Financial Management: USDA Faces Major Financial Management Challenges
(Testimony, 03/21/2000, GAO/T-AIMD-00-115).

Pursuant to a congressional request, GAO discussed the financial
management issues facing the Department of Agriculture (USDA), focusing
on problems in the areas of: (1) implementing the Federal Credit Reform
Act (FCRA) of 1990 and related accounting standards; (2) reconciling its
Fund Balance with Treasury accounts; (3) addressing weaknesses in the
Forest Service's financial accounting and reporting; (4) correcting
certain other material internal control weaknesses; and (5) complying
with some key laws and regulations.

GAO noted that: (1) FCRA and the related accounting standards were
enacted to more accurately measure the government's costs of federal
loan programs and to permit better comparisons both among credit
programs and between credit and noncredit programs; (2) since1994, the
Inspector General (IG) has reported material weaknesses in the processes
and procedures used by USDA's lending agencies to estimate and
reestimate loan subsidy costs; (3) the USDA Chief Financial Officer
established a task force in March 1999 to assist in resolving the
agency's credit reform problems; (4) to date, USDA has not provided the
resources needed to properly address its credit reform problems; (5) the
IG was unable to fully substantiate the Fund Balance accounts with U.S.
Treasury because USDA had not reconciled the balance with the amount
reported by Treasury; (6) prior to 1999, USDA merely adjusted its
records to agree with Treasury's; (7) since 1999, USDA discontinued
adjusting its records to agree with Treasury's and began disclosing any
differences in its reports to Treasury; (8) USDA formed a task force to
resolve outstanding differences and develop procedures that will prevent
the reconciliation problems from recurring in the future; (9) since the
first audit of the Forest Service's financial statements, USDA's IG has
found serious accounting and financial reporting weaknesses; (10) the
Forest Service has completed several actions and begun others that, if
successfully carried through, represent important steps toward achieving
financial accountability; (11) at USDA, several persistent internal
control weaknesses contributed to the IG's inability to form an opinion
on USDA's fiscal year 1999 consolidated financial statements; and (12)
the IG reported instances in which USDA was not complying with federal
regulations, including: (a) component agencies' failure to comply with
the Federal Financial Management Improvement Act; (b) lending agencies'
failure to comply with provisions of the Debt Collection Improvement
Act; and (c) USDA's failure to comply with the Chief Financial Officer
Act.

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

 REPORTNUM:  T-AIMD-00-115
     TITLE:  Financial Management: USDA Faces Major Financial
	     Management Challenges
      DATE:  03/21/2000
   SUBJECT:  Financial statement audits
	     Internal controls
	     Accounting standards
	     Government guaranteed loans
	     Data integrity
	     Federal agency accounting systems
	     Financial management systems
	     Accountability
	     Noncompliance
	     Reporting requirements
IDENTIFIER:  Food Stamp Program
	     USDA Homeless Children Nutrition Program
	     U.S. Government Standard General Ledger
	     USDA Foundation Financial Information System

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   * For Release on Delivery
     Expected at
     2 p.m.

Tuesday,

March 21, 2000

GAO/T-AIMD-00-115

financial management

USDA Faces Major Financial Management Challenges

        Statement of Linda M. Calbom

Director, Resources, Community, and Economic Development, Accounting and
Financial Management Issues

Accounting and Information Management Division

Testimony

Before the Subcommittee on Government Management, Information and
Technology, Committee on Government Reform, House of Representatives

United States General Accounting Office

GAO

Mr. Chairman and Members of the Subcommittee:

I am pleased to be here today to discuss U. S. Department of Agriculture
(USDA) financial management issues. As evidenced by the Inspector General's
sixth disclaimer of opinion in a row on USDA's consolidated financial
statements, the agency has serious accountability problems over the $118
billion in assets and $120 billion in budgetary resources provided for
fiscal year 1999 to carry out its diverse missions. Before USDA can achieve
financial accountability, it or its component agencies must address a number
of issues that we or USDA's Office of Inspector General (IG) have reported
as serious problems. My statement will focus on problems the agency has
encountered in five major areas: (1) implementing the Federal Credit Reform
Act of 1990 and related accounting standards,
(2) reconciling its Fund Balance with Treasury accounts, (3) addressing
weaknesses in the Forest Service's financial accounting and reporting,
(4) correcting certain other material internal control weaknesses, and
(5) complying with some key laws and regulations. I will also briefly
discuss our assessments of the Rural Utilities Service's (RUS) electric loan
program policies and procedures and the risk of loss to the federal
government from direct loans or loan guarantees RUS provides to electric
cooperatives.

USDA is responsible for a variety of major programs that (1) boost farm
production and exports, (2) promote small community and rural development,
(3) ensure a safe food supply for the nation, (4) manage natural resources,
and (5) improve the nutrition of families and individuals with low incomes.
The financial results of the activities of these programs are reported in
USDA's consolidated financial statements and make up a significant portion
of certain components of the consolidated financial statements of the U.S.
government. For example, USDA is responsible for managing the nation's
largest federal direct loan portfolio, with reported net credit program
receivables of about $70.7 billion as of September 30, 1999. In addition,
USDA reported net costs of $32.7 billion for fiscal year 1999 for its food
assistance programs such as the Food Stamp Program (FSP) and Child Nutrition
Programs (CNP), that represent a significant portion of income security net
cost reported in the U. S. consolidated financial statements.

Background

Improving financial accountability throughout the federal government has
been an area of emphasis since implementation of the Chief Financial
Officers (CFO) Act of 1990, which required a CFO structure in 24 major
agencies and the Office of Management and Budget (OMB) to provide the
necessary financial management leadership and focus. To help instill greater
accountability and fix pervasive and costly control breakdowns, financial
statements were required to be prepared and audited, beginning with those
for fiscal year 1991, for revolving and trust funds and commercial
activities. For 10 agencies-including USDA-audited financial statements were
required as part of a pilot program to test this concept for an agency's
entire operations.

Since USDA's participation in the pilot program in 1991, USDA and several of
its component agencies have received a series of unfavorable financial audit
reports due to deficiencies in financial reporting that are attributable
primarily to weaknesses in the agency's financial management systems. USDA's
Chief Financial Officer recognizes the seriousness of these problems and has
a number of efforts underway to address these issues.

The Government Management Reform Act (GMRA) of 1994 expanded the CFO Act by
mandating that (1) major departments and agencies produce annual financial
statements subject to independent audit, beginning with those for fiscal
year 1996, and (2) the Secretary of the Treasury, in cooperation with the
Director of the Office of Management and Budget, prepare financial
statements for the U.S. government that are audited by GAO, starting with
those for fiscal year 1997.

In addition, the Congress passed the Federal Financial Management
Improvement Act (FFMIA) of 1996, Public Law 104-208. FFMIA requires auditors
for each of the 24 major departments and agencies named in the CFO Act to
report, as part of their audit report on agencies' annual financial
statements, whether the agencies' financial management systems comply
substantially with three requirements: (1) federal financial management
systems requirements, (2) applicable federal accounting standards, and (3)
the U. S. Government Standard General Ledger (SGL) at the transaction level.
These requirements are critical for ensuring that agency financial
management activities are consistently and accurately recorded and promptly
and uniformly reported throughout the federal government. Departments and
agencies must comply with these requirements in order to maximize their
performance and ensure their accountability.

As USDA's financial statements have continued to be subjected to annual
audits, the agency's history of deficiencies in financial reporting has
continued. Many of these weaknesses persist because of (1) an outdated
accounting system and (2) problems with supporting computerized
systems-referred to by USDA as feeder systems. The USDA IG has reported that
the old accounting system does not comply with the requirements of FFMIA
because, among other things, it does not conform with the SGL. In addition,
the IG reported that the feeder systems-which include information such as
billing, purchases, and real and personal property activities-are poorly
documented, operationally complex, deficient in appropriate control
processes, and costly to maintain.

