers. In addition, the stated purpose of the
debt guarantee program--raising funds for rural economic development
loans and grants--could be accomplished through a no-risk alternative
that we have identified.
Matters for Congressional Consideration:
We are presenting three matters for congressional consideration. To
better target RUS' lending to borrowers serving rural areas, Congress
may wish to consider specifying that the program criterion for rural
areas applies to both an initial loan and any subsequent loans that
borrowers seek. In addition, to provide additional funds for rural
economic development loans and grants without risk to taxpayers,
Congress may wish to consider amending the RE Act to authorize a small
loan-origination fee on RUS' electricity and telecommunication loans
and direct that fees collected on such loans be used for rural economic
development loans and grants, and simultaneously repeal the new lender
debt guarantee requirement.
Agency Comments and Our Evaluation:
We provided a draft of this report to USDA for review and comment. We
received written comments from the Acting Under Secretary for Rural
Development, which are presented in appendix III together with our
detailed responses.
USDA did not express agreement or disagreement with our matters for
congressional consideration. USDA commented that the report challenges
the long-established RUS practice of determining the rural or nonrural
nature of areas at the time RUS made the loan for initial service, but
not doing so for subsequent loans. In this regard, USDA also said that
this issue has been raised with Congress many times before, and that
while Congress has revised the RE Act, it has not accepted previous
recommendations from us and others to address RUS' lending practices.
However, USDA pointed out that the President's budget recommends that
the rural status of borrowers be recertified. According to USDA's
budget summary for fiscal year 2005, RUS' borrowers would be asked to
recertify that they are serving areas that are rural, rather than urban
or suburban areas. In addition, RUS officials told us that they drafted
legislation along these lines, but that USDA has not sent this proposal
to Congress for consideration. Given this apparent recognition by USDA
of the need to address RUS' lending practices, there may be an
opportunity for improving the focus of RUS' program.
USDA also commented that it believes the methodology used in the report
does not accurately portray the extent to which its borrowers serve
consumers who are not in rural areas. USDA referred to the definition
of rural in the RE Act and said it believes that any methodology used
to characterize a borrower's service territory should be based directly
on Bureau of the Census data as applied to the service territory maps
of its borrowers. USDA also stated that our use of the Economic
Research Service's county classification system is inappropriate and
that the Office of Management and Budget has said that it is not
correct to use statistical information about metropolitan areas for
determining eligibility for federal programs. The service territory
maps of the 530 distribution borrowers included in our analysis were
not available at RUS; collecting these maps and applying census data to
each one would have precluded us from providing a timely response to
our requester. While RUS does not collect comprehensive data on the
areas served by its distribution borrowers, nor maintain current
service territory maps of its borrowers, RUS identified for us the
counties each borrower serves. This information enabled us to use the
Economic Research Service's rural-urban classification system to
characterize the areas served by RUS borrowers. Also, our report makes
no specific determinations about the eligibility of any RUS borrower to
participate in the program. We disagree with USDA's objection to the
use of the rural-urban classification method developed by the Economic
Research Service. USDA's Economic Research Service classification
system is based on Bureau of the Census data, and it classifies areas,
including counties, by degree of rurality. According to the Economic
Research Service, its system captures the diversity of rural America in
ways that are meaningful for developing public policies and programs.
We agree that these classifications are not the criteria of the RE Act.
Our purpose, however, was to describe the characteristics of areas
served by RUS electricity distribution borrowers, and the Economic
Research Service's classification system is useful for that purpose. We
believe our analyses, taken together, provide insight into the extent
of service provided by borrowers in counties with large urban
populations within metropolitan areas, which we have emphasized in our
results. Furthermore, the population has grown in many areas served by
RUS distribution borrowers that originally qualified for loans under
the requirement that they serve sparsely populated rural areas. During
our review, RUS officials agreed that many of its borrowers would no
longer meet the RE Act population test for service to rural areas if
that criterion were applied.
USDA also discussed the general location of places where rural
residents reside and stated that the majority live in metropolitan
counties. Accordingly, USDA said that the report would classify service
to these consumers as evidence that a distribution borrower was serving
nonrural areas. We did not use our results in this manner and our
leading observation, based on several analyses and our previous
reports, is that RUS distribution borrowers serve not only rural areas
but also highly populated areas. At the same time, we reported that
about 24 percent of the counties served by RUS distribution borrowers
are completely rural or have only nominal urban populations. However,
it should be recognized that, according to USDA's Economic Research
Service, rural areas, particularly those rich in natural resources,
have experienced economic transformation and rapid population growth,
while other areas face declining job opportunity and population loss.
We believe that suggestions to better target RUS lending could respond
to these changed conditions.
