USDA is the federal government’s principal provider of loans used to assist the nation’s rural areas in developing their utility infrastructure. Through RUS, USDA finances the construction, improvement, and repair of electrical, telecommunications, and water and waste disposal systems. The agency provides credit assistance through direct loans and through repayment guarantees on loans made by other lenders. Electricity loans are made primarily to electric cooperatives; more than 99 percent of the borrowers with electricity loans are nonprofit cooperatives. Direct loans are made to construct and maintain the distribution facilities that provide electricity to users, and guarantees are provided on loans to finance the construction of electricity generating and transmission facilities. Telecommunications loans—both direct and guaranteed—are made primarily to telephone cooperatives and commercial companies to build and improve telephone and telecommunications facilities and services; about 28 percent of the borrowers with telecommunications loans are nonprofit cooperatives, and about 72 percent are for-profit companies. RUS also administers the Rural Telephone Bank (RTB) loan program, in which direct loans are made to supplement the financing that telephone cooperatives and commercial companies receive from RUS through the telecommunications loan program. Water and waste disposal loans, either direct or guaranteed, are made to public bodies and nonprofit associations; about 80 percent of the borrowers with water and waste disposal loans are public bodies, and about 20 percent are nonprofit associations. Water loans are made to improve the storage, treatment, and distribution of water, and waste disposal loans are made to collect, treat, and dispose of waste, including solid waste and storm drainage. (App. I provides additional details on each of the utility loan programs.) During fiscal years 1992 through 1996, RUS made or provided USDA guarantees on slightly more than 6,150 utility loans, which totaled about $10.4 billion. Table 1 shows the level of loans in each of the utility programs. Direct loans accounted for 6,033 of the total loans and for $8.9 billion of the total loan amount. The other 121 loans had USDA guarantees—83 loans were electricity or telecommunications loans, and 38 were water and waste disposal loans. All electricity and telecommunications loans that received USDA repayment guarantees during this 5-year period were made by the Treasury’s Federal Financing Bank (FFB); all water and waste disposal loans that received guarantees were made by commercial lenders. (App. I provides detailed information on direct and guaranteed loans in each of the utility loan programs for fiscal years 1992 through 1996.) RUS’ cost for the utility loan programs totaled about $1.4 billion in fiscal years 1992 through 1996. This cost consists of two components: federal subsidy costs and administrative costs for salaries and other expenses. The subsidy cost under credit reform (post-fiscal year 1991 credit) includes net present value estimates of (1) the interest costs associated with loans made at rates below the rate at which RUS borrows from the Treasury, (2) default costs, (3) fees, and (4) other costs and revenues.(App. I presents a more detailed discussion of the principles and requirements of credit reform.) Table 2 shows RUS’ reported costs for each of the utility programs. About 54 percent of RUS’ total subsidy costs on electricity loans involved loans made in fiscal years 1992 and 1993; the remaining 46 percent involved loans made during fiscal years 1994 through 1996. On telecommunications loans, about 69 percent of the total subsidy costs involved loans made in the first 2 fiscal years, and 31 percent involved loans made in the last 3 fiscal years. On the other hand, about 31 percent of the total subsidy costs on water and waste disposal loans involved loans made in fiscal years 1992 and 1993, and 69 percent involved loans made in fiscal years 1994 through 1996. Almost 99 percent of RUS’ total subsidy costs involved direct loans. About 59 percent of the electricity loans were direct loans made at a 5 percent interest rate; these loans accounted for about 42 percent of the total dollar amount of all electricity loans. About 24 percent of the telecommunications loans were direct loans made at a 5 percent interest rate; these loans accounted for about 27 percent of the total dollar amount of all telecommunications loans. Also, about 91 percent of the water and waste disposal loans were direct loans made at interest rates that were less than RUS’ costs of borrowing from the Treasury; these loans accounted for about 87 percent of the total dollar amount of all water and waste disposal loans. (App. I discusses loans with subsidized interest rates.) We did not assess the accuracy of RUS’ reported subsidy cost estimates or the adequacy of the system used by RUS to derive such estimates under credit reform. (App. I provides detailed information on the reported costs for the direct and guaranteed loans in each of the utility loan