In order to help address these systems problems, on December 23, 1994, the
Office of the Chief Financial Officer (OCFO) purchased a new accounting
system, the Foundation Financial Information System (FFIS), with the goal of
replacing the old accounting system USDA-wide. But while USDA has
implemented the new system in several component agencies, it has experienced
delays in agencywide implementation. The agency plans to complete
implementation of the system USDA-wide by October 1, 2002. Meanwhile, USDA's
CFO has agreed with the IG's recommendation to develop a long-range plan to
consolidate, integrate, and/or reengineer the feeder systems.

USDA's fiscal year 1999 audit was conducted by the Office of Inspector
General. We reviewed the IG's workpapers between January and February 2000.
We shared a draft of this statement with USDA officials, who provided us
some clarifying comments. We have incorporated their comments where
appropriate. Our work was conducted in accordance with generally accepted
government auditing standards.

Barriers to Implementing Credit Reform

Since 1994, the IG has reported material weaknesses in the processes and
procedures used by USDA's lending agencies to estimate and reestimate loan
subsidy costs. In January 1999, we reported that the agency was unable to
make reasonable estimates of the cost of its loan programs because it did
not maintain key historical data needed as a basis to estimate future cash
flows and that USDA's computer systems were not configured to capture the
data needed to make the estimates. The USDA CFO established a task force in
March 1999 to assist in resolving the agency's credit reform problems. To
date, USDA has not provided the resources needed to properly address this
problem. As a result, progress has been slow.

Since USDA is the largest direct lender in the federal government and the
amount involved is material, the agency's inability to properly implement
credit reform will continue to contribute to our inability to give an
opinion on the consolidated financial statements of the U.S. government.
Additionally, for most of USDA's credit programs, cost estimates based on
unreliable data can affect the availability of credit programs to potential
borrowers because changes in these estimates can affect the number and
amount of loans and guarantees which can be made.

USDA Lacks Adequate Systems and Historical Data to Reasonably Estimate the
Cost of Its Credit Programs

Because USDA lacks historical information, it bases some of its predictions
of borrower behavior, such as the amount and timing of future defaults and
prepayments, primarily on the opinion of program managers. While program
management opinion may be used when a new or unique program is established,
it should only be an interim method and does not provide the reliable basis
for estimating borrower behavior that historical data adjusted for changes
in future economic events does. Further, program manager opinion, when used,
should be compared to actual cash flow data to corroborate the
reasonableness of management's judgement. However, USDA does not routinely
perform these comparisons.

The lack of historical data is largely the result of system inadequacies.
Prior to the implementation of credit reform, USDA systems did not track
certain key cash flow data that are critical to estimating the cost of a
loan program. For example, because USDA's systems were incapable of
accumulating summary level information on when borrowers had paid their
loans early, the agency's ability to calculate reasonable estimates of
future borrower early payments was limited. In addition, some of the key
cash flow data in the system are suspect. For example, USDA's system for
reporting some of its non-housing direct loans contains inaccurate data on
the number of payments borrowers make each year. As a result, the agency
cannot reasonably estimate the amount of cash that should be received
annually from borrowers using these data.

USDA Has Not Allocated the Resources Needed to Correct Credit Reform Issues

USDA recognizes the need to hire additional qualified staff to help make
reasonable estimates of its loan program costs. During 1999, two budget
staff and one budget assistant were internally reassigned to work in this
area. In addition, in May 1999, the agency started the lengthy process to
hire additional staff. To date, one additional person has been hired.
However, none of these people work full time on addressing the problems.
Instead, these staff, as well as other staff in the finance office, attempt
to resolve the complex problems associated with credit reform while
performing other duties.