Finally, USDA commented that it is important to recognize, and not
criticize, RUS' efforts to implement the 2002 Farm Bill provision to
guarantee the bonds and notes that lenders could use to raise funds for
making loans for electricity and telecommunications services. USDA
asked that the report be revised to distinguish between criticism of
the legislation and RUS' efforts to implement it. We believe that our
report properly describes RUS' efforts to implement the legislation in
a factual manner and supports the purpose rather than criticizes the
legislation in the 2002 Farm Bill calling for the new guarantee program
or RUS' efforts to implement the legislation. It does, however, provide
an alternative for funding rural economic development that avoids risk.
Our report notes RUS' view that guaranteeing bonds and notes may not
result in losses, although providing such guarantees would include some
risks to taxpayers and, in a worst-case scenario, could result in
potential losses of $1.5 billion. We stated that, recognizing the
potential risks, RUS included in its proposed regulation certain risk-
mitigation requirements not specified in the 2002 Farm Bill. However,
we also noted that CFC commented that these proposals would make the
program unworkable. In addition, we stated that RUS' economic analyses
do not include a discussion of risks facing CFC in the electricity and
telecommunications markets.
As agreed with your office, unless you publicly announce its contents
earlier, we plan no further distribution of this report until 15 days
from the date of this letter. We will then send copies to interested
congressional committees; the Secretary of Agriculture; the
Administrator of RUS; the Director, Office of Management and Budget;
officials at CoBank and CFC; and other interested parties. We will make
copies available to others on request. In addition, this report will be
available at no charge on the GAO Web site at http://www.gao.gov.
If you or your staff have any questions about this report, please call
me at (202) 512-3841. Key contributors to this report are listed in
appendix IV.
Sincerely yours,
Signed by:
Lawrence J. Dyckman:
Director, Natural Resources and Environment:
[End of section]
Appendix I: Objectives, Scope, and Methodology:
The Chairman of the Subcommittee on Energy Policy, Natural Resources
and Regulatory Affairs, House Committee on Government Reform asked that
we report to him on (1) the extent to which RUS distribution borrowers
provide electricity service to nonrural areas and (2) the potential
financial risk to taxpayers of the 2002 Farm Bill requirement to
guarantee lenders' debts, and the amount of rural economic development
loans and grants that could be funded by fees on the guarantees. In
addition, we identified an alternative that could provide funds for
rural economic development loans and grants.
In the overall course of our work, we reviewed the basic statutory
authority for RUS programs--the Rural Electrification Act of 1936, as
amended (RE Act); USDA's Budget Explanatory Notes for Committee on
Appropriations for fiscal years 1999 through 2005; prior GAO reports;
and RUS reports and publications. To provide relatively current
information on RUS' electricity program, we focused on the loans RUS
made, guaranteed, and wrote-off in fiscal years 1999 through 2003. We
interviewed RUS officials, including the Administrator and Assistant
Administrator for the electricity program. For the Rural Business-
Cooperative Service's rural economic development loan and grant
program, we used similar sources, including agency publications and
reports, its annual financial report containing information on loans
and grants made from fiscal year 1999 through 2003, the budget
explanatory notes, and our prior reports. We also interviewed USDA's
Deputy Administrator for the business programs. We did not verify the
accuracy of the financial information contained in the Rural Business-
Cooperative Service's annual financial report.
To address the extent to which RUS distribution borrowers provide
electricity service to rural and nonrural areas, we obtained
information about RUS' lending policies by reviewing provisions of the
RE Act; RUS regulations; and our prior reports; we also interviewed RUS
officials.[Footnote 23] We obtained automated financial reports from
RUS that covered all direct and guaranteed electricity loans made
between fiscal years 1999 and 2003. We took steps to verify the
accuracy of the information contained in the automated financial
reports, and performed some data reliability testing and found that the
data were reliable enough for our purposes. We also obtained from RUS a
list of the counties served by its active electricity borrowers, which
we compared to the Economic Research Service's 2003 rural-urban
continuum codes. These codes classify all U.S. counties along a 9-point
scale that distinguishes metropolitan counties by the population size
of their metropolitan area and nonmetropolitan counties by the degree
of urbanization and adjacency to a metropolitan area. The metropolitan
and nonmetropolitan classifications are based on the Office of
Management and Budget's June 2003 groupings. Metropolitan counties are
distinguished by the population size of the metropolitan statistical
area of which they are part. Nonmetropolitan counties are classified
according to the aggregate size of their urban population and by
whether they are adjacent to a metropolitan area. Using this
information, we coded the counties where RUS' electricity borrowers
that received loans between fiscal years 1999 and 2003 provide
service.[Footnote 24] To avoid overstating the number of counties
served by RUS borrowers, we did not code the same county twice, in the
event that two different borrowers served customers in the same county.
We then analyzed county-level data from the 2000 census. Specifically,
we analyzed the number of residents in counties that the Bureau of the
Census classifies as residing in rural and urban areas. In general, the
Bureau of the Census historically defined rural areas as cities,
villages, boroughs, or towns with fewer than 2,500 inhabitants. The
Bureau of the Census revised the definition for the 2000 census to
focus on population density within areas while retaining the 2,500
population criterion. Thus, for this part of our analysis, we used
counties served by the distribution borrowers as an indicator of areas
being served by borrowers that obtain RUS electricity loans. We also
analyzed the service area maps of selected RUS borrowers.
