Local TV Act: Progress Made, but Timeliness and Cost Accounting Issues Need to be Addressed
Published: 2003-10-31T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: The LOCAL TV Act required that GAO perform an annual audit of the (1) administration of the provisions of the Act, and (2) financial position of each applicant who receives a loan guarantee under the Act, including the nature, amount, and purpose of investments made by the applicant. In fiscal year 2002, the LOCAL TV Program was funded; however, because it was not fully implemented in that year, there were no loan guarantee applicants for GAO to audit. Therefore, this report primarily addresses whether program administration during fiscal year 2002 satisfied the provisions of the Act.
section_title: What GAO Found
paragraphs: In December 2000,the Congress passed the Launching Our Communities' Access to Local Television Act of 2000 (LOCAL TV Act or Act). The Act created the Local Television Loan Guarantee Program (Program or LOCAL TV Program) and established the Local Television Loan Guarantee Board (Board) to approve guaranteed loans, totaling no more than $1.25 billion, to finance projects that will provide local television access to households with limited over-the-air television broadcast signals or cable service. The Board is comprised of the Secretary of the Treasury, the Chairman of the Board of Governors of the Federal Reserve System, the Secretary of Agriculture, and the Secretary of Commerce, or their designees. The Department of Agriculture (USDA) Rural Utilities Service serves as Program Administrator (Administrator). The LOCAL TV Program has not been established in an expeditious fashion as specified by the Act. Given that funds were appropriated in November 2001, thus starting the clock on the 120 days allowed for completing program regulations and underwriting criteria, the Program should have been ready for implementation by March 2002. According to the Board and Administrator, three factors contributed to program delays: (1) initial uncertainties over program funding, (2) inadequate dedicated staff resources for program activities, and (3) the decision to issue a proposed rule. As of the end of August 2003, neither of these key documents, which provide the overall framework for the Program, was ready for implementation, thus delaying lending activities and ultimately, realization of improved television reception in target areas throughout the United States. Further, the full costs of administering the Program, including those incurred by the respective agencies and departments providing support to the Board, were not accumulated and charged to the program as called for by federal accounting standards. Statement of Federal Financial Accounting Standard No.4, Managerial Cost Accounting Standards requires federal agencies to capture the costs of federal programs to assist the Congress in authorizing, modifying, and discontinuing programs and to provide agencies with reliable cost data for making informed managerial decisions and evaluating performance. Further, the capacity to capture these costs going forward is key to fully recovering certain costs of administering the Program through loan application and loan guarantee origination fees.

section_title: Letter
paragraphs: Today, approximately 23.4 million households in the United States have  limited or no access to local television broadcast signals. To facilitate access to local television stations for households located in nonserved and  underserved areas, the Congress passed the Launching Our Communities’  Access to Local Television Act of 2000 (LOCAL TV Act or Act). The Act  created the LOCAL Television Loan Guarantee Program (Program or LOCAL TV Program). The Program provides for loan guarantees of up to 80 percent of loans totaling no more than $1.25 billion to finance projects to  enable local television access to communities where distance and  topography limit access to over-the-air television broadcast signals or cable  service. The Act established the LOCAL Television Loan Guarantee Board  (Board), which is comprised of the Secretary of the Treasury, the Chairman of the Board of Governors of the Federal Reserve System, the Secretary of Agriculture, and the Secretary of Commerce, or their designees, primarily  to approve loan guarantees and the Department of Agriculture (USDA)  Rural Utilities Service (RUS) as Program Administrator (Administrator) to  issue and administer approved loan guarantees.
This report addresses the Act’s requirement that we perform an annual  audit of the (1) administration of the provisions of the Act and (2) financial  position of each applicant who receives a loan guarantee under the Act,  including the nature, amount, and purpose of investments made by the  applicant. Because the Program was not funded during fiscal year 2001, we  agreed with your offices that we would revisit the mandate in fiscal year  2002. The Program was funded in fiscal year 2002; however, because it was  not fully implemented in that year, there were no loan guarantee applicants  for GAO to audit. Therefore, this report primarily addresses whether  program administration during fiscal year 2002 satisfied the provisions of  the Act.
subsections: section_title: Background
paragraphs: The Launching Our Communities’ Access to Local Television Act of 2000  created a guaranteed loan program to facilitate access to signals of local  television stations for households located in nonserved and underserved  areas of the United States. The Act established the LOCAL Television Loan  Guarantee Board (Board) whose primary function is to approve loan  guarantees to finance projects to provide local television access for  communities in remote areas throughout the United States. The Board is  authorized to approve loan guarantees up to 80 percent of the aggregate  value of each loan. The Board may not approve loan guarantees after  December 31, 2006, and the aggregate of all loans guaranteed may not be  more than $1.25 billion. The repayment of the loan(s) is required to be  made with a term of the lesser of 25 years from the date of the execution of  the loan or the economically useful life of the primary assets to be used in  the delivery of the signal involved.