programs for fiscal years 1992 through 1996, and further discussion of subsidy costs.) The outstanding principal on RUS’ direct and guaranteed electricity, telecommunications, and water and waste disposal loans totaled $42.5 billion at the end of fiscal year 1996. About $660 million of the total outstanding principal was owed by borrowers that were delinquent (at least 30 days past due on loan repayment)—about $618 million by delinquent borrowers with electricity loans and about $43 million by delinquent borrowers with water and waste disposal loans. The telecommunications loan portfolio had no delinquencies. Much more of the outstanding electricity loan principal is at risk, however, because it is owed by other borrowers that are experiencing financial distress; for example, they are in bankruptcy or, according to RUS officials, are likely to default on loan repayment in the near future. RUS’ records show that a total principal of $7.4 billion was owed by such borrowers at the end of fiscal year 1996. Four borrowers whose loans had previously been restructured (the original loan agreements were altered, including revised repayment schedules and changes in interest rates) and that continue to be in severe financial trouble owe $5.7 billion; four other borrowers whose loans had not previously been restructured and that are also in serious financial difficulty owe $1.1 billion; and, one other borrower whose loans had previously been restructured and that informed RUS in early fiscal year 1997 that it was experiencing financial difficulties owes $0.6 billion. Most of the electricity loans to RUS’ problem borrowers were made many years ago—some dating back to the late 1970s. This relatively high dollar amount of problem loans exists even though RUS had written off some borrowers’ debts in recent years. Most of the write-offs have involved electricity loans, but some water and waste disposal loans have also experienced write-offs. Specifically, RUS wrote off almost $1.05 billion in electricity loans during the 5-year period, fiscal years 1992-96. It also wrote off $6 million in water and waste disposal loans during this period. According to RUS’ reports, about $8 billion, or almost 25 percent of the $32.3 billion in outstanding principal on electricity loans as of September 30, 1996, was owed by 12 borrowers that are delinquent or in financial distress. These 12 borrowers made up less than 2 percent of the total number of RUS’ electricity loan borrowers. About $618 million of principal was owed by three delinquent borrowers. These three borrowers, each of which had been delinquent since the mid-1980s, also owed almost $400 million in unpaid interest. Table 3 shows the amount of principal owed by all borrowers, and the portion owed by delinquent borrowers, on electricity loans at the end of fiscal year 1996. (App. II provides information on electricity loans at the end of fiscal years 1992 through 1995.) Each of the three delinquent borrowers has filed for bankruptcy. According to RUS officials, two of the borrowers (a distribution borrower and a power supply borrower) have problems that stem from investments in the same nuclear-generating plant, which resulted in high levels of debt and debt-servicing expenses, coupled with a lack of growth in their customer bases. At the end of fiscal year 1996, the distribution borrower owed $15.1 million in outstanding principal and $4 million in unpaid interest on RUS’ direct loans. The power supply borrower owed $41.2 million in principal and $21.5 million in interest on RUS’ direct and guaranteed loans. Both borrowers filed for bankruptcy in April 1996. The third delinquent borrower has a high debt level because it invested in a nuclear-generating plant that was not completed. This power supply borrower, which owed $561.5 million in principal and $373.4 million in interest on loans guaranteed by RUS, has been in bankruptcy since 1985. In addition to delinquent borrowers, the electricity loan program had other problem borrowers at the end of fiscal year 1996. These include four power supply borrowers that previously had their debts restructured and that continued, according to RUS officials, to be in severe financial trouble. According to the RUS officials, these borrowers’ problems stem from their investments in nuclear-generating plants that were completed late and over budget or in coal-fired generating plants that were built to satisfy anticipated industrial growth that did not occur. These borrowers’ debts had been restructured at least once in the 1980s or the early part of 1990. Two of these borrowers had filed for bankruptcy: One, with $4.2 billion in outstanding loans, filed in 1994, and the other, with $531 million in outstanding loans, filed in 1996. The third borrower with $293 million of debt was negotiating the resolution of its outstanding loans at the time of our review. The fourth borrower, with more than $700 million in outstanding loan principal and about $36 million in accrued interest, had agreed in late 1995 to provide a lump-sum payment to settle its electricity debt.