We also cross-referenced the loan information we obtained from RUS
against data that the distribution borrowers report to the agency
annually on the number of customers that they serve. We then
categorized the borrowers that received loans by various incremental
ranges of residential customers served. These ranges generally
correspond with the population criteria for various USDA rural
development programs--for example, a population of less than 2,500 for
electricity loans, 10,000 or less for water and waste disposal loans
and grants, and 20,000 or less for community facility loans and grants.
We used the most recently available customer data at the time a loan
was approved for our analysis. Thus, if a loan was approved in calendar
year 2000, we used customer data as of December 31, 1999. We took this
approach because the agency does not collect data on the number of
customers in each county that the borrowers serve. We recognize that
most borrowers serve multiple areas, which could result in their having
a high number of customers. However, we noted that the residential
customer data are counted as individuals responsible for paying the
electricity bills; a household is generally counted as one customer.
Thus, the customer count data would be less than the number of
inhabitants.
To address the potential financial risk to taxpayers of the 2002 Farm
Bill requirement to guarantee lenders' debts, and the amount of rural
economic development loans and grants that could be funded by fees on
the guarantees, we reviewed the relevant portion of the act and its
legislative record. During the initial portion of our review, RUS had
not issued a proposed or implementing regulation. Because the Rural
Business-Cooperative Service's Deputy Administrator for the business
programs told us the agency had not yet developed a program-level
estimate of the additional loans and grants that could be funded under
the new program, we made such an estimate using RUS' estimated level of
guaranteed debt and the resulting available fee proceeds, if that level
were achieved, and the Rural Business-Cooperative Service's fiscal year
2004 budget figures for rural economic development loans and grants. To
obtain information on RUS' efforts and plans to implement the new
guarantee program, we interviewed RUS officials, including the
Assistant Administrator for the electricity program. A proposed
regulation was published in the Federal Register on December 30, 2003.
We reviewed this document to determine how the agency was proposing to
implement the new program and the agency's description of the program's
risk, impact, and benefits. We interviewed officials of CFC and CoBank
to obtain their views on the proposed new program, and reviewed
financial and business reports on these entities and the electric and
telecommunications industries.
To determine whether an alternative mechanism might be available to
fund the rural economic development program with less risk, we analyzed
RUS' fiscal year 2005 budget request for electricity and
telecommunications loans and the Rural Business-Cooperative Service's
request for rural economic development loans and grants to determine
what level of fees would be needed to cover the costs of the Rural
Business-Cooperative Service's program. For this part of our analysis,
we focused on a fee level that could result in a level of funds to
support rural economic development loans and grants that approximately
doubles the Rural Business-Cooperative Service's fiscal year 2005
requested program levels. Moreover, we obtained from the Rural
Development mission area's finance office information on the level of
funds in the cushion-of-credit account and available to cover the
subsidy costs of rural economic development loans and the cost of rural
economic development grants.
We conducted our review from October 2003 to June 2004 in accordance
with generally accepted government auditing standards.
[End of section]
Appendix II: Customers and Examples of Urban Counties Served by RUS
Borrowers:
This appendix contains two tables: table 3 provides information about
the numbers of customers served by RUS distribution borrowers included
in our analysis; table 4 provides information about 12 counties with
substantial urban populations that are served entirely or predominately
by RUS electricity borrowers. These counties are located in the
vicinity of Atlanta, Georgia; Charlotte, North Carolina; Tampa,
Florida; and Washington, D.C.
Table 3: Direct and Guaranteed Electricity Loans Made to Distribution
Borrowers from Fiscal Years 1999 through 2003, by Range of Residential
Customers Served:
Dollars in millions.
Less than 2,500;
Loans: Number: 54;
Loans: Percent of total: 6.3%;
Dollars: Amount: $90.0;
Dollars: Percent of total: 1.0%;
Average number of customers served: Residential customers: 1,561;
Average number of customers served: Nonresidential customers: 369.
2,500-10,000;
Loans: Number: 354;
Loans: Percent of total: 41.0%;
Dollars: Amount: $1,530.1;
Dollars: Percent of total: 17.1%;
Average number of customers served: Residential customers: 5,724;
Average number of customers served: Nonresidential customers: 926.
10,001-20,000;
Loans: Number: 211;
Loans: Percent of total: 24.4%;
Dollars: Amount: $2,184.6;
Dollars: Percent of total: 24.4%;
Average number of customers served: Residential customers: 14,280;
Average number of customers served: Nonresidential customers: 1,520.
20,001-50,000;
Loans: Number: 195;
Loans: Percent of total: 22.6%;
Dollars: Amount: $3,401.2;
Dollars: Percent of total: 38.0%;
Average number of customers served: Residential customers: 30,319;
Average number of customers served: Nonresidential customers: 3,093.
