GAO/AIMD-00-286R RD’s Credit Reform Implementation

United States General Accounting Office

Washington, DC 20548

Accounting and Information

Management Division

B-286010

August 22, 2000

The Honorable Dan Glickman

The Secretary of Agriculture

Subject: Credit Reform: Improving Rural Development’s Credit Program

Cost Estimates

Dear Mr. Secretary:

This letter and the attached briefing slides are the third in a series of status reports on

the Rural Development (RD) mission area’s progress in improving its credit program

cost estimates under credit reform. Until RD makes significant progress in

developing well supported, reasonable estimates of its credit program costs, an

unqualified audit opinion on the Department of Agriculture’s (USDA) consolidated

financial statements will not be possible. Furthermore, since USDA is the largest

direct lender in the federal government and the credit program amounts are material,

USDA’s inability to properly implement credit reform will continue to contribute to

our inability to give an unqualified audit opinion on the consolidated financial

statements of the U.S. government.

Therefore, since April 1999, we have assessed RD’s credit reform implementation

efforts in such areas as (1) identifying key cash flow assumptions, (2) improving cash

flow models, (3) assessing cash flow model data, and (4) implementing other

procedures to enhance the credit subsidy estimation process. As part of this effort,

we have provided regular briefings to USDA’s Executive Steering Committee for

Credit Reform Implementation. Shortly after our first briefing in June 1999, the

USDA credit reform task force developed a detailed implementation plan to guide the

agency through its efforts to improve its credit program cost estimates. Today, we

briefed the Steering Committee on (1) the status of RD’s efforts to implement

procedures from the plan and (2) recommendations designed to make the necessary

improvements to RD’s cost estimates in a more timely manner.

Results in Brief

Overall, the task force has made some progress in addressing the deficiencies related

to reasonably estimating the cost of RD’s credit programs. Progress made since our

last briefing to the Steering Committee on December 16, 1999, includes updating
B-286010

Page 2 GAO/AIMD-00-286R RD’s Credit Reform Implementation

sensitivity analyses1and completing new cash flow models for the non-housing direct

and guaranteed loan programs. However, several milestone dates from the plan were

missed because of a shortage in both the staff and funding resources USDA devoted

to resolving long-standing credit reform weaknesses. Inadequate resources

hampered progress in critical areas, such as assessing the quality of the data used to

estimate future loan performance and developing a new cash flow model based on

available data to estimate the cost of the housing direct loan programs. As a result,

RD continues to have limited assurance that credit program costs estimates are

reasonable. While oversight for credit reform implementation efforts falls under the

guidance of the USDA Executive Steering Committee for Credit Reform

Implementation, the Steering Committee as a whole has had little direct involvement

in overseeing progress to improve RD’s credit program cost estimates.

Background

Prior to the implementation of the Federal Credit Reform Act (FCRA) of 1990, credit

programs, like other federal programs, were reported in the budget on a cash basis.

Thus, loan guarantees appeared to be free while direct loans appeared to be as

expensive as grants in a given budget year. FCRA and the related accounting

standard, Statement of Federal Financial Accounting Standards (SFFAS) No. 2,2

Accounting for Direct Loans and Loan Guarantees, together known as credit reform,

were established to more accurately measure the government’s costs of federal credit

programs and to permit better comparisons both among credit programs and

between credit and noncredit programs. When the Federal Accounting Standards

Advisory Board (FASAB)3developed SFFAS No. 2, it recognized that financial

accounting should support the budget and that accounting standards for credit

reform should be consistent with the budgeting under credit reform. This mirroring

provides more assurance through the financial statement audit that credit program

budget estimates are reasonable since the estimates should be calculated with the

same data and same process. However, without consistency between the data and

processes used to prepare credit program cost estimates for the financial statements

and budget, this assurance cannot be fully achieved.

As part of implementing credit reform, agencies are required to estimate the net cost

of extending or guaranteeing credit—generally referred to as the subsidy cost—based

1

Sensitivity analysis is a process used to identify the assumptions that, when adjusted, have the

greatest impact on the credit subsidy estimate.

2

SFFAS No. 2 was amended by SFFAS No. 18, Amendments to Accounting Standards For Direct Loans

and Loan Guarantees. The objective of the amendments was to improve financial reporting for

subsidy costs and performance of federal credit programs.

3

FASAB was created by the Office of Management and Budget, Treasury, and GAO to develop and

recommend accounting principles for the federal government. These three agencies approved SFFAS

No. 2, Accounting for Direct Loans and Loan Guarantees, in July 1993.
B-286010

Page 3 GAO/AIMD-00-286R RD’s Credit Reform Implementation

on the present value4of estimated net cash flows excluding administrative costs.

Because credit program cost estimates are based on estimated cash flows, agencies

have to be able to predict borrower behavior–how many borrowers will pay early,

pay late, or default on their loans and at what point in time. Generally, the best

predictor of borrower behavior is prior historical data adjusted for expected changes

in future economic events. However, alternative data sources including informed

opinion5or proxy data6may be used in certain limited instances on a temporary basis

to estimate future cash flows in the absence of adequate historical data. Agencies use

historical information, or alternative data sources if necessary, and sophisticated

computer models, known as cash flow models, to estimate the cost of a credit

program.

As we previously reported to your office,7

RD has received a qualified opinion on its

financial statements since 1994, due in part to its inability to reasonably estimate its

credit programs’ costs. RD’s problems implementing credit reform, among other

things, have also prevented USDA from achieving an unqualified audit opinion on its

consolidated financial statements. This long-standing problem is attributable, in part,

to a lack of adequate historical data, which resulted largely from system

inadequacies. For example, prior to the implementation of credit reform, USDA

systems did not track certain key cash flow data critical to estimating the cost of a

credit program. These problems also raise concerns over the integrity of RD’s credit

program budgetary data because the same cost estimates are generally used for both

budget preparation and financial reporting.