In April and June 1999, we met with the Steering Committee and discussed how
other agencies had successfully used outside contractors to help estimate
the cost of their credit programs. Specifically, these agencies had used
contractors to help gather adequate historical data, establish a reliable
basis for cash flow estimates, and improve the agencies' cash flow models.
USDA obtained limited funding late in fiscal year 1999 to contract with an
independent public accounting firm to assess loan accounting systems data
availability related to its direct loan housing programs.

This is just one of several steps that remain to be completed before the
agency will be able to make reasonable estimates of loan program costs.
Other significant tasks that have yet to be completed include developing and
implementing new cash flow models for USDA's direct loan housing program and
its guaranteed loan programs, comparing estimated loan performance to
historical cash flow data to determine whether the estimates reasonably
predicted borrower behavior, testing key cash flow data maintained in the
systems to determine whether they accurately reflect loan file contents, and
completing efforts to document policies and procedures for estimating the
cost of its loan programs.

Despite the lack of adequate historical data and adequate resources
dedicated exclusively to resolving these long-standing deficiencies, some
progress has been made. For example, sensitivity analysis has been done for
some agency programs to identify the key cash flow assumptions that have the
greatest impact on the loan program cost estimates. These assumptions
include the average interest rate borrowers pay and the number of payments
borrowers make each year. Further, USDA loan program regulatory and
legislative requirements have been summarized and compared to some of the
cash flow models to ensure that the models address all aspects of the
agency's credit programs. In addition, some of the cash flow models have
been reviewed, and formula and logic errors have been identified and
corrected. Preliminary efforts are also underway to assess the quality of
the data that are used to predict loan program performance. However, without
a significant increase in resources dedicated to resolving this problem,
measurable progress will continue to be slow.

USDA Credit Reform Issues Impact Budget Estimates and Consolidated Financial
Statements Opinion

Providing reasonable credit program cost estimates based on reliable data is
critical to effective program stewardship and accountability. For most of
USDA's credit programs, unreliable information can affect the availability
of credit programs to potential borrowers because changes in cost estimates
can affect the number and amount of loans and guarantees available. For
example, if the agency initially underestimates the cost of a loan program,
it will spend more than expected over time to provide the amount of loans it
told the Congress could be made for the initial cost. On the other hand, if
USDA initially overestimates a loan program's cost, less credit would likely
be made available to borrowers than if the cost of the program had been
better estimated. Therefore, until USDA is able to provide reasonable
estimates, the Congress does not have valid cost data on which to base its
decisions about whether to expand or scale back the agency's loan programs.

USDA Is Unable to Reconcile Fund Balance With Treasury Accounts

The Office of the Inspector General first identified unreconciled
differences between USDA and Treasury records in its fiscal year 1992 audit.
According to the IG, differences in some instances have gone uncorrected for
more than 10 years. In May 1999, USDA established a goal of reconciling
differences within 120 days after Treasury notified USDA of discrepancies
between USDA and Treasury records. However, USDA has not been able to meet
this goal to date. As of September 30, 1999, the IG reported the
unreconciled amount was about $5 billion. Unreconciled amounts continue to
occur because of, among other things, timing differences, missing
documentation, input errors, and the inability of USDA feeder systems to
properly transfer data to the accounting system and/or the accounting
system's inability to record transactions in the correct general ledger
accounts.

USDA formed a task force consisting primarily of members representing the
Forest Service, the National Finance Center (NFC), USDA's Office of the
Chief Financial Officer, and an outside consultant-PricewaterhouseCoopers
LLP-to resolve outstanding differences and develop procedures that will
prevent this problem from recurring in the future. In addition, we and the
IG have monitored this effort for the past 6 months. The task force
anticipates that the reconciliations and implementation of procedures to
prevent this problem from recurring will be completed by March 31, 2000, a
date we consider to be optimistic. Until this problem is corrected, the
integrity of much of USDA's financial data is questionable.