50,001 or more;
Loans: Number: 50;
Loans: Percent of total: 5.8%;
Dollars: Amount: $1,751.2;
Dollars: Percent of total: 19.6%;
Average number of customers served: Residential customers: 75,731;
Average number of customers served: Nonresidential customers: 7,520.
Total;
Loans: Number: 864;
Loans: Percent of total: 100.0%;
Dollars: Amount: $8,957.1;
Dollars: Percent of total: 100.0%;
Average number of customers served: Residential customers: 17,156;
Average number of customers served: Nonresidential customers: 1,907.
Source: GAO analysis of RUS data.
Note: The percentage of dollars is based on whole numbers and the
totals may not add due to rounding.
[End of table]
Table 4: Population Profile of 12 Counties That Are Entirely or
Predominantly Served by Electric Cooperatives That Received RUS
Electricity Loans between Fiscal Years 1999 and 2003:
County: Calvert, Maryland;
Total population of county: 74,563;
Urban population of county: 40,429;
Rural population of county: 34,134;
Percent rural within county: 46%.
County: Charles, Maryland;
Total population of county: 120,546;
Urban population of county: 79,874;
Rural population of county: 40,672;
Percent rural within county: 34%.
County: Citrus, Florida;
Total population of county: 118,085;
Urban population of county: 67,791;
Rural population of county: 50,294;
Percent rural within county: 43%.
County: Coweta, Georgia;
Total population of county: 89,215;
Urban population of county: 48,586;
Rural population of county: 40,629;
Percent rural within county: 46%.
County: Douglas, Georgia;
Total population of county: 92,174;
Urban population of county: 73,467;
Rural population of county: 18,707;
Percent rural within county: 20%.
County: Fayette, Georgia;
Total population of county: 91,263;
Urban population of county: 71,391;
Rural population of county: 19,872;
Percent rural within county: 22%.
County: Forsyth, Georgia;
Total population of county: 98,407;
Urban population of county: 64,243;
Rural population of county: 34,164;
Percent rural within county: 35%.
County: Hall, Georgia;
Total population of county: 139,277;
Urban population of county: 93,066;
Rural population of county: 46,211;
Percent rural within county: 33%.
County: Hernando, Florida;
Total population of county: 130,802;
Urban population of county: 99,591;
Rural population of county: 31,211;
Percent rural within county: 24%.
County: Pasco, Florida;
Total population of county: 344,765;
Urban population of county: 293,288;
Rural population of county: 51,477;
Percent rural within county: 15%.
County: Spalding, Georgia;
Total population of county: 58,417;
Urban population of county: 34,745;
Rural population of county: 23,672;
Percent rural within county: 41%.
County: Union, North Carolina;
Total population of county: 123,677;
Urban population of county: 62,039;
Rural population of county: 61,638;
Percent rural within county: 50%.
Source: GAO analysis of electricity cooperative service area maps and
2000 census data.
[End of table]
[End of section]
Appendix III: Comments from the U.S. Department of Agriculture:
Note: GAO comments supplementing those in the report text appear at the
end of this appendix.
USDA:
United States Department of Agriculture:
Office of the Secretary:
Washington, D.C. 20250:
MAY 24 2004:
Mr. Lawrence J. Dyckman:
Director, Natural Resources and Environment:
United States General Accounting Office:
441 G Street, NW:
Washington, DC 20548:
Dear Mr. Dyckman:
Thank you for providing the United States Department of Agriculture
(USDA), Rural Development, with a draft of your report on Opportunities
to Better Target Assistance to Rural Areas and Avoid Unnecessary
Financial Risk (Audit No. GAO-04-647). I would like to offer the
following comments for your consideration and ask that a copy of this
response be included in your final report.
The draft report notes that the Rural Utilities Service (RUS) issued a
proposed rule to implement Section 6101 (7 U.S.C. 313A) that was
provided in the Farm Security and Rural Investment Act of 2002 (Pub. L.
107-171) (Farm Bill). Specifically, this section requires the Secretary
to guarantee payments on bonds or notes issued by certain cooperative
or nonprofit lenders that make electric and telephone loans. The draft
report is critical of this legislation and suggests that Congress may
wish to consider repealing it.
It is important to recognize that RUS' responsibility for administering
this legislation requires that the agency proceed with due diligence in
accordance with the intent of Congress in its passage of the
legislation. RUS has taken this responsibility seriously. We would ask
that GAO's draft report be revised to distinguish between its criticism
of the legislation and RUS' efforts to implement it.
RUS and National Rural Utilities Cooperative Finance Corporation (CFC)
have a long history of working together to provide credit for rural
electrification and telecommunications. This relationship is grounded
in Section 306 of the Rural Electrification Act of 1936, (RE Act) as
amended (7 U.S.C. 901 et Seq) which explicitly mentions CFC in
conferring authority to RUS to guarantee loans made by CFC for RE Act
purposes. CFC is second only to RUS in providing credit for these
sectors.
