GAO

United States General Accounting Office

Report to Congressional Requesters

September 2000 FINANCIAL 

MANAGEMENT

Impact of RUS’ 

Electricity Loan 

Restructurings

GAO/AIMD-00-288

Page 1 GAO/AIMD-00-288 RUS’ Loan Restructurings

Contents

Letter 3

Appendixes Appendix I: Key Policies and Procedures Used to Settle Debt

Owed by Electric Borrowers 24

Appendix II: Comments From the Rural Utilities Service 28

Appendix III: Staff Acknowledgments 36

Abbreviations

CFC National Rural Utilities Cooperative Finance Corporation

FFB Federal Financing Bank

G&T generation and transmission

OMB Office of Management and Budget

RD Rural Development

RE Act Rural Electrification Act of 1936

RUS Rural Utilities Service

SFFAS Statement of Federal Financial Accounting Standards

USDA Department of Agriculture
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United States General Accounting Office

Washington, D.C. 20548

Accounting and Information

Management Division

B-286021 Letr

September 29, 2000

The Honorable John R. Kasich

Chairman

Committee on the Budget

House of Representatives

The Honorable Stephen Horn

Chairman, Subcommittee on Government

Management, Information and Technology

Committee on Government Reform

House of Representatives

This report responds to your request, as expressed in your letters of 

October 15, 1999, and March 23, 2000, to review the Rural Utilities Service’s 

(RUS) policies, procedures, and assumptions used when restructuring 

loans of financially troubled borrowers to mitigate future loan losses. 

Increased competition in the electricity industry has increased the risk of 

the federal government incurring future losses on loans to generation and 

transmission (G&T) cooperatives. This risk is directly related to the G&Ts’ 

ability to set their rates in a competitive and/or regulated market at a level 

sufficient to recover all their costs. In fiscal year 1999, under its debt 

settlement authority, RUS restructured the loans of two financially troubled 

G&T borrowers which totaled $737 million after the restructuring. In the 

event that G&Ts are unable to establish a competitive position within the 

electricity industry, it is probable that in the future, RUS will have to use its 

debt settlement authority to restructure additional G&T borrowers’ loans 

that represent $19 billion of the $28 billion electric loan portfolio as of 

September 30, 1999. Based on agreement with your staff, we reported to 

you separately in a February 10, 2000, letter1

 on RUS’ loan origination 

policies and procedures for making new G&T loans. In that letter, we 

recommended that the Secretary of Agriculture direct the Acting 

Administrator of RUS to develop and document written procedures to 

ensure consistent implementation of its G&T loan origination policies. In 

this report, we have focused on RUS’ restructurings of loans made to two 

financially troubled G&T borrowers prior to implementation of the Federal 

1

Rural Utilities Service: Loan Origination Policies and Procedures for Generation and 

Transmission Loans (GAO/AIMD-00-89R, February 10, 2000). 
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Credit Reform Act of 1990. Specifically, you asked us to determine (1) RUS’ 

policies and procedures for restructuring financially troubled G&T loans 

and whether these are being consistently followed, (2) whether RUS 

properly carried out loan restructurings in accordance with criteria defined 

in the Federal Credit Reform Act of 1990 and Office of Management and 

Budget (OMB) guidance, (3) how much it cost the federal government to 

restructure RUS’ debt since enactment of its debt settlement authority, and 

(4) whether the costs of restructured loans are accurately reported.

Results in Brief While RUS generally followed its policies and procedures for restructuring 

loans of two financially troubled borrowers, we found one instance where 

RUS’ policies were not fully utilized and other instances where procedures 

could be improved. For example, RUS’ policies provide that a borrower 

may be required to obtain credit support from its member distribution 

cooperatives, such as obtaining a co-signature when restructuring the G&T 

loans. RUS exercised this option for only one of the two financially 

troubled borrowers, and in that case, only a portion of the restructured 

note was guaranteed by the G&T’s member distribution cooperatives. A 

co-signature allows RUS to seek payment from the member distribution 

cooperatives if the G&T defaults on its restructured loans, which could 

help mitigate future loan losses to the government by better securing the 

restructured loans. In addition, RUS’ procedures lack detailed written 

criteria for determining when a borrower should be added or removed from 

RUS’ list of financially troubled borrowers. RUS maintains this list to assist 

in minimizing the federal government’s risk of loss by identifying those 

borrowers that require additional monitoring of their ability to repay the 

loans. Lack of detailed written criteria increases the potential for not 

properly identifying those loans that require increased monitoring and for 

inconsistent determinations as to when to add or remove a borrower from 

the list.

RUS properly carried out its loan restructurings under its debt settlement 

authority in accordance with the Federal Credit Reform Act of 1990 and 

OMB guidance.2

 Under Credit Reform, loan restructurings are classified as 

either “workouts” or “modifications” and, depending on the classification, 

require significantly different accounting and/or budgetary treatment to 

accurately measure and report the costs associated with restructured 

2

OMB Circulars A-11 and A-34 include guidance for implementing credit reform and provide 

the criteria used to identify workouts versus modifications.
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loans. Among other differences, modifications require new budget 

authority while workouts do not. OMB concluded, and we agree, that the 

costs of workouts are considered to be part of the costs of defaults and are 

not treated as modifications. In this case, RUS restructured the loans of 

two financially troubled borrowers under its debt settlement authority to 

maximize its recovery in the face of imminent default. Thus, any changes in 

the original terms of the loan or guarantee as a result of restructuring 

should be classified as a workout rather than a modification. Therefore, 

RUS did not have to obtain new budget authority to cover the cost of the 

restructurings.

RUS’ restructuring of the borrowers’ loans resulted in new borrowing 

agreements that included significant concessions, such as noninterest 

bearing notes, notes that included payments based on contingencies such 

as the sale of assets, and forgiveness of interest. These two borrowers had 

outstanding RUS debt of $331 million and $406 million, respectively, after 

their debt was restructured. RUS estimated that it could lose 

approximately $185 million on loans restructured for the first borrower and 

between $110 and $120 million on loans restructured for the second 

borrower, on a net present-value basis. These estimates may change based 

on several events that could occur in the future. For example, according to 

RUS and an independent consultant, the exact cost of restructuring one 

borrower’s debt may vary from current estimates because the debt 

restructuring agreement contains contingencies, such as the borrower 

paying the principal outstanding based on net proceeds from asset sales, 

which may result in RUS receiving more or less from the borrower than 

current estimates.

As part of the debt restructuring agreements, RUS entered into 

transactions with the borrowers and a third-party creditor that resulted in 

RUS acquiring the borrowers’ non-RUS guaranteed debt, totaling about 

$12.3 million. According to RUS officials, the acquisition of the borrowers’ 

debt held by a third party and not guaranteed by RUS was in RUS’ best 

interest. RUS reached this conclusion because, among other things, it 

allows RUS to make all the creditor decisions in the final development of 

the restructured agreement, improves RUS’ security interest in the 

restructured loans, and increases RUS’ flexibility to make decisions 

concerning the sale or other marketing of the borrowers’ nuclear assets. 
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Rural Development (RD)3 did not include in its fiscal year 1999 financial 

reports the estimated loss of $185 million RUS anticipates will occur as a 

result of restructuring loans for one borrower, and included only 

$30 million of RUS’ estimated $110 to $120 million anticipated loss on the 

restructured loan for the other borrower. Also, RD did not record in its 

accounting records a $7.2 million forgiveness of interest due to the agency 

as a result of restructuring one of the borrower’s loans. These errors 

occurred because RD lacked documented procedures to ensure that debt 

forgiveness, as well as estimated losses resulting from restructuring loans, 

were properly reported in the financial statements. 

