Rural Utilities Service: Opportunities to Operate Electricity and
Telecommunications Loan Programs More Effectively (Letter Report,
01/21/98, GAO/RCED-98-42).

Pursuant to a congressional request, GAO reviewed the Rural Utilities
Service's electricity and telecommunication loan programs, focusing on:
(1) ways to make the loan programs more effective and less costly for
the government; (2) ways to decrease the Rural Utilities Service's
vulnerability to loan losses; and (3) loan information on commercial
lenders that have a significant level of lending for rural electricity
and telecommunication purposes.

GAO noted that: (1) because loan programs are intended to assist in the
development of the nation's rural areas, targeting loans to borrowers
that provide services to areas with low populations could result in the
more effective use of the agency's limited loan funds; (2) current
lending practices sometimes result in loans to borrowers serving areas
that are heavily populated; (3) targeting subsidized direct loans to
borrowers that need the agency's assistance to fund their utility
projects could result in the more effective use of the loan funds and
reduce the level of subsidized loans and program costs; (4) the agency
sometimes makes its subsidized direct loans to borrowers capable of
using their own resources or of obtaining loans from the private sector
to fund their utility projects; (5) graduating the agency's financially
viable borrowers from direct loans to commercial credit could also
reduce program costs; (6) opportunities also exist to decrease the Rural
Utilities Service's vulnerability to losses; (7) the agency's
vulnerability could be lessened if loan and indebtedness limits were
established; (8) borrowers have been able to obtain large-dollar loans
and accumulate large amounts of debt because such limits are generally
lacking; (9) the repayment guarantee that the agency places on loans
made by other lenders could be reduced so that lenders holding the
guaranteed loans bear some portion of the financial risk; (10) the
agency guarantees the repayment of loans made by other lenders at 100
percent; (11) because all guaranteed loans in recent years have been
made by the Treasury's Federal Financing Bank, the risk to the federal
government as a whole would not be reduced if the Federal Financing Bank
continues to be the sole source of loan funds; (12) although the agency
did not make or guarantee loans to such borrowers during the period
covered by GAO's review, there are no policies prohibiting additional
loans to such borrowers; (13) the Rural Utilities Service is not the
only provider of credit to rural utilities; (14) two commercial lenders
are actively involved in lending to rural electricity and
telecommunications providers; and (15) these two lenders had
approximately $13.1 billion in outstanding principal on loans for rural
electricity and telecommunication purposes.

--------------------------- Indexing Terms -----------------------------

 REPORTNUM:  RCED-98-42
     TITLE:  Rural Utilities Service: Opportunities to Operate 
             Electricity and Telecommunications Loan Programs More
             Effectively
      DATE:  01/21/98
   SUBJECT:  Delinquent loans
             Loan repayments
             Lending institutions
             Telecommunication
             Rural economic development
             Government guaranteed loans
             Electric utilities
             Direct loans
             Financial management
             Waste disposal
IDENTIFIER:  RDA Water and Waste Disposal Systems for Rural Communities 
             Program
             
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Cover
================================================================ COVER


Report to the Committee on Agriculture, Nutrition, and Forestry, U.S. 
Senate

January 1998

RURAL UTILITIES SERVICE -
OPPORTUNITIES TO OPERATE
ELECTRICITY AND TELECOMMUNICATIONS
LOAN PROGRAMS MORE EFFECTIVELY

GAO/RCED-98-42

Operation of RUS' Loan Programs

(150725)


Abbreviations
=============================================================== ABBREV

  CFC - National Rural Utilities Cooperative Finance Corporation
  FCS - Farm Credit System
  FFB - Federal Financing Bank
  GAO - General Accounting Office
  REA - Rural Electrification Administration
  REAct - Rural Electrification Act of 1936, as amended
  RTB - Rural Telephone Bank
  RTFC - Rural Telephone Finance Cooperative
  RUS - Rural Utilities Service
  TIER - times-interest-earned ratio
  USDA - U.S.  Department of Agriculture

Letter
=============================================================== LETTER


B-278588

January 21, 1998

The Honorable Richard G.  Lugar
Chairman
The Honorable Tom Harkin
Ranking Minority Member
Committee on Agriculture, Nutrition,
 and Forestry
United States Senate

The U.S.  Department of Agriculture's (USDA) Rural Utilities Service
(RUS) has used its loan programs to successfully finance the
development of electricity and telecommunications infrastructure in
rural areas for many years.\1 RUS' loans are intended to assist in
the development of sparsely populated rural areas.  Recently, the
agency wrote off more than $1.7 billion on electricity loans held by
a handful of borrowers that did not repay them.  More write-offs are
anticipated.  In April 1997, we reported on the financial condition
of RUS' multibillion-dollar portfolio of electricity and
telecommunications loans.\2 In summary, that report showed that at
the end of fiscal year 1996, about $8 billion of the $37.5 billion in
outstanding principal on these loans was held by borrowers
experiencing financial problems.  We also reported that at the end of
calendar year 1995, most electricity and telecommunications loan
borrowers had favorable financial characteristics. 

In response to the information contained in our April 1997 report,
you requested that we conduct a follow-up study focusing on RUS'
program operations.  Specifically, you asked us to identify ways to
(1) make the electricity and telecommunications loan programs more
effective and less costly for the government and (2) decrease RUS'
vulnerability to loan losses.  You also requested that we compile
loan information on commercial lenders that have a significant level
of lending for rural electricity and telecommunications purposes. 


--------------------
\1 RUS operates the electricity and telecommunications loan programs
formerly administered by USDA's Rural Electrification Administration. 
In this report, we refer to these loan programs as RUS' programs. 

\2 Rural Development:  Financial Condition of the Rural Utilities
Service's Loan Portfolio (GAO/RCED-97-82, Apr.  11, 1997). 


   RESULTS IN BRIEF
------------------------------------------------------------ Letter :1

This report identifies a number of options that the Congress could
consider to make the Rural Utilities Service's electricity and
telecommunications loan programs more effective and less costly. 
Specifically, because the loan programs are intended to assist in the
development of the nation's rural areas, targeting loans to borrowers
that provide services to areas with low populations could result in
the more effective use of the agency's limited loan funds.  Current
lending practices sometimes result in loans to borrowers serving
areas that are heavily populated.  Additionally, targeting subsidized
direct loans to borrowers that need the agency's assistance to fund
their utility projects could result in the more effective use of the
loan funds and reduce the level of subsidized loans and program
costs.  Currently, the agency sometimes makes its subsidized direct
loans to borrowers capable of using their own resources or of
obtaining loans from the private sector to fund their utility
projects.  Finally, graduating the agency's financially viable
borrowers from direct loans to commercial credit could also reduce
program costs.  Many of the agency's borrowers are potential
candidates for credit from the commercial sector. 

Opportunities also exist to decrease the Rural Utilities Service's
vulnerability to losses.  Specifically, the agency's vulnerability
could be lessened if loan and indebtedness limits were established. 
Some borrowers have been able to obtain large-dollar loans and
accumulate large amounts of debt because such limits are generally
lacking.  Additionally, the repayment guarantee that the agency
places on loans made by other lenders could be reduced so that
lenders holding the guaranteed loans bear some portion of the
financial risk.  Currently, the agency guarantees the repayment of
loans made by other lenders at 100 percent.  However, because all
guaranteed loans in recent years have been made by the Treasury's
Federal Financing Bank, the risk to the federal government as a whole
would not be reduced if the Federal Financing Bank continues to be
the sole source of loan funds.  Finally, lending policies could be
strengthened to ensure that loans are not made to delinquent
borrowers or to borrowers that have caused the Rural Utilities
Service to incur loan losses.  Although the agency did not make or
guarantee loans to such borrowers during the period covered by our
review, there are no policies prohibiting additional loans to such
borrowers. 

The Rural Utilities Service is not the only provider of credit to
rural utilities.  Specifically, two commercial lenders are actively
involved in lending to rural electricity and telecommunications
providers.  These two lenders had approximately $13.1 billion in
outstanding principal on loans for rural electricity and
telecommunications purposes as of June 30, 1997--an amount equal to
36.4 percent of the outstanding principal on the Rural Utilities
Service's loans.  The largest lender--the National Rural Utilities
Cooperative Finance Corporation and its affiliated lending
organizations--had about $8.9 billion in rural utility loans, and two
banking elements of the Farm Credit System had a total of $4.2
billion in rural utility loans. 


   BACKGROUND
------------------------------------------------------------ Letter :2

RUS, established by the Federal Crop Insurance Reform and Department
of Agriculture Reorganization Act of 1994 (P.L.  103-354, Oct.  13,
1994), administers the electricity and telecommunications loan
programs that formerly were operated by the Rural Electrification
Administration (REA).\3 As part of a general program of unemployment
relief, REA was first established by executive order in 1935 to
provide loan funds to support the electrification of rural America. 
At that time, most utilities served high-density areas and did not
extend lines to farmers and other rural residents.  In 1936, REA was
given the statutory authority to operate the electricity loan
program, and in 1939, REA became part of USDA.  In 1949, REA was
authorized to lend funds for telephone services in rural areas. 

In recent years, RUS has made or guaranteed an average of about $1.4
billion per year in loans to help borrowers develop, upgrade, or
expand their electricity and telecommunications systems.  As of June
30, 1997, the outstanding principal on RUS' electricity and
telecommunications loans totaled about $36 billion.  The Rural
Electrification Act of 1936, as amended (7 U.S.C.  901 et seq.),
referred to as the RE Act, provides the basic statutory authority for
the electricity and telecommunications programs. 


--------------------
\3 RUS also operates USDA's water and waste disposal loan program,
which was not included in this review. 