RUS contracted for, and obtained, a sophisticated, independent
empirical analysis from Bearing Point to the degree of risk of loss in
the case of investment grade bonds. The Bearing Point analysis shows
that the probability of incurring any loss under the 313A program is
unlikely. We believe that the report should acknowledge what the data
shows.
The report also challenges the long-established RUS practice of
determining the rural or non-rural nature of areas as of the time RUS
made the loan for initial service. Generally speaking, this practice,
which the report refers to as "once a borrower always a borrower", has
meant that once an applicant has established a borrowing relationship
with RUS, subsequent population growth in its service territory does
not preclude eligibility for further RUS financial assistance. We note
that GAO and others have brought this matter to the attention of
Congress many times before. In addition to the 1998 and 1996 GAO
reports cited in this latest report, the Congressional Research Service
(CRS) analyzed this same issue in 1991 in CRS Report for Congress, The
Rural Electrification Administration: Background and Current Issues
(91-614 ENR, August 12, 1991). Although Congress has amended the RE Act
several times in the intervening years, instead of accepting these
recommendations, Congress has continued to support the current electric
distribution program. However, the President's budget recommends that
the rural status of borrowers be re-certified.
We also believe that the methodology used in the report does not
present an accurate picture of the extent to which RUS borrowers serve
electric consumers that are not in rural areas. The RE Act defines
rural as being any area not included within the boundaries of any urban
area as defined by the Bureau of the Census. We believe that any
methodology attempting to measure the current demographic
characteristics of an RE borrower's service territory should be based
directly on Bureau of the Census data. This data can be projected on to
maps of borrowers' service territory to ascertain their demographics.
This seems to be what was done in the case of six specific borrowers
named in the report. However, different and inappropriate standards
were used for characterizing the remainder of RUS borrowers. Instead
the Report used techniques used by Economics Research Service (ERS)
researchers and others who discuss conditions in "rural" America by
referring to conditions in "nonmetropolitan" areas.
Metropolitan statistical areas are defined on the basis of whole
counties. Metropolitan statistical areas are defined by the Office of
Management and Budget (OMB) to provide nationally consistent
definitions for collecting, tabulating and publishing Federal
statistics for geographic areas. OMB has expressly characterized the
use of these definitions "for implementing nonstatistical programs and
determining program eligibility" as being "inappropriate." (65 FR
82228) (December 27, 2000). This is because "OMB establishes and
maintains these areas solely for statistical purposes." Id.
When these terms are applied to the 59.1 million rural residents
counted by Census 2000, the majority of rural residents lived in metro
counties. (Source: Economic Research Service, USDA: "Measuring
Rurality: What is Rural?"). Accordingly, it is possible for systems to
serve consumers who are "rural residents" for Census 2000 and RE Act
purposes even though those same consumers are classified as "metro
residents" for Federal statistical purposes. Nevertheless, the report
would classify service to these consumers as evidence that a
distribution cooperative was serving nonrural areas. Under the county-
based methodology used in the report, a system that served only a
handful of consumers living in a county listed as "metro" would be
considered to be a borrower serving a non-rural area regardless of the
actual demographic characteristics of its service territory or the
amount of infrastructure it has located in the metro county.
The report raised the issue of targeting of loan funds. We would note
that targeting of loans would not reduce the Government's subsidy cost
for the electric program, contrary to GAO's statement on page 19 of the
draft report. The fact of the matter is the electric loan program
involves very little subsidy cost. For example, the President's 2005
budget includes $2.6 billion in electric loans at the subsidy cost of
only $4 to $5 million. Moreover, this subsidy cost is limited to
direct loans made for "hardship" and "municipal rate" purposes. The
majority of the electric loan program actually operates at a negative
subsidy cost.
Further we would note that GAO raised the issue on targeting of the
electric loan program in its 1998 report entitled Rural Utilities
Service; Opportunities to Operate Electricity and Telecommunications
Loan Programs More Effectively, GAO/RECD-98-42). GAO's current draft
report does not provide any new information on the matter, except for
citing more recent examples of where loans have been made.
The report indicates that the 5 percent hardship rate program is for
borrowers that serve financially distressed areas. This statement is
incorrect. By Congressional mandate the 5 percent hardship rate program
is limited to borrowers who meet certain rate criteria and whose
members meet certain income level criteria as measured against State
averages. While arguably the per capita income may tie to financially
distressed areas the rate criteria does not. Specifically, Congress
provided that a borrower would qualify for a hardship rate loan if it
met the rate disparity and consumer income test or met the extremely
high rate test. Congress also provided that a hardship rate loan could
be made at the Administrator's discretion. The criteria established by
Congress are as follows:
Rate Disparity Test for Hardship:
A borrower meets this test if its average revenue per kWh sold is not
less that 120 percent of the average revenue per kWh sold by all
electric utilities in the State in which the borrower provides service,
and its average residential revenue per kWh is not less than 120
percent of the average residential revenue per kWh sold by all electric
utilities in the State in which the borrower provides service.