The overall outcome of RUS’ restructuring activities will not be known for 

some time and will be significantly affected by the unfolding of events 

surrounding the current move towards competitive electricity markets. It is 

uncertain how these events will affect the remainder of RUS’ $19 billion 

G&T electric loan portfolio; however, it is likely that additional 

restructurings and losses will occur. To the extent that additional 

restructurings occur, it is essential that RUS fully utilize all measures 

available to minimize the risk of loss from these problem loans and ensure 

that losses that do occur are properly recorded and reported to Congress 

and other decisionmakers. We are making several recommendations to 

address these accounting and reporting deficiencies.

RUS and RD generally agreed with the thrust of our recommendations 

directed toward improving the accuracy of estimated future loan losses and 

the procedures to be employed when loans are restructured. However, RUS 

disagreed with our position that it had not fully used the member guarantee 

option when it restructured certain G&T loans and did not agree that such 

guarantees were mandatory. Our point is that if RUS decides to obtain 

member guarantees as part of a restructuring agreement, the guarantees 

should cover all loans and remain in effect until all loans are repaid in order 

to optimally protect the government’s interest. With regard to our 

conclusion on RD’s inaccurate reporting of costs associated with 

restructured loans, RD disagrees with our assessment because the 

allowance for loan loss is an accounting estimate and RD believes that the 

issue is one of “timely” reporting rather than accurate reporting. While we 

agree that estimates can never be totally “accurate,” in this case, even 

though the loss estimates had been determined at the time of the 

3

RUS is a component of RD’s mission area. RD provides accounting services to RUS for its 

electric, telecommunications, and water and environmental loan programs. 
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restructuring, they were not fully reflected in RD’s fiscal year 1999 financial 

statements, which were issued 9 months after the last restructuring. 

Background RUS, an entity within the Department of Agriculture (USDA), provides 

direct loans or loan guarantees primarily to rural electric cooperatives that 

market power on a wholesale and retail basis. Most RUS borrowers are 

either G&Ts or distribution cooperatives. A G&T cooperative is a nonprofit 

rural electric system whose chief function is to sell electric power on a 

wholesale basis to its owners—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 customers.

In the 1970s and 1980s, RUS provided financing for several G&Ts that had 

invested in the construction of large nuclear 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, and 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. For 

example, from fiscal year 1992 through July 1999, RUS wrote off $1.8 billion 

of debt related to financially troubled G&Ts and is in the process of writing 

off an additional $3 billion of the $4.1 billion in loans owed by a borrower 

as directed by the bankruptcy courts. We reported4

 that it is probable that 

the federal government will continue to incur losses from loan write-offs 

related to RUS borrowers that were bankrupt or financially troubled. In 

addition, we reported that it is also probable that future losses will arise 

from other RUS borrowers with high production costs and the inability to 

raise rates because of regulatory and/or market pressures.

4

Rural Utilities Service: Status of Electric Loan Portfolio (GAO/AIMD-99-264R, August 17, 

1999).
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Under Public Law 104-127, the Secretary of Agriculture has the authority to 

compromise, adjust, reduce, or charge off debts or claims arising from 

loans made or guaranteed, such as those obtained by G&Ts, under the 

Rural Electrification Act of 1936 (RE Act).5

 The Secretary of Agriculture 

has delegated this authority to the Administrator of RUS, with respect to 

loans made or guaranteed by RUS.6

The Federal Credit Reform Act of 1990 governs how RUS should budget for 

loans and loan guarantees made under the RE Act. The act requires that the 

budget reflect a more accurate measurement of the government’s subsidy 

costs7

 for federal direct loans and loan guarantees, which permits better 

cost comparisons both among credit programs and between credit and 

noncredit programs. In addition, accounting standards for credit programs 

were developed to ensure that financial reporting for credit program 

activities generally mirror the requirements of the Federal Credit Reform 

Act of 1990. The requirements for budgeting and accounting for the costs of 

debt restructurings are drawn from the Federal Credit Reform Act, OMB 

guidance, and RUS’ authority to make loans and loan guarantee 

commitments and its debt settlement authority. The costs of the 

workouts/restructuring of debt in imminent or actual default are not 

considered modifications, but are considered to be part of the cost of 

default for which the agency has permanent, indefinite budget authority.

Scope and 

Methodology

We selected for review all troubled debt restructured by RUS under its 

authority granted in Public Law 104-127 dated April 4, 1996. Two debt 

restructuring agreements had been completed by the agency under this 

authority as of May 1999. In addition to these two restructurings, another 

borrower had requested that RUS settle its debt in the form of debt 

5

According to 7 CFR 1717, a claim is defined as any claim of the government arising from 

loans made or guaranteed under the RE Act, as amended, to a rural electric borrower. Debt 

is defined as, but not limited to, outstanding principal, accrued interest, penalties, and the 

government’s costs of debt collection arising from loans made or guaranteed under the RE 

Act.

6

Prior to April 4, 1996, the Department of Justice had to approve all write-offs that were part 

of any agreement RUS reached with a G&T to restructure its debt.

7

The credit subsidy cost is the government’s estimated net cost, in present value terms, of 

direct or guaranteed loans over the entire period the loans are outstanding. The data used 

for these budgetary estimates are generally reestimated after the fiscal year-end to reflect 

any changes in actual loan performance since the budget was prepared.
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forgiveness. However, restructuring of the borrower’s loans did not 

materialize because RUS negotiated a deal that resulted in the borrower 

merging with another RUS borrower considered financially viable. As part 

of this deal, the financially viable borrower assumed the debt of the 

financially troubled borrower. 

To determine RUS’ policies and procedures for restructuring financially 

troubled G&T loans, we reviewed RUS’ policies outlined in regulation 

7 CFR 1717.1200, Settlement of Debt and RUS’ operating procedures 

documented in Staff Instruction 1717Y-1, Processing Requests for 

Settlement of Debt Owed by Electric Borrowers. In addition, we 

interviewed RUS officials to obtain background information regarding the 

enactment of RUS’ authority. 

To determine if RUS consistently followed its policies and procedures 

when restructuring the loans of two financially troubled borrowers, we 

reviewed RUS’ administrative documents supporting the debt restructuring 

agreements and compared those documents to RUS’ policies and 

procedures. We also reviewed both financially troubled borrowers’ 

applications to RUS requesting settlement of debt to determine whether the 

documents included with each borrower’s application supported its 

statement that it was unable or would be unable to meet its financial 

obligations in the short term. We interviewed RUS officials regarding the 

status of RUS’ list of financially troubled G&T borrowers and the criteria it 

uses to add and remove borrowers from the list. In addition, we 

interviewed officials at the National Rural Utilities Cooperative Finance 

Corporation (CFC) to identify policies and procedures it uses when 

restructuring financially troubled borrowers’ debt. We did not verify the 

accuracy of the underlying data RUS used to assess the borrowers’ need for 

debt settlement, nor did we reperform any of RUS’ procedures to approve 

the borrowers’ application for debt settlement.