Previous efforts to effectively implement credit reform at RD have had limited

success. In response to the Inspector General’s (IG) audit findings, USDA organized

a task force and developed a detailed implementation plan.8

The plan includes

procedures to (1) identify key cash flow assumptions, (2) improve cash flow models,

(3) assess cash flow model data, and (4) implement other procedures to enhance

RD’s credit subsidy estimation process. The plan also includes points of contact for

many procedures as well as some milestone dates.

Beginning in April 1999, we have assessed RD’s efforts to improve its credit program

cost estimates under credit reform. Since our December 1999, briefing to the

Steering Committee, the task force has primarily focused on RD’s non-housing direct

4

Present value is the worth of a future stream of returns or costs in terms of money paid immediately.

In calculating present value, prevailing interest rates provide the basis for converting future amounts

into their “money now” equivalents.

5

Informed opinion refers to the judgment of agency staff or others who make subsidy estimates based

on their programmatic knowledge and/or experience.

6

Proxy data refer to data from other credit programs that have borrowers with similar characteristics,

such as socioeconomic status, education, or geographic distinctions.

7

Correspondence dated June 25, 1999, to the Deputy Secretary, Department of Agriculture.

8

The detailed credit reform implementation plan included most of the procedures outlined in our

June 16, 1999, briefing to the USDA Executive Steering Committee for Credit Reform Implementation.
B-286010

Page 4 GAO/AIMD-00-286R RD’s Credit Reform Implementation

loan programs and the guaranteed loan programs, which RD reported at $40.9 billion

and $11.6 billion, respectively, as of September 30, 1999. The task force is focusing

secondarily on the direct housing loan programs, which RD reported at $28.5 billion

as of September 30, 1999. The task force has focused on the largest programs within

each loan program type that are significant to both the agency’s financial statements

and budget to ensure the new procedures’ maximum effectiveness in improving the

reasonableness of the overall cost estimates of RD’s credit programs.

Scope and Methodology

We evaluated RD’s progress since our last briefing to the Steering Committee on

December 16, 1999, in completing procedures by the related milestone dates included

in the credit reform implementation plan. We participated in weekly status meetings

of the task force and discussed RD’s progress with numerous agency representatives

throughout the process.

We assessed RD’s implementation efforts based on procedures in the FASAB

Accounting and Auditing Policy Committee’s Technical Release, Preparing and

Auditing Direct Loan and Loan Guarantee Subsidies Under the Federal Credit Reform

Act, as well as procedures designed to assist other credit agencies in successfully

implementing credit reform. These efforts were in four areas: (1) identifying key cash

flow assumptions, (2) improving cash flow models, (3) assessing cash flow model

data, and (4) implementing other procedures to enhance credit subsidy estimates.

Specifically, to identify key cash flow assumptions, we assessed RD’s approach to

sensitivity analysis to determine whether RD used a systematic, nonjudgmental and

well documented process. We reviewed cash flow models as they were developed,

identified and communicated formula errors, and subsequently reviewed RD’s

revisions to the cash flow models. We also reviewed cash flow models to determine

whether they reasonably represented the cash flows of the loan programs based on

the laws and regulations that govern them. To assess cash flow model data, we

worked with the USDA IG to develop a statistically valid sampling approach that the

USDA IG and we will use to test the reliability of data supporting the key cash flow

assumptions of USDA’s credit programs. Lastly, as RD implemented other

procedures to enhance credit subsidy estimates, we reviewed and conveyed potential

improvements to the documentation of cash flow assumptions and cash flow models.

We conducted our work in Washington, D.C., from January 2000 through August 2000

in accordance with generally accepted government auditing standards. We requested

comments on a draft of our briefing slides and letter from cognizant RD budget and

finance office officials and officials from USDA’s Office of the Chief Financial Officer

(OCFO). On August 17, 2000, RD and OCFO officials provided us with oral

comments, which are discussed in the “Agency Comments” section. The enclosed

briefing slides highlight the results of our work and the information we provided

during the briefing.
B-286010

Page 5 GAO/AIMD-00-286R RD’s Credit Reform Implementation

Further Improvements Are Needed to Ensure That

Credit Subsidy Estimates Are Reasonable

Since December 1999, some procedures included in the implementation plan have

been completed or are currently in process to address deficiencies in estimating the

costs of RD’s credit programs. However, a shortage in both the staff and funding

resources USDA devoted to resolving credit reform weaknesses has continued to

hamper timely progress in properly addressing credit reform implementation

problems. As a result, numerous key procedures included in the plan remain

incomplete, and several milestone dates were missed. Most of the procedures not yet

completed relate to (1) improving the cost estimates for the guaranteed and housing

direct loan programs and (2) developing written policies and procedures for

calculating credit program cost estimates for all three program types: non-housing

direct, guaranteed, and housing direct loan programs.

Until RD makes significant progress in implementing the remaining key procedures in

the plan, RD will continue to lack an adequate process to develop well supported,

reasonable estimates of credit program costs. As a result, financial statements and

budget estimates could be misstated. Due to the magnitude of RD’s credit programs,

an unqualified audit opinion on USDA’s consolidated financial statements will not be

possible without the successful implementation of credit reform. Because USDA is

the largest direct lender in the federal government, proper implementation of credit

reform is material to the consolidated financial statements of the U.S. government.

USDA’s deficiencies in this area will also continue to contribute to our inability to

give an unqualified audit opinion on the consolidated financial statements of the U.S.

government.

The following sections summarize the status of key procedures outlined in USDA’s

detailed implementation plan related to RD’s non-housing direct, guaranteed, and

housing direct loan programs. The status of procedures that relate to all RD’s loan

program types is also presented.

