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entitled 'Local Television Act: Status of Spending for Fiscal Year 
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October 15, 2004:

The Honorable Richard C. Shelby:
Chairman:
The Honorable Paul S. Sarbanes:
Ranking Minority Member:
Committee on Banking, Housing, and Urban Affairs:

United States Senate:
The Honorable Michael G. Oxley:
Chairman:
The Honorable Barney Frank:
Ranking Minority Member:
Committee on Financial Services:

House of Representatives:

Subject: Local Television Act: Status of Spending for Fiscal Year 2003:

In December 2000, the Congress passed the Launching Our Communities' 
Access to Local Television Act of 2000 (Local TV Act or act).[Footnote 
1] The act created the Local Television Loan Guarantee Program 
(Program) and established the Local Television Loan Guarantee Board 
(Board) to finance projects that will provide access to signals of 
local television stations to households in areas with limited or no 
access to such signals from a commercial satellite service or other 
multichannel video provider. The Board may approve loan guarantees up 
to 80 percent of loans totaling no more than $1.25 billion in 
aggregate. In November 2001, the Congress appropriated $2 million for 
administrative expenses to implement the Program.[Footnote 2]

Section 1006 of the act requires 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. In October 2003, we issued our first annual report[Footnote 
3] as required by the act. In that report, we addressed program 
administration and key activities that occurred during fiscal years 
2002 and 2003. We reported that the Program had not been established 
expeditiously as specified by the act and that the full costs of 
administering the Program were not accumulated and charged to the 
Program as called for by federal accounting standards. Because the 
regulations and underwriting criteria that would have provided the 
overall framework for the Program had not been implemented at the time 
of our initial review, lending activities were delayed. Therefore, 
there were no loan guarantee applicants to audit, which was one of our 
mandated audit objectives under Section 1006 of the act. This second 
report addresses the status of the $2 million administrative 
appropriation and the fiscal year 2003 Working Group[Footnote 4] costs.

To determine the status of the $2 million administrative appropriation 
and the Working Group costs incurred during fiscal year 2003, we 
obtained and evaluated information from the Board, including budget, 
contract and cost data, minutes of Board meetings, and other related 
information. Further, we reviewed federal accounting standards to 
determine if Working Group costs were accounted for properly. We did 
not independently verify or audit the Working Group cost data we 
obtained from the Board. We conducted our work from March 2004 through 
September 2004 in accordance with generally accepted government 
auditing standards. We requested comments on a draft of this report 
from the Chairman of the Board.

During fiscal year 2002, the Department of Agriculture obligated the $2 
million in appropriated funds by issuing an order to GovWorks for its 
anticipated needs. GovWorks is a franchise fund established within the 
Department of the Interior by the Congress and the Office of Management 
and Budget to offer administrative services to federal agencies. As of 
the end of fiscal year 2003, GovWorks had awarded, on the Board's 
behalf, contracts totaling almost $1.2 million, leaving approximately 
$802,000 of the $2 million administrative appropriation still available 
for contracting with outside consultants or other administrative 
expenses. Table 1 summarizes the activity for this appropriation for 
fiscal years 2003 and 2002.

Table 1: Status of Administrative Appropriation as of September 30, 
2003:

Appropriation received by the Department of Agriculture (USDA) during 
fiscal year 2002[A,B]: $2,000,000; 

Less contracts awarded by GovWorks during Fiscal year 2002 - Ernst & 
Young, LLP for developing underwriting criteria (includes $20,323 
GovWorks fee): $697,771; 

Less contracts awarded by GovWorks during Fiscal year 2003 - Arnold 
and Porter for legal services[C]: $500,000; 

Subtotal: $1,197,771; 

Amount available for contracting with outside consultants as of 
September 30, 2003: $802,229. 

Source: GAO analysis.