      ELECTRICITY LOANS
---------------------------------------------------------- Letter :2.1

RUS makes electricity loans--both direct and guaranteed--primarily to
electric cooperatives.\4 It makes direct loans to construct and
maintain the distribution facilities that provide electricity to
users.  It also provides guarantees on loans that are made by other
lenders for financing the construction, repair, and improvement of
electricity generating and transmission facilities.  Nearly all
borrowers with electricity loans are nonprofit cooperatives. 

RUS' direct loans include both hardship rate loans and municipal rate
loans.  Hardship rate loans are made to borrowers that meet the
following criteria:  (1) Their customers have below-average per
capita income or below-average median household income for the state,
and (2) they have a relatively high cost for providing service, as
indicated by a high average revenue per kilowatt-hour sold.  Hardship
rate loans have a 5-percent interest rate.  Generally, municipal rate
loans are made to qualified borrowers that do not meet the criteria
for hardship rate loans.  Municipal rate loans have an interest rate
that is tied to an index of municipal bond rates; the rate can change
quarterly. 

All electricity loans on which RUS has provided repayment guarantees
in recent years have been made by the Treasury's Federal Financing
Bank (FFB).  These loans have an interest rate equal to the
Treasury's cost of money plus one-eighth of 1 percent.  While RUS can
also guarantee electricity loans made by commercial lenders, it has
not done so in recent years because borrowers have applied for loans
from the FFB, which has lower interest rates than those available
from commercial lenders. 


--------------------
\4 Cooperatives are organizations owned by and operated for the
benefit of those using their services.  Utility cooperatives are
owned by the consumers, who elect boards of directors responsible for
policy and operations. 


      TELECOMMUNICATIONS LOANS
---------------------------------------------------------- Letter :2.2

RUS makes telecommunications loans--both direct and
guaranteed--primarily to commercial telephone companies and
cooperatives to build and improve telephone and telecommunications
facilities and services.  These loans are also made for advanced
telecommunications facilities and services, such as fiber-optic
cabling, digital-switching equipment, and educational television
applications.  About 72 percent of the borrowers with
telecommunications loans are for-profit companies, while the others
are mostly nonprofit cooperatives. 

RUS' direct loans are hardship rate loans and cost-of-money rate
loans.  Hardship rate loans are made to borrowers that meet the
following criteria:  (1) an average of four or fewer customers per
mile of telecommunications line in their current service areas, (2)
income that is 1 to 3 times more than their interest expenses, and
(3) an average of 17 or fewer customers per mile in the area to be
served by the project to be funded with the loan.  These loans have a
5-percent interest rate.  Generally, cost-of-money rate loans are
made to borrowers that do not qualify for hardship rate loans and
that have an income of 1 to 5 times more than their interest
expenses; these loans have an interest rate that matches USDA's cost
of money, which currently exceeds the rate for hardship rate loans. 
RUS also administers the Rural Telephone Bank (RTB) loan program, in
which direct loans are made concurrently with cost-of-money rate
loans.\5

RTB loans have an interest rate that matches RTB's cost of money. 

RUS also provides guarantees on loans made to commercial telephone
companies and cooperatives.  As with electricity loans, all
guaranteed telecommunications loans in recent years have been made by
the FFB, at an interest rate equal to the Treasury's cost of money
plus one-eighth of 1 percent.  RUS guaranteed only FFB loans because
borrowers applied for FFB loans rather than for commercial lenders'
loans. 


--------------------
\5 RTB is a government-private corporation with federal agency status
until it is privatized through the retirement of the stock that the
government owns.  Privatization began in fiscal year 1996. 


      RUS' LOAN OBLIGATIONS IN
      RECENT YEARS
---------------------------------------------------------- Letter :2.3

During fiscal year 1994 through the first three-quarters of fiscal
year 1997, RUS made or provided guarantees on 926 electricity and
telecommunications loans; these loans totaled about $4.9 billion. 
Table 1 shows the total number and amount of loans made in each
program during this period. 



                                Table 1
                
                 Total Number and Amount of Electricity
                  and Telecommunications Loans Made or
                Guaranteed by RUS, by Loan Type, Fiscal
                    Years 1994 Through June 30, 1997

                         (Dollars in millions)

                                   Total number of        Total dollar
Program/Loan type                            loans     amount of loans
------------------------------  ------------------  ------------------
Electricity
Direct hardship rate                            97              $341.6
Direct municipal rate                          401             1,945.4
======================================================================
Subtotal, direct                               498          $2,286.9\a
Guaranteed                                      36               835.5
======================================================================
Total electricity                            534\b            $3,122.4
Telecommunications
Direct hardship rate                            49               255.4
Direct cost-of-money rate                      157               730.9
Direct RTB                                     157               544.7
======================================================================
Subtotal, direct                               363            $1,531.0
Guaranteed                                      29               257.5
======================================================================
Total telecommunications                     392\c            $1,788.5
----------------------------------------------------------------------
\a Figures do not add to subtotal because of rounding. 

\b A total of 457 borrowers obtained these 534 electricity loans. 

\c A total of 190 borrowers obtained these 392 telecommunications
loans.  In this program, borrowers frequently receive a combination
of loan types--e.g., hardship rate and concurrent cost-of-money rate
and RTB loans. 

Source:  RUS' reports. 


      OUTSTANDING PRINCIPAL OWED
      ON RUS' ELECTRICITY AND
      TELECOMMUNICATIONS LOANS
---------------------------------------------------------- Letter :2.4

According to RUS' reports, the outstanding principal owed on
electricity and telecommunications loans totaled about $36 billion as
of June 30, 1997.  Table 2 shows the amount owed in each program.



                                Table 2
                
                   Amount of Outstanding Principal on
                Electricity and Telecommunications Loans
                 Made or Guaranteed by RUS, as of June
                                30, 1997

                         (Dollars in millions)


                                                    Telecommunications
Loan type                        Electricity loans               loans
------------------------------  ------------------  ------------------
RUS' direct loans                        $11,369.1            $3,385.4
RTB's direct loans                               0             1,428.7
Guaranteed FFB loans                      12,989.5               333.4
Other guaranteed loans                       649.9                 1.8
Restructured loans\a                       5,838.9                   0
======================================================================
Total                                    $30,847.4            $5,149.3
----------------------------------------------------------------------
\a Restructured loans are loans for which the original loan
agreements have been altered, including revised repayment schedules
and changes in interest rates.  These loans include previously issued
(1) direct loans made by RUS, (2) guaranteed loans made by the FFB,
(3) guaranteed loans made by commercial lenders on which RUS agreed
to be directly liable for repaying the loans, and (4) loans that had
been owed by borrowers now assumed by other utilities.  The amounts
cover the principal and the capitalized interest owed on the loans. 
The loans in this category are not included in the other direct and
guaranteed loan categories. 

Source:  RUS' reports. 


   OPPORTUNITIES EXIST TO MAKE THE
   LOAN PROGRAMS MORE EFFECTIVE
   AND LESS COSTLY
------------------------------------------------------------ Letter :3

RUS' electricity and telecommunications loans are intended to assist
in the development of the nation's rural areas.  Modifying certain
aspects of the electricity and telecommunications loan programs could
aid in reaching this goal while reducing the government's cost. 
First, lending practices could be modified to ensure that the loans
benefit areas with low populations, thereby more effectively using
the agency's limited loan funds.  Currently, borrowers serving areas
that are heavily populated sometimes receive loans.  Second, RUS'
subsidized direct loans could be focused on borrowers that are not
capable of using their own resources or of obtaining loans from the
private sector to fund their utility projects.  Targeting subsidized
direct loans to borrowers in need of federal assistance could result
in the more effective use of the loan funds.\6

Currently, financially healthy borrowers sometimes receive these
subsidized loans.  Finally, a graduation program could be instituted
to attempt to move RUS' financially viable borrowers with direct
loans to commercial sources of credit.  This action could allow the
agency to reduce the interest and administrative-servicing expenses
that it now incurs. 


--------------------
\6 In addition, the cost to the government could be less if the
targeted borrowers required a lower dollar volume of subsidized loans
than those currently receiving loans. 


      LOANS ARE SOMETIMES MADE TO
      BORROWERS SERVING LARGE
      CUSTOMER POPULATIONS
---------------------------------------------------------- Letter :3.1

A fundamental concept of both the electricity and the
telecommunications loan programs is that funds are to be provided to
borrowers for delivering service to sparsely populated rural areas. 
RUS' regulations require borrowers in both programs to establish that
they serve rural areas when they apply for their first loan. 
Generally, for a new borrower, the population threshold is less than
2,500 for the electricity program and no more than 5,000 for the
telecommunications program.  However, in both programs, subsequent
loans for service can be made without the borrower's having to meet
the initial test of serving a rural area.  In addition, as the RE Act
allows, telecommunications loans can be made for service to nonrural
areas when that service is considered incidental to providing service
to a rural area. 

We found that RUS sometimes makes loans to existing borrowers for
providing service to areas where the population exceeds original
thresholds for rural areas.  For example, an electricity distribution
borrower that first received a loan in 1945 received another loan in
1996; in the year prior to receiving this recent loan, the borrower
had almost 140,000 customers.  This borrower provided service to
customers in five counties; one county had about 55,800 residential
customers, and another had about 45,100 residential customers.  None
of these counties was classified as completely rural by USDA's
Economic Research Service--all contained an urban population that
exceeded 2,500.  Furthermore, two of the counties were within a
metropolitan area having a population of at least 1 million. 
Likewise, a telecommunications borrower that first received a loan in
1964 received another loan in 1996; this borrower had about 49,600
residential customers and about 13,700 business subscribers in the
year prior to receiving the latest loan.  This borrower provided
service to customers located in one county, which also was identified
by the Economic Research Service as being a county within a
metropolitan area having a population that was between 250,000 and 1
million people. 