Consumer Income Test:
A borrower meets this test if either the average per capita income of
the residents receiving electric service from the borrower is less than
the average per capita income of the residents of the State in which
the borrower provides service or the median household income of the
residents receiving electric service from the borrower is less than the
median household income of the households in the State.
Extremely High Rates Test:
The Administrator shall make an insured electric loan at the hardship
rate to any borrower whose residential revenue exceeds 15 cents per kWh
sold.
Administrator's Discretion:
The Administrator may make a hardship rate loan if, in the sole
discretion of the Administrator, the borrower has experienced a severe
hardship.
Thank you for this opportunity to comment on the report. If you have
any questions, please contact John M. Purcell, Director, Financial
Management Division at (202) 692-0080.
Sincerely,
Signed by:
GILBERT GONZALEZ
Acting Under Secretary
Rural Development:
The following are GAO's comments on the U.S. Department of
Agriculture's letter dated May 24, 2004.
GAO Comments:
1. We do not criticize the legislation in the 2002 Farm Bill calling
for the new guarantee program, and offer Congress an alternative for
funding rural economic development loans and grants that does not
provide added risk exposure to the nation's taxpayers. Our report
recognizes that a key feature of the new program, as specified in the
bill report of the Senate Committee on Agriculture, Nutrition, and
Forestry and in the conference report, is to provide an additional
funding mechanism for rural economic development loans and grants.
2. The report recognizes that RUS has taken steps to implement the new
guarantee program and does not criticize the agency's actions.
Moreover, we recognize in the report that RUS proposed steps to
mitigate risk in the new program, including the requirements for a
bankruptcy trust, pledges of collateral, a 5 percent limit on cash
patronage refunds, and the use of certain standards that apply to
depository financial institutions.
3. We reviewed a January 2004 Bearing Point report prepared for RUS
that lays out credit subsidy rate options, which suggest some risks
with the new guarantee program. This Bearing Point report does not
state or otherwise show that the probability of incurring any loss
under the program is unlikely; it does, however, contain various
estimated subsidy rates assuming defaults. We also reviewed a December
2002 Bearing Point report prepared for RUS on credit subsidies; this
report also has no statement about losses being unlikely. These two
Bearing Point reports are Guarantee Program for Bonds and Notes Issued
for Electrification or Telephone Purposes, Credit Subsidy Input and
Output Sheets for 15-Year Bond Scenarios (January 9, 2004), and Bond
and Note Guarantee Program, Credit Subsidy Research Final (December 16,
2002). In addition, our report states that RUS estimated, in the
economic analysis section of its proposed program regulations, maximum
potential losses at $1.5 billion, but that RUS does not expect losses
to occur.
4. Contrary to USDA's assertion, we do not challenge RUS' practice of
determining eligibility when a borrower first applies for a loan to
provide electricity service in a rural area. In our opinion, this
practice is called for and meets the provisions of the RE Act. We do
question, however, RUS' practice of providing subsequent loans for
service to areas that are no longer rural.
5. We agree with USDA that there has been prior reporting on
electricity loans being made by RUS to borrowers that have experienced
population growth in their service territories and on RUS' policy of
allowing such lending. However, we have an obligation to report on the
continuation of these conditions because we were specifically requested
to do so. We believe it is important to highlight these conditions for
Congress given the purpose of the RE Act--that is, providing loans to
assist in the electricity infrastructure development of sparsely
populated rural areas.
6. In discussing the results of our analyses with RUS officials, they
told us that legislation had been drafted that is consistent with the
President's fiscal year 2005 budget to require borrowers to recertify
that they are serving rural areas. We added this statement to the
report.
7. We used various methodologies to characterize the areas served by
RUS distribution borrowers because the agency does not collect
comprehensive data on the areas they serve. For example, RUS does not
maintain up-to-date service territory maps or current population data
within those service areas. We recognize that urban-rural continuum
codes of USDA's Economic Research Service are not the criteria the RE
Act specifies RUS use to determine program eligibility. We also
acknowledge that all the metropolitan counties served by RUS
electricity distribution borrowers have at least some parts that the
2000 census classifies as rural, and that many of these counties are
only partially served by a RUS borrower. Our point, however, is to
generally describe the characteristics of areas served by RUS
electricity distribution borrowers. Moreover, our analysis of the
Economic Research Service's system was one of various methodologies we
used; the others were our analyses of specific borrowers serving highly
populated areas, counties with substantial urban populations served by
RUS' distribution borrowers, and the numbers of customers served by
these borrowers. More specifically, as USDA's letter acknowledges, the
report provides information on five borrowers that serve highly
populated areas. In addition, table 4 in appendix II lists the total
population, urban population, and rural population based on the 2000
census of 12 counties that are exclusively or predominantly served by
RUS electricity distribution borrowers. This table shows conclusively
that urban populations are benefiting from RUS electricity loans.
Furthermore, table 3 in appendix II disaggregates RUS electricity
borrowers by the number of customers served.