Non-Housing Direct Loan Programs

As of December 1999, the implementation plan included six key procedures not yet

completed for the non-housing direct loan programs. Table 1 summarizes the

established milestone dates from the plan and the current status of these six

procedures. Since December, RD has completed three of these procedures, two are

in process, and one procedure was not yet started. Delays in completing the new

cash flow model significantly hampered progress in other areas.
B-286010

Page 6 GAO/AIMD-00-286R RD’s Credit Reform Implementation

Table 1: Status of Non-housing Direct Loan Program Procedures

Procedure Original due

date (if any)

Revised due

date (if any)

Current

status

Finalize new cash flow model Completed

May 2000

Perform sensitivity analyses to identify key

cash flow assumptions

Completed

June 2000

Document cash flow assumptions Sept. 1999 Completed

July 2000

Assess cash flow model data reliability April 2000 Aug. 2000 In process

Document cash flow model Sept. 1999 In process

Compare estimated to actual cash flows Aug. 1999 Not started

The three procedures that were completed relate to developing a new cash flow

model, performing sensitivity analyses, and documenting cash flow assumptions. The

new cash flow model to estimate the cost of RD’s non-housing direct loan programs

was completed and reviewed. During the review process, several refinements were

implemented. After the cash flow model was revised and completed, sensitivity

analyses were updated and documented by RD staff to identify the key cash flow

assumptions. These assumptions include the average borrower interest rate and loan

term. Finally, the cash flow assumptions were documented, including data sources

and calculation methods.

The two procedures currently in process are assessing cash flow model data and

documenting the cash flow model. To ensure that cost estimates are based on

reliable data, planning for data reliability tests was completed to determine if

accounting system data used as support for key cash flow assumptions are reliable.

The data reliability tests for the key cash flow assumptions are currently in process.

If these data are determined to be unreliable, it may be necessary to (1) adjust the

values of cash flow assumptions, (2) identify alternative data sources, and/or

(3) revise the cash flow model. In addition, documentation of the logic flow and

mechanics of the cash flow model is in process. This documentation was reviewed

and is currently being revised.

The procedure in the plan that was not started involves comparing estimated to

actual cash flows. This comparison allows an agency to identify and determine if

significant differences exist and whether assumptions related to future loan

performance need to be revised.

Guaranteed Loan Programs

As of December 1999, the implementation plan included six key procedures not yet

completed for the guaranteed loan programs. Table 2 summarizes the established

milestone dates from the plan and the current status of these six procedures. Since
B-286010

Page 7 GAO/AIMD-00-286R RD’s Credit Reform Implementation

December, RD has completed one of these procedures, four are in process, and one

procedure has not yet been started.

Table 2: Status of Guaranteed Loan Program Procedures

Procedure Original due

date (if any)

Revised due

date (if any)

Current

status

Finalize new cash flow model July 2000 Completed

Aug. 2000

Document cash flow model Sept. 2000 In process

Document cash flow assumptions Sept. 2000 In process

Perform sensitivity analyses to identify key

cash flow assumptions Aug. 2000 In process

Assess cash flow model data reliability Aug. 2000 In process

Compare estimated to actual cash flows Not started

The one completed procedure relates to developing a new cash flow model to

estimate the cost of RD’s guaranteed loan programs based on available data from the

accounting system. This new cash flow model was reviewed and tested to ensure

that calculations worked as intended. During the model development, regulatory and

legislative requirements were considered to ensure that it reasonably represents the

cash flows of the loan programs based on the laws and regulations that govern them.

The four procedures currently in process relate to (1) documenting the new cash flow

model, (2) documenting the cash flow assumptions, (3) performing sensitivity

analyses, and (4) assessing the reliability of cash flow model data. As the new cash

flow model was developed, its logic flow and mechanics were documented and are

currently being reviewed and revised for model refinements. RD staff are

documenting the cash flow assumptions, including the data sources and calculation

methods. After the cash flow model was finalized, RD staff performed sensitivity

analyses to identify the key cash flow assumptions and are reviewing the results.

Once the key cash flow assumptions are identified, tests may be performed to

determine if accounting system data used as support for these assumptions are

reliable. These tests are needed to ensure that cost estimates are based on reliable

data. If these data are determined to be unreliable, it may be necessary to (1) adjust

the values of cash flow assumptions, (2) identify alternative data sources, and/or

(3) revise the cash flow model. Planning for data reliability tests was completed, and

RD staff are scheduled to begin conducting these tests this fiscal year.

The procedure that was not started involves comparing estimated to actual cash

flows. This comparison allows an agency to identify and determine if significant

differences exist and whether assumptions related to future loan performance need

to be revised. A milestone date was not established for this procedure.
B-286010

Page 8 GAO/AIMD-00-286R RD’s Credit Reform Implementation

Housing Direct Loan Programs

As of December 1999, the implementation plan included eight key procedures not yet

completed for the housing direct loan programs. Table 3 summarizes the established

milestone dates from the plan and the current status of these eight procedures. RD

currently has one of these procedures in process, and seven procedures were not yet

started. For the seven procedures for which no progress was made, completing six of

them depends on developing a new cash flow model9based on available data to

estimate the cost of these loan programs. However, development of the new cash

flow model was not started. Due to the magnitude of these loan programs, it would

be unlikely that RD or USDA could receive an unqualified audit opinion unless and

until a new cash flow model is developed. Therefore, the development of the new

cash flow model is critical for RD.

Table 3: Status of Housing Direct Loan Program Procedures

Procedure Original due

date (if any)

Revised due

date (if any)

Current

status

Assess existing cash flow data July 2000 In process

Develop new cash flow model May 2001 Not started

Ensure cash flow model represents regulatory

requirements May 200110 Not started

Document cash flow model May 200110 Not started

Perform sensitivity analyses to identify key

cash flow assumptions May 200110 Not started

Document cash flow assumptions May 200110 Not started

Assess cash flow model data reliability Not started

Compare estimated to actual cash flows Not started

The procedure currently in process is assessing the cash flow data in the accounting

systems. An outside contractor was hired to analyze existing cash flow data for the

housing direct loan programs to determine if the systems contain the appropriate

data to reasonably estimate future loan performance and identify alternative data

sources, if necessary. This analysis is necessary prior to developing the new cash

flow model for RD’s housing direct loan programs to ensure that the cash flow model

is based on available data. Once the results of the outside contractor’s analysis are

known, it may be necessary to temporarily use alternative data sources for cost

9

The cash flow model currently used to estimate the cost of the housing direct loan programs includes

several cash flow assumptions that RD was unable to adequately support.

10The due date for this procedure is presented in the plan as being completed with the development of

the new housing direct cash flow model, which is presented as being completed by contractors.