[A] The Agriculture, Rural Development, Food and Drug Administration, 
and Related Agencies Appropriations Act, 2002, appropriated $2 million 
for administrative expenses necessary for carrying out the Local 
Television Loan Guarantee Program, which it directed to be transferred 
to and merged with the appropriation for Rural Development, Salaries 
and Expenses, Pub L. No. 107-76, 115 Stat. 704, 725. (Nov. 28, 2001).

[B] The Consolidated Appropriations Resolution, 2003, provided that any 
balances available from prior years for the Rural Utilities Service, 
Rural Housing and the Rural Business-Cooperative Services salaries and 
expenses account be transferred and merged with the fiscal year 2003 
appropriation, Pub. L. No 108-7, Div. A, title III, 117 Stat. 26, 28 
(Feb. 20, 2003). Pursuant to this provision, the balance of the $2 
million appropriated in fiscal year 2002 was carried forward to fiscal 
year 2003.

[C] This contract is an indefinite quantity, indefinite delivery 
contract for fixed-price labor services with a maximum dollar threshold 
of $500,000. As of May 27, 2004, no services had been obtained. This 
contract is subject to an administrative fee based on services provided 
in an amount no greater than $15,000.

[End of table]

At the Board's request, GovWorks awarded a $677,448 contract to Ernst 
and Young for developing underwriting criteria and a $500,000 contract 
to Arnold and Porter for legal services. As of the end of fiscal year 
2003, approximately $598,000, about 88 percent of the contract amount, 
had been disbursed to Ernst and Young. Because the Board had not used 
Arnold and Porter's services as of the end of fiscal year 2003, the 
original amount awarded remained available at fiscal year end.

Separate from the $2 million appropriation for administrative expenses 
discussed above, the Board reported that during fiscal years 2002 and 
2003, the Working Group incurred approximately $333,742 in 
administrative costs for continuing development:

of the Program regulations and underwriting criteria. Table 2 
summarizes these costs for fiscal years 2002 and 2003.

Table 2: Summary of Estimated Administrative Costs Incurred by the 
Working Group:

For the Fiscal Years Ended September 30, 2002 and 2003;

Entity representing the Board: USDA Rural Utilities Service; 
Estimated costs: Fiscal Year 2002: $53,586; 
Estimated costs: Fiscal Year 2003: $158,491; 
Total: $212,077; 

Entity representing the Board: Department of the Treasury; 
Estimated costs: Fiscal Year 2002: $11,202; 
Estimated costs: Fiscal Year 2003: $50,402; 
Total: $61,604; 

Entity representing the Board: Department of Commerce; 
Estimated costs: Fiscal Year 2002: $8,506; 
Estimated costs: Fiscal Year 2003: $31,123; 
Total: $39,629; 

Entity representing the Board: Federal Reserve Board; 
Estimated costs: Fiscal Year 2002: $5,155; 
Estimated costs: Fiscal Year 2003: $15,277; 
Total: $20,432; 

Total estimated costs; 
Estimated costs: Fiscal Year 2002: $78,449; 
Estimated costs: Fiscal Year 2003: $255,293; 
Total: $333,742; 

Source: GAO analysis based on information obtained from the Board. 
Information is unaudited.

[End of table]

The respective departments and agencies of the Working Group members 
absorbed these costs from their own salaries and expense accounts 
rather than being paid from the $2 million appropriation. Also, as 
discussed in our previous report,[Footnote 5] the total costs of 
administering the Program were not accumulated and charged to the 
Program consistent with federal accounting standards.[Footnote 6] For 
example, Working Group costs reported by the Board did not include 
fringe benefits and overhead. Again, during fiscal year 2003, such 
costs incurred by the Board had not been included in reported costs. 
Without accumulating and reporting the costs of administering the 
Program, the Board will not be able to satisfy federal cost accounting 
requirements or be in a position to determine the portion of those 
costs that are statutorily required to be recovered.

The Board provided written comments on a draft of this report. In its 
response, the Board commented on the accumulation of Board and Working 
Group costs for the purpose of establishing loan guarantee origination 
fees and application fees and the delay of lending activities.