To determine whether RUS properly carried out loan restructurings in 

accordance with criteria defined in the Federal Credit Reform Act of 1990 

and OMB guidance, we interviewed RUS’ Office of General Counsel staff 

and OMB officials. In addition, we reviewed the Federal Credit Reform Act 

of 1990, as amended by the Balanced Budget Act of 1997, RUS’ authority 

under the RE Act and its debt settlement authority, and our Office of 

General Counsel analyzed how troubled debt restructurings should be 

budgeted and accounted for based on the requirements of those laws. 
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To determine how much it cost the federal government to restructure RUS’ 

debt since enactment of its debt settlement authority, we analyzed debt 

restructuring agreements and supporting documentation, independent 

consultants’ reports, agency and borrower financial reports, and held 

discussions with agency program, accounting, and budget officials. We did 

not determine the administrative costs, such as salaries, associated with 

the debt restructurings because that information was not tracked by the 

agency and could not be readily determined. 

To determine whether the costs of restructured loans have been accurately 

reported, we reviewed agency audited financial statements and supporting 

records. We compared cost data included in the debt restructuring 

agreements to the agency’s financial statements and supporting records. 

We interviewed agency accounting staff to determine policies and 

procedures used to estimate losses on outstanding loan balances. In 

addition, we interviewed budget staff to determine how loan losses are 

reported in the budget. Because RUS is a component of USDA’s Rural 

Development mission area, RUS’ financial data are included in Rural 

Development’s consolidated financial statements. 

We conducted our review from September 1999 through July 2000 in 

accordance with generally accepted government auditing standards. We 

requested comments on a draft of this report from the Administrator of the 

Rural Utilities Service or his designee. The Administrator provided us with 

written comments, which are discussed in the “Agency Comments and Our 

Evaluation” section and reprinted in appendix II.

Policies and 

Procedures for Loan 

Restructurings Were 

Not Fully Utilized and 

Could Be Improved

RUS’ policies for the settlement of debt and claims owed by rural electric 

borrowers are documented in 7 CFR 1717.1200, Settlement of Debt. This 

regulation implements RUS’ statutory authority to settle borrowers’ debts 

and claims arising from loans made or guaranteed to rural electric 

borrowers under the Rural Electrification Act of 1936.8

 RUS’ internal Staff 

Instruction 1717Y-1, Processing Requests for Settlement of Debt Owed by 

Electric Borrowers, documents the procedures for processing borrowers’ 

requests for settlement of debt owed to RUS. Key policies and procedures 

are discussed in more detail in appendix I. 

8

The Rural Electrification Act of 1936, as amended (7 U.S.C. § 901 et seq.), provides the basic 

statutory authority for the electricity and telecommunications programs, including the 

authority for loans to be made by the Federal Financing Bank. 
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While RUS generally followed its policies and procedures for restructuring 

loans of two financially troubled borrowers, we found one instance where 

RUS’ policies were not fully utilized and other instances where procedures 

could be improved. For example, RUS’ policies provide that a borrower 

may be required to obtain credit support from its member distribution 

cooperatives, such as obtaining a co-signature when restructuring the 

G&Ts’ loans. RUS exercised this option for only one of the two financially 

troubled borrowers, and in that case, only a portion of the restructured 

note was guaranteed by the G&T’s member distribution cooperatives. A 

co-signature allows RUS to seek payment from the member distribution 

cooperatives if the G&T defaults on its restructured loans. Requiring a 

co-signature could help mitigate future loan losses to the government by 

better securing the restructured loans. In addition, RUS’ procedures lack 

detailed written criteria for determining when a borrower should be added 

or removed from RUS’ list of financially troubled borrowers. Federal 

internal control standards require that (1) internal control procedures be 

clearly documented, (2) the documentation be readily available for 

examination, and (3) the documentation appear in management directives, 

administrative policies, or operating manuals.9

 RUS maintains the list to 

assist in minimizing the federal government’s risk of loss by identifying 

those borrowers that require additional monitoring of their ability to repay 

the loans. Lack of detailed written criteria increases the potential for not 

properly identifying those loans that require increased monitoring and for 

inconsistent determinations as to when to add or remove a borrower from 

the list.

In the first two restructurings completed under its debt settlement 

authority, which we will refer to as borrower A and borrower B, RUS only 

obtained a member guarantee for borrower B, and in that case, only a 

portion of the restructured note was guaranteed by that G&T’s members. 

For this borrower, RUS made three restructured notes totaling 

$331 million. Of the $331 million, RUS required the borrower’s members to 

guarantee approximately 3 percent (about $10.2 million). In addition, RUS 

has agreed to reduce the guarantee by 7 cents for each dollar of original 

principal paid on the first two notes and eliminate the member guarantee 

after the notes are paid. RUS stated that the level of guarantee obtained 

9

Standards for Internal Control in the Federal Government (GAO/AIMD-00-21.3.1, November 

1999). These standards provide an overall framework for establishing and maintaining 

internal control and for identifying and addressing major performance and management 

challenges and areas at greatest risk of fraud, waste, abuse, and mismanagement.
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was based on the value of the members’ equity. However, we believe that 

this does not maximize the government’s security in the restructured loans 

because the level of guarantee is reduced as the first two loans are repaid 

and then eliminated for the life of the third loan. Had RUS structured the 

guarantee to include the third loan until it was paid in full, it would have 

maximized its recovery chances. That is, the guarantee would have 

remained in effect for the third loan which has significant risk because 

payment of this note is contingent on net proceeds from asset sales and 

other recovery mechanisms. RUS’ debt settlement policies outlined in 

7 CFR 1717.1200 include various factors to consider when restructuring a 

borrower’s loan, including obtaining member guarantees to secure loans. 

This practice of requiring member guarantees is used by CFC, a private, 

not-for-profit cooperative association whose principal purpose is to 

provide its members with a source of financing to supplement the loan 

programs of RUS. CFC officials stated that when it restructures troubled 

debt of G&T borrowers, its policy is to obtain guarantees from the 

borrower’s member systems. Utilizing member guarantees, to the greatest 

extent possible, when restructuring loan agreements could help reduce the 

government’s risk of future losses even if the amount guaranteed is not a 

substantial part of the loan.

In addition, RUS’ procedures lack detailed criteria used to determine when 

a borrower should be added or removed from RUS’ list of financially 

troubled borrowers. For example, RUS’ procedures require that any 

borrower assigned to RUS’ Financial Services Staff—who monitor 

financially troubled borrowers—will automatically be designated as 

financially troubled. No other criteria is documented as to when to add a 

borrower to the list. Also, RUS’ procedures require that a borrower be 

removed from the list when its financial troubles have been successfully 

mitigated. However, there is no explanation provided to define 

“successfully mitigated.” RUS’ broad criteria documented in its procedures 

does not reflect the detailed definitions used by RUS and communicated to 

us during this and a previous assignment. In September 1997, we reported10

RUS management’s definition of a financially troubled borrower. According 

to RUS, borrowers considered financially troubled have either defaulted on 

their loans, had their loans restructured but are still experiencing financial 

10Federal Electricity Activities: The Federal Government’s Net Cost and Potential for Future 

Losses (GAO/AIMD-97-110 and 110A, September 19, 1997). This report discusses the federal 

government’s net costs and exposure to future financial losses to support electricity-related 

activities, including RUS.
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difficulty, declared bankruptcy, or have formally requested financial 

assistance from RUS. During this assignment, in an interview with a senior 

RUS official, we were told that borrowers are removed from the list of 

financially troubled borrowers when RUS is no longer actively negotiating 

with that borrower regarding its outstanding debt. Although RUS staff are 

aware of the various criteria used, not documenting this criteria increases 

the potential for not properly identifying those loans that require increased 

monitoring. Other improvements we believe RUS could make to its 

procedures for reporting the cost of restructuring G&T debt are discussed 

later in this report.