Status of Forest Service Efforts to Achieve Financial Accountability

Since the first audit of the Forest Service's financial statements, which
covered fiscal year 1991, USDA's IG has found serious accounting and
financial reporting weaknesses, some of which continue to exist today. For
example, while the Forest Service implemented its new accounting system
agencywide on October 1, 1999, as scheduled, the system is supported by
feeder systems that the IG has described as, among other things, deficient
in appropriate control processes and costly to maintain. Furthermore, the
independence afforded by the agency's autonomous field structure has
hampered efforts to correct accounting and financial reporting weaknesses.
These shortcomings mean that the agency and the Congress do not have
accurate financial data to track the cost of programs and activities and to
help make informed decisions about future funding. They also raise questions
about the accuracy of program performance measures and of certain budget
data drawn from the same database.

The Forest Service has completed several actions and begun others that, if
successfully carried through, represent important steps toward achieving
financial accountability. Nevertheless, as we testified before your
Subcommittee in July 1998, major barriers remain, and the Forest Service may
need several years to achieve financial accountability. Therefore, in
January 1999, we designated the Forest Service's financial management as a
high-risk area because of the serious and long-standing accounting and
financial reporting weaknesses plaguing its operations. Because of this
high-risk designation, we will give sustained attention to monitoring the
Forest Service's efforts to achieve financial accountability.

New Accounting System Implemented

Despite some start-up problems, such as rejected transactions and system
downtime, Forest Service staff are now entering fiscal year 2000
transactions into the system. However, the new accounting system depends on
and receives data from feeder systems that the IG and the Logistics
Management Institute-a consultant for USDA-have characterized as seriously
deficient. Specifically, the IG reported that these feeder systems-which
process and transfer information such as credit card, personal property, and
travel transactions into the new accounting system-are poorly documented,
operationally complex, deficient in appropriate control processes, and
costly to maintain. The IG has also concluded that these feeder systems
reduce assurance that the new system will be able to provide timely,
accurate, reliable, and consistent financial information. USDA has agreed
with the IG's recommendation to develop a long-range plan to consolidate,
integrate, and/or reengineer the feeder systems.

Accounting and Reporting Deficiencies Remain

In addition, the Forest Service has over $100 million in unsupported
balances remaining from its old accounting system. These unsupported
balances resulted largely from the Forest Service's use for some 20 years of
an accounting system that did not meet basic federal requirements. The
Forest Service faces a major effort in trying to (1) document and validate
these balances so they can be converted to the new system or (2) reach
agreement with the IG on a policy for resolving the remaining amounts.

Current Field Structure Hampers Accountability

In our February 1998 report, we stated that the Forest Service's autonomous
organization may hinder top management's ability to gain the full
participation of all regional fiscal directors in efforts to achieve
financial accountability. An independent contractor's report issued in March
1998, which addressed financial management and organizational analysis at
the Forest Service, also raised the issue of the agency's autonomous
structure. Further, the contractor reported that whether the subject is
budget execution, financial plan development, or accounting for reimbursable
agreements, each unit operates independently.

The Forest Service restructured its national office management team in April
1998 to create functional lines of accountability for fiscal management by
establishing a Chief Financial Officer position that reports directly to the
Chief Operating Officer of the Forest Service. A Forest Service official
told us in January 2000 that a decision about hiring chief financial
officers at the regional level will be made following completion of a study
of the Forest Service's financial management field structure during fiscal
year 2000. The establishment of the Chief Financial Officer in the national
office addresses some of the concerns we have previously raised regarding
management structure. However, the key issue regarding the Forest Service's
decentralized and autonomous field structure as it relates to financial
management remains unresolved.

High-Risk Designation

In order to be removed from the list, the Forest Service will need to
demonstrate sustained financial accountability, which goes beyond receiving
an unqualified audit opinion. The Forest Service will also need to address
material internal control weaknesses that limit its ability to maintain
accountability over its assets on an ongoing basis. For example, it needs to
implement a system of controls to properly record, track, and depreciate
property and equipment from acquisition to disposition, which is essential
to properly safeguarding these assets.

