Detailed Information on the
Rural Telecommunications Loan Programs Assessment

Conduct periodic independent reviews that focus on how well the program is accomplishing its mission and meeting its long term goals.

Within the next three years, develop a method to collect cost information to allow tracking of all direct and indirect costs and to develop baselines and targets for the efficiency measure cost per loan.

Reduce funding supporting non-rural areas by recertifying borrowers' rural status.

Determine if the current policy for loan processing of "first in, first out" provides adequate support to the areas with the highest priority needs.

Develop a measure that determines how rural the area served by the borrower is.

Measure: Percentage of rural subscribers of telecommunications program borrowers receiving new or improved service. From 2004 through 2010.

Explanation:Increase the percentage of consumers receiving new or upgraded telecommunications service by 40% by 2010. Performance is measured using a formula based on the number of consumers recieving new or upgraded telecommunications service divided by the total number of consumers served by all existing telecommunications program borrowers.

Measure: Percentage of lines upgraded to high-speed capability.

Explanation:Increase the percentage of subscriber lines that are upgraded to high-speed capability by 30% by 2010. Performance is measured using a formula based on the number of subscriber lines upgraded divided by the total number of existing subscriber lines for all Telecommunications Program borrowers.

Measure: Percentage decrease in subscriber rates attributable to RUS funding.

Explanation:This measure is designed to measure the reduction in rates charged to rural consumers for telecommunications.

Measure: Percentage of subscribers receiving new or improved service.

Explanation:Increase the percentage of consumers receiving new or upgraded telecommunications service by 5.7% annually. Performance is measured using a formula based on the number of consumers recieving new or upgraded electric service divided by the total number of consumers served by all existing telecommunications program borrowers.

Measure: Percentage of telecommunications programs borrowers' subscriber lines in rural America that have been upgraded to high-speed capability.

Explanation:Increase the percentage of subscriber lines that are upgraded to high-speed capability by 4.3% annually. Performance is measured using a formula based on the number of subscriber lines upgraded divided by the total number of existing subscriber lines for all Telecommunications Program borrowers.

Measure: Percentage increase in leveraging.

Explanation:This measure is designed to measure the amount of non-governmental resources that are used to fund telecommunications plant investment in coordination with governmental resources.

Measure: Cost per loan. Measure is under development.

Explanation:The ratio of total annual obligated salaries and expenses funding over the obligated average loan portfolio balance outstanding plus accrued interest and fees plus total average grants. At the moment cost accounting systems are not in place to track expenses at the program level. However, over the next year the agency will be working to differentiate adminstrative expenses among each loan program.

Is the program purpose clear?

Explanation: Authorizing legislation provides the Secretary of Agriculture the authority to make loans for the improvement and expansion of telecommunications services in rural areas. The policies and procedures by which this purpose is carried out are detailed in implementing regulations.

Evidence: 7 USC Chapter 31; Rural Electrification Act of 1936, as amended; and 7 CFR Parts 1735 through 1757.

Does the program address a specific and existing problem, interest or need?

Explanation: Due to industry's constant technological evolution, the definition of telecommunications service is constantly evolving. The issue of providing services to sparsely populated areas still exists. As such, the program's mission continues to exist. Providing telecommunications services in rural areas is more expensive than in non rural areas. Investment per subscriber in rural systems averages $2,921 compared to $1,920 for urban. The two private sector lenders provide capital for rural telecommunications at interest rates that average 2 percentage points higher than Government rates before adjustments upwards for risk. Given the recent downturn in the telecommunications industry, private lenders have restricted the amount of capital available and raised rates over the past two years, thereby making investment in rural telecommunications more expensive without RUS program financing. However, some RUS borrowers are million dollar companies that are capable of obtaining private financing.

Evidence: In the Rural Electrification Loan Restructuring Act (the 1993 Farm Bill), Congress amended the Rural Electrification Act to require that facilities financed under this program must be capable of providing broadband service at the rate of 1 megabite per second. SEC filings.