RUS Properly Carried 

Out Loan 

Restructurings

RUS properly carried out its loan restructurings under its debt settlement 

authority in accordance with the Federal Credit Reform Act of 1990 and 

OMB guidance. Under Credit Reform, loan restructurings are classified as 

either “workouts” or “modifications” and depending on the classification, 

require significantly different accounting and/or budgetary treatment in 

order to accurately measure the costs associated with restructured loans. 

As mentioned earlier, RUS restructured loans totaling about $737 million 

for the two financially troubled G&T borrowers under its debt settlement 

authority. Both debt restructuring agreements were completed during fiscal 

year 1999. RUS restructured these loans to provide the borrowers more 

favorable payment terms and to improve the borrowers’ competitive 

position and ability to repay their loans. New borrowing agreements were 

made as part of both debt restructurings, which included significant 

concessions such as issuing noninterest bearing notes and allowing the 

borrowers to make payments based on contingencies, including net 

proceeds from asset sales.

The accounting and/or budgetary treatment for a workout significantly 

differs from the treatment of a modification. A workout does not require an 

agency to obtain budget authority in the current year to cover the full cost 

of the loan or guarantee over its remaining life. The cost of the revision 

under a workout (e.g., a change in cash receipts and/or any defaults that 

may occur in the future) is recognized in the budget over the remaining life 

of the restructured loan or guarantee in the year(s) the change in the cost 

occurs. However, for a modification, Credit Reform requires an agency to 

obtain budget authority in the current year to cover the full cost of the 

modified loan (referred to as subsidy) over its remaining life. Also, the full 

cost of the modified loan or guarantee must be reflected in the agency’s 

current year financial statements and budget. While agencies are required 

to annually reestimate the subsidy cost, Congress provided permanent, 
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indefinite authority to cover the difference between the reestimated cost 

and prior estimate. Therefore, improper classification of restructured loans 

could result in RUS and Congress not having accurate budgetary and 

financial statement data to help make informed decisions about future 

funding needs for the electric loan program.

RUS classified the loans it restructured under its debt settlement authority 

as workouts and not modifications in accordance with the Federal Credit 

Reform Act and OMB guidance. When the government takes an action that 

differs from the actions assumed in the original estimates and changes the 

estimated cost of an outstanding loan or guarantee from the current 

estimate of cash flows, such as eliminating any fees associated with the 

program, the action must be classified as a loan modification, which 

requires new budget authority. On the other hand, if the action is allowed 

by an existing statute, under the original terms of the loan or guarantee, or 

was included in the original estimate of the subsidy cost, such as a 

restructuring as a result of imminent or actual default, then the revision to 

the loan or guarantee should be classified as a workout, although the 

estimated cost of the loan or guarantee may be altered. Therefore, OMB 

concluded, and we agree, that the costs of workouts are considered to be 

part of the costs of default and are not treated as modifications. Here, RUS 

restructured the loans of two financially troubled borrowers under its debt 

settlement authority to maximize its recovery in the face of imminent 

default. Thus, any changes in the original terms of the loan or guarantee 

should result in classifying the restructuring as a workout rather than a 

modification. As a result, RUS did not have to obtain new budget authority 

to cover the cost of the restructurings.

The Federal 

Government Has 

Incurred Costs on 

Restructured Loans

The federal government has incurred costs related to restructuring loans 

for the two financially troubled borrowers. These two borrowers had 

outstanding RUS debt totaling about $737 million after their debt was 

restructured. RUS stated that it could lose approximately $185 million on 

loans restructured for borrower B and between $110 and $120 million on 

loans restructured for borrower A. These estimates may change based on 

several events that could occur in the future. For example, according to 

RUS and an independent consultant, the exact cost of restructuring 

borrower B’s debt may vary from current estimates because the debt 

restructuring agreement contains contingencies, such as the borrower 

paying the principal outstanding based on net proceeds from asset sales, 

which may result in RUS receiving more or less from the borrower than 

current estimates. RUS restructured the borrowers’ loans to provide more 
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favorable payment terms to improve the borrowers’ competitive position 

and ability to repay the loans. RUS officials reported that they negotiated 

the best deals possible for the federal government taking into 

consideration, among other things, the probability that the borrowers 

would file for bankruptcy, which according to RUS, would leave minimal or 

possibly no funds available for RUS to collect on the troubled debt. 

As part of the debt restructuring agreements, RUS entered into 

transactions with the borrowers and a third-party creditor that resulted in 

RUS acquiring the borrowers’ non-RUS guaranteed debt. According to RUS 

officials, the acquisition of the borrowers’ debt held by a third party and not 

guaranteed by RUS was in RUS’ best interest. RUS reached this conclusion 

because, among other things, acquiring the borrowers’ debt allowed RUS to 

make all the creditor decisions in the final development of the restructured 

agreement, improves RUS’ security interest in the restructured loans, and 

increases RUS’ flexibility to make decisions concerning the sale or other 

marketing of the borrowers’ nuclear assets. Also, the third party agreed 

that RUS could acquire the borrower’s debt at a significant discount. RUS’ 

acquisition of the borrowers’ non-RUS guaranteed debt to maximize its 

recovery of the restructured loans in the face of imminent default is 

allowed under RUS’ broad authority to settle debt related to loans and loan 

guarantees under the RE Act. Thus, RUS’ acquisitions of the non-RUS 

guaranteed debt are not considered new loans under Credit Reform and, 

therefore, do not require the agency to obtain budget authority to cover the 

cost of the new loans.

RUS’ restructuring of the borrowers’ loans resulted in new borrower 

agreements that included significant concessions like noninterest bearing 

notes, notes that included payments based on contingencies such as the 

sale of assets, and forgiveness of interest. Both borrowers had significant 

investments in nuclear power facilities, which, according to RUS officials, 

had questionable market value under a forced liquidation proceeding such 

as bankruptcy. From a negotiating standpoint, RUS officials stated that 

they needed to balance RUS’ objective of minimizing the federal 

government’s losses against the likely outcome of forced collection of 

assets at current market prices in the event of bankruptcy. RUS officials 

also estimated that the government’s recovery would most likely have been 

minimal or possibly zero under a forced collection scenario. The following 

is a brief discussion of the agreements between RUS and the two 

borrowers whose loans were restructured under RUS’ debt settlement 

authority. 
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RUS’ Agreement With 

Borrower A

On May 28, 1998, borrower A submitted an application to the RUS 

Administrator requesting debt settlement under RUS’ debt settlement 

authority. The borrower’s financial difficulties stemmed from high 

production costs of its nuclear generating asset as well as state initiatives 

establishing retail competition. Prior to submitting its application, 

borrower A pursued opportunities to reduce administrative overhead, 

improve efficiency and effectiveness, and expand its markets and revenues. 