The Act set forth specific provisions and requirements for the Board to  implement this new program. Specifically, the Act required the Board to:  (1) direct the Administrator to prescribe regulations within 120 days after  the Congress appropriated funds, (2) develop underwriting criteria in  consultation with the Director, Office of Management and Budget (OMB)  and an independent public accounting firm (IPA) within 120 days after the  Congress appropriated funds, (3) establish and collect loan application and  loan guarantee origination feesto offset the cost of administering the  Program under the Act, including the costs of the Board and the  Administrator, and (4) consider other numerous specialized technical and  business requirements prior to approving a loan guarantee.
In addition to developing the regulations, the Act directed RUS, an agency  of the Department of Agriculture’s Rural Development, to issue and  administer loan guarantees that have been approved by the Board. This is  consistent with RUS’s mission of administering loan and grant programs,  including those to finance projects so rural areas can have, among other  things, more modern affordable electricity, telecommunications, public  water, and waste removal services.
Based on authority granted in the Act, the Board established a Working  Group, consisting of senior level officials from the various departments and  agencies that represent the Board, to assist it with activities to implement  the Program. The costs incurred by the Working Group members to  support the Board have been borne by the respective departments and  agencies from within their existing budgetary resources (i.e., salaries and  expense appropriations or accounts).
Although the Act was passed on December 21, 2000, which required the  establishment of program regulations and underwriting criteria, initial  funding for the Program was not provided until November 2001 through the  Agriculture, Rural Development, Food and Drug Administration, and  Related Agencies Appropriations Act, 2002. The Act provided $258 million  in loan guarantee authority and $2 million for administrative expenses.  Later in the fiscal year, two additional pieces of legislation resulted in  USDA receiving approximately a combined $1.07 billion in loan guarantee  authority available for providing access to local TV stations through direct  broadcast satellite (DBS) or some other means.
Figure 1 illustrates the relationships between the Congress, federal entities  involved in implementing the LOCAL TV Program, and the public.
section_title: Scope and Methodology
paragraphs: To determine how the provisions of the Act were administered, we focused  primarily on program activities and related obligations and administrative  expenses that were incurred on behalf of the Program during fiscal year  2002. We analyzed the LOCAL TV Act to obtain an understanding of its  provisions and reviewed legislation concerning the Program’s funding. We  obtained and evaluated information from the LOCAL TV Board including its  internal operating regulations, minutes from Board meetings, the IPA’s  technical and price proposals, the solicitation to obtain information related  to the legal advisory services for the Board, and other budget and cost  information to obtain an understanding of the activities that occurred to  implement the Program during fiscal year 2002. We reviewed OMB  circulars and federal accounting standards, as applicable. We did not  independently verify or audit the cost data we obtained from the Board. We  did not review the proposed regulations or draft underwriting criteria  because they were not made available to us while OMB was completing its  review. We conducted our work from February 2003 through August 2003  in accordance with generally accepted government auditing standards.
We requested comments on a draft of this report from the Chairman of the  Board and the Department of Agriculture. The Department of Agriculture  chose to have the Board incorporate its views into the Board’s overall  response. The Board’s comments are discussed in the Agency Comments  and Our Evaluation section of this report and are reprinted in appendix I.  The Board also provided technical comments on our draft report, which we  incorporated as appropriate.
section_title: The LOCAL TV Program Has Not Been Implemented in a Timely Manner
paragraphs: Under the requirements of the authorizing legislation and the timing of the  available appropriation, the Board was to have had the program regulations  and underwriting criteria completed and ready to implement within 120  days after funding was available. Since funds were appropriated in  November 2001, the target time frame was March 2002. However, as of the  end of August 2003, neither of these key documents had been finalized.  Since these documents provide the overall framework for the Program,  including operating procedures and lending criteria, lending activities  cannot proceed.
Figure 2 provides a chronology of the key activities pertaining to the Act  and its implementation as discussed in the following paragraphs.