However, there currently is no contract for this work and no funds were provided for these purposes.
B-286010

Page 9 GAO/AIMD-00-286R RD’s Credit Reform Implementation

estimates and develop and prioritize system change requests to ensure that in the

future, accounting systems provide all essential data to estimate future loan

performance.

As previously mentioned, the new cash flow model has yet to be developed. The plan

proposes developing the cash flow model and completing several other procedures,

including performing sensitivity analyses and documenting the cash flow model and

assumptions, with the assistance of outside contractors. However, there currently is

no contract for this work and no funds were provided for these purposes. While

developing the cash flow model, it will be necessary to ensure that it reasonably

represents the cash flows of the loan programs based on the laws and regulations

that govern them. Once the cash flow model is completed, it will then be possible to

complete other key procedures—including documenting the cash flow model’s logic

flow and mechanics; performing sensitivity analyses to identify the key cash flow

assumptions; and documenting the cash flow assumptions, including data sources

and calculation methods. Since the plan presents these procedures as being

completed under the contract to develop the new cash flow model, the milestone

date for all these procedures is May 2001.

The plan also calls for data reliability tests to determine if accounting system data

used as support for key cash flow assumptions are reliable. If these data are

determined to be unreliable, it may be necessary to (1) adjust the values of cash flow

assumptions, (2) identify alternative data sources, and/or (3) revise the cash flow

model. Finally, the plan calls for comparing estimated to actual cash flows. This

comparison allows an agency to identify and determine if significant differences exist

and whether assumptions related to future loan performance need to be revised.

Completing these procedures also depends on completing the new cash flow model.

To date, no progress was made in these areas and no milestone dates were

established.

Procedures Related to All Loan Programs

As of December 1999, the implementation plan included five key procedures not yet

completed that relate to improving RD’s overall credit subsidy estimation process.

Table 4 summarizes the established milestone dates from the plan and the current

status of these five procedures. Since December, RD has completed one of these

procedures, one is in process, and three procedures have not yet been started.
B-286010

Page 10 GAO/AIMD-00-286R RD’s Credit Reform Implementation

Table 4: Status of Procedures Related to All Loan Programs

Procedure Original due

date (if any)

Revised due

date (if any)

Current

status

Hire additional staff Completed

May 2000

Resolve reestimate issues with OMB March 2000 In process

Develop policies and procedures for calculating

estimates of credit program costs Feb. 2000 Not started

Implement procedures to automate the

estimation process Not started

Conduct “lessons learned” sessions with HUD

regarding the balances approach Sept. 1999 Jan. 2000 Not started11

The procedure that RD completed in this area is the hiring of additional staff to assist

with efforts to implement credit reform. The procedure currently in process is

resolving the timing and frequency of reestimate issues with the Office of

Management and Budget (OMB).

Three other procedures related to all loan program types have not yet been started.

The first is developing written policies and procedures for calculating credit program

cost estimates, including a formal supervisory review process and a process to ensure

that key cash flow assumptions are reviewed and approved by budget, accounting,

and program offices. The second is developing and implementing procedures to

automate the credit subsidy estimation process to reduce workloads and the chance

of data entry errors. These procedures could include (1) centralizing input sections

by program instead of by cohort12 and (2) linking data files to cash flow model input

sections. Finally, RD has yet to hold “lessons learned” sessions with the Department

of Housing and Urban Development (HUD) staff to understand how they

implemented the balances approach13 and automated their estimation processes.

However, the task force has put this procedure on hold until OMB issues guidance on

the balances approach.

Implementation Plan Oversight Could Be Improved

The implementation plan was developed to help guide the agency through its credit

reform implementation efforts extending into fiscal year 2001. This plan includes

points of contact for many procedures and some milestone dates. Thus far, RD has

experienced many delays in meeting milestone dates, and several procedures did not

11The task force has put this procedure on hold until OMB issues guidance on the balances approach.

12A cohort includes those direct loans or loan guarantees of a program for which a subsidy

appropriation is provided for a given fiscal year even if disbursements occur in subsequent years.

13The Office of Management and Budget has characterized the balances approach as a simplified, more

direct method of reestimating credit subsidies. Detailed implementation guidance has not yet been

developed.
B-286010

Page 11 GAO/AIMD-00-286R RD’s Credit Reform Implementation

have due dates established. For example, for the 20 key procedures not yet

completed, 6 have missed the due dates, 4 lack due dates, and 10 have due dates in

the future. Further, for the 5 recently completed procedures, 2 were completed after

the due dates and 3 lacked due dates. Until RD makes significant progress in

implementing the remaining key procedures in the plan, RD will continue to lack an

adequate process to develop well supported, reasonable estimates of credit program

costs. As a result, financial statements and budget estimates could be misstated.

While oversight for credit reform implementation efforts falls under the guidance of

the USDA Executive Steering Committee for Credit Reform Implementation, the

Steering Committee as a whole has had little direct involvement in overseeing

progress to improve RD’s credit subsidy estimates. The Steering Committee does not

meet on a regular basis to monitor the task force’s progress and was not made aware

of missed or changed milestone dates.

However, there were individual efforts by task force and Steering Committee

members to eliminate barriers impeding implementation efforts. An OCFO task force

representative has provided general progress updates approximately every 2 weeks

to the USDA Chief Financial Officer and has met separately on various occasions

with individual members of the Steering Committee to discuss specific issues, such as

funding requests. While these efforts are important, Steering Committee oversight

and monitoring of the task force’s activities are critical to timely and successful

implementation of credit reform at the agency.

RD Has Not Committed Sufficient Resources

to Correct Credit Reform Issues

In our March 2000 testimony,14 we stated that limited progress in addressing the

deficiencies related to estimating the cost of USDA credit programs was primarily

attributable to a shortage of resources, both staff and funds, to properly address the

problem. Although the agency recognized the need for additional qualified staff,

between April 1999 and April 2000, RD had internally reassigned only two staff that

worked part time on credit reform implementation issues. Recently, RD has hired

two additional staff that management plans to dedicate full time to solving these longstanding problems.