However, according to RUS, these actions could not alleviate borrower A’s 

financial difficulties. In 1997, RUS undertook a review of borrower A’s 

member systems operations to identify inefficiencies and opportunities for 

cost savings. RUS reported that while savings could be realized if the 

member systems changed their operating practices, such as updating their 

meter reading systems and combining customer service groups, these 

savings, if realized, would have little effect on the overall competitiveness 

of members’ retail rates. 

On March 29, 1999, RUS and borrower A entered into a debt restructuring 

agreement to address the borrower’s financial stress. This restructuring 

agreement included the borrower’s RUS-guaranteed Federal Financing 

Bank (FFB)11 debt, but not the borrower’s direct loans held by RUS at that 

time. Prior to the restructuring, borrower A’s FFB debt totaled about 

$416 million. After the restructuring, borrower A’s new note totaled 

$406 million. According to RUS, the $10 million difference in principal 

resulted from RUS reducing the amount due by the borrower’s payments 

received during the restructuring process. The new note, with an interest 

rate of 7.18 percent, replaces old notes with interest rates ranging from 

5.18 percent to 10.3 percent. Also included in the $406 million note is a 

$95 million balloon payment due at maturity on January 1, 2008. However, 

RUS recognizes that the borrower should have several options for payment 

of the $95 million, including a reamortization of the amount due. In 

addition, terms of the $406 million note and borrowing agreement include 

forgiveness of interest, calculated on a quarterly basis, if all members of the 

borrower’s system agreed to the terms of the debt settlement that are 

applicable to them, such as paying revised wholesale rates. The amount of 

interest forgiveness is prorated when there is less than 100 percent 

participation. 

11The Federal Financing Bank is a government corporation under the U.S. Treasury created 

by Congress to centralize and reduce the cost of federal and federally assisted borrowing 

from the public.
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In addition, RUS and borrower A entered into another loan agreement that 

resulted in RUS paying $1.07 million to CFC to satisfy debt that borrower A 

had with CFC, but was not guaranteed by RUS. RUS acquired borrower A’s 

$3 million net outstanding debt with CFC at a substantial discount by 

agreeing to offset the $1.07 million from amounts CFC owed RUS under a 

separate debt settlement arrangement. 

RUS’ Agreement With 

Borrower B

On March 2, 1999, borrower B submitted an application to the RUS 

Administrator requesting debt settlement under RUS’ debt settlement 

authority. The borrower’s financial difficulties stemmed from high 

production costs of its nuclear generating asset and significant rate 

disparity between the borrower’s wholesale power costs and those of its 

competition. Prior to submitting its application, borrower B undertook 

efforts to address its financial stress. These initial efforts, among others, 

included cost-cutting measures, renegotiation of its power supply contracts 

with another utility, refinancing of RUS-guaranteed debt, and sale of its 

transmission facilities to another RUS borrower. However, these efforts did 

not resolve borrower B’s financial stress. 

On May 6, 1999, RUS and borrower B entered into a debt restructuring 

agreement to address the borrower’s financial stress, with an effective date 

of April 30, 1999. Prior to the restructured agreement, borrower B’s debt 

held by RUS totaled about $310 million. After the restructuring, borrower 

B’s debt totaled about $331 million. The increase in principal amount held 

by RUS after the restructuring is a result of RUS acquiring borrower B’s 

other debt that was held by a third party and not guaranteed by RUS. The 

$331 million consists of three new notes that all mature on December 31, 

2008. Two notes are interest-bearing, with an interest rate of 5.23 percent. 

The remaining note is noninterest bearing. However, the exact amount of 

recovery cannot be assured since payments are not fixed, but are based on 

the amount of available cash for debt service and the net proceeds from the 

sale of borrower B’s nuclear and other assets. As a result, forgiveness of 

principal may occur if the net proceeds are insufficient to pay off the notes. 

As part of the debt restructuring agreement, RUS acquired borrower B’s 

loans with CFC. RUS negotiated with CFC to acquire the $31 million of CFC 

loans at a significant discount for $9.3 million. To carry out the acquisition, 

RUS, CFC, and borrower B entered into a formal purchase agreement 

where the borrower was directed to skip a payment to FFB and use the 

funds to make a $9.3 million payment to CFC on behalf of RUS. RUS made 

payment to FFB for the missed scheduled payment and in turn, 
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incorporated the acquired debt in borrower B’s newly restructured notes 

resulting from the debt settlement agreement. Borrower B no longer has 

any debt service obligations to CFC. 

Rural Development Did 

Not Accurately Report 

RUS’ Costs for 

Restructuring G&T 

Debt

RD did not include the estimated loss of $185 million RUS anticipates will 

occur as a result of restructuring loans for borrower B in the agency’s fiscal 

year 1999 financial reports. In addition, only $30 million of RUS’ estimated 

$110 million to $120 million anticipated loss on the restructured loan for 

borrower A was included in RD’s fiscal year 1999 financial reports. Also, 

RD did not record in its accounting records a $7.2 million forgiveness of 

interest due to the agency as a result of restructuring borrower A’s loans. 

These errors occurred because RD lacks documented procedures to ensure 

that debt forgiveness, as well as estimated losses resulting from 

restructuring loans, is properly recorded in the financial reports. Until this 

situation is corrected, Congress and other decisionmakers cannot rely on 

the reported costs of RUS’ electric loan program included in RD’s annual 

consolidated financial statement reports.

Lack of Documented 

Policies and 

Procedures Has Led to 

Improper Reporting of 

Estimated Losses for 

RUS’ Electric Loan 

Portfolio 

RD did not properly report estimated future loan losses for the restructured 

loans. Reporting errors occurred for the restructured loans because RUS’ 

procedures for processing borrower’s requests for settlement of debt owed 

to RUS do not include accounting staff responsibilities during the loan 

restructuring process to ensure proper reporting of the cost of 

restructuring the debt as well as amounts due after the restructuring. Also, 

RD lacks documented procedures to ensure that losses estimated to occur 

as a result of restructuring loans are properly calculated and net loan 

balances are reported in accordance with Statement of Federal Financial 

Accounting Standards (SFFAS) No. 2, Accounting for Direct Loans and 

Loan Guarantees.

12 For example, when recording borrower B’s 

restructured loans, no loss was included in the agency’s estimated future 

loan losses calculation for electric loans, even though RUS stated that it 

anticipated recovery of less than half of the loans on a net present value 

basis. For borrower A, RD significantly understated RUS’ estimated loss. 

Specifically, in its financial reports, RD reported that a $30 million 

12SFFAS No. 2, which generally mirrors the Federal Credit Reform Act of 1990, requires that 

all direct loans obligated and loan guarantees committed after September 30, 1991, be 

accounted for on a present value basis. 
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Page 19 GAO/AIMD-00-288 RUS’ Loan Restructurings

estimated loan loss would occur on the restructured loan. However, this 

information is inconsistent with one of RUS’ program documents which 

states that “the debt settlement negotiated would result in a write-off of 

between $110 and $120 million with respect to outstanding RUS-guaranteed 

FFB debt in the principal amount of $416.1 million.” 