Is the program designed so that it is not redundant or duplicative of any other Federal, state, local or private effort?

Explanation: Commercial credit is available. One commercial lender has $5 billion in outstanding loans to rural telecommunications companies and issues about $500 million to $1 billion per year in new loans. A recent SAIC study performed for the Rural Telephone Bank showed that rural telecommunications capital needs met by the commercial market are significantly higher (75%) then the support provided through the RUS telecommunications program. In addition, the Universal Service Fund also provides support to telecommunications providers in rural areas. In 2002, USF provided $2 billion in funding to rural high cost areas. However, no other Federal, State, local or private programs provide lending for rural telecommunications infrastructure on an 'area coverage' basis, where applicants must provide service to the widest practicable number of rural residents (not just 'in-town' customers).

Evidence: 7 CFR Part 1735.11, Area Coverage "the borrower must seek to provide service to all interested potential subscribers in the service area." Due to cyclical fluctuations in the availability of private capital, a steady source of available capital is important; annual commercial bank statements. SAIC report - "Annual rural telecommunications capital spending is estimated at $4.8 billion. Internal funding by rural carriers is estimated to serve roughly 50% of this demand."

Is the program design free of major flaws that would limit the program's effectiveness or efficiency?

Explanation: Program effectiveness and efficiency has been increasing. The program is effective in making capital available where the private market cannot. No private sector capital is available that requires "area coverage" to ensure that the most rural customers receive service. Due to financial and technological feasibility requirements of the program and a low default rate, a $500 million lending program costs the Government only $125,000 (based upon 2004 subsidy rates), less than 0.03%. The program is promoting efficiency through a series of new program initiatives designed to streamline operations. The Office of Inspector General conducts ongoing audits of the program's operations and efficiencies, the most recent of which was conducted in 1998. No material findings were disclosed. Basically, there is no evidence that there are flaws that limit the program's effectiveness or efficiency.

Evidence: FY2003 subsidy rates - 1.71, 0.05, and -2.36. FY2004 subsidy rates - -4.44, 0.05, and -1.85. The program introduced new "Xpress" loan procedures designed to process and approve loans for financially sound borrowers in less than 15 days thereby promoting internal efficiency and lowering borrowers' costs.

Is the program effectively targeted, so that resources will reach intended beneficiaries and/or otherwise address the program's purpose directly?

Explanation: There is no prioritization of applications for the other telecommunications loan programs to make sure the neediest areas receive funding first. In addition, the program is not designed to prevent funding from supporting non rural telecommunications investments. There is no requirement to recertify rural status of a telecommunication provider which can lead to funding supporting non rural areas. The program provides funding to areas of 5,000 inhabitants or less and requires that the most rural customers lying outside of the population concentrations are served through its area coverage requirement. The program's hardship funds are targeted to borrowers who: 1) have an average number of subscribers per mile of line is not more than 4; 2) have a projected TIER of not greater than 3; and 3) are participating in its state telecommunications modernization plan. However, in FY2003, the Hardship program was only 15% of the RUS telecommunications programs loan level.

Evidence: 1) Eligibility is dictated by 7 USC Chapter 31; Rural Electrification Act of 1936, as amended "As used in this subchapter, the term ''rural area'' shall be deemed to mean any area of the United States not included within the boundaries of any incorporated or unincorporated city, village, or borough having a population in excess of 5,000 inhabitants;" 2) 7 CFR Part 1735.11, Area Coverage; and 1735.30, Hardship Loans; 3) GAO/RCED-98-42 Opportunities to operate electricity and telecommunications loan programs more effectively, "specifically, because the loan programs are intended to assist in the development of the nation's rural areas, targeting loans to borrowers that provide service to areas with low populations could result in the more effective use of the agency's limited loan funds."

Does the program have a limited number of specific long-term performance measures that focus on outcomes and meaningfully reflect the purpose of the program?

Explanation: Three specific long-term performance measures and four specific short-term performance measures have been developed which focus on specific short-term and long-term outcomes and reflect the purpose of the Telecommunications Program and its funding. These measures support the program purpose of providing telecommunications to rural areas.