8. Neither the draft reviewed by USDA, nor this report, suggests that
metropolitan statistical areas be used as eligibility criteria for
participating in the electricity loan program. Rather, we state in
appendix I of our report that we used counties served by the
distribution borrowers as an indicator of areas being served by
borrowers that obtain RUS electricity loans. Our purpose in providing
information on the metropolitan counties served by RUS borrowers was to
illustrate how some borrowers now provide service to largely populated
areas, rather than providing service solely to sparsely populated rural
areas.
9. We agree that the electricity loan program involves relatively
little subsidy cost. Our concern with the actual and potential cost of
the program stems from the fact that RUS has experienced a high level
of losses in recent years. Specifically, the background section of this
report notes that RUS wrote off more than $3.2 billion during fiscal
years 1999 through 2003. Our 1998 report noted that RUS wrote off more
than $1.7 billion during fiscal year 1994 through June 30, 1997. In
addition, it is likely RUS will incur additional losses in the near
future. For example, at the end of fiscal year 2003, the assets of two
borrowers that owed a total of more than $22 million were being
liquidated by bankruptcy trustees, and the agency's officials told us
they anticipate losses.
10. We disagree. This report contains new information highlighting that
loans are being made to borrowers providing service in highly populated
metropolitan areas; it provides examples of specific counties in highly
populated areas that are served by borrowers; and it contains a
nationwide analysis of counties that are served by borrowers that
obtained loans from RUS in recent years. The report also contains in
appendix II updated information on loans made to borrowers that have a
high number of customers.
11. We revised the report to recognize that hardship rate loans are
made to borrowers that have a relatively high cost of providing
service, as indicated by a high average revenue per kilowatt-hour sold,
and that serve customers with below-average income, or at the
discretion of RUS' Administrator. However, we note that in the current
period of low interest rates, the rate charged on hardship rate loans,
which is set at 5 percent, has been higher than the rates charged by
RUS on its municipal rate loans and Treasury rate loans. Specifically,
as the report states, the interest rate on municipal rate loans ranged
from 1.1 percent to 4.6 percent during the first quarter of calendar
year 2004, and on Treasury rate loans ranged from 1.2 percent to 4.4
percent in mid-March 2004.
[End of section]
Appendix IV: GAO Contacts and Staff Acknowledgments:
GAO Contacts:
Lawrence J. Dyckman (202) 512-3841 Charles M. Adams (202) 512-8010:
Acknowledgments:
In addition to the individuals named above, Jonathan C. Altshul,
Vondalee R. Hunt, Cynthia C. Norris, Patrick J. Sweeney, and Amy E.
Webbink made key contributions.
FOOTNOTES
[1] The RE Act (7 U.S.C. §§ 901 et seq.) also authorizes RUS'
telecommunications program in which direct and guaranteed loans are
used for furnishing and improving telephone service.
[2] In general, the Bureau of the Census historically defined urban
areas as cities, villages, boroughs, or towns with 2,500 or more
inhabitants. The Bureau of the Census revised the definition for the
2000 census to focus on population density within areas while retaining
the population criterion of 2,500 inhabitants.
[3] RUS' regulations state that an area determined to be rural for an
initial loan prior to November 1, 1993, shall continue to be considered
rural, and for an initial loan made on or after November 1, 1993, RUS
will rely on the Bureau of the Census' designation.
[4] 7 U.S.C. § 940c-1, added by Section 6101 of the 2002 Farm Bill,
Pub. L. No. 107-171, 116 Stat. 134, 413 (2002).
[5] U.S. General Accounting Office, Rural Utilities Service:
Opportunities to Operate Electricity and Telecommunications Loan
Programs More Effectively, GAO/RCED-98-42 (Washington, D.C.:
January1998) and U.S. General Accounting Office, Congressional
Oversight: Opportunities to Address Risks, Reduce Costs, and Improve
Performance, GAO/T-AIMD-00-96 (Washington, D.C.: February 2000).
[6] Pub. L. No. 103-354, 108 Stat. 3221 (1994).
[7] RUS also administers USDA's other utility programs, such as the
telecommunications loan and the water and waste disposal loan and grant
programs. These programs define "rural" differently. A "rural area" for
RUS telecommunications loans is any area not included in a city,
village, or borough with a population in excess of 5,000 inhabitants.
"Rural" and "rural area" for RUS' water and waste disposal loans and
grants are a city, town, or unincorporated area that has a population
of no more than 10,000 inhabitants.
[8] Restructured loans are loans for which the original loan agreements
have been altered, including loans that had been owed by borrowers now
assumed by other utilities. The amount covers the principal and the
capitalized interest owed on the loans. Also, the loan amounts in this
category are not included in the other direct and guaranteed loan
categories.
[9] RUS also made or guaranteed more than $2.3 billion of
telecommunications loans over this 5-year period.
[10] This report section covers distribution borrowers but not power
supply borrowers, which do not directly serve residential or business
customers.