Also, RD did not document whether it considered applicable accounting 

requirements outlined in SFFAS No. 2 when it calculated estimated loan 

losses for the electric loan portfolio.13 SFFAS No. 2 provides guidance for 

reporting estimated future loan losses on direct loans and loan guarantees. 

One of the key factors used to estimate future loan losses is default costs. 

The default cost of direct loans results from any anticipated deviation, 

other than prepayments, by the borrowers from the payments schedule in 

the loan contracts. The deviations include delinquencies and omissions in 

interest and principal payments. In estimating default costs, SFFAS No. 2, 

par. 34, recommends that the following risk factors be considered: (1) loan 

performance experience; (2) current and forecasted international, national, 

or regional economic conditions that may effect the performance of the 

loans; (3) financial and other relevant characteristics of borrowers; (4) the 

value of collateral to loan balance; (5) changes in recoverable value; and 

(6) newly developed events that would affect the loan’s performance. In 

addition, SFFAS No. 2, par. 35, requires that if individual accounts with 

significant amounts carry a high weight in risk exposure, an analysis of the 

individual accounts is warranted in making a default cost estimate for that 

category. 

During our review of RD’s fiscal year 1999 calculation of estimated future 

loan losses for the electric loan portfolio, we noted that RD does not 

maintain supporting documentation that addresses the risk factors used to 

estimate the default costs. Unless RD develops policies and procedures to 

estimate future loan losses in accordance with SFFAS No. 2 and establishes 

accounting staff responsibilities during the loan restructuring process, 

there is no assurance that the accounting information related to the electric 

loan program provides an accurate basis for Congress and other 

decisionmakers to evaluate credit program performance. 

13RUS’ credit program receivable data are reported in RD’s financial reports. As of 

September 30, 1999, RD reported $23.1 billion in pre-1992 electric loans or about 82 percent 

of the total $28.1 billion gross electric loans receivable. RD elected to report its pre-1992 

electric loans on a net present value basis. SFFAS No. 2 permits, but does not require, 

restatement of pre-1992 direct loans and loan guarantees on a present value basis. 
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Other Loan 

Restructuring Costs 

Were Not Reported

For borrower A’s restructured loans, RD did not record in its accounting 

records a $7.2 million forgiveness of interest to the borrower. As part of the 

debt settlement agreement, RUS provided the borrower debt forgiveness 

on accrued interest owed. However, this information was not reported in 

the agency’s financial reports. During interviews with RD officials 

regarding the borrower’s debt settlement agreement, we noted that the 

officials were unaware of all the facts surrounding the borrower’s debt 

settlement agreement and did not have copies of applicable loan file 

documents maintained by the program office, which outline the terms of 

the borrower’s debt settlement agreement. After further discussions with 

RD staff, the Deputy Chief Financial Officer agreed that a write-off for the 

debt forgiveness should have been recorded at the time of the restructuring 

and the records would be adjusted to reflect the debt forgiveness. Without 

accurately reporting debt forgiveness associated with the loan 

restructuring, Congress and other decisionmakers do not have valid cost 

data to make informed decisions about the electric loan program. 

Conclusions RUS has exercised its broad authority in restructuring the loans of two 

G&T borrowers, including acquisition of third-party non-RUS guaranteed 

debt, and providing significant concessions to the borrowers, such as 

noninterest bearing notes, contingent payments, and forgiveness of 

interest. RUS officials stated that their main objective is to minimize the 

federal government’s losses and that the restructurings were necessary to 

carry out this objective. Yet, RUS did not obtain member guarantees on the 

bulk of the restructured loans and does not have adequate procedures for 

updating its list of financially troubled borrowers that need special 

monitoring—two important factors in minimizing potential losses. 

Thus far, these restructurings have resulted in estimated losses of 

$295 million to $305 million,14 of which only $30 million was reported in 

RD’s financial statements. The overall outcome of RUS’ restructuring 

activities will not be known for some time, and will be significantly affected 

by the unfolding of events surrounding the current move towards 

14The range of anticipated losses is calculated by combining the dollar amounts of losses for 

both borrowers. The $295 million is calculated by adding borrower A’s anticipated minimal 

loss of $110 million to borrower B’s anticipated loss of $185 million. The $305 million 

amount is calculated by adding borrower A’s maximum anticipated loss of $120 million to 

borrower B’s anticipated loss of $185 million.
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competitive electricity markets. It is uncertain how these events will affect 

the remainder of RUS’ $19 billion G&T electric loan portfolio; however, it is 

likely that additional restructurings and losses will occur. To the extent that 

additional restructurings occur, it is essential that RUS fully utilize all 

measures available to minimize the risk of loss from these problem loans 

and ensure that losses that do occur are properly recorded and reported to 

Congress and other decisionmakers.

Recommendations To better secure the restructured loans and to improve RUS’ process to 

restructure and report financially troubled borrower’s loans, we 

recommend that the Secretary of Agriculture direct the Administrator of 

the Rural Utilities Service and in some instances, the Under Secretary of 

Rural Development to take the following actions:

• Utilize member guarantees to the greatest extent possible by ensuring 

that such guarantees obtained remain in effect until all restructured 

loans are paid in full.

• Broaden procedures in its Staff Instruction document, 1717Y-1, 

Processing Requests for Settlement of Debt Owed By Electric 

Borrowers to include

• the program staff’s coordination with accounting staff to provide all 

relevant information regarding the terms of the borrowers’ 

restructured loans and 

• procedures that identify the criteria RUS uses to determine when a 

borrower should be added or removed from the list of financially 

troubled borrowers.

• Develop and document written procedures to estimate future loan 

losses for its credit program receivables in accordance with Statement 

of Federal Financial Accounting Standards No. 2, Accounting for Direct 

Loans and Loan Guarantees. 

• Adjust accounting reports to properly disclose the full costs associated 

with the restructured loans.

Agency Comments and 

Our Evaluation

We provided RUS and Rural Development with a draft of this report for 

review and comment. In summary, RUS and RD officials generally agreed 

with our recommendations to broaden RUS’ procedures regarding the 

coordination of program and accounting staff responsibilities, develop and 

document written procedures to estimate future loan losses for its credit 

program receivables in accordance with federal accounting standards, and 
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adjust its financial reports to reflect the costs associated with the 

restructured loans. RUS also plans to review the criteria used to determine 

when to add or remove a borrower from the list of financially troubled 

borrowers. However, RUS and RD officials disagreed with our conclusions 

regarding RUS’ use of member guarantees when restructuring loans of 

financially troubled borrowers and its inaccurate reporting of costs 

associated with the restructured loans. 

Specifically, RUS stated that our finding regarding its utilization of member 

guarantees implies that RUS’ efforts were somehow deficient because it did 

not obtain more guarantees. Further, RUS stated that our conclusion 

suggests that we disagree with its policy on member guarantees, and that 

our report “misreads” the requirements of RUS’ regulations regarding debt 

compromise. Our report does not state that RUS should require member 

guarantees as a condition of debt settlement nor does it imply that RUS 

should have used the member guarantee option in the case of borrower A. 