Corrective Measures Are Underway

   * made significant progress in completing its physical inventory of real
     and personal property, as well as developing a methodology for valuing
     its road assets;
   * begun implementation of a new methodology for tracking and reporting
     the cost of its operations;
   * continued staffing its newly organized Office of Finance;
   * received a final report, Financial Statement Risk Assessment, from its
     consultant that assessed the relative audit risk of financial statement
     line items, thereby enabling the Forest Service to prioritize its
     efforts and develop a realistic time-line to achieve a clean opinion;
   * developed a plan to study the Forest Service's highly decentralized and
     autonomous field office financial management structure; and
   * finalized a long-range plan with goals and objectives, timeframes, and
     measures for attaining financial accountability.

As these accomplishments demonstrate, the Forest Service has made progress
in addressing its financial management deficiencies and is on the right
track towards financial accountability. However, much work remains, and
sustained top management commitment is necessary to ensure that progress
continues.

Material Internal Control Weaknesses Hamper Accountability

A strong internal control system provides the framework for the
accomplishment of management objectives, accurate financial reporting, and
compliance with laws and regulations. Effective internal controls serve as
checks and balances against undesired actions and, as such, provide
reasonable assurance that agencies operate in a safe and sound manner. The
lack of good internal controls puts an agency at risk of mismanagement,
waste, fraud, and abuse. Further, without strong internal controls, an
agency is unable to generate consistent, reliable financial information
needed to maintain accountability over its assets on an ongoing basis.

At USDA, several persistent internal control weaknesses contributed to the
IG's inability to form an opinion on the agency's fiscal year 1999
consolidated financial statements. These weaknesses, as well as others
identified by the IG, are discussed below.

Food Stamp Recipient Claims

Financial Management Systems

   * had a net difference of about $130 million between its accounting
     records and the supporting personal property system;
   * had a payroll system that contained data dating as far back as 1979
     that had not been properly analyzed; and
   * lacked controls to ensure that transactions recorded in its old
     accounting system were accurate and properly authorized.

It is critical that USDA correct these problems by implementing new or
revamped systems that are properly designed and implemented to integrate
budgetary and cost information with external reporting to provide USDA with
the capability to accurately track assets and identify all costs associated
with an activity.

Accounting for Personal Property

Information Technology Security and Controls

USDA Does Not Fully Comply With All Key Laws and Regulations

   * The IG noted that some component agencies' financial management systems
     do not substantially comply with the three requirements of FFMIA. The
     act requires agencies to implement and maintain financial management
     systems that comply substantially with federal financial management
     systems requirements, applicable federal accounting standards, and the
     Standard General Ledger at the transaction level. USDA has prepared a
     remediation plan that includes corrective actions that are scheduled to
     be completed no later than September 2003.
   * The IG noted that USDA's lending agencies are not in full compliance
     with some of the provisions of the Debt Collection Improvement Act. The
     purpose of the act is to maximize collections of federal non-tax debt
     by directing actions towards debtors with the ability to pay and to
     minimize the costs of debt collection by consolidating related
     functions and activities. The IG found that the National Finance Center
     did not refer debt that was delinquent over 180 days to Treasury for
     cross-servicing. The Center did not forward the debt because it was
     waiting for notification from Treasury as to whether it would be
     designated as a debt collection center. In January 2000, the Center was
     notified that it would not be designated a debt collection center.
     Therefore, it plans to begin referring delinquent debt to Treasury
     later this year.
   * The IG also concluded that USDA has not fully addressed two problems
     related to compliance with the CFO Act. Specifically, the agency has
     not implemented a fully integrated financial information system. The
     current system relies on data from various program and administrative
     systems throughout the agency in order to prepare USDA's consolidated
     financial statements. In addition, USDA has not (1) conducted required
     biennial reviews of the fees, royalties, and other charges imposed by
     USDA agencies for services and (2) made recommendations on revising
     those charges to reflect costs incurred by the agencies in providing
     those services as required by the CFO Act. The IG noted that one agency
     did not update its user fees for its inspection services for fiscal
     year 1998 and part of fiscal year 1999. As a result, the agency did not
     bill for millions of dollars that it was entitled to receive because
     the fees were not adjusted for salary increases and inflation factors.

