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

Letter

Background

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.

Scope and Methodology

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.

The LOCAL TV Program Has Not Been Implemented in a Timely Manner

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.

Policies and Procedures Needed as a Basis for Collecting User Fees Have Not Been Established

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.

Conclusions

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.

Recommendations

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.

Agency Comments and Our Evaluation

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.

Comments from the LOCAL TV Board

GAO Contacts and Staff Acknowledgments

GAO Contacts

Acknowledgments

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.

GAO’s Mission

The General Accounting Office, the audit, evaluation and investigative arm of Congress, exists to support Congress in meeting its constitutional responsibilities and to help improve the performance and accountability of the federal government for the American people. GAO examines the use of public funds; evaluates federal programs and policies; and provides analyses, recommendations, and other assistance to help Congress make informed oversight, policy, and funding decisions. GAO’s commitment to good government is reflected in its core values of accountability, integrity, and reliability.

Obtaining Copies of GAO Reports and Testimony

The fastest and easiest way to obtain copies of GAO documents at no cost is through the Internet. GAO’s Web site (www.gao.gov) contains abstracts and full- text files of current reports and testimony and an expanding archive of older products. The Web site features a search engine to help you locate documents using key words and phrases. You can print these documents in their entirety, including charts and other graphics.

Each day, GAO issues a list of newly released reports, testimony, and correspondence. GAO posts this list, known as “Today’s Reports,” on its Web site daily. The list contains links to the full-text document files. To have GAO e-mail this list to you every afternoon, go to www.gao.gov and select “Subscribe to e-mail alerts” under the “Order GAO Products” heading.

Order by Mail or Phone

To Report Fraud, Waste, and Abuse in Federal Programs

Public Affairs