Delays in completing the non-housing direct cash flow model due to a shortage of

both staff and funding resources USDA devoted to resolving credit reform

weaknesses have significantly hampered progress in performing sensitivity analyses

and assessing the quality of the data RD uses to predict future loan performance.

Additionally, delays in identifying the necessary funding for outside contractors have

significantly impeded the development and implementation of a new cash flow model

for RD’s housing direct loan programs. In April and June 1999, we met with the

Steering Committee and discussed how other agencies have successfully used

outside contractors to help gather adequate historical data, establish a reliable basis

14Financial Management: USDA Faces Major Financial Management Challenges (GAO/T-AIMD-00-115,

March 21, 2000).
B-286010

Page 12 GAO/AIMD-00-286R RD’s Credit Reform Implementation

for cash flow estimates, and improve cash flow models in a timely manner. In our

March 2000 testimony we again discussed this issue.

Because the single family housing program’s interest calculations are very complex, it

is unlikely that the housing direct cash flow model will be developed in a timely

manner with the resources that USDA has made available to the task force thus far.

While funds were made available to assess the existing cash flow data for the housing

direct loan programs, to date, no funding was identified to complete the critical

procedure of developing a new cash flow model. Until this new cash flow model is

developed, most of the other key procedures related to the housing direct loan

program cannot be completed.

Conclusions

RD’s progress in improving credit program cost estimates is slow, and several

procedures are not completed because USDA did not allocate to the task force the

necessary dedicated full-time staff or adequate funding for outside contractors.

Without sustained top level management commitment, guidance from the Steering

Committee, and the necessary dedicated staff and funding resources, RD will not be

able to improve the quality of its credit program cost estimates in a timely manner.

Until RD makes significant progress in implementing the remaining key procedures, it

will continue to lack an adequate process to develop well supported, reasonable

estimates of credit program costs. As a result, financial statements and budget

estimates could be misstated. Due to the magnitude of RD’s credit programs, an

unqualified audit opinion on USDA’s consolidated financial statements will not be

possible without the successful implementation of credit reform. Since USDA is the

largest direct lender in the federal government, proper implementation of credit

reform is material to the consolidated financial statements of the U.S. government.

USDA’s deficiencies in this area will also continue to contribute to our inability to

give an unqualified audit opinion on the consolidated financial statements of the U.S.

government.

Recommendations

In order to improve Rural Development’s estimates of credit program costs in a

timely manner, we recommend that the Secretary of Agriculture or his designee take

the following actions:

• Commit the necessary staff and/or funding resources to promptly implement the

procedures in the detailed implementation plan.

• Set milestone dates for all the procedures included in the detailed implementation

plan.

• Establish a process whereby the Executive Steering Committee for Credit Reform

Implementation routinely monitors the progress of credit reform implementation

efforts. With respect to the detailed implementation plan, establish a process for

the Steering Committee to (1) be notified when scheduled due dates will not be
B-286010

Page 13 GAO/AIMD-00-286R RD’s Credit Reform Implementation

met so that corrective actions can be taken and (2) approve changes to scheduled

due dates.

Agency Comments

On August 17, 2000, we obtained oral comments on a draft of our briefing slides and

letter from cognizant RD budget and finance office officials and USDA OCFO

officials, who generally agreed with our findings, conclusions, and recommendations.

Their comments were incorporated where appropriate.

-----

This report contains recommendations to you. The head of a federal agency is

required by 31 U.S.C 720 to submit a written statement on actions taken on these

recommendations. You should submit your statement to the Senate Committee on

Governmental Affairs and the House Committee on Government Reform no later than

60 days after the date of this letter. A written statement must also be sent to the

House and Senate Committees on Appropriations with the agency’s first request for

appropriations made more than 60 days after the date of this letter.

We are sending copies of this letter to the Honorable Richard E. Rominger, Deputy

Secretary for Agriculture; the Honorable Sally Thompson, Chief Financial Officer of

Agriculture; and the Honorable Jill Long Thompson, Under Secretary for Rural

Development. Copies of this letter will be made available to others upon request.

If you have any questions about this letter or the briefing, please contact me at (202)

512-9508 or Dan Blair, Assistant Director, at (202) 512-9401. Key contributors to this

assignment were McCoy Williams, Marcia Carlsen and Mary Papadopulos.

Sincerely yours,

Linda M. Calbom

Director, Resources, Community,

and Economic Development, Accounting

and Financial Management Issues

Enclosure
Enclosure

Page 14 GAO/AIMD-00-286R RD’s Credit Reform Implementation

Briefing to the USDA Executive Steering Committee

for Credit Reform Implementation

1

Accounting and Information

Management Division

Status of Rural Development Credit

Reform Implementation Efforts

Briefing to the USDA Executive Steering

Committee for Credit Reform Implementation

August 22, 2000
Enclosure

Page 15 GAO/AIMD-00-286R RD’s Credit Reform Implementation

2

Contents

• Purpose

• Background

• Status of Task Force Efforts

• Implementation Plan Issues

• Oversight Issues

• Resource Issues

• Conclusions

• Recommendations
Enclosure

Page 16 GAO/AIMD-00-286R RD’s Credit Reform Implementation

3

Purpose

• The purpose of this briefing is to provide the Steering

Committee an update on the status of USDA’s credit

reform task force’s efforts to improve Rural

Development’s (RD) subsidy estimation process since

our December 16, 1999, briefing. We will provide an

update on the status of procedures related to

• non-housing direct loan programs,

• guaranteed loan programs, and

• housing direct loan programs.

• Additionally, the status of procedures that relate to all

loan program types will be presented.
Enclosure

Page 17 GAO/AIMD-00-286R RD’s Credit Reform Implementation

4

Purpose

• With this briefing we will provide recommendations

designed to help RD complete the remaining

procedures in the implementation plan to improve

estimates of credit program costs.