The Act established the Board for the primary purpose of approving loan  guarantees. Further, the Act required, prior to the Board’s approving loan  guarantees, that (1) the Board approve regulations prescribed by RUS that  provide the overall operating procedures for the Program, and (2) the  Board, in consultation with the Director, OMB, and an independent public  accounting firm, develop underwriting criteria relating to the guarantees,  including appropriate collateral and cash flow levels. Each of these key  documents was to be completed 120 days after program funding was  provided, which, given the timing of the appropriations, would have been  over a year ago.
According to Board and RUS officials, three factors contributed to program  delays: (1) initial uncertainties over program funding, (2) inadequate  dedicated staff resources for program activities, and (3) the decision to  issue a proposed rule. Each of these reasons is discussed in the following  paragraphs.
In the fiscal year 2002 appropriation approved in November 2001, the  Congress provided $258 million in initial loan guarantee authority for the  Program and $2 million for administrative costs. RUS officials told us that  they had deferred action on developing the Program at that time because  the $258 million in loan guarantee authority was insufficient to fund the  technology needed to implement the Program. In April 2002, RUS issued a  Notice of Inquiry in the Federal Register to obtain information needed to  assist in drafting the proposed regulations such as changes in technology or  new developments in the industry. In the notice, RUS specifically requested  comments on the proposed merger of two major DBS providers that, if  approved, could have noticeably affected the Program and virtually  fulfilled the Act’s purpose. However, any substantial movement on the  Program was delayed until the Farm Bill was passed on May 13, 2002,when RUS believed that sufficient funding for the Program was available.
The Board determined that it needed the $2 million in appropriated funds  to procure the statutorily required IPA as well as other outside consultants  and experts needed to implement and administer the Program. Therefore,  the Working Group members have been supporting the Board as a  collateral duty. Because the members have been unable to focus  exclusively on Board activities, this resulted in further program delays.
The Board held its first meeting on September 13, 2002, and on September  26, 2002, awarded a $677,000 contract to Ernst and Young, an independent  public accounting firm, to assist in drafting the underwriting criteria. As of  the end of fiscal year 2002, approximately $1.3 million of the $2 million  remained available for contracting with outside consultants.
The third contributing factor to the delay of the Program was the Board’s  September 2002 decision to issue a proposed rule to provide the public an  opportunity to comment on the proposed regulations to ensure that the  Program’s objectives and mission were consistent with congressional  intent. Although the Act did not explicitly require formal rulemaking  procedures, the Board believed it necessary given the complex and  precedential issues raised in the statute. On February 7, 2003, the Board  submitted the underwriting criteria to OMB for consultation. The first draft  of the proposed operating regulations was submitted to OMB on May 5,  2003. OMB approved the draft regulations on August 8, 2003, and the Board  issued the proposed rule in the Federal Register on August 15, 2003, with a  closing date of September 15, 2003. The Board will issue a final rule after  considering and incorporating comments from the public and receiving  OMB’s approval of any revisions to the proposed rule. The Board plans to  begin accepting loan guarantee applications once the final rule is issued.  The Board stated they believe this process will begin by February 2004.
section_title: Policies and Procedures Needed as a Basis for Collecting User Fees Have Not Been Established
paragraphs: Total costs of administering the Program, including those incurred by the  respective departments and agencies providing support to the Board, were  not accumulated and charged to the Program. Statement of Federal  Financial Accounting Standard No. 4, Managerial Cost Accounting  Standards (SFFAS No. 4) requires federal agencies to capture the costs of  federal programs to assist the Congress in authorizing, modifying, and  discontinuing programs and to provide agencies with reliable cost data for  making informed managerial decisions and evaluating performance. Also, if  relevant costs of administering the Program are not accumulated, the  Board will not be able to support the establishment of loan application and  loan guarantee origination fees that are sufficient to recover, but not  exceed, certain costs of administering the Program.
According to SFFAS No. 4, costs of federal resources required by programs  are an important factor in making policy decisions related to program  authorization, modification, and discontinuation. SFFAS No. 4 also states  that to fully account for the costs of the goods and services they produce,  reporting entities should include the cost of goods and services received  from other entities. Further, the standard states that, “Ideally, all inter- entity costs should be recognized. This is especially important when those  costs constitute inputs to government goods or services provided to non- federal entities for a fee or user charge. The fees and user charges should  recover the full costs of those goods and services.”