However, our report does state that when RUS exercises its option to 

require its borrowers to obtain member guarantees, it should utilize these 

guarantees to the greatest extent possible by structuring the guarantee to 

include all of the borrower’s restructured loans until the last loan is paid in 

full. This was not the scenario in the case of borrower B. Also, contrary to 

RUS’ statement, we take no issue with RUS’ debt settlement policy, which 

states that the Administrator of RUS will “consider requiring the borrower 

to obtain credit support from its member systems....” Our discussion of 

member guarantees in this report is not a suggestion that RUS consider 

changing its policy, but rather to more fully utilize it to help maximize the 

federal government’s recovery on troubled loans. 

With regard to our conclusion on RD’s inaccurate reporting of costs 

associated with restructured loans, RD disagrees with our assessment 

because the allowance for loan loss is an accounting estimate and RD 

believes that the issue is one of “timely” reporting rather than accurate 

reporting. While we agree that estimates can never be totally “accurate,” in 

this case the estimates were significantly understated. As noted by RUS, 

the restructurings were completed in March and May 1999 and the 

estimated losses were determined at that time. Yet, because of a lack of 

communication between the program staff and accounting staff, these loss 

estimates were not reported in RD’s fiscal year 1999 financial statements, 

which were issued in February 2000. Additionally, for borrower B, RD 

included an estimated loss of $200 million in its fiscal year 1998 financial 

reports. However, accounting staff failed to include any loss estimate for 

borrower B in the fiscal year 1999 financial reports, even though the 
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Page 23 GAO/AIMD-00-288 RUS’ Loan Restructurings

borrower’s financial condition continued to deteriorate and the borrower 

had requested financial assistance from RUS. Thus, the financial 

statements were inaccurate and misleading in that they did not reflect all 

known information about loss estimates. A complete presentation of RUS’ 

comments and our responses is provided in appendix II.

As we arranged with your office, unless you publicly announce its contents 

earlier, we plan no further distributions of this report until 30 days from the 

date of this letter. At that time, we will send copies of this report to the 

Honorable John M. Spratt, Jr., and the Honorable Jim Turner, the Ranking 

Minority Members of your Committee and Subcommittee; the Honorable 

Daniel Glickman, the Secretary of Agriculture; the Honorable Christopher 

A. McLean, Administrator of the Rural Utilities Service; the Honorable 

Jacob J. Lew, the Director of the Office of Management and Budget; and 

other interested parties. We will make copies available to others upon 

request.

If you have any questions regarding this report, please contact me at (202) 

512-9508 or McCoy Williams, Assistant Director, at (202) 512-6906. Key 

contributors to this assignment are listed in appendix III.

Linda M. Calbom

Director, Resources, Community,

and Economic Development, Accounting

and Financial Management Issues
Page 24 GAO/AIMD-00-288 RUS’ Loan Restructurings

Appendix I

Key Policies and Procedures Used to Settle Apendxies

Debt Owed by Electric Borrowers ApendxiI

RUS’ policies for the settlement of debt and claims owed by rural electric 

borrowers are documented in 7 CFR 1717.1200, Settlement of Debt. This 

regulation implements RUS’ statutory authority to settle borrowers’ debts 

and claims arising from loans made or guaranteed to rural electric 

borrowers under the Rural Electrification Act of 1936. This regulation 

outlines (1) the criteria and factors RUS must use to determine the need for 

debt settlement, (2) conditions RUS may place on the settlement 

agreement, (3) debt settlement measures RUS considers when 

restructuring loans, and (4) consideration of loan requests after debt 

settlement. The regulation also describes the type of information the 

borrower must submit to RUS to support the borrower’s statement that it is 

unable or will be unable to meet its financial obligations in the short term. 

For example, the borrower must provide an analysis of the causes resulting 

in the borrower’s inability to meet its financial obligations. The borrower 

must also provide a thorough review of opportunities available or 

potentially available to reduce overhead and other costs and improve the 

efficiency and effectiveness of its operations.

RUS’ internal Staff Instruction 1717Y-1, Processing Requests for Settlement 

of Debt Owed by Electric Borrowers, documents the procedures for 

processing borrowers’ requests for settlement of debt owed to RUS. These 

operating procedures include the responsibilities of RUS staff assigned to a 

troubled borrower and their coordination with other offices during the 

restructuring process. For example, the RUS staff assigned to a troubled 

borrower must work with various RUS offices within the electric program 

as well as RUS’ Office of General Counsel on issues affecting the 

borrower’s financial condition. RUS’ procedures also identify internal 

documents that staff must prepare, which address the borrower’s financial 

stress and justification for the debt restructure. Two primary documents 

that staff must prepare as part of the restructuring process include an 

administrative action document and a recommendation and report 

document. The administrative action document outlines those measures 

approved by the Administrator to address the borrower’s financial stress. A 

recommendation and report outlines internal and external factors leading 

to the borrower’s stress; the process used to analyze the borrower’s stress; 

steps taken by RUS, the borrower, and the borrower’s member systems to 

mitigate the borrower’s stress; and recommended action to be taken by 

RUS regarding debt settlement. In addition, the procedures provide that 

RUS monitor and maintain a list of financially troubled borrowers. RUS’ 

key policies documented in 7 CFR 1717.1200 to settle debt and claims owed 

by rural electric borrowers are listed below.
Appendix I

Key Policies and Procedures Used to Settle 

Debt Owed by Electric Borrowers

Page 25 GAO/AIMD-00-288 RUS’ Loan Restructurings

Criteria and Factors 

Used to Determine the 

Need for Debt 

Settlement

The Administrator will not settle any debt or claim unless RUS has 

determined that (1) the borrower is unable to meet its financial obligations 

under its loan agreement or (2) the borrower will not be able to meet its 

obligations within 24 months following the month the borrower submits its 

application for debt settlement to RUS, and in either case, default is likely 

to continue indefinitely. The determination of a borrower’s ability to meet 

its financial obligations will be based on analyses and RUS’ documentation 

of the borrower’s historical, current, and projected costs, revenues, cash 

flows, assets, opportunities to reduce costs and/or increase revenues, and 

other factors that may be relevant to the request. In addition, RUS may 

require that an independent consultant analyze the efficiency and 

effectiveness of the borrower’s organization and operations and those of 

the borrower’s member systems. Also, RUS may require the borrower to 

employ a temporary or permanent manager during the time the debt 

settlement is being considered, and possibly for some time after the debt 

settlement or on a permanent basis, to manage the borrower’s operations 

and ensure that all actions are taken to avoid or minimize the need for debt 

settlement.