Rural Utilities Service Electric Loan Portfolio Issues

Most RUS borrowers are either generation and transmission (G&T) cooperatives
or distribution cooperatives. A G&T cooperative is a nonprofit rural
electric system whose chief function is to produce and sell electric power
on a wholesale basis to its owners, who consist of distribution cooperatives
and other G&T cooperatives. A distribution cooperative sells the electricity
it buys from a G&T cooperative to its owners, the retail consumers.

Most RUS direct loans and loan guarantees were made during the late 1970s
and early 1980s. For example, from fiscal years 1979 through 1983, RUS
approved direct loans and loan guarantees of about $29 billion, whereas
during fiscal years 1992 through 1999, it approved a total of about $5
billion in direct loans and loan guarantees. During the late 1970s and early
1980s, RUS provided financing for several G&Ts that had invested in the
construction of large nuclear-generating and coal-fired generating power
plants. Several of these plants were completed late and over budget. In
addition, an expected increase in demand for electric power did not
materialize. As a result, several of these G&Ts became financially troubled
and could not meet their debt-servicing requirements. In turn, the federal
government incurred several billion dollars in loan losses.

As we previously testified before this Subcommittee, RUS has had, and
continues to have, significant financial problems with the electric loan
portfolio. For example, from fiscal year 1992 through July 31, 1997, RUS
wrote off about $1.5 billion of loans to four rural electric cooperatives.
The most significant write-offs relate to two G&T loans. In fiscal year
1996, one G&T made a lump sum payment of $237 million in exchange for RUS
writing off and forgiving the remaining $982 million of its RUS loan
balance. In fiscal year 1997, another G&T borrower made a lump sum payment
of approximately $238.5 million in exchange for write-off and forgiveness of
its remaining $502 million loan balance. Since 1997, the agency has written
off an additional $330 million of loans to two rural electric cooperatives
and is in the process of writing off an additional
$3 billion of the total $4.1 billion in loans owed by Cajun Electric, a RUS
borrower that has been in bankruptcy since December 1994. Cajun Electric
filed for bankruptcy protection after the Louisiana Public Service
Commission disapproved a requested rate increase and instead lowered rates
to a level that reduced the amount of revenues available to Cajun to make
annual debt service payments. In addition to these past and anticipated
write-offs, we have reported that it is probable that the agency will
continue to incur losses in the future.

In our February 2000 report on RUS' loan origination policies and procedures
for making G&T loans to electric cooperatives, we noted that RUS' loan
origination policies are reasonably designed to mitigate future loan losses
to the government and are generally consistent with banking industry
standards. However, RUS lacks implementing procedures in certain key areas
to carry out its policies for determining whether to make G&T loans.
Specifically, RUS does not have implementing procedures to (1) assess some
of the primary documents which must be prepared by the borrower to support
the loan application and (2) document its loan assessment and recommendation
that a loan be approved. Because RUS lacks implementing procedures to carry
out its G&T loan origination policies in certain key areas,
misinterpretation and/or inconsistent implementation of the loan origination
policies could occur. In order to ensure consistent implementation of G&T
loan origination policies, we recommended that the Secretary of Agriculture
direct the Acting Administrator of RUS to develop and document written
procedures for the two areas mentioned above. Agency officials have agreed
with our recommendation.

Mr. Chairman, this concludes my statement. I would be happy to answer any
questions you or other Members of the Subcommittee may have.

Contact and Acknowledgements

(913895)

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