The Board stated that we had not made a distinction between the Working 
Group's costs to date that have been related to developing regulations 
and underwriting criteria and otherwise setting up the Program and 
those costs that are eligible for recovery through loan guarantee 
origination and application fees. The Board also reiterated a point 
made in commenting on our prior report. This is, when the Board accepts 
applications or extends offers for loan guarantees, it will ensure that 
such administrative costs adhere to managerial cost accounting concepts 
in accordance with federal accounting standards and related guidance, 
provided that those costs prove to be material. We agree that the 
Program development costs should not be considered when establishing 
the loan application or loan guarantee origination fees and have never 
suggested that they should be.[Footnote 7] However, assuming that the 
Board will eventually process at least one completed application or 
award at least one loan guarantee, we believe that it needs to 
establish a methodology to accumulate the costs that the Board and 
Working Group will incur before applications are accepted. This 
methodology is needed to meet the statutory requirement that loan 
application and loan guarantee origination fees be set at a level 
reasonably expected to offset, but not in the aggregate exceed, these 
costs. Such a methodology need not be elaborate, as long as it 
satisfies the basic cost accounting processes prescribed by Statement 
of Federal Financial Accounting Standards No. 4 (SFFAS No. 4).

Aside from accumulating costs for the purpose of establishing fees, we 
also continue to believe that appropriate cost information should be 
available about the Program. As discussed in our previous report, 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.[Footnote 8]

Consistent with the previous report, the Board stated that lending 
activities were delayed because the statute required the Board to 
procure the services of an independent public accounting firm to assist 
with developing underwriting criteria and such criteria needed to be 
developed in accordance with the statute and the regulations. We 
continue to believe, as stated in our prior report, that the Program 
has not been established in an expeditious fashion as specified by the 
act. Based on the criteria stated in the act, the program regulations 
and the underwriting criteria, which provide the overall framework for 
the Program, should have been ready for implementation no later than 
March 2002. Since these key documents were not ready until December 
2003, the Board was delayed in initiating the lending activities needed 
to carry out the objectives of the program. The Board's written 
comments are presented in the enclosure.

We are sending copies of this report to the Secretaries of Agriculture, 
Commerce, and Treasury, and the Chairman of the 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.

We look forward to working with you and your staff on the fiscal year 
2004 audit required by the Local TV Act. Should you or your staff have 
any questions on matters discussed in this report, please contact me at 
(202) 512-6906 or by e-mail at williamsm1@gao.gov, or Alana Stanfield, 
Assistant Director, at (202) 512-3197 or at stanfielda@gao.gov. Major 
contributors to this report include Lisa Crye, F. Abe Dymond, Lauren S. 
Fassler, Jeff Isaacs, and Christina Quattrociocchi.

Signed by: 

McCoy Williams:

Director:
Financial Management and Assurance:

Enclosure:

Comments from the Local Television Loan Guarantee Board: 

LOCAL Television Loan Guarantee Board: 
Room 2919-S, Stop 1575: 
1400 Independence Ave., S.W.: 
Washington, DC 20250-1575:

October 1, 2004:

McCoy Williams: 
Director:
Financial Management and Assurance:
United States Government Accountability Office: 
Room 5089:
441 G St. NW: 
Washington, DC 20548:

Dear Mr. Williams:

The Government Accountability Office (GAO) recently asked the LOCAL 
Television Loan Guarantee Board (the Board) for its comments on the 
second GAO draft report to Congressional Committees on the 
administration of the provisions of the "Launching Our Communities' 
Access to Local Television Act of 2000." Specifically, this draft 
report addresses the status of the $2 million administrative 
appropriation and the fiscal year 2003 Working Group costs.

In its report, GAO asserts that Working Group costs, such as fringe 
benefits and overhead, were not reported and thus the Board will not 
have the information needed to determine the amount of loan guarantee 
and application fees needed to cover, but not exceed, the costs of 
administering the Program GAO fails to acknowledge that the Working 
Group's costs to date have not been eligible for recovery through these 
fees. The Board will only charge an application fee to those applicants 
whose application has been accepted and that fee will cover the costs 
of making necessary determinations and findings with respect to that 
application. See 47 U.S.C.  1104(n)(1); see also 7 C.F.R.  
2201.11(n), 2201.21(a). Moreover, the Board will only charge and 
collect a loan guarantee origination fee to those borrowers to whom an 
offer of guarantee is extended and that fee will cover the 
administrative costs of the Board associated with making such a 
guarantee regardless of whether the loan closes. See 47 U.S.C.  
1104(n)(2); see also 7 C.F.R.  2201.21(b). The Working Group's costs 
to date have been related to developing regulations and underwriting 
criteria and otherwise setting up the Program. None of these costs have 
been associated with an application accepted for consideration or the 
offer of a loan guarantee. Thus the costs incurred by the Board and 
Working Group to date are immaterial in determining the level of fees 
to be charged and the need to account for the Working Group's 
administrative costs in the manner suggested by GAO has not yet 
occurred. However, when the Board accepts applications or extends 
offers for loan guarantees, the Board will ensure that such 
administrative costs adhere to managerial cost accounting concepts in 
accordance with federal accounting standards and related guidance, 
provided that those costs prove to be material.

GAO also notes that lending activities were delayed because regulations 
and underwriting criteria were not implemented at the time of GAO's 
initial review. As previously reported to GAO, the statute required the 
Board to procure the service of an independent public accounting firm 
to develop underwriting criteria and other such matters as the Board 
considers appropriate. Timing was compromised because the Board 
followed Federal procurement law in procuring the services of the 
independent public accounting firm. Timing was further compromised 
because of the need to develop the underwriting criteria in accordance 
with the statute and the regulations.

I hope this information is helpful. Please do not hesitate to contact 
me if GAO has any questions concerning the Board's comments on the 
report or any issue involving the LOCAL Television Loan Guarantee 
Program.

Sincerely,

Signed by: 

Brian C. Roseboro: 
Chairman: 

[End of section]

(195038):

FOOTNOTES

[1] Pub. L. No. 106-553, title X, 114 Stat. 2762A-128 (Dec. 21, 2000) 
(codified in part at 47 U.S.C. 1101-1110).

[2] Agriculture, Rural Development, Food and Drug Administration and 
Related Agencies Appropriations Act, 2002, Pub. L. No. 107-76, title 
III, 115 Stat. 704, 725 (Nov. 28, 2001).

[3] Local TV Act: Progress Made, but Timeliness and Cost Accounting 
Issues Need to be Addressed, GAO-04-134 (Washington, D.C.: Oct. 31, 
2003).

[4] The Working Group, which the Board established based on authority 
granted in the act, consists of senior level officials and staff from 
the Board members' departments and agencies, including the Departments 
of Agriculture, Commerce, Treasury, and the Board of Governors of the 
Federal Reserve System.

[5] GAO-04-134, 9.

[6] Federal Accounting Standards Advisory Board. Statement of Federal 
Financial Accounting Standards No. 4: Managerial Cost Accounting 
Standards, July 31, 1995.

[7] The Local TV Act and implementing regulations require the Board to 
charge applicants a loan application fee and a loan guarantee 
origination fee. See Pub. L. No. 106-553, title X,  1005(n), 114 Stat. 
2762A-128-137 (Dec. 21, 2000) (codified at 47 U.S.C.  1104(n)); see 
also 7 C.F.R.  2201.11(m), (n), 2201.21. The act established the loan 
application fee "to cover the cost of the Board in making necessary 
determinations and findings with respect to the loan guarantee 
application under this act." The act established the loan guarantee 
origination fee to cover the administrative costs, including the costs 
of the Board, associated with the issuance of a loan guarantee. 
However, the act limits the Board to imposing fees that in the 
aggregate do not exceed the actual amount of administrative costs under 
this act.

[8] GAO-04-134, 9.