Conditions RUS 

Considers When 

Restructuring Loans 

During the restructuring process, the Administrator may place conditions 

on the borrower as part of the debt settlement agreement and/or consider 

other factors when restructuring a borrower’s loans. During the 

restructuring process, the Administrator will

• not grant relief on debt owed to the federal government unless similar 

relief, on a pro rata basis, is granted with respect to other secured 

obligations of the borrower, or the other secured creditors provide other 

benefits or value to the debt restructuring;

• consider requesting that the borrower or independent consultant solicit 

competitive bids for the assets of the borrower;

• consider the value of the borrower’s assets, including wholesale power 

contracts1

 between the G&T and its member systems;

• consider rates charged for electric service by the borrower and its 

member systems;

• consider whether a settlement is favorable to the federal government in 

comparison to recovery by enforced collection procedures;

1

Wholesale power contracts are long-term contracts that obligate the distribution 

cooperatives to purchase all of their respective power needs from the G&T.
Appendix I

Key Policies and Procedures Used to Settle 

Debt Owed by Electric Borrowers

Page 26 GAO/AIMD-00-288 RUS’ Loan Restructurings

• require the borrower to provide satisfactory evidence that it has 

obtained all approvals required by regulatory bodies that are needed to 

implement rates or other provisions of the settlement;

• require the borrower and its member systems to implement changes in 

structure, management, operations, and performance deemed 

necessary;

• consider requiring the borrower to convey some or all of its assets to the 

federal government;

• consider requiring the borrower to obtain credit support from its 

member systems, as well as action plans by the members to change their 

operations, management, and organizational structure to reduce 

operating costs, improve efficiency, and/or expand markets and 

revenues;

• require the borrower to warrant and agree that no bonuses or similar 

extraordinary compensation has been or will be provided, for reasons 

related to the settlement of debt, to any officer or employee of the 

borrower or to other persons or entities identified by RUS; and

• require borrower management to certify that all information provided to 

the federal government in connection with the debt settlement, is true, 

correct, and complete in all material respects.

Debt Settlement 

Measures

If the Administrator determines that debt settlement is appropriate, the 

debt settlement measures considered with respect to direct or guaranteed 

loans include, but are not limited to, reamortization of debt; extension of 

debt maturity;2

 reduction of interest rate charged to the borrower;3

forgiveness of interest accrued, penalties, and costs incurred by the 

government to collect the debt; and forgiveness of loan principal with 

concurrence from the Under Secretary for Rural Development. Also, for 

loans guaranteed under section 306 of the RE Act made by the Federal 

Financing Bank (FFB) or other third parties, the Administrator may 

restructure the borrower’s obligations by (1) acquiring and restructuring 

the guaranteed loan, (2) restructuring the loan guarantee obligation, 

(3) restructuring the borrower’s reimbursement obligations, or (4) such 

2

Extension of maturity shall not extend more than 10 years beyond the latest maturity date 

prior to settlement.

3

The interest rate on any portion of the restructured debt shall not be reduced to less than 5 

percent, unless the Administrator determines that reducing the rate below 5 percent would 

maximize debt recovery by the federal government.
Appendix I

Key Policies and Procedures Used to Settle 

Debt Owed by Electric Borrowers

Page 27 GAO/AIMD-00-288 RUS’ Loan Restructurings

means as the Administrator deems appropriate, subject to such consents 

and approvals, if any, that may be required by the third party lender.

Consideration of Loan 

Requests After Debt 

Settlement

In considering any future loan requests from a borrower whose debt has 

been settled in whole or part, it will be presumed that the Administrator 

will require that the borrower provide credit support that is acceptable to 

the Administrator for the full amount of the loan request. Types of credit 

support may include, but are not limited to, equity infusions and guarantees 

of debt repayment, either from the applicant’s members or from a third 

party. 
Page 28 GAO/AIMD-00-288 RUS’ Loan Restructurings

Appendix II

Comments From the Rural Utilities Service ApendxiI

Note: GAO comments 

supplementing those in the 

report text appear at the end 

of this appendix.

See comment 1.

See comment 3.

See comment 2.
Appendix II

Comments From the Rural Utilities Service

Page 29 GAO/AIMD-00-288 RUS’ Loan Restructurings

See comment 3.

See comment 3.

See comment 4.

See comment 3.

See comment 5.
Appendix II

Comments From the Rural Utilities Service

Page 30 GAO/AIMD-00-288 RUS’ Loan Restructurings

See comment 6.

See comment 7.
Appendix II

Comments From the Rural Utilities Service

Page 31 GAO/AIMD-00-288 RUS’ Loan Restructurings

See comment 3.

See comment 3.

See comment 3.
Appendix II

Comments From the Rural Utilities Service

Page 32 GAO/AIMD-00-288 RUS’ Loan Restructurings

See comment 8.

See comment 9.

See comment 10.
Appendix II

Comments From the Rural Utilities Service

Page 33 GAO/AIMD-00-288 RUS’ Loan Restructurings
Appendix II

Comments From the Rural Utilities Service

Page 34 GAO/AIMD-00-288 RUS’ Loan Restructurings

The following are GAO’s comments on the Rural Utilities Service’s (RUS) 

letter dated September 14, 2000. 

GAO Comments 1. We have modified our report to distinguish between Rural 

Development (RD) and RUS when discussing the errors and 

weaknesses found in the reporting and accounting procedures for the 

restructured loans. However, as we have stated in our report, RUS is a 

component of RD’s mission area and RUS’ financial data are included in 

RD’s consolidated financial statements.

2. The sentence being referred to is simply a statement of our findings and 

reads as follows: “While RUS generally followed its policies and 

procedures for restructuring loans of two financially troubled 

borrowers, we found one instance where RUS’ policies were not fully 

utilized and other instances where procedures could be improved.”

3. Discussed in the “Agency Comments and Our Evaluation” section in the 

letter report.

4. Regarding member guarantees as credit support, the only aspect we 

discuss in our report relates to the structuring of the guarantee to 

include the third loan.

5. Our report does not contain comments or recommendations regarding 

member guarantees for borrower A.

6. For borrower B, the amount of the initial guarantee represents about 

$10.2 million, which is 3 percent of the $331 million total restructured 

amount. Under the negotiated agreement, the guarantee only applies to 

the first two loans and not the third loan. Had RUS structured the 

guarantee to include the third loan until it was paid in full, it would 

have maximized its recovery chances. That is, the guarantee would 

have remained in effect for the third loan which has significant risk 

because payment of this note is contingent on net proceeds from asset 

sales and other recovery mechanisms. 

7. We agree with RUS’ comment that in situations where RUS and CFC 

both remain creditors for a borrower whose debt is restructured, CFC 

has not attempted to obtain nor been given member guarantees on its 

restructured debt. However, we disagree with RUS’ comment that the 

cases where CFC has obtained member guarantees from financially 
Appendix II

Comments From the Rural Utilities Service

Page 35 GAO/AIMD-00-288 RUS’ Loan Restructurings

troubled borrowers differ from the two loan restructurings discussed in 

this report. In our meeting with CFC officials, they stated that in cases 

where CFC has bought out RUS’ interest and is the sole lender as a 

result of a troubled debt restructuring, it obtains member guarantees 

from the borrower’s member distribution systems. In addition, CFC 

officials provided examples of three financially troubled borrowers, 

where CFC bought out RUS’ interest, became the sole lender of those 

loans, and in all cases obtained guarantees. 

8. Our report does not provide a recommendation that RUS prepare and 

complete checklists when determining whether a borrower is 

financially troubled. 

9. RUS’ procedures state that a roster of financially troubled borrowers be 

maintained. Also, it was beyond the scope of our review to make an 

assessment of the completeness of RUS’ list of financially troubled 

borrowers.

10. GAO has provided guidance and consultation to the working group, but 

is not involved in developing USDA policies and procedures.
Page 36 GAO/AIMD-00-288 RUS’ Loan Restructurings

Appendix III

Staff Acknowledgments ApendxiI

Tom Armstrong, Art Brouk, Carla Lewis, Edda Emmanuelli-Perez, and 

Maria Zacharias made key contributions to this report.

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