• We will formalize our recommendations in a letter to

the Secretary.
Enclosure

Page 18 GAO/AIMD-00-286R RD’s Credit Reform Implementation

5

Background

• On June 16, 1999, we briefed this Committee on

• procedures outlined in the Technical Release,

Preparing and Auditing Direct Loan and Loan

Guarantee Subsidies Under the Federal Credit

Reform Act,

1 which includes procedures that

were successfully implemented by other

agencies, and

• additional procedures that RD should implement.

• In response, USDA developed a detailed

implementation plan, which included most of these

procedures.

1This Technical Release was approved by the Federal Accounting Standards Advisory Board and is expected

to be issued by the Office of Management and Budget.
Enclosure

Page 19 GAO/AIMD-00-286R RD’s Credit Reform Implementation

6

Background

• The detailed implementation plan was developed

to help guide the agency through its credit reform

implementation efforts extending into fiscal year

2001.

• This plan includes procedures to identify key

cash flow assumptions, improve cash flow

models, assess cash flow model data, and

other procedures to enhance RD’s credit

subsidy estimation process.

• The plan also includes staff responsible for

most tasks as well as some milestone dates.
Enclosure

Page 20 GAO/AIMD-00-286R RD’s Credit Reform Implementation

7

Background

• On December 16, 1999, we briefed the Executive

Steering Committee for Credit Reform

Implementation on the status of the task force’s

efforts to improve RD’s credit subsidy estimation

process.
Enclosure

Page 21 GAO/AIMD-00-286R RD’s Credit Reform Implementation

8

Background

• Between our June 1999 and December 1999

briefings, RD accomplished the following:

• RD budget and finance staff were trained to

conduct sensitivity analyses2 and performed

these analyses for the large non-housing direct

loan programs with a preliminary version of the

non-housing direct cash flow model.

• Summaries of the regulatory and legislative

requirements for all programs were completed.

2Sensitivity analysis is a process used to identify the assumptions that, when adjusted, have the greatest impact

on the credit subsidy estimate.
Enclosure

Page 22 GAO/AIMD-00-286R RD’s Credit Reform Implementation

9

Background

• The non-housing direct cash flow model was

compared to the summarized program and

legislative requirements to ensure that it reasonably

represented the cash flows of the loan programs

based on the laws and regulations that govern

them.

• A template was developed to document the cash

flow assumptions, data sources, and calculation

methods.

• An overview briefing was provided by the Office of

Management and Budget (OMB) on implementing

the balances approach to reestimates.3

3OMB has characterized the balances approach as a simplified, more direct method of reestimating credit

subsidies. Detailed implementation guidance is not yet developed.
Enclosure

Page 23 GAO/AIMD-00-286R RD’s Credit Reform Implementation

10

Background

• Since our last briefing, the task force has primarily

focused on procedures related to RD’s non-housing

direct loan programs and guaranteed loan programs,

which RD reported as $40.9 billion and $11.6 billion,

respectively, as of September 30, 1999.

• The task force is focusing secondarily on procedures

related to the housing direct loan programs, which

RD reported as $28.5 billion as of September 30,

1999.
Enclosure

Page 24 GAO/AIMD-00-286R RD’s Credit Reform Implementation

11

Background

• Due to the magnitude of RD’s credit programs, an

unqualified audit opinion on USDA’s consolidated

financial statements will not be possible without the

successful implementation of credit reform.

• Because USDA is the largest direct lender in the

federal government, proper implementation of credit

reform is material to the consolidated financial

statements of the U.S. government.

• USDA’s deficiencies in this area will continue to

contribute to our inability to give an unqualified audit

opinion on the consolidated financial statements of

the U.S. government.
Enclosure

Page 25 GAO/AIMD-00-286R RD’s Credit Reform Implementation

12

Background

• The programs most significant financially to both

RD’s financial statements and budget were identified

to ensure the new procedures’ maximum

effectiveness in improving the reasonableness of the

overall cost estimates of RD’s credit programs.

• Subsequently, these procedures will be

implemented for the smaller programs.
Enclosure

Page 26 GAO/AIMD-00-286R RD’s Credit Reform Implementation

13

Status of Task Force Efforts

• The following slides present the status of key

procedures outlined in USDA’s detailed

implementation plan related to RD’s

• non-housing direct loan programs,

• guaranteed loan programs, and

• housing direct loan programs.

• Additionally, we will update the status of procedures

that relate to all RD’s loan program types.
Enclosure

Page 27 GAO/AIMD-00-286R RD’s Credit Reform Implementation

14

Status of Procedures Related to NonHousing Direct Loan Programs

• The following table summarizes key procedures that were not

completed as of December 1999, their scheduled due dates from

the implementation plan, and the current status.

Procedure Original due

date (if any)

Revised due

date (if any) Current status

Finalize new cash flow model Completed

May 2000

Document cash flow model September

1999 In process

Perform sensitivity analyses to

identify key cash flow

assumptions

Completed

June 2000

Document cash flow

assumptions

September

1999

Completed

July 2000

Assess cash flow model data

reliability April 2000 August 2000 In process

Compare estimated to actual

cash flows August 1999 Not started
Enclosure

Page 28 GAO/AIMD-00-286R RD’s Credit Reform Implementation

15

Procedures Related to Non-Housing

Direct Loan Programs

Procedures completed or in process for the nonhousing direct loan programs:

• The cash flow model was completed and

reviewed.

• Several refinements were implemented.

• The logic flow and mechanics of the cash flow

model were documented and reviewed and are

currently being revised.
Enclosure

Page 29 GAO/AIMD-00-286R RD’s Credit Reform Implementation

16

Procedures Related to Non-Housing

Direct Loan Programs

• Sensitivity analyses were updated and

documented by RD staff to reflect revisions made

to the non-housing direct cash flow model.

• Key cash flow assumptions were identified.

• RD staff have primarily focused their efforts on

documenting and supporting these

assumptions.