While we did not evaluate the population density of the areas served
by all of RUS' electricity and telecommunications borrowers, we did
examine customer service statistics as an indicator of population
density.\7

We found that 71 electricity distribution borrowers that received
loans during calendar years 1994 through June 30, 1997, had more than
25,000 customers; 20 of these borrowers had more than 50,000
customers.  Nine of the telecommunications borrowers had more than
25,000 customers; five of these borrowers served a customer base of
more than 50,000.  (See table 3.)\8



                                Table 3
                
                 Number of Electricity Distribution and
                   Telecommunications Borrowers That
                  Obtained Loans During Calendar Years
                1994 Through June 30, 1997, by Range of
                               Customers

                                                  Telecommunications
                         Electricity program           program
                        ----------------------  ----------------------
                                    Percentage              Percentage
                         Number of          of   Number of          of
Range of customers       borrowers   borrowers   borrowers   borrowers
----------------------  ----------  ----------  ----------  ----------
More than 100,000                4         0.9           0         0.0
50,001-100,000                  16         3.7           5         3.0
25,001-50,000                   51        11.8           4         2.4
10,001-25,000                  156        36.1          12         7.1
5,001-10,000                   104        24.1          33        19.6
2,501-5,000                     75        17.4          39        23.2
2,500 or fewer                  26         6.0          75        44.6
======================================================================
Total                          432       100.0         168     100.0\a
----------------------------------------------------------------------
Note:  This table covers borrowers that obtained loans from RUS
during calendar years 1994 through June 30, 1997, and for which RUS'
databases contained information for the year prior to the one in
which the loans were made. 

\a Figures do not add to total because of rounding. 

Source:  GAO's analysis of RUS' automated databases, which contain
information submitted by electricity distribution and
telecommunications borrowers. 


--------------------
\7 We recognize that some borrowers may serve multiple rural areas,
which could result in their having a high number of customers. 

\8 RUS' automated files contained operational data supplied by 432
electricity distribution and 168 telecommunications borrowers that
received loans during calendar years 1994 through June 30, 1997. 


      LOANS WITH SUBSIDIZED
      INTEREST RATES ARE MADE TO
      FINANCIALLY HEALTHY
      BORROWERS
---------------------------------------------------------- Letter :3.2

Unlike the requirements for some other USDA rural credit
programs--such as the water and waste disposal, farm, single-family
housing, and community facilities loan programs--the RE Act does not
require electricity and telecommunications loan applicants to
demonstrate that they cannot obtain credit from other lenders before
applying for a RUS loan.  The act also does not preclude a
financially healthy borrower from receiving a RUS loan.  As a result,
RUS' loans are sometimes made to financially healthy borrowers that
may not need federal assistance to fund their utility projects.\9 In
addition, some financially healthy borrowers obtain municipal rate
loan funds at interest rates lower than the rate available on
hardship rate loans. 


--------------------
\9 In this section of the report, we use various financial measures
that provide a broad prospective of the financial strength of RUS'
borrowers.  A more complete analysis would be needed to assess each
individual borrower's financial circumstances. 


         LOANS ARE MADE TO
         FINANCIALLY HEALTHY
         BORROWERS THAT MAY NOT
         NEED RUS' ASSISTANCE
-------------------------------------------------------- Letter :3.2.1

The RE Act does not address the effect of an applicant's financial
health on the applicant's eligibility to obtain loans in either
program.  For telecommunications loans, however, the relationship
between income and interest expenses influences the type of loan that
an applicant may qualify to receive.  The RE Act does state that a
loan cannot be denied or reduced on the basis of a borrower's level
of general funds.  However, a provision in 7 U.S.C.  930--a
congressional policy declaration on RUS' loan programs that is not
part of the RE Act--states that the agency's electricity and
telecommunications borrowers should be encouraged and assisted in
satisfying their credit needs either internally or through other
credit sources. 

Many electricity borrowers that obtained loans during calendar years
1994 through June 30, 1997, had favorable financial
characteristics.\10 Specifically, almost 56 percent of the borrowers
had equity--total assets less total liabilities--of $10 million or
more at the end of the year prior to receiving the loans, and another
43 percent had equity of between $1 million and $10 million.  In
addition, about 40 percent of the borrowers made a profit (net
income) of $1 million or more in the year prior to receiving the
loans, and another 55 percent made a profit of between $100,000 and
$1 million.\11 (App.  I provides detailed information on electricity
loans to borrowers by various incremental ranges of equity and
profit.)

The electricity borrowers also had generally favorable current,
debt-to-asset, and times-interest-earned ratios (TIER).  The current
ratio is a measure showing the extent to which a borrower has
sufficient current assets to cover its current liabilities.  About 41
percent of the borrowers had a current ratio of 2 or more times,
indicating that their level of current assets was at least twice the
level of their current liabilities.  The debt-to-asset ratio reflects
a borrower's debt as a percentage of its assets--it shows the extent
to which a borrower has sufficient assets to cover all of its debt. 
Eighty-six percent of the borrowers had a generally favorable
debt-to-asset ratio of 70 percent or less, including 7 percent whose
ratio was no more than 40 percent.  The TIER shows the extent to
which a borrower can pay its annual interest expenses from its net
income.  Sixty-two percent of the borrowers had a TIER of 2 or more
times, which reflects their having at least twice the level of net
income as interest expenses.  (App.  I also provides detailed
information on electricity loans to borrowers by various incremental
ranges of these three ratios.)

The following are examples of electricity loans to borrowers that had
high levels of equity and/or profit.  A distribution borrower that
received a $4.5 million loan in 1997 had equity of $48.7 million, or
almost 11 times the loan amount, at the end of 1996; this borrower
also had $5.1 million in profit in 1996.  Another distribution
borrower had over 3 times more profit than the RUS loan amount. 
Specifically, this borrower received a $630,000 loan in 1994 and had
a profit of $2.1 million in 1993; this borrower also had $12.2
million in equity at the end of 1993.  Likewise, a power supply
borrower that received a $5.3 million loan in 1995 had $9.1 million
in profit in 1994; this borrower had $226.4 million in equity at the
end of 1994. 

Many telecommunications borrowers that obtained loans during calendar
years 1994 through June 30, 1997, also had favorable financial
characteristics.\12 Specifically, about 24 percent of the borrowers
had equity of $10 million or more at the end of the year prior to
receiving the loans, and another 65 percent had equity of between $1
million and $10 million.  In addition, about 29 percent of the
borrowers made a profit of $1 million or more in the year prior to
receiving the loans, and another 61 percent made a profit of between
$100,000 and $1 million.  Furthermore, about 80 percent of the
borrowers had a current ratio of 2 or more times, 83 percent had a
debt-to-asset ratio of 70 percent or less, and 87 percent had a TIER
of 2 or more times.  (App.  I provides detailed information on
telecommunications loans to borrowers by various incremental ranges
of equity and profit, as well as these three ratios.)

The following are examples of telecommunications loans to borrowers
that had high levels of equity and/or profit.  A borrower that
received a $1.1 million loan in 1995 had equity of about $9.2
million, or more than 8 times the loan amount, at the end of 1994;
this borrower also had $800,000 in profit in 1994.  Another borrower
that received a loan of $10.4 million in 1994 had $11.7 million in
profit in 1993; this borrower also had $82.9 million in equity at the
end of 1993. 

RUS incurs a considerable expense in providing direct loans to
financially healthy borrowers.  The principal cost is associated with
the interest rate subsidies--the interest costs associated with loans
made at rates below the rate at which RUS borrows from the
Treasury.\13 Specifically, RUS' estimated total subsidy costs (not
including its administrative costs) on direct electricity and
telecommunications loans made during fiscal years 1994 through 1996
totaled $227.5 million:  $49.6 million on hardship rate loans and
$148.9 million on municipal rate loans in the electricity program
(many more municipal rate loans than hardship rate loans were made)
and $29 million on hardship rate loans in the telecommunications
program.  We did not quantify the portion of this estimated cost that
relates to interest rate subsidies and the portion that relates to
default costs, fees, and other costs.  However, hardship rate loans
in both programs are made at interest rates that are less than RUS'
cost of acquiring funds from the Treasury.  The interest rates on
municipal rate loans are based on the rates in effect for municipal
obligations of similar maturities; the rates on these loans are also
less than RUS' cost of borrowing.  In addition, RUS has had few
repayment problems with its direct loans.  Finally, RUS estimated the
subsidy costs on the cost-of-money rate loans made during this 3-year
period at a far lower amount--$0.1 million.  These loans do not have
an interest rate subsidy because they are made at rates that match
RUS' cost of borrowing. 


--------------------
\10 RUS' automated files contained financial data supplied by 452
electricity borrowers--432 distribution and 20 power supply
borrowers--that received loans during calendar years 1994 through
June 30, 1997. 

\11 RUS refers to the profits made by electricity and
telecommunications borrowers that are nonprofit cooperatives as "net
margins."

\12 RUS' automated files contained financial data supplied by 168
telecommunications borrowers that received loans during calendar
years 1994 through June 30, 1997. 

\13 The Federal Credit Reform Act of 1990, which was included as
title 13B of the Omnibus Budget Reconciliation Act of 1990 (P.L. 
101-508, Nov.  5, 1990), changed the way post-fiscal year 1991 credit
programs are reported.  Subsidy cost under credit reform includes net
present value estimates of (1) interest costs associated with loans
made at rates below the rate at which RUS borrows from the Treasury,
(2) default costs, (3) fees, and (4) other costs and revenues. 