Evidence: In developing these four specific performance measures, the program purpose, goals, and funding were analyzed to develop measures that adequately reflect the program. New measures include: percentage of customers receiving new and/or improved service, percentage of lines upgraded to high speed capability, and percentage decrease in subscriber rates attributable to RUS funding. See performance measures attached.

Does the program have ambitious targets and timeframes for its long-term measures?

Explanation: Baselines and targets have been developed. The targets are similar to levels that have been achieved in previous years though the funding level has been reduced. These targets are ambitious though attainable since in several of the areas this program has been accomplishing more with similar or less funding than in previous years.

Evidence: Discrete, quantifiable, and measurable data is collected annually from various agency sources.

Does the program have a limited number of specific annual performance measures that can demonstrate progress toward achieving the program's long-term goals?

Explanation: The four performance measures developed include specific annual short-term performance measures which will demonstrate progress toward achieving the long-term outcomes of the Telecommunications Program. The new annual measures reflect the impact the program has on improving rural telecommunications. USDA is developing an efficiency measure for all credit programs.

Evidence: The performance measures include annual short-term measures that collectively will aid the program in meeting its long-term outcomes. New measures include: percentage of subscribers receiving improved service, percentage of miles of lines upgraded to high-speed capability, and percentage increase in leveraging. See performance measures attached.

Does the program have baselines and ambitious targets for its annual measures?

Explanation: Baselines and targets have been developed. The targets are similar to levels that have been achieved in previous years though the funding level has been reduced. These targets are ambitious though attainable since in several of the areas this program has been accomplishing more with similar or less funding than in previous years.

Evidence: Discrete, quantifiable, and measurable data is collected annually from various agency sources.

Do all partners (including grantees, sub-grantees, contractors, cost-sharing partners, and other government partners) commit to and work toward the annual and/or long-term goals of the program?

Explanation: For more than 53 years, the program borrowers have been committed to provide modern, advanced telecommunications service. Loan contracts require loan funds be used for specific purposes. All loans are reviewed by program staff to ensure that loan funds were used for proper loan purposes. Borrowers annually report the information required to evaluate performance measures.

Evidence: RUS Form 479, Financial and Statistical Reports for Telecommunications Borrowers. Standard loan contract.

Are independent evaluations of sufficient scope and quality conducted on a regular basis or as needed to support program improvements and evaluate effectiveness and relevance to the problem, interest, or need?

Explanation: Independent evaluations reviewing how well the program is accomplishing its mission and meeting its long term goals are not performed. However, Management Control Reviews are performed on a periodic basis, not to exceed 5 years. These reviews look at how RUS is implementing the Telecommunications program and provides recommendations for improvement. In addition, the Office of the Inspector General and the General Accounting Office periodically perform compliance audits of the Telecommunications program. The Rural Development financial statement audit, which includes compliance with GPRA, is conducted annually by OIG. All borrowers also have annual financial audits.

Evidence: 1) Management Control Review August 2001, 2)OIG and GAO compliance audits; and 3) OIG financial statement audits. The last MCR evaluated compliance with rules and regulations controlling loan application and approval and post loan reviews. In most instances RUS personnel complied with the rules and regulations. 4 GAO audits that dealt with RUS since 1979. One was on long-term cost implications and another was on the financial condition of RUS' loan portfolio. A third GAO audit reviewed all federal telecommunications programs looking at lessons learned by communities receiving funding. Only one GAO report focused on RUS telecommunications program performance, GAO/RCED-98-42 Opportunities to operate electricity and telecommunications loan programs more effectively. This report indicated that opportunities exist "to make the Rural Utilities Service's electricity and telecommunications loan programs more effective and less costly."

Are Budget requests explicitly tied to accomplishment of the annual and long-term performance goals, and are the resource needs presented in a complete and transparent manner in the program's budget?

Explanation: Since RUS did not have annual performance measures that were outcome measures, it was unclear how funding, policy or legislative changes impact annual performance. Once baselines and targets are established for the new measures, the impact should be evident. The funding impact is easily seen on the loan level since the budget authority and loan level are linked.

Evidence: Rural Development budget processing instructions.

Has the program taken meaningful steps to correct its strategic planning deficiencies?

Explanation: The Telecommunications program has developed a limited number of specific long-term performance measures and annual performance measures. Baselines and targets for these measures need to be developed. Performance measures are reviewed on an annual basis to ensure current applicability to program delivery.

Evidence: A review of long-term performance measures, annual performance measures, and outcomes is required as part of the Rural Development budgeting process.

Does the agency regularly collect timely and credible performance information, including information from key program partners, and use it to manage the program and improve performance?

Explanation: Detailed records of annual lending activities are maintained. All borrowers are required to annually file financial and performance data. Information is used to process and monitor loans allowing for effective and consistent management of the loan portfolio. The results of this management are reflected in low default rates. Information collected is also used to improve program processes, for example modifying loan application processing to reduce the time involved. However, this information is not currently utilized to measure performance in meeting long-term and annual goals and targets. In addition, this information is not used to direct funding to areas of critical need.

Evidence: 1) Internal processing records; and 2) RUS Form 479, Financial and Statistical Reports for Telecommunications Borrowers. Loans approved and funded on a first in first out basis. RUS Form 479 is an annual report submitted by borrowers providing information on balance sheet data, income statements, subscriber levels, plant fund expenditures, and other financial data. An example of changes made: loan processing information was used to implement new procedures to expedite loan processing for borrowers that met certain financial and eligibility requirements.

Are Federal managers and program partners (including grantees, sub-grantees, contractors, cost-sharing partners, and other government partners) held accountable for cost, schedule and performance results?

Explanation: The Federal Manager directly responsible for the Telecommunications program is at the SES level with specific performance measures that ensure accountability. Loan contracts require borrowers to use loan funds for specific purposes. Borrowers are required to provide annual financial and performance data which is reviewed by program staff.

Evidence: 1) Program Manager Performance Elements and Evaluations; and 2) RUS Form 479, Financial and Statistical Reports for Telecommunications Borrowers.

Are funds (Federal and partners') obligated in a timely manner and spent for the intended purpose?

Explanation: On average, loans are processed within 60-90 days of receipt of a completed application. Total funds available are obligated by fiscal year end. Each loan application requires a loan design that includes a forecast of service requirements and a narrative of the services to be offered, support for subscriber forecasts, and engineering studies detailing the proposed construction. Based upon this, a Telephone Loan Budget is prepared which includes all costs of the project including those financed with RUS loan funds and those with non-loan funds. All loan funds disbursed are reviewed by the Agency to ensure that funds were expended for proper loan purposes under the Rural Electrification Act. Funds improperly spent are required to be returned to the Federal Government.

Evidence: 1) Loan processing schedules; 2) Obligation schedules; 3) Loan applications, which provide information used to make sure loan is for eligible purposes; 4)Telephone Loan Budgets; and 5) Loan Fund and Accounting Reviews, which provides and "audit" on the use of expended funds to ensure that funds are used only for approved purposes.

Does the program have procedures (e.g. competitive sourcing/cost comparisons, IT improvements, appropriate incentives) to measure and achieve efficiencies and cost effectiveness in program execution?

Explanation: RUS routinely looks for methods of improving service and reducing costs. For example the introduction of the "Xpress" loan procedures, designed to process and approve loans for financially sound borrowers in less than 15 days versus 60-90 days for the normal process. RUS subsidy rates reflect the default risk of loans issued by RUS. For some time the Telecommunications program has had very low subsidy rates. For the last five years, except for one, all programs had rates below 5%. Low defaults reflect the quality of the borrowers and the program performance in that work performed by RUS reduces the losses experienced by the Government. The Agency has outsourced a significant portion of its IT activities including development of its loans management system. RUS also utilizes outside support for legal and environmental services.

Evidence: Contracts with outside consultants. New "Xpress" loan procedures. Loan program subsidy rates.

Does the program collaborate and coordinate effectively with related programs?

Explanation: There are no other Federal, state, or local programs providing loan funding to the rural telecommunications industry. However, the Telecommunications program collaborates and works extensively with industry-related, non-lending Government partners. Specifically, the Telecommunications program utilizes the construction standards developed and issued in National Electrical Code, the National Electrical Safety Code, and the National Fire Protection Association. Construction projects must be included in the State's Telecommunications Modernization plan. The program works with the Appalachian Regional Commission, the National Telecommunications and Information Administration, the Federal Communications Commission, Federal Emergency Management Agency, Institute of Electrical and Electronic Engineers, National Association of Regulatory Utility Commissioners, National Exchange Carrier Association, National Telecommunications Cooperative Association, and National Rural Telecom Association, among others.

Evidence: 1) Engineering Standards: 2) Committee meeting notes; and 3) Multi-agency conferences.

Does the program use strong financial management practices?

Explanation: Based upon the annual financial statement audit, the Telecommunications program utilizes strong financial management practices. The Rural Development mission area, of which the Telecommunications program is a part, received an unqualified audit report in Fiscal Years 2001, 2002 and 2003. The Agency's extremely low loan loss percentage, including the Telecommunications program's historic loan loss of $0, plays a major role in the clean audit opinion.

Evidence: 1) Rural Development's annual financial statement audit; 2) RUS Form 479, Financial and Statistical Report for Telecommunications Borrowers; 3) Borrowers annual audited financial statements; and 4) Telecommunications program's historic loan loss of zero.

Has the program taken meaningful steps to address its management deficiencies?

Explanation: Management deficiencies are found through program monitoring and OIG financial audits. The Rural Development mission area has established a strong system of management controls, under which the Telecommunications program's management system is reviewed. Noted deficiencies are required to be remedied within a 12-month period which is strictly monitored by the mission area. Financial management deficiencies are detailed in Rural Development's annual financial statement audit. The Agency's only material weakness is due to its legacy accounting systems. The Agency has contracted with an IT development specialist to create a new loans management accounting system, expected to be completed by the end of Fiscal Year 2004.

Evidence: 1) Rural Development's annual financial statement audit; and 2) Management Control reviews, corrective action plans, and evidence of completion of corrective action plans.

Is the program managed on an ongoing basis to assure credit quality remains sound, collections and disbursements are timely, and reporting requirements are fulfilled?

Explanation: Borrower's performance is monitored on an ongoing basis. Annually borrowers submit financial and statistical data and an audited financial statement. Procedures are established to monitor borrower compliance. Financial information reported on RUS Form 479 is reviewed and each borrower's risk is established by a pre-established set of financial criteria. Borrowers with high or imminent risk are reviewed for the cause and agreed upon corrective action is pursued. The Agency's accounting staff review borrower's audited financial statements and monitor borrower compliance. Deficiencies noted in the audit and downward trends in financial performance are reported to the program for correction. The accounting staff independently tracks the program's progress in obtaining corrective action. Monthly the accounting staff notifies the program staff of any late payment collections, at which time the program takes immediate action to remedy.

Evidence: 1) RUS Form 479, Financial and Statistical Report for Telecommunications Borrowers; 2) Borrowers' audited financial statements: 3) Accounting and Program tracking reports, which provide information on deficiencies noted in financial audits, downward trends in financial performance and progress in obtaining corrective action; 4) Accounting staff's audit review checklists; 5) Annual risk assessment report, which provides an analysis of each borrowers risk based on data submitted by the borrower on RUS Form 479; and 6) Monthly Delinquency Report, which provides information on any late payment collections.

Do the program's credit models adequately provide reliable, consistent, accurate and transparent estimates of costs and the risk to the Government?

Explanation: The Rural Development mission area has changed the credit models used to calculate subsidy rates. The OIG has audited these new models. In addition, most variation experienced by the Telecommunications program's subsidy rates is due to interest rate fluctuations that are not within the programs control. Subsidy rates have been fairly consistent over the past ten years.

Evidence: FFB telecommunication loan subsidy rates have fluctuated 3.86 % over ten years. Treasury rate telecommunications loans have fluctuated 1.79% over ten years. Hardship telecommunications loans, which show more fluctuation due to the higher interest rate subsidization, has fluctuated more significantly at 24% over ten years.

Has the program demonstrated adequate progress in achieving its long-term performance goals?

Explanation: USDA has developed new measures and targets. Data from previous years is provided to show efforts towards improving telecommunications service. The program has made some progress in obtaining annual goals which indicates that the long term goals should be obtained. However, in several instances the actuals do not meet the current targets so it is possible that not all long term goals will be met. Based on this, partial credit is given.

Evidence: See answer to 4.2.

Does the program (including program partners) achieve its annual performance goals?

Explanation: USDA has developed new measures and targets. Data from previous years is provided to show efforts towards improving telecommunications service. The program has made some progress in obtaining many of its annual performance goals. However, not all years have exceeded the targets and in one measure the results show a decrease instead of an increase. Based on this, partial credit is given.

Evidence: % of subscribers receiving new or upgraded services was 6.8% in 2003. % of lines upgraded to high-speed capability was 4.9% in 2003. % decrease in subscribers rates attributable to RUS funding has no data before 2004. % increase in leveraging was -17% which is a decrease instead of an increase.

Does the program demonstrate improved efficiencies or cost effectiveness in achieving program goals each year?

Explanation: The Telecommunications program has instituted a multitude of operational efficiency processes and procedures, most notably its "Xpress" loan process which established a 15 day application process in lieu of the normal 60-90 days. Through ongoing efforts, default rates are maintained at low rates (consistently less than 0.5%).

Evidence: The Telecommunications program has been given several new programs to administer, including a multi-billion dollar broadband program, without any increase in human or administrative support expense resources.

Does the performance of this program compare favorably to other programs, including government, private, etc., with similar purpose and goals?

Explanation: The RUS Telecommunications program compares favorably in some instances, not favorably in others, other comparisons provide no value, and others have not been done. The RUS program's interest rates are lower than private lenders, however this comparison is of little value. The RUS program has a better repayment history. But private lenders provide four times as much financing. A comparison between the USF and the RUS Telecommunications program might be possible since the purpose of USF's high cost program, reduce service rates charged to consumers, is similar to one of RUS's measures. However, the RUS program exists for additional reasons that would not be covered by this comparison. Basically, there are other programs that provide funding to the same companies. However, the purpose/mission of these programs differ greatly. This may make it difficult to have a meaningful comparison.

Evidence: The two private sector lenders provide capital for rural telecommunications at interest rates that average 2 percentage points higher than Government rates before adjustments upwards for risk. SAIC report - "Annual rural telecommunications capital spending is estimated at $4.8 billion. Internal funding by rural carriers is estimated to serve roughly 50% of this demand." No RUS loan has defaulted whereas one private lender experienced $5.5 million in losses from 2000 through 2002.

Do independent evaluations of sufficient scope and quality indicate that the program is effective and achieving results?

Explanation: Although independent evaluations reviewing how well the program is accomplishing its mission and meeting its long term goals are not performed, other aspects of performance including financial management are reviewed. These audits review the financial aspects of programs which is a significant issue for loan programs and loan portfolio management. The most recent Management Control Review found that RUS's loan application, approval and post loan reviews processes are implemented in accordance with the rules and regulations. Financial statement audits and OIG and GAO program compliance audits have indicated that the program is effective and achieving its goals. However, GAO/RCED-98-42 Opportunities to operate electricity and telecommunications loan programs more effectively provided recommendations on how to improve the program. Based on this, partial credit was given. To obtain a large extent or yes, reviews of actual performance results (actual program impact) are necessary.

Evidence: 1) Management Control Review August 2001, 2) Rural Development's annual financial statement audit; and 3) OIG and GAO compliance reviews.