• The programs’ cash flow assumptions were

documented, including data sources and

calculation methods.
Enclosure

Page 30 GAO/AIMD-00-286R RD’s Credit Reform Implementation

17

Procedures Related to Non-Housing

Direct Loan Programs

• Data reliability tests were planned and are

currently in process for key cash flow

assumptions. If it is determined that accounting

system data supporting key cash flow

assumptions are not reliable, it may be necessary

to

• adjust the values of cash flow assumptions,

• identify alternative data sources, and/or

• revise the cash flow model.
Enclosure

Page 31 GAO/AIMD-00-286R RD’s Credit Reform Implementation

18

Procedures Related to Non-Housing

Direct Loan Programs

The procedure that remains to be started for the

non-housing direct loan programs:

• Estimated loan performance needs to be

compared to actual cash flows to determine if

significant differences exist and whether

assumptions related to future loan performance

need to be revised.
Enclosure

Page 32 GAO/AIMD-00-286R RD’s Credit Reform Implementation

19

Status of Procedures Related to

Guaranteed Loan Programs

• The following table summarizes key procedures that were not

completed as of December 1999, their scheduled due dates from

the implementation plan, and the current status.

Procedure Original due

date (if any)

Revised due

date (if any) Current status

Finalize new cash flow model July 2000 Completed

August 2000

Document cash flow model September

2000 In process

Perform sensitivity analyses to

identify key cash flow

assumptions

August 2000 In process

Document cash flow

assumptions

September

2000 In process

Assess cash flow model data

reliability August 2000 In process

Compare estimated to actual

cash flows Not started
Enclosure

Page 33 GAO/AIMD-00-286R RD’s Credit Reform Implementation

20

Procedures Related to Guaranteed

Loan Programs

Procedures completed or in process for the guaranteed

loan programs:

• A new cash flow model was developed based on

readily available data from the accounting system and

concepts4 from other agencies’ cash flow models. This

cash flow model was reviewed and several

refinements were implemented.

• Regulatory and legislative requirements were

considered during the development.

• The logic flow and mechanics of the new cash flow

model were documented and are currently being

reviewed.

4To facilitate model development, sections of this model were patterned after other agency cash flow models that

were audited and determined to provide a reasonable basis to estimate future loan performance.
Enclosure

Page 34 GAO/AIMD-00-286R RD’s Credit Reform Implementation

21

Procedures Related to Guaranteed

Loan Programs

• Sensitivity analyses were performed to identify the

key cash flow assumptions and RD staff are

currently reviewing the results.

• RD staff are preparing documentation for the

programs’ cash flow assumptions. This

documentation will include data sources and

calculation methods.
Enclosure

Page 35 GAO/AIMD-00-286R RD’s Credit Reform Implementation

22

Procedures Related to Guaranteed

Loan Programs

• Data reliability tests were planned for key cash

flow assumptions. If it is determined that

accounting system data supporting key cash flow

assumptions are not reliable, it may be necessary

to

• adjust the values of cash flow assumptions,

• identify alternative data sources, and/or

• revise cash flow models.
Enclosure

Page 36 GAO/AIMD-00-286R RD’s Credit Reform Implementation

23

Procedures Related to Guaranteed

Loan Programs

The procedure that remains to be started for the

guaranteed loan programs:

• Estimated loan performance needs to be

compared to actual cash flows to determine if

significant differences exist and whether

assumptions related to future loan performance

need to be revised.
Enclosure

Page 37 GAO/AIMD-00-286R RD’s Credit Reform Implementation

24

Status of Procedures Related to

Housing Direct Loan Programs

• The following table summarizes key procedures that were not

completed as of December 1999, their scheduled due dates from

the implementation plan, and the current status.

Procedure Original due

date (if any)

Revised due

date (if any) Current status

Assess existing cash flow data July 2000 In process

Develop new cash flow model May 2001 Not started

Ensure cash flow model

represents regulatory

requirements

May 20015 Not started

Document cash flow model May 20015 Not started

Perform sensitivity analyses to

identify key cash flow

assumptions

May 20015 Not started

Document cash flow

assumptions May 20015 Not started

Assess cash flow model data

reliability Not started

Compare estimated to actual

cash flows Not started

5The due date for this procedure is presented in the plan as being completed with the development of the new

housing direct cash flow model, which is presented as being completed by contractors. However, there

currently is no contract for this work and no funds were provided for these purposes.
Enclosure

Page 38 GAO/AIMD-00-286R RD’s Credit Reform Implementation

25

Procedures Related to Housing Direct

Loan Programs

The procedure in process for the housing direct loan

programs:

• An outside contractor was hired to analyze

existing cash flow data to determine if the

accounting systems contain the appropriate data

to reasonably estimate future loan performance

and identify alternative data sources if necessary.
Enclosure

Page 39 GAO/AIMD-00-286R RD’s Credit Reform Implementation

26

Procedures Related to Housing Direct

Loan Programs

Procedures that remain to be started for the housing

direct loan programs:

• Once the results of the contractor’s analysis of

existing cash flow data are known, it may be

necessary to

• temporarily use alternative data sources and

• develop and prioritize system change requests

to ensure systems provide essential data to

model future loan performance.
Enclosure

Page 40 GAO/AIMD-00-286R RD’s Credit Reform Implementation

27

Procedures Related to Housing Direct

Loan Programs

• A new cash flow model needs to be developed6

that will reasonably estimate the cost of the loan

programs based on readily available data or

alternative data sources, if necessary.

• During the development, ensure that the cash

flow model reasonably represents the cash

flows of the loan programs based on the laws

and regulations that govern them.

• The logic flow and mechanics of the cash flow

model need to be documented.

6The cash flow model currently used to estimate the cost of the housing direct loan programs is based on

several cash flow assumptions that RD is unable to adequately support.
Enclosure

Page 41 GAO/AIMD-00-286R RD’s Credit Reform Implementation

28

Procedures Related to Housing Direct

Loan Programs

• Sensitivity analyses need to be performed to

identify key cash flow assumptions.