         FINANCIALLY HEALTHY
         BORROWERS OBTAIN
         MUNICIPAL RATE LOANS AT
         INTEREST RATES LOWER THAN
         THE RATE ON HARDSHIP
         LOANS
-------------------------------------------------------- Letter :3.2.2

Currently, some financially healthy borrowers are obtaining municipal
rate loan funds at interest rates that are less than the 5-percent
rate available on hardship loans.  More specifically, after RUS
approves a loan application, a borrower obtains loan funds by taking
advances (drawdowns) against the loan.  All advances on hardship rate
loans bear interest at 5 percent.  However, each advance on municipal
rate loans bears interest at a rate based on an index of municipal
bond rates, which can change each calendar quarter.  At the beginning
of each quarter, RUS publishes a schedule of the interest rates
applicable to advances taken during the quarter.  A borrower may take
up to eight separate advances of funds on an approved municipal rate
loan.  For each advance, the borrower selects an interest rate term,
which is the period of time used to determine the interest rate.  The
minimum interest rate term is 1 year, and the maximum is the number
of years corresponding to the final maturity date of the loan. 

By selecting shorter interest rate terms, borrowers can obtain
interest rates on advances for municipal rate loans that are less
than 5 percent.  As a result, a borrower with a municipal rate loan
can borrow at a lower cost than can a borrower with a hardship rate
loan.  Specifically, interest rates of less than 5 percent were
available on advances for municipal rate loans in 14 of the 15
quarters between January 1, 1994, and September 30, 1997.  The lowest
rate available in the 15th quarter was 5 percent.  As table 4 shows,
the interest rates in effect for July 1, 1997, through September 30,
1997, included a range of 3.875 percent for a 1-year interest rate
term to 4.875 percent for a 9-year interest rate term. 



                                Table 4
                
                  Range of Interest Rates on Municipal
                Rate Loan Advances Taken During July 1,
                    1997, Through September 30, 1997

Range of interest rate terms        Range of interest rates
----------------------------------  ----------------------------------
1 year to 9 years                   3.875 to 4.875 percent

10 and 11 years                     5.0 percent

12 years or more                    5.125 to 5.5 percent
----------------------------------------------------------------------
Source:  62 Fed.  Reg.  121 (June 24, 1997). 

At the end of the interest rate term selected by the borrower for
each advance, the borrower has the option of repaying the remaining
portion of the advance or rolling it over for a new interest rate
term.  If the borrower rolls over the remaining amount, depending on
the interest rates in effect at that time, the borrower may again
obtain an interest rate of less than 5 percent by selecting another
short term.  However, the borrower runs the risk that interest rates
may have increased from the rate initially selected. 

Many borrowers that took advances on municipal rate loans obtained
interest rates of less than 5 percent.  Specifically, 115 borrowers
took a total of 210 advances with interest rates of less than 5
percent on municipal rate loans approved during fiscal years 1994
through June 30, 1997.  The total amount of these advances was $242
million.  For example, a borrower with about 29,500 customers had
$25.1 million in equity at the end of 1994.  In February 1995, RUS
approved a $24.7 million loan, and in August 1995, the borrower took
a $12.4 million advance.  The borrower selected a 5-year interest
rate term and obtained a 4.625-percent interest rate.  Another
borrower with about 15,400 customers had $19.6 million in equity at
the end of 1995.  In April 1996, RUS approved an $11 million loan,
and in February 1997, the borrower took a $9.4 million advance.  This
borrower selected a 1-year interest rate term and obtained a
3.875-percent interest rate. 


      A GRADUATION PROGRAM COULD
      ASSIST IN MOVING FINANCIALLY
      HEALTHY DIRECT LOAN
      BORROWERS TO COMMERCIAL
      CREDIT
---------------------------------------------------------- Letter :3.3

While RUS' water and waste disposal loan program has graduation
requirements, the RE Act does not require RUS to attempt to move
financially healthy direct loan borrowers in the electricity and
telecommunications programs to commercial credit sources.  RUS
officials told us that they have not instituted a graduation
procedure because the RE Act is silent on this issue.  Because
graduation is not an integral part of RUS' operation of these two
programs, some borrowers may have direct loans longer than needed and
are therefore able to take advantage of the favorable terms that
exist with such loans.  As a result, RUS continues to incur interest
and other administrative expenses in servicing the accounts of its
financially healthy borrowers. 

Many electricity and telecommunications borrowers with outstanding
direct loans as of December 31, 1996, had favorable financial
characteristics indicating that they may be viable candidates for
having the commercial sector refinance their RUS debt.\14
Specifically, about 39 percent of the borrowers had equity of $10
million or more at the end of calendar year 1996, and another 57
percent had equity of between $1 million and $10 million.  In
addition, 36 percent of the borrowers made a profit of $1 million or
more in 1996, and another 57 percent made a profit of between
$100,000 and $1 million. 

For example, in the electricity program, one distribution borrower
with about $146,000 in outstanding direct loan debt had $27.6 million
in equity at the end of 1996 and had made $1.7 million in profit in
1996.  This borrower also had a current ratio of 2.3, debt-to-asset
ratio of 7 percent, and TIER of 534.6.  (These three ratios were
previously discussed for the electricity borrowers that received
loans during calendar years 1994 through June 30, 1997.) In the
telecommunications program, a borrower with about $1.8 million in
outstanding direct loans had over $23.4 million in equity, $4.2
million in profit, and a current ratio of 11.7, debt-to-asset ratio
of 11 percent, and TIER of 31.2. 

Although RUS has no systematic graduation program, borrowers with
direct electricity loans may initiate graduation on their own.  That
is, the RE Act allows a borrower to prepay its outstanding direct
electricity loan at a discount--the discounted prepayment amount is
the present value of a borrower's outstanding debt.  Therefore,
borrowers can graduate by seeking and obtaining other financing.  The
act also provides that a borrower that prepays at a discount cannot
obtain another direct loan from RUS for 10 years from the prepayment
date.  If eligible, however, such borrowers could obtain a guaranteed
loan. 

RUS' records show that during fiscal years 1994 through June 30,
1997, a total of 107 borrowers prepaid their direct electricity loans
at a discount.  Their total outstanding debt was more than $1.5
billion, the prepayment amount was about $1.3 billion, and the
discount was about $239 million. 

Other USDA rural credit programs generally have graduation
procedures.  For example, RUS' regulations provide for periodic
reviews of financial information submitted by direct loan borrowers
in its water and waste disposal loan program to determine if the
borrowers are likely graduation candidates.  When graduation appears
possible, a borrower or RUS may submit financial information to other
lenders to see if they would refinance the borrower's outstanding
direct loan. 


--------------------
\14 RUS' automated files contained financial data supplied by about
1,600 borrowers that had outstanding direct loans as of December 31,
1996. 


   OPPORTUNITIES EXIST TO DECREASE
   RUS' VULNERABILITY TO LOAN
   LOSSES
------------------------------------------------------------ Letter :4

From a financial standpoint, RUS has successfully operated the
telecommunications loan program, but the agency has had, and
continues to have, significant financial problems with the
electricity loan program.  Modifying certain aspects of both loan
programs could reduce the agency's vulnerability to losses on new
loans.  First, loan and indebtedness limits could be imposed. 
Currently, the loan programs generally lack limits, and, as a result,
some borrowers have obtained large-dollar loans and accumulated large
levels of debt.  Second, the repayment guarantee that RUS places on
loans made by other lenders could be reduced so that the lenders
participating in RUS' programs would share in the risk of the loans
they make.  Currently, RUS guarantees 100 percent of other lenders'
loans.  However, because all guaranteed loans in recent years have
been made by the FFB, the risk to the federal government as a whole
would not be reduced if the FFB continues to be the sole source of
loan funds.  Finally, policies could be strengthened to ensure that
additional loans are not made to borrowers that are delinquent or
that have caused RUS prior losses.  While RUS did not make or
guarantee loans to such borrowers during the period covered by our
review, there are no policies to prevent loans to such borrowers from
being made in the future. 


      ELECTRICITY PROGRAM
      CONTINUES TO BE VULNERABLE
      TO LOAN LOSSES
---------------------------------------------------------- Letter :4.1

During fiscal years 1994 through June 30, 1997, RUS wrote off the
debt of five electricity loan borrowers; these write-offs totaled
more than $1.7 billion.  In February 1994, RUS wrote off about $14
million of debt for a distribution borrower.  In addition, RUS wrote
off debt for four power supply borrowers:  about $52 million in
August 1995, $982 million in September 1996, $502 million in October
1996, and $165 million in June 1997.  The majority of these loan
losses resulted from investments in nuclear power plants that were
either constructed at costs substantially higher than initial
projections or abandoned during the construction phase.  No
borrowers' telecommunications loans were written off during this
period. 

Additionally, a small number of borrowers still in the electricity
program are experiencing serious financial difficulties.  These
difficulties expose RUS to the risk of more write-offs in the future. 
As of June 30, 1997, RUS had three borrowers that were delinquent (at
least 30 days past due) on scheduled loan payments totaling over $1.2
billion:  A distribution borrower was past due on payments of $8.5
million, and two power supply borrowers were past due on payments of
$55.2 million and about $1.2 billion, respectively.  At the end of
June 1997, RUS also had 10 other borrowers--all power supply
borrowers--that were experiencing financial distress:  They were in
bankruptcy, were likely to default on repaying the loans, or had
formally requested debt relief.  These borrowers owed a total
principal of about $7.7 billion on their RUS loans:  Six owed between
$100 million and $500 million each, two owed between $500 million and
$1 billion each, and two owed more than $1 billion each.  As we
reported in April 1997, these borrowers' problems generally stem from
their investments in nuclear-generating plants that were completed
late and over budget or in coal-fired generating plants that were
built to satisfy anticipated industrial growth that did not occur. 
On the other hand, no borrowers with outstanding RUS
telecommunications loans were delinquent or otherwise financially
stressed. 