During fiscal year 2002, the Board did not have a process in place to fully  accumulate and report costs, including those of the IPA, the Board, and  Working Group in conformance with SFFAS No. 4. As mentioned earlier, in  fiscal year 2002, the Congress appropriated $2 million for costs to  implement the Program, which the Board decided to use exclusively for an  IPA and other consulting services. During fiscal year 2002, the Working  Group participated in a number of organizational meetings, coordinated  the Board’s initial meeting, and participated as technical evaluation staff on  the procurement for the IPA. The Working Group also worked with Ernst  and Young to develop the underwriting criteria and with the Board to assist  in the development of the program regulations and other procurement  activities. Because the Board did not request additional funding in fiscal  year 2002 to support Working Group activities, the respective departments  and agencies of the Working Group members absorbed these costs. We  requested that the Board estimate the costs that the Working Group  incurred during fiscal year 2002 in support of the Program’s administrative  activities. The Board estimated that the Working Group incurred $78,000 in  administrative expenses. Table 1 provides a summary of these cost  estimates.
Without accumulating and reporting the costs of administering the  Program, the Board will not comply with SFFAS No. 4 or have the cost  information needed to make informed decisions about the Program. The  Board acknowledged that if the costs incurred by the Working Group were  accumulated and reported, it would more accurately reflect the total cost  of this program.
More importantly, the Act directed the Board to charge and the  Administrator to collect loan guarantee application and origination fees to  cover, but not exceed, certain costs of administering the Program such as  reviewing and approving applications. The Board has proposed in its draft  regulations an application fee of $10,000 to $40,000, depending on the size  of the loan, and a loan guarantee origination fee equal to the lesser of 2  percent of the loan amount or $500,000. Without knowing the costs of  administering the Program, the Board cannot determine whether the  aggregate amount of fees collected is sufficient to recover, but not exceed,  certain costs of administering the Program. It is expected that the Board  will approve a small number of loans; therefore, it has a limited opportunity  to charge the appropriate fees.
section_title: Conclusions
paragraphs: The LOCAL TV Program has not been implemented within the time frames  specified in the LOCAL TV Act. Notwithstanding considerable delays  already incurred, it is important that the Board begin to put the Program in  operation in an expedient fashion. Further delays in completing regulations  and underwriting criteria will postpone lending activities necessary to  carry out the Program. Additionally, without instituting cost accounting  practices in conformance with federal accounting standards, the Board will  not have the information needed to manage and report on the Program or  to support the full recovery of certain Program costs. If the Board does not  set adequate fees, a government subsidy to program applicants may result.
section_title: Recommendations
paragraphs: To help ensure future timely implementation of the Program, we  recommend that the Board and the Administrator work collaboratively to  issue the Program regulations and underwriting criteria in an expeditious  manner.
To help ensure better program management and that loan application and  loan guarantee origination fees are sufficient to fully cover certain costs of  administering the Program, we recommend that the Board and the  Administrator develop a process to ensure that future costs of the Program  are accumulated, documented, and reported in accordance with federal  accounting standards and related guidance.
section_title: Agency Comments and Our Evaluation
paragraphs: In written comments on a draft of this report, the Board described its plans  for implementing our recommendations. The Board stated that it continues  to work with the Administrator and every effort is being made to ensure  that the Program regulations and underwriting criteria are issued  expeditiously. Further, the Board informed us that as it begins accepting  applications, it will ensure that administrative expenses adhere to  managerial cost accounting concepts in accordance with federal  accounting standards and related guidance. The Board also provided  technical comments on our draft report, which we incorporated as  appropriate.
We are sending copies of this report to the Secretaries of Agriculture,  Commerce, and Treasury, and the Chairman of Board of Governors of the  Federal Reserve System, members of the Local Television Loan Guarantee  Board, and the Director, Office of Management and Budget. We will also  make copies available to others upon request. In addition, the report will be  available at no charge on the GAO Web site at http://www.gao.gov.
Should you or your staff have any questions on matters discussed in this  report, please contact me at (202) 512-6906 or by email at  williamsm1@gao.gov or Alana Stanfield, Assistant Director, at  (202) 512-3197 or stanfielda@gao.gov. Major contributors to this report are  acknowledged in appendix II.
section_title: Comments from the LOCAL TV Board
section_title: GAO Contacts and Staff Acknowledgments
subsections: section_title: GAO Contacts
section_title: Acknowledgments
paragraphs: In addition to those named above the following individuals made important  contributions to this report: Lisa Crye, Jeff Isaacs, Jeff Jacobson, Jason  Kelly, Hannah Laufe, and Christina Quattrociocchi.
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