• The programs’ cash flow assumptions need to be

documented, including data sources and

calculation methods.
Enclosure

Page 42 GAO/AIMD-00-286R RD’s Credit Reform Implementation

29

Procedures Related to Housing Direct

Loan Programs

• Data reliability tests need to be performed for key

cash flow assumptions. If it is determined that

accounting system data supporting key cash flow

assumptions are not reliable, it may be necessary

to

• adjust the values of cash flow assumptions,

• identify alternative data sources, and/or

• revise cash flow models.
Enclosure

Page 43 GAO/AIMD-00-286R RD’s Credit Reform Implementation

30

Procedures Related to Housing Direct

Loan Programs

• Estimated loan performance needs to be

compared to actual cash flows to determine if

significant differences exist and whether

assumptions related to future loan performance

need to be revised.
Enclosure

Page 44 GAO/AIMD-00-286R RD’s Credit Reform Implementation

31

Status of Procedures Related to All

Loan Programs

• The following table summarizes key procedures that were not

completed as of December 1999, their scheduled due dates from

the implementation plan, and the current status.

Procedure Original due

date (if any)

Revised due

date (if any) Current status

Hire additional staff Completed

May 2000

Resolve reestimate issues with

OMB March 2000 In process

Develop policies and procedures

for calculating estimates of credit

program costs

February

2000 Not started

Implement procedures to

automate the estimation process Not started

Conduct “lessons learned”

sessions with HUD regarding the

balances approach

September

1999 January 2000 Not started7

7The task force has put this procedure on hold until guidance on the balances approach is issued by OMB.
Enclosure

Page 45 GAO/AIMD-00-286R RD’s Credit Reform Implementation

32

Procedures Related to All Loan

Programs

Procedures completed or in process that apply to all

loan programs:

• Additional staff were hired by RD to assist with

credit reform implementation.

• RD is working to resolve its frequency and timing

of reestimate issues with OMB.
Enclosure

Page 46 GAO/AIMD-00-286R RD’s Credit Reform Implementation

33

Procedures Related to All Loan

Programs

Procedures that remain to be started that apply to all

loan programs:

• Written policies and procedures for calculating

estimates of credit program costs need to be

developed and implemented, including a formal

supervisory review process and a process to

ensure that key cash flow assumptions are

reviewed and approved by budget, accounting,

and program office staff.
Enclosure

Page 47 GAO/AIMD-00-286R RD’s Credit Reform Implementation

34

Procedures Related to All Loan

Programs

• Procedures need to be developed and

implemented to automate the credit subsidy

estimation process to reduce workloads and the

chance of data entry errors.

• Automating this process could include

• centralizing input sections in the cash flow

models organized by program instead of by

cohort8 and

• linking data files to cash flow model input

sections to reduce the need for manual data

entry.

8A cohort includes those direct loans or loan guarantees of a program for which a subsidy appropriation is

provided for a given fiscal year even if disbursements occur in subsequent years.
Enclosure

Page 48 GAO/AIMD-00-286R RD’s Credit Reform Implementation

35

Procedures Related to All Loan

Programs

• The task force needs to conduct “lessons learned”

sessions with the Department of Housing and

Urban Development staff to understand how they

implemented the balances approach and

automated their estimation processes.

• The task force has put this procedure on hold

until guidance on the balances approach is

issued by OMB.
Enclosure

Page 49 GAO/AIMD-00-286R RD’s Credit Reform Implementation

36

Implementation Plan Issues

• RD has experienced a large number of delays in

meeting scheduled due dates and several due dates

are not established. For example, of the 20 key

procedures remaining to be completed,

• 6 procedures’ due dates were already missed,

• 4 procedures lack due dates, and

• 10 procedures are due in the future.

• Further, of the 5 recently completed procedures:

• 2 procedures were completed after the due date

and

• 3 procedures lacked due dates.
Enclosure

Page 50 GAO/AIMD-00-286R RD’s Credit Reform Implementation

37

Oversight Issues

• While there were individual efforts by Steering

Committee members to eliminate barriers impeding

implementation efforts, the Steering Committee as a

whole

• does not meet on a regular basis,

• was not made aware of missed or changed

scheduled due dates, and

• was not actively involved in overseeing progress

toward implementing the plan and resolving credit

reform weaknesses.
Enclosure

Page 51 GAO/AIMD-00-286R RD’s Credit Reform Implementation

38

Resource Issues

• Since April 1999, 2 staff were reassigned internally to

work part time on RD’s credit reform implementation

efforts; in May 2000, 2 additional staff were hired to

work full-time in this area.

• The lack of sustained resource commitment to credit

reform has impeded implementation efforts.

• Due to the complexity of the interest calculations for

the single family housing program and the limited

resources currently available to the task force, timely

development of this cash flow model is unlikely.

Further, no funds were identified to hire contractors for

this work.
Enclosure

Page 52 GAO/AIMD-00-286R RD’s Credit Reform Implementation

39

Conclusions

• The majority of the RD’s key procedures in the

detailed implementation plan are not completed,

and several scheduled completion dates were

missed or not established.

• The credit subsidy estimation process could be

improved in a more timely manner if more people

were assigned in this area on a full-time basis.
Enclosure

Page 53 GAO/AIMD-00-286R RD’s Credit Reform Implementation

40

Conclusions

• The task force’s ability to resolve credit reform

issues will be limited without contractor support to

develop the housing direct loan program cash flow

model.

• Due to the magnitude of the RD’s loan programs, an

unqualified audit opinion on USDA’s consolidated

financial statements will not be possible without the

successful implementation of credit reform for these

programs.
Enclosure

Page 54 GAO/AIMD-00-286R RD’s Credit Reform Implementation

41

Recommendations

• In order to improve RD’s estimates of credit

program costs in a timely manner, we recommend

that the Secretary of the Department of Agriculture

or his designee take the following actions:

• Commit the necessary staff and/or funding

resources to promptly implement the

procedures included in the detailed

implementation plan.

• Establish scheduled due dates for all the

procedures included in the detailed

implementation plan.
Enclosure

Page 55 GAO/AIMD-00-286R RD’s Credit Reform Implementation

42

Recommendations

• Establish a process whereby the Executive

Steering Committee routinely monitors the

progress of credit reform implementation

efforts. With respect to the detailed

implementation plan, establish a process for

the Executive Steering Committee to

• be notified when scheduled due dates will

not be met so that corrective actions can be

taken and

• approve changes to scheduled due dates.

(913905)