Furthermore, our April 1997 report stated that RUS' electricity loan
portfolio faces the possibility of additional financial stress
because of increasing competition among the providers of
electricity.\15

Competition in the wholesale electricity market is increasing as a
result of legislation that was enacted in the early 1990s, such as
the Energy Policy Act of 1992 (P.L.  102-486, Oct.  24, 1992).  The
act encouraged additional wholesale suppliers to enter the
electricity market and provided greater access to other utilities'
transmission lines.  Additionally, the industry in which RUS'
telecommunications loan borrowers operate is changing.  In
particular, there have been rapid advances in technology and changes
in the legislative environment, such as the Telecommunications Act of
1996 (P.L.  104-104, Feb.  8, 1996).  These factors could work to
either the betterment or the detriment of the borrowers that have
telecommunications loans. 


--------------------
\15 We also reported similar results in Federal Electricity
Activities:  The Federal Government's Net Cost and Potential for
Future Losses (GAO/AIMD-97-110, Sept.  19, 1997). 


      LOAN AND DEBT LIMITS COULD
      REDUCE RUS' VULNERABILITY TO
      LOSSES
---------------------------------------------------------- Letter :4.2

The RE Act does not limit the amount of an electricity or a
telecommunications loan that a borrower may receive or the amount of
outstanding indebtedness that a borrower may accumulate through
multiple loans.  RUS' vulnerability to losses on future loans in the
operation of these two credit programs could be reduced if limits
were imposed. 

RUS has set loan limits only for direct telecommunications loans. 
Specifically, the maximum amount of a hardship rate
telecommunications loan to any one borrower is the lesser of (1) up
to 10 percent of the annual loan appropriation or (2) $7 million, an
operational level set administratively by the agency in fiscal year
1996.  RUS set this maximum amount in order to distribute its limited
funds among the largest number of qualified borrowers.  Similarly, to
ensure that its cost-of-money rate and RTB loan funds are broadly
dispersed, on September 5, 1997, RUS published a change to its
regulations, providing a limit of 10 percent of the annual loan
appropriation to any single borrower.  This change became effective
on October 6, 1997. 

RUS officials in both programs told us that they had not set limits
for the other loan types--all electricity loans and guaranteed
telecommunications loans--or limits on the amount of debt that a
borrower can accumulate because the RE Act does not require limits. 
Electricity program officials added that they believe they need to be
able to provide an applicant with the level of funds needed to
support the proposed project. 

The general lack of loan limits has allowed RUS to make large-dollar
loans to some borrowers.  Specifically, while most electricity loans
approved during fiscal years 1994 through June 30, 1997, were for
less than $10 million, a total of 77 loans, or about 14 percent of
the loans, were for $10 million or more.  These 77 loans totaled
about $1.6 billion, or 51.7 percent of the amount for all loans
approved during the period.  Similarly, while most telecommunications
loans were made for less than $10 million, a total of 36 loans, or
about 9.2 percent, were for $10 million or more.  These 36 loans
totaled about $653 million, or 36.5 percent of the amount for all
loans approved during the period.  (App.  II provides detailed
information on loans to borrowers by loan size.)

In addition to the general absence of limits on individual loans,
borrowers do not have any limits on the total amount of debt that
they can accumulate through multiple loans.  As a result, some
borrowers owe a high dollar amount of outstanding principal.  For
example, 128 borrowers with outstanding direct loans in the
electricity program as of June 30, 1997, each owed more than $20
million; one owed about $122 million.  In the telecommunications
program, 38 borrowers with outstanding direct loans each owed more
than $20 million; one owed over $100 million. 

Loan and debt limits exist in some, but not all, of USDA's rural
credit programs.  For example, USDA has loan and debt limits on its
farm ownership, operating, and emergency disaster loans and on its
single-family housing loans.  Conversely, it has no limits on loans
in other programs, such as those made in the water and waste disposal
loan program. 


      A LOWER REPAYMENT GUARANTEE
      COULD REDUCE THE LEVEL OF
      RUS' VULNERABILITY TO LOSSES
---------------------------------------------------------- Letter :4.3

The RE Act allows RUS to guarantee repayment on electricity and
telecommunications loans made by the FFB or other lenders.  The act
also requires that the guarantee be 100 percent.  As of June 30,
1997, RUS had about $19.8 billion in guaranteed loan debt on which it
has full risk exposure.  Almost $14 billion of this amount was
outstanding principal on original loans with RUS guarantees, and
about $5.8 billion was on restructured loans.  The lenders that made
the loans--the FFB and a few commercial lenders--have no risk
exposure.  Providing a guarantee of less than 100 percent could
reduce RUS' vulnerability to losses from these two credit programs. 
However, because all guaranteed loans in recent years have been made
by the FFB, the risk to the federal government as a whole would not
be reduced if the FFB continues to be the sole source of loan funds. 

According to FFB officials, providing a guarantee of less than 100
percent could cause the FFB to stop making electricity and
telecommunications loans because it only participates in lending
programs when there is full security on its loans.  Even if the
guarantee remains unchanged, however, a provision in the recently
enacted Balanced Budget Act of 1997 (P.L.  105-33, Aug.  5, 1997) may
affect the FFB's willingness to continue making loans to electricity
and telecommunications borrowers.  The act provides that the
surcharge on FFB loans, which is one-eighth of 1 percent over the
Treasury's cost of borrowing, is to be deposited in the RUS account
held by the Treasury and used to finance the cost of these two loan
programs.  FFB officials told us that this surcharge has generally
offset its administrative cost of participating in RUS' programs. 
The act also provides that the FFB can require RUS to reimburse it
for the administrative expenses incurred that are attributable to the
loans. 

All loans that received RUS' guarantees during fiscal years 1994
through June 30, 1997, were made by the FFB.  While the RE Act gives
the borrower the option of selecting the FFB or a commercial lender,
RUS officials told us that borrowers have selected the FFB because it
offers lower interest rates.  According to FFB officials, some
borrowers also turn to the FFB because the large amount of money they
need is probably more than commercial lenders would provide.  While
this may be true, our analysis of guaranteed loans made by the FFB
and commercial lenders showed that some commercial lenders provided
large-dollar loans and that the FFB made a number of small-dollar
loans that could have been funded by commercial lenders.  For
example, as of June 30, 1997, 10 power supply borrowers had
outstanding guaranteed loans from commercial lenders that had been
made before the start of fiscal year 1994--six of these had received
loans for more than $100 million each.  In addition, even though the
FFB is thought of as a high-dollar lender, RUS' records showed that 9
of the 36 electricity loans and 20 of the 29 telecommunications loans
made by the FFB during fiscal years 1994 through June 30, 1997, were
for less than $5 million. 

USDA has less risk exposure when guaranteeing loans in other rural
credit programs, such as farm ownership and operations, single-family
housing, community facilities, business and industry, and water and
waste disposal loans.  With each of these loan programs, the maximum
allowable loan guarantee is generally 90 percent.  In some cases,
such as RUS' water and waste disposal loans, the guarantees are
usually at 80 percent. 


      ESTABLISHING POLICIES TO
      PRECLUDE LOANS TO CERTAIN
      RISKY BORROWERS WOULD REDUCE
      FUTURE EXPOSURE TO LOSS
---------------------------------------------------------- Letter :4.4

A borrower that is delinquent on an electricity or a
telecommunications loan is not prohibited by the RE Act or by RUS'
regulations from obtaining an additional loan.  Likewise, a borrower
that has caused RUS to incur loan losses is not prohibited from
obtaining another loan.  Our review of RUS' loan approval records
showed that no delinquent borrower or one that caused prior losses
received loans during fiscal years 1994 through June 30, 1997.  While
RUS did not make or guarantee loans to such borrowers during this
period, we believe that the agency's ability to do so is an area of
concern that could, if loans were made, contribute to future exposure
to loss.  Prohibiting loans to such risky borrowers is a way of
ensuring that RUS does not add to its vulnerability in operating
these two credit programs. 

RUS has had few delinquent borrowers and borrowers that have caused
it to incur losses in recent years.  Specifically, as of June 30,
1997, three electricity loan borrowers were delinquent; no
telecommunications loan borrowers were delinquent.  Additionally,
during fiscal years 1994 through June 30, 1997, RUS wrote off the
debt of five electricity loan borrowers, which resulted in losses to
RUS; no telecommunications borrowers had loans written off. 

RUS' electricity and telecommunications loan officials told us that a
borrower has to be in good standing on its existing debts in order to
obtain a RUS loan.  An official in the telecommunications program
said that it would be highly unlikely for an additional loan to be
made to a borrower that had caused a loss because RUS would have
pursued foreclosure proceedings against the borrower and would have
required disposal of assets as a part of the settlement that resulted
in the loss.  Nonetheless, officials in both programs acknowledged
that their regulations do not prohibit loans to delinquent borrowers
or to those that have caused prior losses. 

On September 26, 1997, RUS published a change to its electricity loan
regulations that, rather than denying loans to borrowers that have
had debts written off, provides guidance on what such borrowers need
to provide as a condition for obtaining another loan.  RUS stated
that in considering a loan request from a borrower whose debt had
been settled, including debt written off, the borrower would be
required to demonstrate evidence of financial support for the amount
of the requested loan.  This support could include increasing the
level of the applicant's equity or a guarantee of debt repayment,
either from the applicant's members (in the case of a power supply
borrower) or from a third party. 

Prior to the Federal Agriculture Improvement and Reform Act of 1996
(P.L.  104-127, Apr.  4, 1996), USDA provided some loans in another
rural credit program--farm loans--to delinquent borrowers and to
those whose prior performance resulted in losses for USDA.  However,
because of concerns about the fiscal prudence of making loans to such
borrowers, coupled with the high level of delinquencies and losses
that USDA had experienced, the Congress enacted provisions in that
act that generally prohibit farm loans to such borrowers. 


   COMMERCIAL LENDING FOR RURAL
   ELECTRICITY AND
   TELECOMMUNICATIONS PURPOSES
------------------------------------------------------------ Letter :5

RUS is not the only provider of credit to rural utilities.  Two
commercial lenders have a significant level of lending activity for
rural electricity and telecommunications purposes:  (1) the National
Rural Utilities Cooperative Finance Corporation (CFC) and its various
affiliated lending organizations and (2) the Farm Credit System
(FCS).  These two commercial lenders had a combined total of $13.1
billion in outstanding principal on loans for rural electricity and
telecommunications purposes as of June 30, 1997. 

CFC provides electricity loans to its owners, such as distribution
cooperatives and power suppliers.  CFC's loans parallel RUS'
lending--that is, loans are made for financing the construction,
improvement, and repair of electricity systems.  Loans are also made
for other purposes, such as financing operations and business
activities related to the borrowers' electricity operations,
including acquiring office buildings and equipment.  One of CFC's
affiliates--the Guaranty Funding Cooperative--made electricity loans
to CFC's owners for refinancing their outstanding FFB debt.  Another
affiliate--the Rural Telephone Finance Cooperative (RTFC)--makes
loans to rural telephone systems that are eligible to participate in
RUS' telecommunications program.  While RTFC finances some
infrastructure development, most of its financing is for activities
that RUS is not involved in, such as cellular telephone operations,
or is involved in to only a limited extent, such as the acquisition
of local telephone exchanges. 

FCS lends primarily to agricultural producers and agricultural
cooperatives.  However, two FCS banks--CoBank and the St.  Paul
(Minnesota) Bank for Cooperatives--also make loans to rural
utilities.  CoBank is FCS' national bank for lending to rural utility
systems and cooperatives.  The St.  Paul Bank, although it also has a
national charter, provides similar lending to borrowers located
primarily in four upper midwestern states (Michigan, Minnesota, North
Dakota, and Wisconsin).  Both banks provide electricity and
telecommunications loans to RUS' borrowers, rural utility systems
that are eligible to borrow from RUS, and the subsidiary
organizations of these borrowers or other eligible entities.  As with
CFC and RTFC, the loans from these banks parallel RUS' infrastructure
lending and are also made for other activities that RUS is not
involved in or is involved in to only a limited extent. 

These lenders and their affiliated organizations had about $10.4
billion in outstanding principal on electricity loans and about $2.8
billion in outstanding principal on telecommunications loans as of
June 30, 1997.  As table 5 shows, CFC's loans accounted for the
greatest portion of this amount. 



                                Table 5
                
                   Amount of Outstanding Principal on
                Electricity and Telecommunications Loans
                 Held by Various Commercial Lenders, as
                            of June 30, 1997

                         (Dollars in millions)


                                                    Telecommunications
Lender                           Electricity loans               loans
------------------------------  ------------------  ------------------
CFC\a                                     $7,766.4                  $0
RTFC                                             0             1,123.2
CoBank                                     2,144.5             1,292.9
St. Paul Bank                                454.2               336.0
======================================================================
Total                                    $10,365.1            $2,752.1
----------------------------------------------------------------------
\a Includes loans made by CFC to distribution and power supply
systems and loans made by CFC's Guaranty Funding Cooperative for
refinancing FFB debt. 

Source:  Financial reports provided by each lender to GAO. 

Additionally, the information provided to us by each of these lenders
shows that their electricity and telecommunications portfolios were
generally financially sound.  For example, less than 1 percent of
CFC's $7.8 billion electricity loan portfolio was owed by delinquent
borrowers.  Furthermore, since its inception in 1969 through the end
of May 1997, CFC wrote off a total of $28.4 million in electricity
loans.  According to CFC and RTFC officials, no borrowers with RTFC
telecommunications loans were delinquent, and no such loans had been
written off since RTFC's inception in 1987. 

CoBank and the St.  Paul Bank had similar experiences.  Specifically,
all borrowers with electricity and telecommunications loans were
current on their loan repayment.  In addition, according to their
officials, CoBank has not written off any electricity or
telecommunications loans in recent years, and the St.  Paul Bank has
never written off such a loan. 


   CONCLUSIONS AND OPTIONS FOR
   CONGRESSIONAL CONSIDERATION
------------------------------------------------------------ Letter :6

RUS has had a long and successful role in contributing to the
development of the utility infrastructure in the nation's rural
areas.  However, RUS is now at a significant crossroads.  The size of
the population in the areas served by many of RUS' borrowers has
changed over time, as have the financial resources available to
borrowers.  Furthermore, spurred by recent legislative and/or
technological changes, increasing competition in the electricity and
telecommunications industries may have an impact on many of the
agency's borrowers.  We recognize that difficult decisions are
necessary to improve the effectiveness and reduce the cost of these
loan programs as well as to decrease RUS' vulnerability to losses in
operating the programs.  It may be hard to accomplish all these
objectives simultaneously. 

Recognizing that there would be trade-offs with any changes to RUS'
electricity and telecommunications loan programs, the Congress has a
number of options that it could consider in its deliberations on the
future of RUS' programs, including the following: 

  -- To ensure that RUS' assistance is targeted to rural areas with
     sparse populations, the Congress could apply a population
     threshold test to the service areas of borrowers who apply for
     any RUS loan--not only for initial loans but also for any
     subsequent loans. 

  -- To target subsidized direct loans to borrowers in need of RUS'
     assistance and to control program costs, the Congress could make
     financial tests a part of the eligibility criteria for the
     various types of direct loans in both programs.  Additionally,
     cost-of-money rate loans could be established in the electricity
     program for borrowers that do not meet the financial tests for
     municipal rate loans.  Furthermore, the interest rates for
     municipal rate loans and cost-of-money rate loans, if
     established in the electricity program, could be set no lower
     than the rate on a hardship rate loan.  Finally, a test could be
     established to require a borrower to seek commercial credit as a
     condition for RUS' assistance. 

  -- To assist in moving financially healthy borrowers with direct
     loans to the commercial sector, the Congress could have RUS
     establish a graduation program to require borrowers to attempt
     to have their outstanding direct loans refinanced by commercial
     credit sources. 

  -- To limit the level of the agency's vulnerability to losses, the
     Congress could set limits on the total amount of money that RUS
     provides or guarantees on any one loan and on the total amount
     of outstanding debt that any one borrower can accumulate through
     a combination of loans. 

  -- To further control RUS' vulnerability to losses on guaranteed
     loans, the Congress could set the repayment provision at less
     than 100 percent. 

  -- To ensure that RUS does not increase its vulnerability to losses
     by making loans to certain risky borrowers, the Congress could
     provide guidance specifying that a borrower is ineligible for a
     direct or a guaranteed loan if the borrower is delinquent or if
     the borrower has caused RUS to incur a prior loan loss. 


   AGENCY COMMENTS AND OUR
   EVALUATION
------------------------------------------------------------ Letter :7

We provided a draft of this report to USDA for its review and
comment.  In summary, USDA expressed concern over several of the
options presented in the report, particularly those involving
targeting loans, graduating borrowers, and limiting borrowers' loan
and debt levels.  In regard to targeting loans, USDA noted, among
other things, that a borrower serving a combination of rural and
nonrural customers is probably financially stronger than a borrower
that does not serve a diverse customer base.  We agree.  Our point,
however, is that some borrowers serve large numbers of customers,
including some in nonrural areas, and that the Congress may want to
target loans to borrowers who serve rural areas more exclusively. 
USDA's discomfort over options involving graduating borrowers and
limiting borrowers' loan and debt levels reflects, in part, concern
over possible detrimental impacts that these options may have on
borrowers or their service to rural areas.  It is difficult to
predict the extent to which USDA's concerns would be realized if
these options were to be put into effect.  However, we believe that
the possible impacts to service in rural areas should be considered
in developing specific implementation plans for these or any other
options that the Congress may choose to act upon. 

Overall, USDA's comments provide additional perspectives on issues
discussed in the report and highlight the difficulties that face
policymakers as they consider options for improving the effectiveness
and efficiency while reducing the cost to the government of RUS'
electricity and telecommunications loan programs.  A complete
presentation of USDA's comments and our response is provided in
appendix III. 


---------------------------------------------------------- Letter :7.1

We performed our review of the operations of RUS' electricity and
telecommunications loan programs from May 1997 through December 1997
in accordance with generally accepted government auditing standards. 
Our scope and methodology are discussed in appendix IV. 

As agreed, unless you publicly announce its contents earlier, we plan
no further distribution of this report until 14 days from the date of
this letter.  At that time, we will send copies of this report to the
appropriate Senate and House committees; interested Members of
Congress; the Secretary of Agriculture; the Administrator of RUS; the
Director, Office of Management and Budget; and other interested
parties.  We will also make copies available to others upon request. 

Please call me at (202) 512-5138 if you or your staff have any
questions.  Major contributors to this report are listed in appendix
V. 

Robert A.  Robinson
Director, Food and
 Agriculture Issues


FINANCIAL INFORMATION ON BORROWERS
THAT RECEIVED LOANS IN RECENT
YEARS
=========================================================== Appendix I

This appendix contains information on the financial characteristics
of borrowers that obtained electricity and telecommunications loans
during calendar years 1994 through June 30, 1997.\1 Table I.1 shows
that the overwhelming majority of the borrowers had equity of $1
million or more at the end of the year prior to receiving the loans. 
Table I.2 shows that most of these borrowers made a profit of at
least $100,000 in the year prior to receiving the loans.  Tables I.3,
I.4, and I.5 show that the current ratios, debt-to-asset ratios, and
times-interest-earned ratios of the borrowers were generally
favorable prior to receiving the loans. 



                                        Table I.1
                         
                                Number of Electricity and
                            Telecommunications Borrowers That
                           Obtained Loans During Calendar Years
                         1994 Through June 30, 1997, by Range of
                           Equity Prior to Receiving the Loans

                                              Range of equity
                   ----------------------------------------------------------------------
                                                                          $10
                                             $100,000  $1 million  million to
                               $0 to less     to less     to less   less than        $100
                    Less than        than     than $1    than $10        $100     million
Type of borrower           $0    $100,000     million     million     million     or more
-----------------  ----------  ----------  ----------  ----------  ----------  ----------
Electricity
 distribution               1           1           2         194         229           5
 borrowers
Electricity power
 supply borrowers           1           0           0           0          16           3
Telecommunication
 s borrowers                1           1          17         109          40           0
=========================================================================================
Total                       3           2          19         303         285           8
-----------------------------------------------------------------------------------------
Note:  Equity, or net worth, is the difference between assets and
liabilities and includes capital stock and/or patronage capital,
memberships, and capital credits. 

Source:  GAO's analysis of RUS' automated databases, which contain
financial information submitted by electricity and telecommunications
borrowers. 



                                        Table I.2
                         
                                Number of Electricity and
                            Telecommunications Borrowers That
                           Obtained Loans During Calendar Years
                         1994 Through June 30, 1997, by Range of
                           Profit Prior to Receiving the Loans

                                              Range of profit
                   ----------------------------------------------------------------------
                                                                          $10
                                             $100,000  $1 million  million to
                               $0 to less     to less     to less   less than        $100
                    Less than        than     than $1    than $10        $100     million
Type of borrower           $0    $100,000     million     million     million     or more
-----------------  ----------  ----------  ----------  ----------  ----------  ----------
Electricity
 distribution              12          13         246         158           3           0
 borrowers
Electricity power
 supply borrowers           0           0           2          16           2           0
Telecommunication
 s borrowers                4          12         103          46           3           0
=========================================================================================
Total                      16          25         351         220           8           0
-----------------------------------------------------------------------------------------
Note:  Profit, or net income, is the difference between revenues and
expenses and includes operating income plus or minus nonoperating
income, capital credits, and fixed charges (e.g., interest on funded
debt and other interest expenses).  RUS refers to the profits made by
electricity and telecommunications loan borrowers that are nonprofit
cooperatives as "net margins" and to the losses as "deficits in net
margins."

Source:  GAO's analysis of RUS' automated databases, which contain
financial information submitted by electricity and telecommunications
borrowers. 



                               Table I.3
                
                       Number of Electricity and
                   Telecommunications Borrowers That
                  Obtained Loans During Calendar Years
                1994 Through June 30, 1997, by Range of
                  Current Ratio Prior to Receiving the
                                 Loans

                                    Range of current ratio
                        ----------------------------------------------
                                                 Two to up
                         Less than       Up to     to five     Five or
Type of borrower          one time   two times       times  more times
----------------------  ----------  ----------  ----------  ----------
Electricity
 distribution                   73         188         145          26
 borrowers
Electricity power
 supply borrowers                1           5          14           0
Telecommunications              15          19          83          51
 borrowers
======================================================================
Total                           89         212         242          77
----------------------------------------------------------------------
Note:  The current ratio is a measure showing the extent to which a
borrower has sufficient current assets to cover its current
liabilities.  It is computed by dividing a borrower's current assets
by current liabilities. 

Source:  GAO's analysis of RUS' automated databases, which contain
financial information submitted by electricity and telecommunications
borrowers. 



                               Table I.4
                
                       Number of Electricity and
                   Telecommunications Borrowers That
                  Obtained Loans During Calendar Years
                1994 Through June 30, 1997, by Range of
                 Debt-to-Asset Ratio Prior to Receiving
                               the Loans

                                 Range of debt-to-asset ratio
                        ----------------------------------------------
                               100                                  40
                           percent    71 to 99    41 to 70     percent
Type of borrower           or more     percent     percent     or less
----------------------  ----------  ----------  ----------  ----------
Electricity
 distribution                    1          45         353          33
 borrowers
Electricity power
 supply borrowers                1          15           4           0
Telecommunications               1          28         113          26
 borrowers
======================================================================
Total                            3          88         470          59
----------------------------------------------------------------------
Note:  The debt-to-asset ratio shows the extent to which a borrower
has sufficient assets to cover all of its debt.  It is computed by
dividing a borrower's total debt by total assets. 

Source:  GAO's analysis of RUS' automated databases, which contain
financial information submitted by electricity and telecommunications
borrowers. 



                               Table I.5
                
                       Number of Electricity and
                   Telecommunications Borrowers That
                  Obtained Loans During Calendar Years
                1994 Through June 30, 1997, by Range of
                  Times-Interest-Earned Ratio Prior to
                          Receiving the Loans

                             Range of times-interest-earned ratio
                        ----------------------------------------------
                                                 Two to up
                         Less than       Up to     to five  Five times
Type of borrower          one time   two times       times     or more
----------------------  ----------  ----------  ----------  ----------
Electricity
 distribution                   11         146         249          26
 borrowers
Electricity power
 supply borrowers                0          17           1           2
Telecommunications               4          18          95          51
 borrowers
======================================================================
Total                           15         181         345          79
----------------------------------------------------------------------
Note:  The times-interest-earned ratio shows the extent to which a
borrower can pay its annual interest expenses from its net income. 
It is computed by dividing the sum of a borrower's total net income
and interest on debt by interest on debt. 

Source:  GAO's analysis of RUS' automated databases, which contain
financial information submitted by electricity and telecommunications
borrowers. 


--------------------
\1 This appendix covers borrowers that obtained loans from the Rural
Utilities Service (RUS) during calendar years 1994 through June 30,
1997, and for which RUS' databases contained financial information
for the year prior to the one in which the loans were made. 


INFORMATION ON THE VALUE OF LOANS
MADE IN RECENT YEARS
========================================================== Appendix II

This appendix contains information on the dollar value of electricity
and telecommunications loans made to borrowers during fiscal years
1994 through June 30, 1997.  Table II.1 shows that while most of the
926 loans approved during this period were made for less than $10
million, 113 loans were for $10 million or more. 



                                        Table II.1
                         
                                Number of Electricity and
                            Telecommunications Loans Approved,
                         Fiscal Years 1994 Through June 30, 1997,
                                 by Range of Loan Amounts

                                           Range of loan amounts
                   ----------------------------------------------------------------------
                                                              $10         $20
                               $1 million  $5 million  million to  million to
                                  to less     to less   less than   less than         $50
Program and loan    Less than     than $5    than $10         $20         $50     million
type               $1 million     million     million     million     million     or more
-----------------  ----------  ----------  ----------  ----------  ----------  ----------
Electricity
Direct hardship            12          68          11           5           1           0
 rate
Direct municipal           43         232          76          42           8           0
 rate
Guaranteed                  2           7           6          10           6           5
=========================================================================================
Total                      57         307          93          57          15           5
Telecommunication
 s
Direct hardship             3          18          27           1           0           0
 rate
Direct cost-of-            26          82          28          18           3           0
 money rate
Direct Rural               39          79          30           8           1           0
 Telephone Bank
Guaranteed                 13           7           4           2           1           2
=========================================================================================
Total                      81         186          89          29           5           2
-----------------------------------------------------------------------------------------
Source:  GAO's analysis of RUS' loan records. 




(See figure in printed edition.)Appendix III
COMMENTS FROM THE U.S.  DEPARTMENT
OF AGRICULTURE
========================================================== Appendix II



(See figure in printed edition.)



(See figure in printed edition.)



(See figure in printed edition.)



(See figure in printed edition.)



(See figure in printed edition.)



(See figure in printed edition.)



(See figure in printed edition.)


The following are GAO's comments on the U.S.  Department of
Agriculture's (USDA) letter dated December 18, 1997. 

GAO COMMENTS

1.  The draft reviewed by USDA contained no GAO recommendations;
rather, as requested by the Senate Committee on Agriculture,
Nutrition, and Forestry, it presented several options for
congressional consideration and recognized that there would be
tradeoffs for any option implemented. 

2.  Our report referenced the 7 U.S.C.  930 provision in a relatively
narrowly focused discussion of how an applicant's financial health
affects its eligibility to obtain RUS' loans.  As a result, we had no
reason to discuss the other parts of the provision that dealt with
broader policy statements on the availability of RUS' loan funds.  We
therefore continue to believe that we cite the provision
appropriately and that it indicates congressional intent that
borrowers in both programs should be encouraged and assisted to use
their own resources or seek credit through commercial sources to
satisfy their needs. 

3.  We believe that changes in the composition of a borrower's
service territory should be considered in determining an applicant's
eligibility to participate in RUS' loan programs if the Congress is
interested in targeting loans primarily to rural areas.  We agree
with the benefits of diversity cited by USDA--that a combination of
rural and nonrural customers reduces risk and contributes to
financial health.  Our point is that the Congress may want to
consider clarifying the level at which RUS' loans are primarily
benefiting nonrural rather than rural customers. 

4.  We appreciate USDA's concerns about the changing environment in
which RUS' borrowers operate.  We recognize in the report's
discussion on the continuing vulnerability to loan losses that
competition may affect borrowers. 

5.  RUS uses net margins to refer to the bottom-line income of its
cooperative borrowers; we recognize RUS' use of this term in footnote
11 in the report.  Rather than use this term, however, we use profits
(net income), which is more widely recognized.  Profits, or net
margins, and losses, or deficits in net margins, are calculated in
the same manner.  That is, operating revenue less operating expenses
plus or minus nonoperating income/expenses, other fixed charges
(including interest expense), and other income statement adjustments. 
We also recognize that a cooperative's distribution of
profits/margins to its members has the effect of reducing the rates
that the members pay. 

6.  Our intention in providing information on customer populations
was to show that some borrowers serve large populations--a fact that
USDA acknowledges in its response.  While most RUS borrowers may be
serving sparsely populated areas, as USDA points out, our purpose was
to report on customer populations and identify instances in which
borrowers appear to be serving areas that are not sparsely populated. 
Regarding the example of a telecommunications loan borrower,
documentation in RUS' files stated that the loan was intended to
benefit the borrower's entire service area--not just its rural
customers. 

7.  Our draft report did not suggest that customer size be a
criterion for program eligibility.  In fact, the report acknowledges
that customer service statistics are only an indicator of population
density, which, in our view, should be considered if the Congress
wants to target program benefits to rural areas. 

8.  The draft reviewed by USDA did not discuss the extent to which
borrowers invested their own funds or sought nonfederal financing. 
Rather, it discussed the levels of equity, profit, and various ratios
for borrowers that obtained loans during calendar years 1994 through
June 30, 1997. 

9.  The draft reviewed by the Department defines equity as total
assets less total liabilities--it did not state nor attempt to imply
that equity is only cash. 

10.  We recognize that there is some judgment involved in determining
benchmarks for financial ratios.  This is why we presented data on
the number of RUS' borrowers having debt-to-asset ratios of 70
percent or less as well as those having debt-to-asset ratios of no
more than 40 percent. 

11.  We agree.  As the draft reviewed by USDA stated, the current
ratio is a measure that shows the extent to which a borrower has
sufficient current assets to cover its current liabilities.  As such,
it is one measure of the financial health of borrowers. 

12.  The draft reviewed by USDA stated that the discounted prepayment
amount is the present value of a borrower's outstanding debt. 

13.  The borrower we use as an example in the report is one of many
borrowers that appear to be candidates for commercial lenders to
refinance their outstanding direct loans.  As the report states,
about 39 percent of RUS' electricity and telecommunications borrowers
had equity of $10 million or more at the end of 1996.  In addition,
about 36 percent made a profit of $1 million or more in 1996. 

14.  We appreciate USDA's concerns about requiring borrowers to
refinance their direct loans with private sector financing during a
time in which the environment that the borrowers operate in is
changing.  However, the fact is that some borrowers appear to have
such highly favorable financial characteristics that we believe a
graduation program is a logical step in terms of assisting them to
move to private sector financing. 

15.  The draft reviewed by USDA recognized that the
Telecommunications Act of 1996 and the Energy Policy Act of 1992
could have either positive or negative impacts on RUS' borrowers and
on the quality of the agency's portfolio.  This issue is covered in
the discussion on the continuing vulnerability to loan losses. 

16.  We agree that the telecommunications loan program has been
operated very successfully.  The draft reviewed by USDA stated that
there were no telecommunications loans written off during the period
covered by our review and that no telecommunications loans were
delinquent as of June 30, 1997.  We have revised the report to
reflect USDA's comment concerning the losses in the electricity loan
program. 

17.  USDA states that it does not agree that loan limits will reduce
RUS' vulnerability to loan losses.  We believe that limits would
reduce the agency's vulnerability because individual borrowers would
be restricted to a maximum amount on any one loan and on the level of
debt that they could accumulate through multiple loans. 

18.  The extent to which these problems occur would, of course,
depend on how much of a limit was placed on loans and debt.  These
limits could be established with the intent of balancing
consideration for minimizing risk as well as optimizing operational
efficiency. 

19.  We do not agree with USDA that the September 1997 rule
adequately addresses our concerns.  The rule allows borrowers whose
accounts are settled, including a write-off of debt, to obtain
additional loans, rather than prohibiting such borrowers from being
eligible for loans. 


OBJECTIVES, SCOPE, AND METHODOLOGY
========================================================== Appendix IV

In April 1997, we reported on the financial condition of RUS'
multibillion-dollar portfolio of electricity and telecommunications
loans.  Subsequently, the Chairman and the Ranking Minority Member of
the Senate Committee on Agriculture, Nutrition, and Forestry
requested that we conduct a follow-up study focusing on RUS' program
operations, specifically looking to identify ways to (1) make the
electricity and telecommunications loan programs more effective and
less costly for the government and (2) decrease RUS' vulnerability to
loan losses.  They also requested that we compile loan information on
commercial lenders that have a significant level of lending for rural
electricity and telecommunications purposes. 

To compile information on loans and outstanding debt, we used RUS'
automated loan records and various loan reports.  We did not adjust
the outstanding loan amounts to reflect the allowance for losses that
RUS includes in its financial statements or assess the adequacy of
reserves on the loans. 

To address our first two objectives--ways to make the loan programs
more effective and less costly for the government and to decrease
RUS' vulnerability to loan losses--we interviewed officials at RUS'
headquarters, including the Assistant Administrators and Deputy
Assistant Administrators for Electricity and Telecommunications.  We
reviewed in detail the Rural Electrification Act of 1936, as amended,
and its legislative history; and RUS' implementing regulations and
other program operating guidance.  We conducted extensive analyses of
information in RUS' various automated records.  First, we identified
borrowers from the automated records that received loans in calendar
years 1994 through June 30, 1997, and then matched those borrowers
with the agency's databases containing borrower-submitted operational
and financial information for the year prior to the one in which the
loans were made.  In addition, we categorized the borrowers that
received loans by various incremental ranges of loan amounts. 
Second, we analyzed borrowers' financial data at the end of 1996 to
determine the financial characteristics of borrowers with outstanding
direct loans.  Third, we analyzed information covering borrowers that
prepaid their direct electricity loans at a discount during fiscal
years 1994 through June 30, 1997.  We also interviewed RUS' officials
in Oklahoma and Missouri, and an electricity borrower and a
telecommunications borrower in each of those two states. 

The information on the subsidy costs of the programs for fiscal years
1994 through 1996 was obtained from USDA reports.  The information on
interest rates that were available on municipal rate loan advances
from January 1, 1994, through September 30, 1997, was obtained from
RUS' quarterly publications in the Federal Register and/or from other
RUS announcements.  We also extracted from RUS' loan portfolio
databases the information on borrowers that obtained advances with
interest rates of less than 5 percent. 

We interviewed Federal Financing Bank (FFB) officials to obtain
information on the bank's participation in RUS' loan programs.  We
reviewed the FFB's annual financial statements and independent
auditor's reports for fiscal years 1994 through 1996.  We also
reviewed the provisions in the Balanced Budget Act of 1997 that
relate to the FFB's participation in RUS' programs. 

We obtained the information on problem borrowers, including borrowers
that caused losses, from interviews of RUS officials, including those
in the electricity program; testimony by RUS' Administrator at a July
8, 1997, hearing before the Senate Committee on Agriculture,
Nutrition, and Forestry; and the agency's financial reports and
automated records. 

To address our third objective--information on commercial lenders
that have a significant level of lending for rural electricity and
telecommunications--we interviewed RUS' loan program officials and
FFB officials.  We also interviewed officials with each of the
private lending institutions that we identified--the National Rural
Utilities Cooperative Finance Corporation, Rural Telephone Finance
Cooperative, CoBank, and the St.  Paul Bank for Cooperatives--and
reviewed documents they provided that describe their organizations
and lending activities, and, as of June 30, 1997, the extent of their
outstanding loans and the quality of their loan portfolios.  We did
not verify the accuracy of the loan information that they provided to
us, but we noted that it was consistent with data in their 1996
annual reports, which had been audited by independent auditors.  We
also reviewed the reporting requirements of federal banking
regulators to determine if commercial banks report on their lending
activities for rural electricity and telecommunications purposes. 
However, the regulators do not require banks to report such
information. 

Much of the financial data presented in this report were taken from
RUS' reports and automated records, which include data submitted by
borrowers.  We did not verify the accuracy of the information
contained in the agency's reports and automated records.  We also did
not verify the accuracy of the submissions from the borrowers to RUS. 

We conducted our review from May 1997 through December 1997 in
accordance with generally accepted government auditing standards.  We
provided copies of a draft of this report to USDA for review and
comment.  The Department's comments and our response to them appear
in appendix III and are discussed in the body of the report.  We also
provided extracts from our draft report to the Cooperative Finance
Corporation and the Rural Telephone Finance Cooperative, and to
CoBank and the St.  Paul Bank, which covered their respective lending
activity.  We made technical corrections to the report on the basis
of their comments. 


MAJOR CONTRIBUTORS TO THIS REPORT
=========================================================== Appendix V

FOOD AND AGRICULTURE
ISSUES--KANSAS CITY FIELD OFFICE

Ronald E.  Maxon, Jr., Assistant Director
Ruth Anne Decker
Jerry D.  Hall
Larry D.  Van Sickle

FOOD AND AGRICULTURE
ISSUES--RESOURCES, COMMUNITY, AND
ECONOMIC DEVELOPMENT DIVISION,
WASHINGTON, D.C. 

Patrick J.  Sweeney

OFFICE OF THE GENERAL COUNSEL,
WASHINGTON, D.C. 

Oliver H.  Easterwood


*** End of document. ***