[11] For this analysis, we examined RUS data on the counties served by
distribution borrowers, USDA's Economic Research Service 9-point scale
that classifies counties, which is based on the Office of Management
and Budget's classification of metropolitan counties, and census data
on county populations.
[12] Appendix II contains additional data on RUS distribution
borrowers, and examples of the urban counties they serve.
[13] RUS' economic analysis was included with its proposed program
regulations. Guarantees for Bonds and Notes Issued for Electrification
or Telephone Purposes, 68 Fed. Reg. 75153 (to be codified at 7 C.F.R.
pt. 1720) (proposed Dec. 30, 2003).
[14] CFC's principal purpose is to provide cooperative utility systems
with financing to supplement RUS programs. CFC competes with CoBank of
the Farm Credit System to provide lending to projects partially funded
by RUS, and for projects involving cooperatives in which RUS is not a
participant.
[15] The Department of the Treasury's Federal Financing Bank, which
makes most electricity and telecommunications loans guaranteed by RUS,
is not eligible because it is a federal entity.
[16] The Federal Credit Reform Act of 1990, 2 U.S.C. §§ 661-661f,
requires agencies entering into new loan guarantee commitments to first
obtain budget authority to cover the "cost" of the loan program. The
subsidy cost of guarantees is generally the net present value of
estimated payments by the government to cover defaults and
delinquencies, interest subsidies, or other payments, offset by any
payments to the government, including origination and other fees,
penalties, and recoveries.
[17] One basis point equals .01 percent.
[18] The fees are to establish an additional funding mechanism to be
used by the Rural Business-Cooperative Service to cover the costs of
rural economic development loans and grants. See S. Rep. No. 107-117,
at 23 (2001); H. R. Rep. No. 107-424, at 588 (2002).
[19] National Rural Utilities Cooperative Finance Corporation, Form 10-
K, Annual Report Pursuant to Section 13 or 15(d) of the Securities and
Exchange Act of 1934, Fiscal Year Ended May 31, 2003 (Washington, D.C.:
August 2003).
[20] CFC is intent on maintaining a high credit rating. For example,
according to CFC's May 2003 report to the Security and Exchange
Commission, bonuses are authorized for key executives if CFC improves
its financial ratings.
[21] Nonprofit lenders and RUS refer to profits as "net margins" and
the distribution of profits to the cooperatives' owners as "patronage
refunds."
[22] As this is an average, we recognize that differing loan amounts
and customer bases would result in a higher cost for the customers of
some borrowers and less for others. Funds obtained through a loan-
origination fee to power supply borrowers would likely result in a
slight additional cost for each customer.
[23] We did not include power supply borrowers in this part of our
analysis because they do not directly serve retail customers.
[24] We did not include data on distribution borrowers serving Puerto
Rico or American Samoa in this part of our analysis because the
Economic Research Service does not classify counties in U.S.
territories.
GAO's Mission:
The General Accounting Office, the investigative arm of Congress,
exists to support Congress in meeting its constitutional
responsibilities and to help improve the performance and accountability
of the federal government for the American people. GAO examines the use
of public funds; evaluates federal programs and policies; and provides
analyses, recommendations, and other assistance to help Congress make
informed oversight, policy, and funding decisions. GAO's commitment to
good government is reflected in its core values of accountability,
integrity, and reliability.
Obtaining Copies of GAO Reports and Testimony:
The fastest and easiest way to obtain copies of GAO documents at no
cost is through the Internet. GAO's Web site ( www.gao.gov ) contains
abstracts and full-text files of current reports and testimony and an
expanding archive of older products. The Web site features a search
engine to help you locate documents using key words and phrases. You
can print these documents in their entirety, including charts and other
graphics.
Each day, GAO issues a list of newly released reports, testimony, and
correspondence. GAO posts this list, known as "Today's Reports," on its
Web site daily. The list contains links to the full-text document
files. To have GAO e-mail this list to you every afternoon, go to
www.gao.gov and select "Subscribe to e-mail alerts" under the "Order
GAO Products" heading.
Order by Mail or Phone:
The first copy of each printed report is free. Additional copies are $2
each. A check or money order should be made out to the Superintendent
of Documents. GAO also accepts VISA and Mastercard. Orders for 100 or
more copies mailed to a single address are discounted 25 percent.
Orders should be sent to:
U.S. General Accounting Office
441 G Street NW,
Room LM Washington,
D.C. 20548:
To order by Phone:
Voice: (202) 512-6000:
TDD: (202) 512-2537:
Fax: (202) 512-6061:
To Report Fraud, Waste, and Abuse in Federal Programs:
Contact:
Web site: www.gao.gov/fraudnet/fraudnet.htm E-mail: fraudnet@gao.gov
Automated answering system: (800) 424-5454 or (202) 512-7470:
Public Affairs:
Jeff Nelligan, managing director, NelliganJ@gao.gov (202) 512-4800 U.S.
General Accounting Office, 441 G Street NW, Room 7149 Washington, D.C.
20548:
