oversight

Rural Development's Financial Statements for Fiscal Years 2018 and 2017

Published by the Department of Agriculture, Office of Inspector General on 2018-11-14.

Below is a raw (and likely hideous) rendition of the original report. (PDF)

        United States Department of Agriculture




  Rural Development's
  Financial Statements
  for Fiscal Years 2018 and 2017




Audit Report 85401-0009-11
                                                  OFFICE OF INSPECTOR GENERAL
November 2018
Rural Development’s Financial Statements for
Fiscal Years 2018 and 2017

Audit Report 85401-0009-11

OIG audited the consolidated financial statements of Rural Development for
fiscal years 2018 and 2017.


OBJECTIVE                          WHAT OIG FOUND
Our objectives were to determine   Rural Development received an unmodified opinion
whether (1) the consolidated       for the Office of Inspector General’s audit of Rural
financial statements present       Development’s consolidated financial statements. We
information fairly, in all
                                   determined that the agency’s financial statements
material respects, and in
accordance with generally
                                   present fairly Rural Development’s financial position as
accepted accounting principles;    of September 30, 2018 and 2017, in all material respects,
(2) internal control objectives    and were prepared in accordance with accounting
over financial reporting were      principles generally accepted in the United States of
met; (3) transactions and          America. This includes the agency’s net costs, changes in
events potentially material to     net position, and statements of budgetary resources and
the financial statements were      related notes to the financial statements.
compliant; and (4) information
was materially consistent with     Our consideration of Rural Development’s internal
other sources.
                                   control over financial reporting identified no material
                                   weaknesses and our consideration of compliance
                                   with laws and regulations noted no instances of
REVIEWED                           noncompliance.
We conducted our audits at
Rural Development’s National
Financial and Accounting
Operations Center in St. Louis,
Missouri, and reviewed selected
documentation from Rural
Development’s national office
in Washington, D.C., and field
offices.



RECOMMENDS
This report does not contain
recommendations.
                          United States Department of Agriculture
                                  Office of Inspector General
                                   Washington, D.C. 20250



DATE:          November 8, 2018

AUDIT
NUMBER:        85401-0009-11

TO:            Anne Hazlett
               Assistant to the Secretary for Rural Development

ATTN:          Tony Bainbridge
               Chief Financial Officer
               Rural Development

FROM:          Gil H. Harden
               Assistant Inspector General for Audit

SUBJECT:       Rural Development’s Financial Statements for Fiscal Years 2018 and 2017


This report presents the results of our audits of Rural Development’s financial statements for the
fiscal years ending September 30, 2018 and 2017. The report contains an unmodified opinion on
the financial statements, as well as the results of our assessment of Rural Development’s internal
control over financial reporting and compliance with laws and regulations. Your response is
included in its entirety in Exhibit B.

We appreciate the courtesies and cooperation extended to us by members of your staff during our
audit fieldwork and subsequent discussions. This report contains publicly available information
and will be posted in its entirety to our website (http://www.usda.gov/oig) in the near future.
Table of Contents

Independent Auditor’s Report ..............................................................................1
        Report on the Financial Statements .............................................................1
        Opinion on the Financial Statements ...........................................................2
        Other Matters.................................................................................................2
        Report on Internal Control Over Financial Reporting .............................3
        Report on Compliance with Laws, Regulations, Contracts, and Grant
        Agreements .....................................................................................................4
        Purpose of the Report on Internal Control Over Financial Reporting
        and the Report on Compliance with Laws, Regulations, Contracts, and
        Grant Agreements .........................................................................................5
Abbreviations ..........................................................................................................6
Exhibit A: Status of Prior Years’ Internal Control Weakness and
Noncompliance Findings ........................................................................................7
Exhibit B: Agency’s Response ..............................................................................9
Exhibit C: Consolidated Financial Statements .................................................11
Independent Auditor’s Report
Anne Hazlett
Assistant to the Secretary
for Rural Development

The Department of Agriculture’s Office of Inspector General audited the consolidated financial
statements of Rural Development for fiscal years 2018 and 2017. We also considered Rural
Development’s internal control over financial reporting and tested Rural Development’s
compliance with certain provisions of applicable laws, regulations, contracts, and grant
agreements that could have a direct effect on the determination of material financial statement
amounts and disclosures on these consolidated financial statements.

Exhibit A of this report provides the status of the prior years’ internal control weaknesses and
noncompliance with laws and regulations. Exhibit B presents Rural Development’s response in
its entirety.

Report on the Financial Statements

We have audited the accompanying consolidated financial statements of Rural Development,
which comprise the consolidated balance sheets as of September 30, 2018 and 2017, and the
related consolidated statements of net cost and changes in net position; and the combined
statements of budgetary resources for the fiscal years then ended and the related notes to the
financial statements (hereinafter referred to as the “financial statements”). The objective of our
audits was to express an opinion on the fair presentation of these financial statements.

Management’s Responsibility for the Financial Statements

Management is responsible for the preparation and fair presentation of these financial statements
in accordance with accounting principles generally accepted in the United States of America
(U.S.); and the design, implementation, and maintenance of internal control relevant to the
preparation and fair presentation of financial statements that are free from material misstatement,
whether due to fraud or error.
Auditor’s Responsibility

Our responsibility is to express an opinion on these financial statements based on our audits. We
conducted our audits in accordance with auditing standards generally accepted in the U.S.; the
standards applicable to financial audits contained in government auditing standards, issued by
the Comptroller General of the U.S.; and the Office of Management and Budget (OMB) Bulletin
19-01, Audit Requirements for Federal Financial Statements. Those standards and OMB
Bulletin 19-01 require that we plan and perform audits to obtain reasonable assurance about
whether the financial statements are free from material misstatement.




                                                                  AUDIT REPORT 85401-0009-11         1
An audit involves performing procedures to obtain audit evidence about the amounts and
disclosures in the financial statements. The procedures selected depend on the auditor’s
judgment, including the assessment of the risks of material misstatement of the financial
statements, whether due to fraud or error. In making those risk assessments, the auditor
considers internal control relevant to the entity’s preparation and fair presentation of the financial
statements in order to design audit procedures that are appropriate in the circumstances, but not
for the purpose of expressing an opinion on the effectiveness of the entity’s internal control.
Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness
of accounting policies used and the reasonableness of significant accounting estimates made by
management, as well as evaluating the overall presentation of the financial statements. Our
audits also included performing such other procedures as we considered necessary in the
circumstances.

We believe that the audit evidence we have obtained is sufficient and appropriate to provide a
basis for our audit opinion.

Opinion on the Financial Statements

In our opinion, the financial statements referred to above present fairly, in all material respects,
the financial position of Rural Development, as of September 30, 2018 and 2017, and its net
costs, changes in net position, and budgetary resources for the years then ended, in accordance
with accounting principles generally accepted in the U.S.

Other Matters

Required Supplementary Information

Accounting principles generally accepted in the U.S. issued by the Federal Accounting Standards
Advisory Board (FASAB) require that the Required Supplemental Information (RSI)1 be
presented to supplement the financial statements. Although the RSI is not a part of the financial
statements, FASAB considers this information to be an essential part of financial reporting for
placing the financial statements in appropriate operational, economic, or historical context. We
have applied certain limited procedures to the RSI in accordance with auditing standards
generally accepted in the U.S., which consisted of inquiries of management about the methods of
preparing the RSI and comparing the information for consistency with management’s responses
to our inquiries, the financial statements, and other knowledge we obtained during our audits of
the financial statements. We do not express an opinion or provide any assurance on the
information because the limited procedures do not provide us with sufficient evidence to express
an opinion or provide any assurance.




1
 The RSI consists of Management’s Discussion and Analysis, and the Combined Statement of Budgetary Resources
by Major Fund.


2     AUDIT REPORT 85401-0009-11
Other Reporting Required by Government Auditing Standards

Report on Internal Control Over Financial Reporting

In planning and performing our audits of the financial statements, we considered Rural
Development’s internal control over financial reporting (internal control) to determine the audit
procedures that are appropriate in the circumstances for the purpose of expressing our opinion on
the financial statements, but not for the purpose of expressing an opinion on the effectiveness of
Rural Development’s internal control. Accordingly, we do not express an opinion on the
effectiveness of Rural Development’s internal control. We did not test all internal controls
relevant to operating objectives as broadly defined by the Federal Managers’ Financial Integrity
Act of 1982 (FMFIA).

Our consideration of internal control was for the limited purpose described in the preceding
paragraph and was not designed to identify all deficiencies in internal control over financial
reporting that might be significant deficiencies or material weaknesses, and, therefore, material
weaknesses or significant deficiencies may exist that were not identified.

A deficiency in internal control exists when the design or operation of a control does not allow
management or employees, in the normal course of performing their assigned functions, to
prevent, or detect and correct, misstatements on a timely basis. A material weakness is a
deficiency or a combination of deficiencies, in internal control, such that there is a reasonable
possibility that a material misstatement of Rural Development’s financial statements will not be
prevented, or detected and corrected on a timely basis.

A significant deficiency is a deficiency, or combination of deficiencies, in internal control that is
less severe than a material weakness, yet important enough to merit attention by those charged
with governance.

OMB Bulletin 19-01 requires us to describe significant deficiencies and material weaknesses
identified during our audits, and in the event that no material weaknesses were identified, to so
report. We did not identify any deficiencies in internal control that were considered to be
material weaknesses during our audits.




                                                                   AUDIT REPORT 85401-0009-11       3
Report on Compliance with Laws, Regulations, Contracts, and Grant Agreements

As part of obtaining reasonable assurance about whether Rural Development’s financial
statements are free of material misstatement, we performed tests of its compliance with certain
provisions of laws, regulations, contracts, grant agreements, and Governmentwide policy
requirements, noncompliance with which could have a direct effect on the determination of
material financial statement amounts and disclosure in the financial statements. However,
providing an opinion on compliance with those provisions was not an objective of our audit and,
accordingly, we do not express such an opinion.

We also performed tests of Rural Development’s compliance with certain provisions referred to
in Section 803(a) of the Federal Financial Management Improvement Act of 1996 (FFMIA).
Providing an opinion on compliance with FFMIA was not an objective of our engagement, and
accordingly, we do not express such an opinion. The results of our tests of FFMIA disclosed no
instances in which Rural Development’s financial management systems did not substantially
comply with FFMIA.

Management’s Responsibility for Internal Control and Compliance

Rural Development’s management is responsible for (1) evaluating the effectiveness of internal
control over financial reporting based on criteria established under FMFIA, (2) providing a
statement of assurance on the overall effectiveness of internal control over financial reporting,
(3) ensuring Rural Development’s financial management systems are in substantial compliance
with FFMIA requirements, and (4) ensuring compliance with other applicable laws, regulations,
contracts, and grant agreements.

Auditor’s Responsibilities

We are responsible for (1) obtaining a sufficient understanding of internal control over financial
reporting and compliance to plan the audit, (2) testing whether Rural Development’s financial
management systems substantially comply with FFMIA requirements referred to above, and
(3) testing compliance with certain provisions of laws, regulations, contracts, and grant
agreements that have a direct effect on the determination of material amounts and disclosure in
the financial statements.

We did not evaluate all internal controls relevant to operating objectives as broadly established
by FMFIA, such as those controls relevant to preparing statistical reports and ensuring efficient
operations. We limited our internal control testing to controls over financial reporting




4    AUDIT REPORT 85401-0009-11
and compliance. Because of inherent limitations, internal control over financial reporting may
not prevent, or detect and correct, misstatements due to fraud or error.

We did not test compliance with all laws, regulations, contracts, and grant agreements applicable
to Rural Development. We limited our tests of compliance to certain provisions of laws,
regulations, contracts, and grant agreements that have a direct effect on the determination of
material amounts and disclosure in the financial statements that we deemed applicable to Rural
Development’s financial statements for the fiscal year ended September 30, 2018. We caution
that noncompliance may occur and not be detected by these tests.

Management’s Response

Management’s response to the report is presented in Exhibit B. We did not audit Rural
Development’s response and, accordingly, we express no opinion on it.

Status of Prior Years’ Internal Control Weakness and Noncompliance Issues

We reviewed the status of Rural Development’s corrective actions with respect to the prior
year’s Independent Auditor’s Report, dated November 8, 2017. The status is presented in
Exhibit A.

Purpose of the Report on Internal Control Over Financial Reporting and the Report on
Compliance with Laws, Regulations, Contracts, and Grant Agreements

The purpose of the “Report on Internal Control Over Financial Reporting” and the “Report on
Compliance with Laws, Regulations, Contracts, and Grant Agreements” sections of this report is
solely to describe the scope of our testing of internal control and compliance and the results of
that testing, and not to provide an opinion on the effectiveness of Rural Development’s internal
control or on compliance. These reports are an integral part of an audit performed in accordance
with government auditing standards in considering Rural Development’s internal control and
compliance. Accordingly, these reports are not suitable for any other purpose.



Gil H. Harden
Assistant Inspector General for Audit
Washington, D.C.
November 6, 2018




                                                                AUDIT REPORT 85401-0009-11       5
Abbreviations

FASAB........................ Federal Accounting Standards Advisory Board
FFMIA ........................ Federal Financial Management Improvement Act of 1996
FMFIA ........................ Federal Managers’ Financial Integrity Act of 1982
OMB ........................... Office of Management and Budget
RSI .............................. Required Supplementary Information
U.S. ............................. United States of America




6     AUDIT REPORT 85401-0009-11
Exhibit A: Status of Prior Years’ Internal Control Weakness and
Noncompliance Findings
Report 85401-0007-11, Rural Development’s Financial Statements for Fiscal Years 2017 and
2016, dated November 8, 2017.

Reported Noncompliance

In audit report 11601-0001-22, USDA’s 2017 Compliance with the DATA Act, issued November
2017, OIG identified USDA’s noncompliance with the Digital Accountability and Transparency
Act of 2014 (DATA Act). Rural Development’s noncompliance with two provisions of the
DATA Act was carried forward as a noncompliance in Report 85401-0007-11. Rural
Development did not submit fiscal year 2017 data by the required reporting date, and reported
non-Single Family Housing loan programs at 180 days past due, instead of the required 120
days.

Status

Closed. Final action for the five recommendations from Audit Report 11601-0001-22, USDA’s
2017 Compliance with the DATA Act, was achieved during fiscal year 2018.

Report 85401-0006-11, Rural Development’s Financial Statements for Fiscal Years 2016 and
2015, dated November 7, 2016.

Reported Significant Deficiency

Rural Development’s controls over the testing of new credit reform models need improvement.

Status

Closed. Final action on the recommendation was achieved on May 24, 2018.

Reported Noncompliance

In Report 04601-0002-31, Rural Development’s Single Family Housing Direct Loan Program
Credit Reporting, issued March 2016, the Office of Inspector General identified noncompliance
with the Debt Collection and Improvement Act of 1996 and the Fair Credit Reporting Act. This
noncompliance was carried forward as a noncompliance in the Compliance and Other Matters
portion of Report 85401-0006-11.

Status

Closed. Final action on the last of the nine recommendations was achieved on August 1, 2018.




                                                              AUDIT REPORT 85401-0009-11       7
Report 85401-0005-11, Rural Development’s Financial Statements for Fiscal Years 2015 and
2014, dated November 5, 2015.

Reported Material Weakness

Rural Development’s models for projecting cash flows for future loan performance relied on
weighted averages of historical loan performance data, which did not reasonably predict future
cash flows for programs with significant volatility.

Status

Closed. Final action on the recommendation was achieved on May 24, 2018.




8    AUDIT REPORT 85401-0009-11
Exhibit B: Agency’s Response




                               AUDIT REPORT 85401-0009-11   9
10   AUDIT REPORT 85401-0009-11
Exhibit C: Consolidated Financial Statements




           RURAL DEVELOPMENT’S
          FISCAL YEARS 2018 and 2017
           FINANCIAL STATEMENTS
      PREPARED BY RURAL DEVELOPMENT




                                          AUDIT REPORT 85401-0009-11   11
                                                      U.S. DEPARTMENT OF
                                                      AGRICULTURE
                                                      RURAL DEVELOPMENT

                                                                                  “Committed to the future of rural communities”


            Fiscal Years
          2018 and 2017                                 Financial Statements

                                                        This Management Discussion and Analysis, in conjunction with the
                                                        accompanying financial statements, footnotes, and supplemental
                                                        information, reflects the activities of the Rural Development
                                                        mission area of the United States Department of Agriculture.




USDA is an equal opportunity provider and employer.

If you wish to file a Civil Rights program complaint of discrimination, complete the USDA Program Discrimination Complaint Form (PDF), found online at
http://www.ascr.usda.gov/complaint_filing_cust.html, or at any USDA office, or call (866) 632-9992 to request the form. You may also write a letter containing all of
the information requested in the form. Send your completed complaint form or letter to us by mail at U.S. Department of Agriculture, Director, Office of
Adjudication, 1400 Independence Avenue, S.W., Washington, D.C. 20250-9410, by fax (202) 690-7442 or email at program.intake@usda.gov.
                UNITED STATES DEPARTMENT OF AGRICULTURE
                           RURAL DEVELOPMENT
                               FINANCIAL STATEMENTS
                         AS OF SEPTEMBER 30, 2018 AND 2017

                                TABLE OF CONTENTS



MANAGEMENT’S DISCUSSION AND ANALYSIS.…………………………………………………………..…..01
CONSOLIDATED BALANCE SHEET…………………………………………………………………………………....11

CONSOLIDATED STATEMENT OF NET COST………………………………………………………………….....12
CONSOLIDATED STATEMENT OF CHANGES IN NET POSITION…………………………………………..13
COMBINED STATEMENT OF BUDGETARY RESOURCES……………………………………………………..14

ACCOMPANYING FOOTNOTES…………………………………………………………………………………………15
REQUIRED SUPPLEMENTARY INFORMATION...…………………………………….……..…………….…...65




                    FY 2018 RURAL DEVELOPMENT FINANCIAL REPORT
Rural Development
MANAGEMENT’S DISCUSSION AND ANALYSIS
(UNAUDITED)

       This Management’s Discussion and Analysis (MD&A), in conjunction with the
       accompanying consolidated financial statements, footnotes, and supplemental
       information, reflects the activities of the Rural Development mission area of the United
       States Department of Agriculture (USDA).


Mission Statement
Rural Development is committed to helping improve the economy and quality of life in all of rural
America by providing financial programs to support essential public facilities and services such as
water and sewer systems, emergency service facilities, electric and telephone service, health clinics
and housing. Rural Development promotes economic development by providing financial support to
businesses through banks and community-managed lending pools, while also assisting communities to
participate in community empowerment programs.

Core Values
Ensure Rural Development programs are delivered efficiently, effectively, and with integrity and a
focus on customer service, facilitating rural prosperity and economic development.

Organizational Structure
Rural Development’s mission area is comprised of Rural Utilities Service (RUS), Rural Business-
Cooperative Service (RBS), and Rural Housing Service (RHS). Rural Development programs are
delivered through the National Office, state offices, and a network of field offices. During this past
fiscal year, Rural Development has opened the Innovation Center, a focused team of staff from
around the nation that works to identify best practices and bring continuous improvement in program
delivery. Rural Development is supported by various internal organizations that provide
administrative, accounting, budget, and loan servicing support for all programs, functions which are
being organized into the Business Center.

Rural Development Programs Performance
Rural Development programs provide financial support to individuals and enterprises in rural
America.

The table below reflects a total loan portfolio balance higher in fiscal year (FY) 2018 than in
FY 2017. There was an increase in the direct portfolio from $90.9 billion to $92.4 billion and an
increase in the guaranteed portfolio from $114.4 billion to $117.4 billion.




Page 1                            FY 2018 AGENCY FINANCIAL REPORT
                            Total Loan Portfolio as of September 30, 2018
                                      FY’s 2016 Through 2018
                                         (Dollars in Billions)

                                         FY 2016               FY 2017                FY 2018
  Direct Loans
  Water & Environmental                            $12.6                 $12.6                  $12.8
  Electric                                          41.8                  41.7                   42.6
  Telecommunications                                 4.0                   3.6                    3.2
  Business Programs                                  0.8                   0.8                    0.8
  Single Family Housing                             14.6                  14.3                   14.1
  Multi-Family Housing                              10.5                  10.4                   10.3
  Community Facilities                               6.3                   7.5                    8.6
  Total Direct                                      90.6                  90.9                   92.4
  Guaranteed Loans
  Water & Environmental                             $0.1                  $0.1                   $0.1
  Electric                                         0.2                    0.2                    0.2
  Business Programs                                4.5                    4.8                    5.5
  Single/Multi-Family Housing                    103.3                  108.3                  110.6
  Community Facilities                             1.1                    1.0                    1.0
  Total Guaranteed                               109.2                  114.4                  117.4
  Total Loan Portfolio                          $199.8                 $205.3                 $209.8

Rural Development Programs
Rural Development programs facilitate rural prosperity and economic development in rural America.
Utilities programs provide capital for electric, telecommunications (including broadband, distance
learning, and telemedicine) and water and environmental projects. These programs leverage
federal funds with private capital to invest in rural infrastructure, technology and development of
human resources.

Business and Cooperative programs provide capital for building energy efficient and competitive
businesses and sustainable cooperatives that can prosper in the global marketplace. In partnership
with the private sector and community-based organizations, these programs provide financial
assistance and business planning services and help fund projects that create or preserve quality jobs.

Housing and community facilities programs ensure rural families have access to safe, well-built,
affordable homes and support an infrastructure needed to make rural communities attractive to small
business owners, employees and families. Housing and community facilities programs provide loans,
grants and rental assistance to rural low and very low-income residents for housing, and funding to
support rural infrastructure and community services development. These programs are essential to
rural America.




Page 2                            FY 2018 AGENCY FINANCIAL REPORT
The following chart shows key performance indicators, targets and results for Rural Development.

                  RURAL DEVELOPMENT PERFORMANCE SCORECARD FOR FY 2018

                                                      FY 2018 Target   FY 2018 Actual   Results
 Electric Loans – Direct Federal Financing Bank
 (FFB)
 Number of borrowers’ consumers receiving
                                                           4.5             7.534         Met
 new and/or improved electric facilities (millions)
 Telecommunications Loans
 Number of borrowers’ subscribers receiving
 new or improved telecommunication services               .170             .045         Unmet
 (millions)
 Water and Environmental
 Population receiving new or improved services
 from agency-funded water and wastewater                  2.237            2.918         Met
 facilities or projects (millions)
 Rural Business-Cooperative Programs (Grants,
 Direct & Guaranteed Loans)
 Number of jobs created or saved through
                                                         42,205           46,624         Met
 USDA financing of businesses
 Single Family Housing (SFH)
 Homeownership Opportunities Provided
 Direct Loans                                             6,993            7,199        Unmet
 Guaranteed Loans                                        164,829          115,864
 Community Facilities (CF)
 Percentage of rural residents who are
 provided access to new and/or improved                   6.8%             9.45%         Met
 essential community facilities-Health Facilities
 Percentage of rural residents who are
 provided access to new and/or improved                   4.3%             5.52%         Met
 essential community facilities-Safety Facilities
 Percentage of rural residents who are
 provided access to new and/or improved
                                                          6.8%             8.42%         Met
 essential community facilities-Educational
 Facilities

Rural Development did not fully meet its target for Telecommunications loans or Broadband loans
within an allowable variance of +/-5 percent. Several Infrastructure and Broadband loan
applications were determined not to meet requirements. In addition, demand for funding from the
Infrastructure and Broadband loan programs have been greatly reduced due to the significant
amount of alternative grant funding available through the Federal Communications Commission (FCC)
Connect America Fund II Auction and funding from the FY18 Omnibus for the RUS Broadband Pilot
Program General Provision (GP) 779.

The Rural Development Homeownership target measure was not met. In 2018, Section 502
guaranteed loan obligations totaled $16.8 billion for 115,864 loans; approximately 70 percent of




Page 3                                   FY 2018 AGENCY FINANCIAL REPORT
the funding cap. The primary factors affecting obligations were an increasing interest rate
environment, lack of affordable housing inventory and record high home prices.

Future Opportunities and Challenges
Rural communities continue to be impacted by economic challenges, compounded by aging
infrastructure, poor e-Connectivity and the ongoing epidemic of opioid misuse. Through its field
offices across the nation, USDA Rural Development is partnering with community leaders - in both the
public and private sector – to find new, innovative ways to improve the economic health of rural
America.

The key to success lies in our local relationships and partnerships with the public and private sector.
These stakeholders, who are committed to development and growth in their home towns, are the
catalyst that brings all the right economic development partners to the table. Through the long-
standing partnerships between Rural Development, state and local government, nonprofit economic
developers, and our partners in the business and lending communities, we can come together to find
common-sense solutions. These solutions need to come from the local level and be tailored to fit
specific opportunities or challenges, rather than a one-size-fits-all approach.

In order to achieve success and adapt to the rapidly evolving conditions in rural communities, the
solutions that emerge also need to be innovative in their design and execution. USDA Rural
Development can bring positive change to our rural communities. When leveraged with local and
state programs, we can develop innovative solutions to overcome the myriad of challenges that rural
villages, towns, and communities across the country are facing. Additionally, to enhance the quality
of life in rural communities, the Innovation Center works to transform rural communities through
strategic partnerships, data analytics and evaluation, and regulatory reform.

The lack of access to modern infrastructure is a foundational challenge faced by rural and frontier
communities. The basic underpinnings of an efficient and effective electric grid; modern water and
wastewater treatment and distribution systems; and access to high speed broadband connectivity
are critical components for fostering a climate of growth in these communities.

Rural Development is providing broadband infrastructure service in rural areas that are significantly
unserved at reasonable rates and terms that often are not available from the private sector. In
some rural communities, Rural Development Broadband programs are the only source of financing
that will provide residents in rural America with access to modern broadband capabilities.

Addiction is having a critical impact on the health and quality of life of our rural nation. Rural
Development is prioritizing investments that can positively impact a community’s economic health and
provide an environment that removes the conditions that contribute to opioid addiction to assist in
USDA’s efforts to address opioid addiction.




Page 4                            FY 2018 AGENCY FINANCIAL REPORT
In September, Hurricane Florence hit the Carolinas and brought severe flooding to rural communities
in the region. At Secretary Perdue's request, Rural Development worked with its borrowers to
provide loan deferments and temporary additional financing to provide assistance and stability in
the wake of the disaster.

Through the continued efforts of our dedicated employees in the national office and in field offices
across the country, we will seek to achieve Secretary Perdue’s goal of being the most efficient, most
effective, and most customer-focused department in the federal government. We will take strides to
improve economic prosperity in rural America, by investing in infrastructure, strengthening our
partnerships, and helping rural communities find innovative solutions to their local concerns.

Financial Highlights

 Fiscal Year Ending September 30th                        FY 2018                  FY 2017
 (Dollars in Millions)
 Total Assets                                             $107,288                $108,344
 Total Liabilities                                        $102,713                $104,789
 Total Net Position                                         $4,575                  $3,555
 Total Net Cost of Operations                               $3,263                  $2,574
 Total Budgetary Resources                                 $36,920                 $45,451


Rural Development had total assets of $107,288 million at the end of FY 2018, down from
$108,344 million. A $2,639 million decrease in Fund Balance with Treasury combined with a
$1,579 million increase in the Loans Receivable and Related Foreclosed Property were the most
significant lines in the asset category affecting the change. During FY 2018 the agency repaid more
debt across all programs when compared with the previous year resulting in lower cash balances.
The increase in the portfolio was mostly attributed to the FFB Electric loans, which has been trending
up over the last several years.

Total Liabilities of $102,713 million in FY 2018 decreased from $104,789 million in FY 2017, a
decrease of $2,076 million, which is mostly attributed to less debt to Treasury being reported by the
Agency due to borrowing repayments.

Total Net Position increased $1,020 million in FY 2018 as compared to FY 2017, an overall increase
of approximately 29 percent. The most significant change was a result of an increase in
appropriations received in the current year. In FY 2018 Rural Development received a significant
increase in the Water and Environmental (WEP) loan program combined with funding received for
the new RUS Broadband Pilot Program.




Page 5                           FY 2018 AGENCY FINANCIAL REPORT
Total Net Cost of Operations increased $689 million from FY 2017. This change is attributed to an
increase in the amortized amount in the subsidy cost allowance related to the reestimate process
primarily in the Rural Electric and Telecommunication Program (RET).

The decrease of $8,531 million in Budgetary Resources is due to increases in debt repayments and a
decrease in reestimates.

Entity’s Systems, Controls, and Legal Compliance
Management Assurances

Federal Managers’ Financial Integrity Act (FMFIA). The purpose of the FMFIA is to promote the
development of systematic and proactive measures to ensure management accountability for the
effectiveness and efficiency of program operations.

Rural Development Management has conducted its annual evaluations of internal controls and
financial systems pursuant to Section 2 and Section 4 of the FMFIA, Section 803(a) of the Federal
Financial Management Improvement Act (FFMIA), and in accordance with Office of Management and
Budget (OMB) Circular No. A-123, Management’s Responsibility for Enterprise Risk Management
and Internal Control, for the period ended September 30, 2018. Based on the results of the
evaluations, Rural Development provides reasonable assurance that the overall system of internal
controls is operating effectively, except for the deficiencies discussed below.

Section 2 of the FMFIA focuses on the assessment of the adequacy of management controls to
manage the risk associated with a given program and to provide reasonable assurance that
obligations/costs comply with applicable laws and regulations; that Federal assets are safeguarded
against fraud, waste and mismanagement; and that transactions are properly recorded and
accounted for.

A material weakness identifies an instance in which the management controls are not sufficient to
provide the level of assurance required by Section 2 and requires major milestones for corrective
action.

In FY 2018, no material weaknesses were identified. Three existing significant deficiencies have
reached final action and closure, and two new significant deficiencies were identified as discussed
below.

The three existing significant deficiencies reaching final action and closure are:
         1. The FY 2017 OMB Circular No. A-123 Appendix A review found the National Financial
             and Accounting Operations Center (NFAOC) Debt Collection process was not in
             compliance with the Digital Accountability and Transparency Act (DATA Act), as
             delinquent debt was being reported at 180 days. The NFAOC has developed and
             implemented a process to report delinquent debt at 120 days, and the deficiency has
             been closed.




Page 6                           FY 2018 AGENCY FINANCIAL REPORT
         2. FY 2016 Rural Development Financial Statement Audit No. 85401-0006-11 and FY
            2015 Rural Development Financial Statement Audit No. 85401-0005-11. The Office
            of Inspector General (OIG) found that Rural Development needed improvements over
            credit reform model implementation processes and internal controls; and review and
            approval processes needed improvement; and that Rural Development did not have
            fully developed policies and procedures for the review and testing of new econometric
            models. Rural Development has developed a Standard Operating Procedures
            document to ensure controls over the model implementation process and the results are
            reliable and complete. A Credit Reform Assessment Team has been established to
            ensure effective internal controls in accordance with OMB Circular No. A-123 and the
            FMFIA. The Office of the Chief Financial Officer (OCFO) accepted final action on the
            recommendations of both audits on May 24, 2018.

The two new significant deficiencies are discussed below, and independent reviews are being
performed on both.
         1. The FY 2018 Finance Office-Procurement Activity Management Control Review (MCR)
            found significant deficiencies in Rural Development’s management and oversight of SFH
            procurement processes that led to several unauthorized commitments related to SFH
            foreclosure activity. A corrective action plan is being developed.
         2. The FY 2018 Information Technology Office-Procurement Activity MCR found significant
            deficiencies in the oversight of the Comprehensive Loan Program (CLP) Initiative through
            the mismanagement of multiple contracts and invoices, in addition to several
            unauthorized commitments. A corrective action plan is being developed.

Section 4 of the FMFIA relates to the review of financial accounting systems to ensure conformance
with certain principles, standards, and other Federal requirements. A financial system
nonconformance is an instance in which the financial system does not conform to the requirements of
Section 4. A nonconformance also requires major milestones for corrective action.

In FY 2018, no new non-conformances were identified. One existing significant deficiency is in the
process of closing as discussed below.

The FY 2009 OIG Audit No. 85401-17-FM noted the RUS Legacy system was on antiquated
software and needed to be retired. The RUS Legacy system was converted to the more modern,
web based Commercial Loan Servicing System (CLSS) on September 26, 2018 and is awaiting final
closure by the OCFO.

Federal Financial Management Improvement Act (FFMIA). The purpose of the FFMIA is to
promote management’s compliance with Federal financial management systems requirements,
standards promulgated by the Federal Accounting Standards Advisory Board (FASAB), and the U. S.
Standard General Ledger (USSGL) at the transaction level. Financial management systems include
both financial and financially related (or mixed) systems.




Page 7                           FY 2018 AGENCY FINANCIAL REPORT
In 2009, Rural Development developed a large Information Technology (IT) investment called the
CLP, a multi-year funding initiative to modernize Rural Development’s application portfolio, and
substantially modernize and streamline Rural Development’s program delivery systems to benefit
internal and external stakeholders. In addition, CLP supports the USDA-wide Financial Management
Modernization Initiative (FMMI) that modernizes existing corporate financial and administrative
payment systems and agency program specific ledgers. Through FMMI, USDA will replace existing
applications and systems with an advanced, web- based core financial management system that
complies with Federal accounting and systems standards.

The current Rural Development loan servicing systems, in addition to their front-end applications,
contain functionality and/or information for loan applications, loan characteristics, borrower
statistical information, obligation and disbursement requests, borrower unpaid balances, borrower
history related to repayments, payment logic, edits and servicing transactions to conform to agency
regulations, loan’s performance, and credit reform cohort indicators. There are five major loan
servicing systems currently in use by Rural Development that service all Rural Development programs,
and one fund control system that manages all allotments, obligations, and disbursements; as listed
below.

         Program Loan Accounting System (PLAS) - The PLAS system supports multiple functional
         areas for Rural Development direct loan and grant programs – WEP, CF Programs and
         Business Programs (BP) – as well as the Farm Loan Programs (FLP) of the Farm Services
         Agency.

         Guaranteed Loan System (GLS) - The GLS system is used to support guaranteed loans for
         Rural Development and FLP programs. Additionally, the GLS system is used to support the
         applications related to some direct loans and grants for Rural Development BP and CF
         Programs. The GLS system provides a front-end interface with Rural Development
         guaranteed lenders and underwriting systems.

         CLSS - The CLSS system supports the Electric and Telecommunications direct loan and grant
         programs and some WEP, CF and BP. Full systems migration from the RUS Legacy system
         to the CLSS system has been completed.

         Rural Utilities System - The system commonly referred to as the RUS Legacy system was
         utilized by Rural Electrification Administration (REA) for loan servicing of the Electric and
         Telephone Programs. The loan servicing functionality has been migrated to CLSS under the
         CLP initiative to provide improved automation.

         Automated Multi-Family Accounting System (AMAS) - The AMAS system is used to
         support direct loans for the Rural Development Multi-Family Housing (MFH) loan and grant
         programs to include the Rental Assistance (RA) programs.

         LoanServ – The LoanServ system services direct loans for Rural Development SFH programs,
         including collecting and disbursing borrower escrow payments.



Page 8                            FY 2018 AGENCY FINANCIAL REPORT
         Program Funds Control System (PFCS) - The fund control system used by Rural
         Development and FLP to manage funds control of allotments, obligations, and
         disbursements. All loan servicing systems interface with PFCS.

Under the CLP and FMMI initiatives, the future financial management systems will integrate and
streamline the current framework to reduce the number of systems and interfaces and modernize
infrastructure. CLP critical projects are underway and include the following:

     •   Rural Development modernized the CLSS system by converting various RUS program
         portfolios from an old legacy system and adding functionality to meet Federal financial
         standards. During 2018, Rural Development completed its initiative to retire the RUS
         Legacy system, which allows all RET accounts to be serviced in CLSS, providing a user
         friendly, complete financial information system, utilizing state-of-the-art technologies
         integrated with seamless interfaces to other agency systems.

     •   Analyzing and transforming how Rural Development financial and accounting processes can
         properly communicate with the USDA core FMMI financial system. Analyzing business
         requirements to utilize a Rural Development platform to transition loan servicing data into a
         FMMI ready format, providing functionality for management control reporting, improved
         process flows, data warehouse extracts and Business Intelligence Reporting, and select
         interface staging.

Through CLP, Rural Development will continue to enhance efficiency, update technology, automate
systems, and improve business processes. This will significantly improve and consolidate data
processing and reduce long term costs.

Rural Development management evaluated its financial management systems under FFMIA for the
period ended September 30, 2018. Based on the results of its evaluation, Rural Development is in
substantial compliance with the Federal Financial Management Systems Requirements, Applicable
Federal Accounting Standards, and the Standard General Ledger at the transaction level.

Noncompliance with Laws and Regulations. Rural Development reports no new non-compliances
during FY 2018. Two existing non-compliances reached final action and closure.

         1. The FY 2016 OIG Audit No. 04601-0002-31 found Rural Development is not compliant
            with the Debt Collection Improvement Act (DCIA) and the Fair Credit Reporting Act
            (FCRA), and recommended Rural Development identify and correct inaccurate borrower
            accounts, develop a plan to identify and correct errors, and update guidance to
            eliminate future errors. Rural Development has developed a plan to address the listed
            issues. Procedures were updated to ensure Rural Development reports the necessary
            loans to the credit bureaus and monitor procedures for file transmissions and Agency




Page 9                           FY 2018 AGENCY FINANCIAL REPORT
            agreements. The OCFO accepted final action on August 1, 2018 for all
            recommendations for this audit.
         2. Rural Development was non-compliant with the DATA Act as it was unable to submit all
            the required files. Rural Development was able to implement manual reporting
            processes and comply with the requirements by December 31, 2017.

Improper Payments Elimination and Recovery Improvement Act of 2012
(IPERIA)

The Improper Payments Information Act of 2002 (IPIA), as amended by the Improper Payments
Elimination and Recovery Act of 2010 (IPERA), and the Improper Payments Elimination and Recovery
Improvement Act of 2012 (IPERIA), require that executive agencies identify programs that may be
susceptible to significant improper payments, estimate the annual amount of improper payments, and
submit those estimates to Congress. A program with significant improper payments (or a high-risk
program) has both a 1.5 percent improper payment rate and at least $10 million in improper
payments or exceeds $100 million dollars in improper payments.

Annually, agencies must assess all programs with over $1 million in annual expenditures to perform
payment recapture audits, or provide justification that a payment recapture audit program would
not be cost effective, per OMB Circular A-123 Appendix C. For Rural Development, 30 programs
received OMB waivers from conducting payment recapture audits due to cost effectiveness, three
programs participated in the Department’s recovery audit program referred to as the Supplier
Credit Recovery Audit, and four programs developed internal payment recapture plans, which were
approved by the OCFO. These internal plans identify and recover improper payments. Activities
include data mining-initiated reviews, limited scope reviews, special investigations, eligibility
verification, agency wide audits, and internal control reviews. Management has reviewed all
applicable programs and activities to identify any area that may be susceptible to significant
improper payments and no deficiencies were identified.

Limitations on Financial Statements

The principal financial statements are prepared to report the financial position and results of
operations of the reporting entity, pursuant to the requirements of 31 U.S.C. 3515 (b). The
statements are prepared from the books and records of the entity in accordance with Federal
Generally Accepted Accounting Principles (GAAP) and the formats prescribed by OMB. Reports
used to monitor and control budgetary resources are prepared from the same books and records.
The financial statements should be read with the realization that they are for a component of the
U.S. Government.




P a g e 10                       FY 2018 AGENCY FINANCIAL REPORT
                                                                                        FINANCIAL STATEMENTS AND NOTES


                                                    DEPARTMENT OF AGRICULTURE
                                                         RURAL DEVELOPMENT
                                                    CONSOLIDATED BALANCE SHEET
                                                  AS OF SEPTEMBER 30, 2018 AND 2017
                                                                 (In Millions)

                                                                                 2018                    2017
Assets (Note 2):
Intragovernmental:
  Fund Balance with Treasury (Note 3)                                     $               18,793    $            21,432
 Accounts Receivable, Net (Note 5)                                                             0                      0
 Other (Note 8)                                                                                0                     0
Total Intragovernmental                                                                   18,793                 21,432

Cash and Other Monetary Assets (Note 4)                                                       46                     41
Loans Receivable and Related Foreclosed Property, Net (Note 6)                            88,372                 86,793
General Property, Plant and Equipment, Net (Note 7)                                           40                    41
Other (Note 8)                                                                                 37                    37
Total Assets                                                                              107,288               108,344

Liabilities (Note 9):
Intragovernmental:
 Accounts Payable                                                                              0                     0
 Debt (Note 10)                                                                           93,353                 95,010
 Resources Payable to Treasury                                                             7,403                  7,892
 Downward Reestimates Payable to Treasury General Fund                                       951                    990
 Other (Note 11)                                                                              17                     22
Total Intragovernmental                                                                  101,724                103,914


 Accounts Payable                                                                             26                    28
 Loan Guarantee Liability (Note 6)                                                           282                   574
 Federal Employee and Veteran Benefits (Note 9)                                               36                    36
 Other (Note 11)                                                                             645                   237
Total Liabilities                                                                         102,713               104,789


Commitments and Contingencies (Note 12)


Net Position:
 Unexpended Appropriations                                                                 5,126                  3,521
 Cumulative Results of Operations                                                           (551)                   34
Total Net Position                                                                          4,575                 3,555


Total Liabilities and Net Position                                        $               107,288   $           108,344

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS




                Page 11               FY 2018 RURAL DEVELOPMENT FINANCIAL REPORT
                                                                       FINANCIAL STATEMENTS AND NOTES


                                        DEPARTMENT OF AGRICULTURE
                                            RURAL DEVELOPMENT
                                     CONSOLIDATED STATEMENT OF NET COST
                               FOR THE YEARS ENDING SEPTEMBER 30, 2018 AND 2017
                                                    (In Millions)


                                                                    2018                2017



 Gross Costs (Note 13)
  Borrowing Interest Expense                                  $            3,459    $          3,657
  Grants                                                                   1,955               1,999
  Loan Cost Subsidies                                                        (94)              (346)
  Other                                                                    1,786               1,321
 Total Gross Costs                                                         7,106               6,631


 Less: Earned Revenue (Note 13)                                            3,843               4,057


 Net Cost of Operations                                       $            3,263    $          2,574




THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS




            Page 12               FY 2018 RURAL DEVELOPMENT FINANCIAL REPORT
                                                                                       FINANCIAL STATEMENTS AND NOTES


                                                     DEPARTMENT OF AGRICULTURE
                                                         RURAL DEVELOPMENT
                                          CONSOLIDATED STATEMENT OF CHANGES IN NET POSITION
                                           FOR THE YEARS ENDING SEPTEMBER 30, 2018 AND 2017
                                                             (In Millions)


                                                                                2018                      2017
Unexpended Appropriations:


 Beginning Balances                                                 $                     3,521       $           3,187
 Adjustments:
 Changes in Accounting Principle                                                                 0                    0
 Corrections of Errors                                                                           0                    0
 Beginning Balances, as Adjusted                                    $                     3,521       $           3,187


Budgetary Financing Sources:
 Appropriations Received                                                                  5,869                   4,952
 Appropriations Transferred In/Out                                                              (2)                  (5)
 Other Adjustments                                                                             (41)                 (28)
 Appropriations Used                                                                     (4,221)                 (4,585)
 Total Budgetary Financing Sources                                                        1,605                     334


Total Unexpended Appropriations                                     $                     5,126       $           3,521


Cumulative Results of Operations:


 Beginning Balances                                                 $                          34     $           (548)
 Adjustments:
 Changes in Accounting Principle                                                                 0                    0
 Corrections of Errors                                                                           0                    0
 Beginning Balances, as Adjusted                                    $                          34     $           (548)


Budgetary Financing Sources:
 Other Adjustments                                                                              (4)               (137)
 Appropriations Used                                                                      4,221                   4,585
 Nonexchange Revenue                                                                             0                    0
 Transfers-In/Out Without Reimbursement                                                       108                    45


Other Financing Sources (Nonexchange):
 Transfers-In/Out Without Reimbursement                                                          0                    0
 Imputed Financing                                                                            160                   169
 Other                                                                                   (1,807)                 (1,506)
Total Financing Sources                                                                   2,678                   3,156


 Net Cost of Operations                                                                  (3,263)                 (2,574)
 Net Change                                                                                   (585)                 582


 Cumulative Results of Operations                                   $                         (551)   $              34


 Net Position                                                       $                     4,575       $           3,555

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS




                Page 13                   FY 2018 RURAL DEVELOPMENT FINANCIAL REPORT
                                                                                                         FINANCIAL STATEMENTS AND NOTES


                                                               DEPARTMENT OF AGRICULTURE
                                                                   RURAL DEVELOPMENT
                                                      COMBINED STATEMENT OF BUDGETARY RESOURCES
                                                     FOR THE YEARS ENDING SEPTEMBER 30, 2018 AND 2017
                                                                        (In Millions)
                                                                                                  2018                                     2017


                                                                                                    Non-Budgetary Credit                     Non-Budgetary Credit
                                                                                Budgetary             Reform Financing     Budgetary           Reform Financing
                                                                                                          Account                                  Account


Budgetary Resources:
 Unobligated Balance from Prior Year Budget Authority, Net                $              7,808      $            7,617 $          6,907 $               14,415
 Recoveries of Prior Year Unpaid Obligations                                              307                     667              165                    959
 Other Changes in Unobligated Balance                                                     (261)                 (5,107)            (327)                (5,367)
 Unobligated Balance from Prior Year Budget Authority, Net                               7,854                   3,177            6,745                 10,007
 Appropriations                                                                          5,957                       0            5,312                      0
 Borrowing Authority (Notes 15 and 16)                                                       0                 13,670                  0                12,717
 Contract Authority                                                                          0                       0                 0                     0
 Spending Authority from Offsetting Collections                                          2,595                   3,667            2,865                  7,805
Total Budgetary Resources                                                 $             16,406      $          20,514 $         14,922 $                30,529



Status of Budgetary Resources:
 New Obligations and Upward Adjustments (Note 14)                         $              7,111      $          15,535 $           7,114 $               22,912
 Unobligated Balance, End of Year:
   Apportioned, Unexpired Accounts                                                       3,210                   4,497            6,945                  7,174
   Exempt From Apportionment, Unexpired Accounts                                             0                       0                 0                     0
   Unapportioned, Unexpired Accounts                                                     5,985                    482              745                    443
   Unexpired Unobligated Balance, End of Year                                            9,195                   4,979            7,690                  7,617
   Expired Unobligated Balance, End of Year                                               100                        0             118                       0
Total Unobligated Balance, End of Year                                                   9,295                   4,979            7,808                  7,617
Total Budgetary Resources                                                 $             16,406      $          20,514 $         14,922 $                30,529


Outlays, Net
 Outlays, Net (total)                                                                    3,140                   3,116            3,241                  8,781
 Distributed Offsetting Receipts                                                            (4)                 (1,684)                0                (8,512)
 Agency Outlays, Net                                                      $              3,136      $            1,432 $          3,241 $                 269




THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS




                  Page 14                         FY 2018 RURAL DEVELOPMENT FINANCIAL REPORT
                                                                           FINANCIAL STATEMENTS AND NOTES



RURAL DEVELOPMENT
NOTES TO FINANCIAL STATEMENTS
AS OF SEPTEMBER 30, 2018 AND 2017 (In Millions)

NOTE 1: REPORTING ENTITY AND SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES
Basis of Presentation
Rural Development prepares financial statements to report the financial position and results of operations of
the United States Department of Agriculture (USDA) Rural Development mission area. In accordance with the
Office of Management and Budget (OMB) Circular A-136, Financial Reporting Requirements, Rural
Development ensures the information within these financial statements conform to Generally Accepted
Accounting Principles (GAAP) for federal entities and Statements of Federal Financial Accounting Standards
(SFFAS).

Reporting Entity
The Federal Crop Insurance Reform and Department of Agriculture Reorganization Act of 1994, Public Law
No. 103-354, was signed into law and permitted the reorganization of the Department of Agriculture. This
law reaffirmed Rural Development’s statutory authority. Rural Development improves the economy and
quality of life in rural America by providing funding for rural housing programs, rural utilities programs, and
rural business programs within the USDA. The Mission offers loans, grants, and loan guarantees to support
economic development and essential services such as housing, health care, first responder services and
equipment, water, and electric and communications infrastructure.




               Page 15           FY 2018 RURAL DEVELOPMENT FINANCIAL REPORT
                                                                               FINANCIAL STATEMENTS AND NOTES


NOTE 1: Continued
Rural Development List of Major Programs
Rural Housing and Community Facilities Programs
    •   Single Family Housing Direct Loans & Loan Guarantees (including Mutual Self-Help Loans)
    •   Single Family Housing Repair Loans & Grants
    •   Mutual Self-Help Housing Technical Assistance Grants
    •   Rural Rental Housing Direct Loans & Loan Guarantees
    •   Housing Preservation Grants
    •   Farm Labor Housing Loans & Grants
    •   Community Facilities Direct Loans, Loan Guarantees & Grants
    •   Rural Community Development Initiative Grants

Rural Business and Cooperative Programs
    •   Business and Industry Loan Guarantees
    •   Rural Business Development Grants
    •   Rural Business Investment Program
    •   Intermediary Relending Program Loans
    •   Rural Microentrepreneur Assistance Program
    •   Rural Economic Development Loans & Grants
    •   Rural Cooperative Development Grants
    •   Socially Disadvantaged Groups Grants
    •   Delta Health Care Services Grants
    •   Value Added Producer Grants
    •   Rural Energy for America Program Loan Guarantees & Grants
    •   Biorefinery, Renewable Chemical, and Biobased Product Manufacturing Assistance Program Loan Guarantees
    •   Repowering Assistance Program
    •   Advanced Biofuel Payment Program
    •   Strategic Economic and Community Development

Rural Utilities Programs
    •   Water and Waste Disposal Direct Loans, Loan Guarantees & Grants
    •   Solid Waste Management Grants
    •   Water and Waste Disposal Technical Assistance & Training Grants
    •   Circuit Rider Program
    •   Rural Broadband Access Direct Loans and Loan Guarantees
    •   Electric and Telecommunications Infrastructure Direct Loans & Loan Guarantees
    •   Energy Efficiency & Conservation Loans
    •   Rural Energy Savings Program
    •   Special Evaluation Assistance for Rural Communities and Households
    •   Distance Learning and Telemedicine Grants
    •   Community Connect Grants
    •   High Energy Cost Grants
    •   Distributed Generation Energy Project Financing
    •   Energy Resource Conservation
    •   Emergency Community Water Assistance Grants



                Page 16            FY 2018 RURAL DEVELOPMENT FINANCIAL REPORT
                                                                         FINANCIAL STATEMENTS AND NOTES


NOTE 1: Continued
Basis of Accounting and Presentation
The accounting principles and standards applied in preparing the financial statements are in accordance
with guidance from the Federal Accounting Standards Advisory Board (FASAB), the Director of OMB and
Comptroller General, which constitute generally accepted accounting principles for the Federal Government
and its component entities. Additionally, Rural Development applies guidelines from the Federal Credit
Reform Act of 1990 (Credit Reform) contained in the Omnibus Budget Reconciliation Act of 1990.

The amounts in the FY 2017 column of the financial statements have been reclassified due to evolving
changes in the OMB Circular A-136, Financial Reporting Requirements guidance. This reclassification will
facilitate a meaningful comparison between FY 2018 and FY 2017. Footnotes have also been reclassified
and additional information has been added to the applicable changes in guidance or presentation
preferences.

During FY 2018, SFFAS No. 53, Budget and Accrual Reconciliation (BAR) was implemented (Note 22) and
replaced the Reconciliation of Net Cost to Budget. The SFFAS No. 53 requires federal entities to provide a
reconciliation of budgetary and financial (proprietary) accounting. The BAR explains the relationship
between the entity’s net outlays on a budgetary basis and the net cost of operations during the reporting
period.

Rural Development utilizes cash, accrual, and budgetary accounting basis while preparing the financial
statements. The cash accounting basis recognizes Pre-Credit Reform and Credit Reform non-federal
transactions, except for the accrual of interest related to borrower loans. Under the cash method, Rural
Development recognizes revenues when cash is received and expenses when they are paid. Federal
transactions utilize the accrual accounting basis. Budgetary accounting is also necessary to facilitate
compliance with legal constraints and controls over the use of federal funds. Rural Development eliminates
all significant interfund and intrafund balances and transactions in the consolidation of all financial
statements with the exception of the Statement of Budgetary Resources, which is presented on a combined
basis.

Fiduciary activities are the collection or receipt, and the management, protection, accounting, investment,
and disposition by the Federal Government of cash or other assets in which non-federal individuals or
entities have an ownership interest that the Federal Government must uphold. Fiduciary assets are not assets
of Rural Development and, as such, are not recognized on the Balance Sheet (Note 23).

Estimates
The preparation of financial statements requires management to make estimates and assumptions that affect
the amounts reported in the financial statements and accompanying notes. The Agency’s largest estimates
are a result of the Federal Credit Reform Act requirements. Actual results may differ from those estimates.

Revenue and Other Financing Sources
Revolving/Credit Funds:
Beginning in FY 1992, the Federal Credit Reform Act of 1990, as amended, contained in the Omnibus
Budget Reconciliation Act of 1990, provided Credit Reform procedures which affected the financing of the
revolving funds. Under Credit Reform, Rural Development receives an appropriation in the year the loan is
made in a sufficient amount to cover the subsidy cost of providing the loan. The subsidy cost is defined as
the estimated long-term cost to the government of a direct loan or loan guarantee, calculated on a net



               Page 17           FY 2018 RURAL DEVELOPMENT FINANCIAL REPORT
                                                                         FINANCIAL STATEMENTS AND NOTES


NOTE 1: Continued
present value basis, excluding administrative costs. Consequently, the implementation of Credit Reform has
resulted in authorized appropriations, which provide for estimated future losses, as opposed to
appropriations, which provided for reimbursement of past losses actually sustained prior to FY 1992. In
addition to subsidy appropriations, the other sources of funding for the revolving funds include borrowings
from Treasury and borrower loan repayments.

General Funds
Rural Development receives appropriations from Congress on both an annual and multi-year basis to fund
certain general funds and other expenses such as personnel, compensation, fringe benefits, rents,
communications, utilities, other administrative expenses, and capital expenditures. The current budgetary
process does not distinguish between capital and operating expenditures. For budgetary purposes, Rural
Development recognizes both as a use of budgetary resources. For financial reporting purposes under
accrual accounting, operating expenses are recognized in the current reporting period. Expenditures for
capital and other long-term assets are capitalized and are not recognized as expenses until they are
consumed during normal operations. Rural Development records appropriations for general fund activities as
a financing source when expended. Unexpended appropriations are recorded as Net Position.

Fund Balance with Treasury
Treasury processes all receipts and disbursements and maintains the appropriate governmental bank
accounts.

Lending Activities
Rural Development utilizes appropriations and borrowing authority to make direct loans. These loans
represent actual cash disbursements to borrowers which require repayment.

Other lending activities include the guarantee of loans for Single Family Housing, Multi-Family Housing,
Community, Business, and Utility programs. The term “guarantee” means “to guarantee the repayment of all
or a part of the principal or interest on any debt obligation to eligible borrowers originated, held, and
serviced by a private financial agency or other lender approved by the Secretary of Agriculture.”

Guaranteed lenders may sell guaranteed loans in the secondary market to an institution referred to as a
holder. If the holder does not receive payment, Rural Development may purchase the loan. These loans are
reported as direct loans by Rural Development.

Loans Receivable and Related Foreclosed Property, Net
Rural Development establishes a loan receivable after funds have been disbursed. They are carried at their
principal amount outstanding (Note 6), and accrue interest based on the contractual interest rate. When a
loan becomes non-performing (in excess of 90 days delinquent or when borrowers enter into troubled debt
restructuring arrangements), all interest previously accrued on the loan is reversed for financial reporting
purposes, and interest income on the non-performing loan is then recognized only to the extent of the
collections received. Rural Development reclassifies non-performing loans as performing and accrues interest
when they become current or less than 90 days delinquent. In addition, interest income recognition
subsequent to troubled debt restructuring arrangements is generally limited to net present value of the
adjusted future cash flows.




               Page 18           FY 2018 RURAL DEVELOPMENT FINANCIAL REPORT
                                                                           FINANCIAL STATEMENTS AND NOTES


NOTE 1: Continued
In an effort to more accurately portray the actual value of assets, Rural Development adopts the USDA
policy of writing off, for financial reporting purposes, all loans that are two years or more delinquent.

Present value and net realizable value are used to value the remaining interest and principal. Note 6
provides additional information on the methods used for the direct and guaranteed loans.

General Property, Plant, and Equipment, Net
General Services Administration (GSA) provides the land, buildings, and equipment in the current operating
environment. GSA charges a Standard Level Users Charge that approximates the commercial
rental rates for similar properties. Under Credit Reform, all equipment purchases are made through the
Salaries and Expense Fund.

Rural Development accounts for the costs of internal use software in accordance with SFFAS No. 10,
Accounting for Internal Use Software. SFFAS No. 10 requires the capitalization of the cost of internal use
software whether it is commercial off-the-shelf, contractor-developed, or internally-developed which solely
meets internal or operational needs. As defined in SFFAS No. 6, Accounting for Property, Plant, and
Equipment, Rural Development classifies internal use software as General Property, Plant, and Equipment.
The threshold for equipment is $25 thousand and internal use software is $100 thousand. See Note 7 for
further information.

Liabilities
Liabilities represent the amount of monies or other resources that are likely to be paid as the result of a
transaction or event that has already occurred. However, no liability can be paid absent budget authority.
Where an appropriation has not been enacted, liabilities are considered not covered by budgetary
resources. There is no certainty that appropriations will be enacted.

Borrowings and Interest Payable to Treasury
Borrowings payable to Treasury result from the Secretary of Agriculture’s authority to make and issue notes
to the Secretary of Treasury for the purpose of discharging obligations. These funds make periodic
principal and interest payments to Treasury in accordance with established agreements.

Pension and Other Employee Benefits
Rural Development recognizes pension and other employee benefits (primarily health care benefits)
expense at the time employees’ services are rendered. The expense is equal to the actuarial present value
of benefits attributed by the pension plan’s benefit formula, less the amount contributed by the employees.
Rural Development recognizes an imputed cost for the difference between the expense and contributions
made by and for employees.

Resources Payable to Treasury
Rural Development’s Resources Payable to Treasury represent the Pre-Credit Reform funds’ assets in excess
of the funds liabilities. Rural Development returns funds to Treasury after liquidating all the liabilities of
these Pre-Credit Reform funds.




               Page 19           FY 2018 RURAL DEVELOPMENT FINANCIAL REPORT
                                                                          FINANCIAL STATEMENTS AND NOTES


NOTE 1: Continued
Downward Reestimates Payable to Treasury General Fund
Rural Development records the liability for downward reestimates in accordance with the Treasury General
Fund Receipt (GFR) Account Guide, most notably the section, which illustrates the accounting and reporting
requirements for Non-Custodial Statement collections applicable to collections of downward reestimates of
subsidy expense. As direct and/or guaranteed loan financing accounts collect more subsidy than necessary,
to fund future net cash outflows, the applicable financing account must transfer the excess subsidy, with
interest, to a designated Treasury GFR Account. As this transfer does not occur until the following year,
these excess funds are included in the Fund Balance with Treasury and are considered non-entity assets.

Contingencies
Rural Development mission area is a party in various legal actions and claims through the normal course of
its operations. In the opinion of management and the USDA Office of the General Counsel, the ultimate
resolution of these legal actions and claims will not materially affect the financial position or results of
operations (Note 12).

Unexpended Appropriations
Unexpended appropriations include the undelivered orders and unobligated balances of the general funds
and the program accounts, which receive Congressional appropriations through the budgetary process. As
appropriated funds incur obligations, Rural Development records the obligated amount as an undelivered
order (Note 20). An expenditure or an obligation cancellation reduces an undelivered order. Rural
Development treats appropriated funds, which are not obligated, as unobligated amounts. At the end of
the fiscal year, certain multi-year appropriations, which have unobligated balances, remain available for
obligation in future periods. Rural Development returns unobligated appropriations to Treasury when their
period of availability cancels.

Intragovernmental Financial Activities
Rural Development’s mission area is an integral part of the operations of the USDA and may be subject to
financial and managerial decisions and legislative requirements, which are beyond the control of the
Agency’s management. Consequently, day-to-day operations may not be conducted as they would if Rural
Development was a separate and independent entity.

USDA provides mission areas with an allocation of departmental non-reimbursed appropriated costs to
include in their financial statements. These costs affect the Statement of Net Cost and Statement of Changes
in Net Position.

Rural Development does not stipulate that the financial statements report the mission area’s proportionate
share of the Federal deficit or of public borrowing, including interest. Financing for budget appropriations
could derive from tax revenues or public borrowing or both. The ultimate source of this financing, whether
from tax revenues or public borrowing, has not been specifically allocated to Rural Development.




               Page 20           FY 2018 RURAL DEVELOPMENT FINANCIAL REPORT
                                                                          FINANCIAL STATEMENTS AND NOTES


NOTE 1: Continued
Allocation Transfers
Rural Development is a party to allocation transfers with other federal agencies as both a transferring entity
and a receiving entity. Allocation transfers are legal delegations by one department of its authority to
obligate budget authority and outlay funds to another department. A separate fund account is created in
the U.S. Treasury as a subset for tracking and reporting purposes. This account credits all allocation
transfers of balances, and charges subsequent obligations and outlays incurred by the child entity as they
execute the delegated activity on behalf of the parent entity. All financial activity related to allocation
transfers appears in the financial statements of the parent entity, from which the underlying legislative
authority, appropriations and budget apportionments are derived. Rural Development allocates funds, as
the parent, to the Small Business Administration and Department of Housing and Urban Development. Rural
Development receives allocation transfers, as the child, from the Economic Development Administration,
Appalachian Regional Commission, and Delta Regional Authority.




               Page 21           FY 2018 RURAL DEVELOPMENT FINANCIAL REPORT
                                                                      FINANCIAL STATEMENTS AND NOTES


NOTE 2: NON-ENTITY ASSETS
Non-Entity Assets represent assets that are “NOT FOR USE” by Rural Development.

                                                                      FY 2018              FY 2017
Intragovernmental
  Fund Balance with Treasury                                      $               0    $              0
Total Intragovernmental                                                           0                   0

Cash and Other Monetary Assets                                                    46                 41

Total Non-Entity Assets                                                       46                  41
  Total Entity Assets                                                    107,242             108,303
Total Assets                                                      $      107,288       $     108,344




               Page 22         FY 2018 RURAL DEVELOPMENT FINANCIAL REPORT
                                                                           FINANCIAL STATEMENTS AND NOTES


NOTE 3: FUND BALANCE WITH TREASURY
Fund Balance with Treasury represents the undisbursed account balances with Treasury as reported in the
mission area’s records.

The line titled Unavailable consists of restricted funds which are limited in their future use and are not
apportioned for current use. These amounts represent the expired authority in annual year grant and
program accounts (annual years prior to FY 2018) and are only available for prior year upward
obligations. After the fifth year of expiration, Rural Development returns all funds to Treasury except those
entities having extended authority to disburse. For FY’s 2018 and 2017, there were approximately
$140 million and $121 million in expired funds, respectively.

Total unobligated balances and obligated balances not yet disbursed do not agree with the corresponding
fund balance with Treasury amounts presented below because Rural Development borrows funds from
Treasury at the time certain obligations are disbursed. Borrowing authority not yet converted to fund
balance represents unobligated and obligated amounts recorded at fiscal yearend, which will be funded by
future borrowings.

                                                                       FY 2018                    FY 2017
Status of Fund Balance with Treasury (FBWT)
 Unobligated Balance:
   Available                                                       $         7,707            $      14,119
   Unavailable                                                               6,567                    1,306
 Obligated Balance Not Yet Disbursed                                        29,855                   26,973
 Borrowing Authority Not Yet Converted to Fund Balance                     (25,304)                 (20,926)
 Authority Granted Prior to Credit Reform for Rental Assistance
   Grants                                                                      (33)                      (41)
 Temporary Reduction of New Budget Authority                                      2                        1
 Non-Budgetary Fund Balance with Treasury                                        (1)                       0
Total                                                              $       18,793             $      21,432




               Page 23            FY 2018 RURAL DEVELOPMENT FINANCIAL REPORT
                                                                                 FINANCIAL STATEMENTS AND NOTES


NOTE 4: CASH AND OTHER MONETARY ASSETS
Cash is comprised of funds related to the operation of the Rural Housing Escrow Program on deposit with
U.S. Bank as of September 30, 2018.

                                                                                 FY 2018       FY 2017
Cash and Other Monetary Assets
 Cash                                                                        $         46 $           41
 Foreign Currency                                                                       0              0
 Other Monetary Assets                                                                  0              0
Total Cash and Other Monetary Assets                                         $         46 $           41




NOTE 5: ACCOUNTS RECEIVABLE (A/R), NET
                                                          Accounts       Allowance for        Accounts
                                                         Receivable,     Uncollectible       Receivable,
                                                            Gross          Accounts              Net
FY 2018
Intragovernmental
  A/R Revenue, Refunds, Reimbursements                                 0               0                   0
Total Intragovernmental Accounts Receivable $                          0 $             0 $                 0

With the Public
 Audit Receivable                                                 16                  16                   0
Total Accounts Receivable                            $            16 $                16 $                 0

FY 2017
Intragovernmental
  A/R Revenue, Refunds, Reimbursements                                 0               0                   0
Total Intragovernmental Accounts Receivable $                          0 $             0 $                 0

With the Public
 Audit Receivable                                                 16                  16                   0
Total Accounts Receivable                            $            16 $                16 $                 0


Criminal Restitution
The outstanding balance for FY’s 2018 and 2017 criminal restitution was approximately $1 million.




                Page 24            FY 2018 RURAL DEVELOPMENT FINANCIAL REPORT
                                                                          FINANCIAL STATEMENTS AND NOTES


NOTE 6: LOANS RECEIVABLE AND RELATED FORECLOSED PROPERTY, NET
Discussion of Credit Programs and Characteristics
Rural Development offers both direct and guaranteed loans administered through the Rural Housing Service,
Rural Utilities Service and Rural Business-Cooperative Service. Each agency has unique missions to bring
prosperity and opportunity to rural areas. The direct program has $88,372 million in outstanding credit
program net receivables, and the guaranteed program has an outstanding guarantee of $117,373 million
with a liability of $282 million, as of September 30, 2018.

Each year, Rural Development programs create or preserve tens of thousands of rural jobs and provide or
improve the quality of rural housing, business, and utilities. To leverage the impact of its programs, Rural
Development is working with state, local, and Indian tribal governments, as well as private and non-profit
organizations and user-owned cooperatives. Rural Development is able to provide certain loan servicing
options to borrowers whose accounts are distressed or delinquent. These options include reamortization,
restructuring, loan deferral, lowering interest rate, acceptance of easements, and debt write-downs. The
choice of servicing options depends on the loan program and the individual borrower.

Rural Housing programs provide affordable, safe, and sanitary housing and essential community facilities to
rural communities. They also help finance new or improved housing for moderate, low, and very low- income
families each year. Other programs help rural communities to finance, construct, enlarge or improve fire
stations, libraries, hospitals and medical clinics, industrial parks, and other community facilities.

Rural Business programs promote a dynamic business environment in rural America. These programs work in
partnership with the private sector and community-based organizations to provide financial assistance and
business planning. They also provide technical assistance to rural businesses and cooperatives, conduct
research into rural economic issues, and provide cooperative educational materials to the public.

Rural Utilities programs help to improve the quality of life in rural America through a variety of loan
programs for electric, energy, telecommunications, and water and environmental projects. These programs
leverage scarce federal funds with private capital for investing in rural infrastructure, technology, and
development of water resources.




               Page 25           FY 2018 RURAL DEVELOPMENT FINANCIAL REPORT
                                                                                                    FINANCIAL STATEMENTS AND NOTES


NOTE 6: Continued

Loan Program Characteristics
                                          PROGRAM CHARACTERISTICS – DIRECT
      MAJOR PROGRAMS                                     OBJECTIVE                                           TERMS/CONDITIONS


                                                                                              Up to 100% of market value or cost. Loan term of
    Single Family Housing Loans    Safe, well-built, affordable homes for very-low and
                                                                                                 33/38 years. Applicant may be eligible for
(including Mutual Self-Help Loans)             low-income rural Americans.
                                                                                                  payment assistance (subsidy) on the loan.




  Single Family Housing Repair       To help very-low-income applicants remove health
                                                                                                  Loans up to $20,000 up to 20 years at 1%.
              Loans                      and safety hazards or repair their homes.




                                                                                              Up to 100% of total development cost (non-profits);
Rural Rental (Multi-Family) Housing Safe, well-built, affordable rental housing for very-     97% (for-profit); 95% (for-profits with Low-Income
               Loans                       low-income individuals and families.                Housing Tax Credits). 30-year term with up to 50-
                                                                                                              year amortization.



                                                                                              Up to 100% of Market value. Term is for useful life
                                     Improve, develop, or finance essential community
     Community Facility Loans                                                                 of the facility or equipment, the State statue, or 40
                                              facilities for rural communities.
                                                                                                                      years.




                                        Safe, well-built affordable rental housing for         Up to 102% of total development cost. Up to 33
    Farm Labor Housing Loans
                                                         farmworkers.                                  years to repay at 1% interest.




                                                                                              Intermediary makes loans to for-profit or non-profit
   Rural Economic Development        Finance economic development and job creation in
                                                                                               businesses and public bodies. Loans are 0% for 10
              Loans                                    rural areas.
                                                                                                                     years.




                                                                                               The intermediary makes loans to business from its
 Intermediary Relending Program      Establish revolving funds for business facilities and
                                                                                              revolving loan fund on terms consistent with security
              Loans                           community development projects.
                                                                                                 offered. Intermediary pays 1% for 30 years.




     Rural Microentrepreneur        Establish revolving funds to target assistance to small   Maximum term is 20 years with a 2 year payment
       Assistance Program                              rural enterprises.                                        deferral.




 Water and Environmental Loan              Provide infrastructure for rural areas.               Repayment period is a maximum of 40 years.




                                      Helps rural communities obtain affordable, high
                                                                                              Up to 20 years at 0% interest, up to 3% interest for
                                       quality electric. Helps rural families and small
   Electric Loans including Rural                                                              relending to qualified end-users/consumers for up
                                      businesses achieve cost savings through loans to
     Energy Savings Program                                                                     to 10 years; up to 4% of the loan total may be
                                      qualified consumers to implement durable cost –
                                                                                                             used for startup costs.
                                           effective energy efficiency measures.



                                          Financing for construction, maintenance,             Cost of money loans at fixed U.S. Treasury rate.
     Telecommunication and
                                     improvement, and expansion of telephone service          Hardship Loans may be available at fixed interest
        Broadband Loans
                                              and broadband in rural areas.                               rate for up to 20 years.




                    Page 26                FY 2018 RURAL DEVELOPMENT FINANCIAL REPORT
                                                                                                  FINANCIAL STATEMENTS AND NOTES


NOTE 6: Continued
                                    PROGRAM CHARACTERISTICS – GUARANTEED
      MAJOR PROGRAMS                                    OBJECTIVE                                          TERMS/CONDITIONS

                                                                                              30-year fixed. The interest rate is negotiated
                                           To assist low-to moderate-income
   Single Family Housing Loan                                                               between lender and borrower. Loans up to 100%
                                        applicants/household buy their homes by
           Guarantees                                                                        of market value plus the amount of the up-front
                                      guaranteeing loans made by private lenders.
                                                                                                     guarantee fee being financed.



                                         Guarantees on loans to build or preserve
Rural Rental (Multi-Family) Housing                                                    At least 25-year term with fixed interest rate. Loan
                                    affordable rental housing for very-low to moderate
        Loan Guarantees                                                                     guarantees on up to 90% of the principal.
                                                      income tenants




                                                                                            Up to 100% of market value. Term is for useful life
    Community Facilities Loan       Improve, develop, or finance essential community
                                                                                            of the facility or equipment, the State statue, or 40
         Guarantees                          facilities for rural communities.
                                                                                                years. Maximum grant 75% of project cost.




                                                                                             Lender and borrower negotiate terms. Up to 30
    Business and Industry Loan     Create jobs/stimulate rural economics by providing
                                                                                            years for real estate, 15 years for machinery and
           Guarantees                      financial backing for rural business.
                                                                                               equipment, and 7 years for working capital.




                                      Provide assistance for energy efficiency
Rural Energy for America Program                                                             Loan guarantees up to 75% of project cost not to
                                 improvements or to purchase a renewable energy
     (REAP) Loan Guarantees                                                                               exceed $25 million.
                                               system for operations.


                                                                                              90% (maximum) guarantee on loans up to $125
Biorefinery, Renewable Chemical,         Loan guarantees to develop and construct             million; 80% (maximum) guarantee on loans less
      and Biobased Product          commercial–scale biorefineries or retrofit facilities    than $150 million; 70% (maximum) guarantee on
Manufacturing Assistance Program     using eligible technology for the development of         loans of $150 million but less than $200 million;
        Loan Guarantees                               advanced biofuels.                    60% (maximum) guarantee on loans of $200 million
                                                                                                             up to $250 million.



 Water and Environmental Loan                                                                 Eligible lenders obtain up to 90% guarantee on
                                          Provide infrastructure for rural areas.
         Guarantees                                                                                      loans they make and service.




 Electric and Telecommunication      Help rural communities obtain affordable, high-
                                                                                                Maximum 35 year term 100% guaranteed
         Loan Guarantees             quality electric and telecommunications services.




                   Page 27                FY 2018 RURAL DEVELOPMENT FINANCIAL REPORT
                                                                            FINANCIAL STATEMENTS AND NOTES


NOTE 6: Continued

Other Information Related to Credit Programs
Foreclosed Property and Loans Acquired
Property is acquired largely through foreclosure and voluntary conveyance. Rural Development records the
market value of acquired properties associated with loans at the time of acquisition. The projected future
cash flows associated with acquired properties are used in determining the related allowance (at present
value).

For FY’s 2018 and 2017, Rural Housing program properties consist primarily of 1,238 and 1,145 rural
single family dwellings, respectively. The average holding period for single family housing properties in
inventory was 16 months for both years. The approximate number of borrowers for which foreclosure
proceedings were in process at the end of FY’s 2018 and 2017 was 22,789 and 23,111, respectively.
Rural Development also allows leasing certain properties to eligible individuals.

Non-Performing Loans
Rural Development’s loan interest income on non-performing receivables is calculated but the recognition of
revenue is deferred. Non-performing receivables are defined as receivables that are in arrears by 90 or
more days.

Interest Credit
Approximately $14,954 million and $15,375 million of the Rural Housing borrowers’ unpaid loan principal,
as of September 30, 2018 and 2017, respectively, received interest credit (payment assistance). If those
loans receiving interest credit had interest accrued at the full-unreduced rate, interest income would have
been approximately $709 million and $744 million higher for FY’s 2018 and 2017, respectively.

Also, at the end of FY’s 2018 and 2017, the Rural Development housing portfolio contained approximately
55,938 and 58,254 restructured loans, respectively. The outstanding unpaid principal balance was $2,869
million in FY 2018 and $2,900 million in FY 2017.

Modifications
A modification is any government action, different from actions in the baseline assumptions, that affects the
subsidy cost, such as a change in the terms of the loan contract. This includes the sale of loan assets and any
action resulting from new legislation. Modifications may also occur from the exercise of administrative
discretion under existing law that directly or indirectly alters the estimated cost of outstanding direct loans
or loan guarantees. The cost of a modification is the difference between the net present value of the cash
flows before and after the modification.

Multi-Family Housing direct loan modifications related to the revitalization program, which began in FY
2006, and continued through FY 2018. In this program, Rural Development provided restructured
loans and grants to development owners to revitalize multi-family housing development projects in order to
extend their affordable use without displacing tenants due to increased rent.




                Page 28           FY 2018 RURAL DEVELOPMENT FINANCIAL REPORT
                                                                              FINANCIAL STATEMENTS AND NOTES


NOTE 6: Continued
Subsidy Rates and Reestimates
The Federal Credit Reform Act of 1990, as amended, and OMB Circular A-11 govern the proprietary and
budgetary accounting treatment of direct and guaranteed loans. The long-term cost to the government for
direct loans or loan guarantees is referred to as “subsidy cost.” Under the Act, subsidy costs for all loans
obligated post-1991 are recognized at the net present value of projected lifetime costs in the year the loan
is disbursed. Subsidy costs are estimated annually. Components of subsidy include interest subsidies,
defaults, fee offsets, and other cash flows. Reestimates are revisions of the subsidy cost estimate of a cohort
(or risk category) based on information about the actual performance and/or estimated changes in future
cash flows of the cohort. A cohort refers to the fiscal year of obligation for direct loan obligations, or loan
guarantee commitments of a specific program. In FY’s 2018 and 2017, reestimates using projected fiscal
year activity were recorded in the current fiscal year.

In FY’s 2018 and 2017, Rural Development guaranteed loan programs recorded prior year actual
budgetary reestimates and current year activity projected reestimates for material programs. Defaults,
fees, and other collections are considered significant assumptions within the guaranteed housing and business
and industry program estimates.

Based on a sensitivity analysis conducted for each program, the difference between the budgeted and
actual interest for both borrower and Treasury remain the key components of the subsidy formulation and
reestimate rates of Rural Development direct programs. Rural Development uses the government-wide
interest rate projections provided by OMB within its calculations and analysis.

Rural Development’s cash flow models are tailored for specific programs based on unique program
characteristics. Specific models developed and utilized include an econometric model for Guaranteed Single
Family Housing and Guaranteed Business and Industry, and historical weighted average models for Direct
Single Family Housing, Multi-Family Housing, Guaranteed, Electric Underwriters, Electric Modifications, and a
direct loan historical model that covers the remaining portfolio with similar characteristics.

A direct loan is a disbursement of funds by the government to a non-federal borrower under a contract that
requires the repayment of such funds with or without interest.

Valuation Methodology for Direct Loans and Loan Guarantees
For direct loans made pre-1992, Rural Development uses the Net Realizable Value methodology to value
the remaining interest and principal portfolio. Direct loans and loan guarantees made post-1991 are
governed by the Federal Credit Reform Act of 1990, as amended. The Act requires agencies to estimate
the cost of direct loans and loan guarantees at net present value of future cash flows.
Additionally, the net present value of the subsidy costs (i.e., interest rate differentials, interest subsidies,
delinquencies and defaults, fee offsets and other cash flows) associated with direct loans and loan
guarantees are recognized as a cost in the year the direct loan or guaranteed loan is disbursed.




                Page 29            FY 2018 RURAL DEVELOPMENT FINANCIAL REPORT
                                                                           FINANCIAL STATEMENTS AND NOTES


NOTE 6: Continued
DIRECT LOANS
Direct Loan Obligations
Direct loan obligations are binding agreements by a federal agency to make a direct loan when specified
conditions are fulfilled by the borrower. Table 1 illustrates the overall composition of the Rural Development
loan portfolio by mission area and loan program for FY 2018 and FY 2017. Loans receivable and related
foreclosed property, net balances at the end of FY 2018 were $88,372 million compared to $86,793
million at the end of FY 2017. Defaulted guaranteed loans were $237 million in FY 2018 as compared to
$249 million in FY 2017.

The Omnibus Budget Act of 1987, section 313, authorized the accumulation of Cushion of Credit (CoC) in the
Revolving Fund. Borrowers may make advance payments up to their liquidating and financing total Rural
Utilities Service debt. To accurately represent the value of Electric and Telecommunication assets, Rural
Development reports the CoC amounts as a separate line item in Table 1, under the Direct Loans
Receivables Section.




               Page 30           FY 2018 RURAL DEVELOPMENT FINANCIAL REPORT
                                                                        FINANCIAL STATEMENTS AND NOTES


NOTE 6: Continued

TABLE 1: TOTAL CREDIT PROGRAM RECEIVABLE AND RELATED FORECLOSED PROPERTY
                                     Loans
                                   Receivable,     Interest      Foreclosed                              Value of
FY 2018                               Gross       Receivable      Property            Allowance ¹         Assets
Direct Loans
Obligated Pre-1992
 Housing                              $          6,375 $       66 $            15 $             (25) $       6,431
 Community Facility                                 13          0               0                  0            13
 Electric                                        2,284          8               0           (1,593)            699
 Telecommunication                                  83          0               0                  0            83
 Water and Environmental                           274          3               0                 (1)          276
 Intermediary Relending                              6          0               0                  0             6
Pre-1992 Total                                   9,035         77              15          (1,619)           7,508

Obligated Post-1991
 Housing                                        17,930        126              75           (2,085)         16,046
 Community Facility                              8,563         65               0             (169)          8,459
 Electric                                       47,037        296               0             (560)         46,773
 Telecommunication                               3,510          5               0              121           3,636
 Water and Environmental                        12,506         95               0             (264)         12,337
 Intermediary Relending                            362          2               0               (85)           279
 Business and Industry                              43          0               0                 (1)           42
 Economic Development                              183          0               0               (13)           170
Post-1991 Total                                 90,134        589              75          (3,056)          87,742

Cushion of Credit Advance Payments               (7,115)        0               0               0            (7,115)
Total Direct Loans Receivable                   92,054        666              90          (4,675)          88,135

Defaulted Guaranteed Loans
Post-1991
 Housing                                            88          1               0              (57)             32
 Community Facility                                  5          0               0                0               5
 Business and Industry                             260          3               0              (63)            200
Total Defaulted Guaranteed Loans      $           353 $         4 $             0 $          (120) $           237
Total Loans Receivable and Related Foreclosed Property, Net                                         $       88,372


1 Theallowance for Direct Loans Obligated pre-1992 are valued at Net Realizable value, while Direct Loans
Obligated post-1991 and Defaulted Guaranteed Loans are valued at Net Present value.




            Page 31                FY 2018 RURAL DEVELOPMENT FINANCIAL REPORT
                                                                        FINANCIAL STATEMENTS AND NOTES


NOTE 6: Continued

TABLE 1: TOTAL CREDIT PROGRAM RECEIVABLE AND RELATED FORECLOSED PROPERTY
                                     Loans
                                   Receivable,     Interest      Foreclosed                              Value of
FY 2017                               Gross       Receivable      Property            Allowance   2
                                                                                                          Assets
Direct Loans
Obligated Pre-1992
 Housing                              $          6,642 $      115 $            12 $             (30) $       6,739
 Community Facility                                 18          0               0                  0            18
 Electric                                        2,357         12               0           (1,460)            909
 Telecommunication                                 114          0               0                  0           114
 Water and Environmental                           328          4               0                 (1)          331
 Intermediary Relending                              9          0               0                  0             9
Pre-1992 Total                                   9,468        131              12          (1,491)           8,120

Obligated Post-1991
 Housing                                        17,951        143              62           (2,215)         15,941
 Community Facility                              7,497         53               0             (140)          7,410
 Electric                                       45,831        268               0             (626)         45,473
 Telecommunication                               3,826          3               0                 (7)        3,822
 Water and Environmental                        12,266         88               0             (228)         12,126
 Intermediary Relending                            370          2               0               (90)           282
 Business and Industry                              42          0               0                 (3)           39
 Economic Development                              186          0               0               (14)           172
Post-1991 Total                                 87,969        557              62          (3,323)          85,265

Cushion of Credit Advance Payments               (6,841)        0               0               0            (6,841)
Total Direct Loans Receivable                   90,596        688              74          (4,814)          86,544

Defaulted Guaranteed Loans
Post-1991
 Housing                                            73          1               0              (36)             38
 Community Facility                                  7          0               0                0               7
 Business and Industry                             247          4               0              (47)            204
Total Defaulted Guaranteed Loans      $           327 $         5 $             0 $            (83) $          249
Total Loans Receivable and Related Foreclosed Property, Net                                         $       86,793



2 The allowance for Direct Loans Obligated pre-1992 are valued at Net Realizable value, while Direct Loans Obligated
post-1991 and Defaulted Guaranteed Loans are valued at Net Present value.




            Page 32                FY 2018 RURAL DEVELOPMENT FINANCIAL REPORT
                                                                    FINANCIAL STATEMENTS AND NOTES


NOTE 6: Continued
Subsidy Cost Allowance
The net present value of direct loans obligated post-1991 comprises the outstanding balance of
the loans adjusted by the allowance for subsidy for these loans. Table 2 shows the reconciliation
of subsidy cost allowance balances from FY 2018 to FY 2017. The subsidy cost allowance in
FY 2018 was $3,176 million compared to $3,406 million in FY 2017, a decrease of $230 million.

TABLE 2: SCHEDULE FOR RECONCILING SUBSIDY COST ALLOWANCE BALANCES
(POST-1991 DIRECT LOANS)

Beginning Balance, Changes, and Ending Balance                           FY 2018      FY 2017
Beginning Balance of the Subsidy Cost Allowance                        $      3,406 $     3,556

Add subsidy expense for direct loans disbursed during the year by
component:
 Interest rate differential costs                                              (205)       (158)
 Default costs (net of recoveries)                                              102         104
 Fees and other collections                                                      (10)        (14)
 Other subsidy costs                                                             (43)        (56)
 Total of the above subsidy expense components                                 (156)       (124)

Adjustments:
 Loan modifications                                                                0          3
 Fees received                                                                    74         64
 Loans written off                                                             (376)       (306)
 Subsidy allowance amortization                                                  (96)      (200)
 Other                                                                            86         78
 Ending balance of the subsidy cost allowance before reestimates              2,938       3,071

Add or subtract reestimates by component:
 Interest rate reestimates                                                      608         213
 Technical/default reestimates                                                 (370)        122
 Total of the above reestimate components                                       238         335
Ending Balance of the Subsidy Cost Allowance                           $      3,176 $     3,406




          Page 33             FY 2018 RURAL DEVELOPMENT FINANCIAL REPORT
                                                                                                                            FINANCIAL STATEMENTS AND NOTES


NOTE 6: Continued
Direct Loan Subsidy Expense
Direct loan subsidy expense is a component of the subsidy cost allowance. The total direct loan subsidy expense for FY 2018 is a
combination of subsidy expense for new direct loans disbursed in the current year, modifications to existing loans, and interest rate and
technical reestimates to existing loans. Table 3 illustrates the composition of total subsidy expense, including reestimates, for FY’s 2018
and 2017 by program. Total direct loan subsidy expense in FY 2018 was $82 million compared to $214 million in FY 2017, a
decrease of $132 million. Reestimate variances are discussed in the Analysis of Direct Loans.

TABLE 3: DIRECT LOAN SUBSIDY BY PROGRAM AND COMPONENT
                                      Subsidy Expense for New Direct Loans Disbursed                             Modifications and Reestimates
                                                               Fees and
                                  Interest                      Other                                  Total                         Technical/                  GRAND
                                Differential     Defaults     Collections      Other        Total   Modifications Interest Rate       Default        Total       TOTAL
FY 2018
Housing                         $        23 $           50 $            0 $           9 $       82 $         0    $          16 $             30 $        46 $      128
Community Facility                     (155)            43              0             5       (107)          0               43               91        134          27
Electric                               (126)             4            (10)         (30)       (162)          0             538             (489)          49       (113)
Telecommunications                        0              4              0            (4)         0           0              (36)             (26)        (62)       (62)
Water & Environmental                    43              1              0          (23)         21           0               50               23          73         94
Intermediary Relending                    5              0              0             0          5           0                (2)              1           (1)        4
Business and Industry                     1              0              0             0          1           0                 0               0            0         1
Economic Development                      4              0              0             0          4           0                (1)              0           (1)        3
Total Subsidy Expense, Direct   $      (205) $         102 $          (10) $       (43) $     (156) $        0    $        608 $           (370) $      238 $        82


FY 2017
Housing                         $        53 $           45 $            0 $           6 $      104 $         3    $         (20) $            27 $         7 $     114
Community Facility                     (164)            47              0            (1)      (118)          0                (5)             65          60       (58)
Electric                               (104)             6            (14)         (35)       (147)          0             236               (42)       194         47
Telecommunications                        0              5              0            (4)         1           0              (22)              56          34        35
Water & Environmental                    47              1              0          (22)         26           0               26               18          44        70
Intermediary Relending                    5              0              0             0          5           0                (2)              (8)       (10)       (5)
Business and Industry                     1              0              0             0          1           0                 0                6          6         7
Economic Development                      4              0              0             0          4           0                 0                0          0         4
Total Subsidy Expense, Direct   $      (158) $         104 $          (14) $       (56) $     (124) $        3    $        213 $            122 $       335 $      214




                                    Page 34                 FY 2018 RURAL DEVELOPMENT FINANCIAL REPORT
                                                              FINANCIAL STATEMENTS AND NOTES


NOTE 6: Continued
Direct Loans Disbursed
Volume distribution between programs is shown in Table 4. Direct loans disbursed in FY 2018
was $6,830 million compared to $6,925 million in FY 2017, a decrease of $95 million.


TABLE 4: TOTAL AMOUNT OF DIRECT LOANS DISBURSED (POST-1991)
                                                                                   FY 2018
                                                                                  Over/Under
                                                   FY 2018        FY 2017          FY 2017
Housing                                        $     1,185    $      1,123   $         62
Community Facility                                   1,354           1,638          (284)
Electric                                             3,236           3,045           191
Telecommunications                                     232            216              16
Water and Environmental                                766            851             (85)
Intermediary Relending                                  19             17               2
Business and Industry                                    6              5               1
Economic Development                                    32             30               2
Total Direct Loans Disbursed                   $      6,830   $      6,925   $       (95)




          Page 35              FY 2018 RURAL DEVELOPMENT FINANCIAL REPORT
                                                                           FINANCIAL STATEMENTS AND NOTES


NOTE 6: Continued
Subsidy Rates for Direct Loans
Subsidy rates are used to compute each year’s subsidy expense. Table 5 has the direct loan
subsidy rates for FY 2018 as provided in the Federal Credit Supplement to the Budget of the U.S.
Government. The subsidy rates disclosed in Table 5 pertain only to the FY 2018 cohort. These
rates cannot be applied to the direct loans disbursed during the current reporting year to yield
the subsidy expense. The subsidy expense for loans reported in the current year could result from
disbursements of loans from current year and prior year cohorts.

TABLE 5: SUBSIDY RATES FOR DIRECT LOANS (PERCENTAGE)
FY 2018                                                                     Fees and
                                                   Interest                  Other
                                                 Differential   Defaults   Collections   Other    Total
Section 502 Single Family Housing                    -2.37       5.13         0.00       1.09      3.85
Section 504 Housing Repair                          15.65        -0.02        0.00       -3.30    12.33
Single Family Housing Credit Sales                  -11.90       2.39         0.00       4.06     -5.45
Section 514 Farm Labor Housing                      27.11        0.28         0.00       -0.67    26.72
Section 515 Multi-Family Housing                    26.57        0.73         0.00       -0.99    26.31
Section 523 Self-Help Housing Land Development       2.55        4.74         0.00       0.06      7.35
Section 524 Site Development                         0.45        0.00         0.00       0.71      1.16
Multi-Family Housing Credit Sales                                          Not Funded
Multi-Family Housing Relending                     29.50         0.00         0.00       -0.01    29.49
Multi-Family Housing Revitalization Seconds        54.28         0.46         0.00       -0.06    54.68
Multi-Family Revitalization Zero                   48.75         0.37         0.00       -0.20    48.92
Community Facilities                               -12.99        3.48         0.00       1.41     -8.10
Community Facilities Relending                                             Not Funded
Distance Learning and Telemedicine                                         Not Funded
Broadband Treasury Rate                             0.14         16.74        0.00       -0.13    16.75
Water and Environmental                             4.01          0.08        0.00       -3.92     0.17
Electric Hardship                                                          Not Funded
FFB Electric                                        -4.39        0.02         0.00       -0.80    -5.17
Telephone Hardship                                                         Not Funded
Treasury Telecommunications                         0.14         0.37         0.00       -0.26     0.25
FFB Telecommunications                              -0.10        0.24         0.00       -2.63    -2.49
Intermediary Relending Program                      23.03        1.53         0.00       -1.47    23.09
Rural Economic Development                          13.09        0.02         0.00       -0.19    12.92
Rural Microenterprise                               7.28         2.70         0.00       0.00      9.98
Electric Underwriting                               0.00         1.39         -5.25      0.00     -3.86
Rural Energy Savings Program                        12.48        1.29         0.00       -0.44    13.33



            Page 36              FY 2018 RURAL DEVELOPMENT FINANCIAL REPORT
                                                               FINANCIAL STATEMENTS AND NOTES


NOTE 6: Continued

Analysis of Direct Loans
The following is a discussion of events and changes that had a significant and measurable effect
on subsidy expense, reestimates, and allowances.

RURAL HOUSING PROGRAMS
Direct 502 Single Family Housing

The Direct Single-Family Housing Section 502 Program had an overall upward reestimate of $69
million which is a portion of the total Direct Housing Program upward reestimate of $46 million.
The Direct Single Family Housing Section 502 Program represents less than one percent of the
outstanding principal balance, is consistent with the reestimates over the last several years, and
reflects the stable and consistent performance of the program. Older cohorts (2000 through
2010) had an upward reestimate of $115 million, while certain newer cohorts experienced a
downward reestimate of ($58) million. The upward reestimates reflect the impact of continuing
elevated residual defaults of loans for properties acquired prior to the 2008 recession.

Direct Community Facility

The Direct Community Facility Program had a net upward reestimate of $134 million. Cohorts
2015 through 2017 had an upward reestimate of $161 million due primarily to projected
borrowing rates from Treasury rising higher than initially budgeted. Treasury rates on older
cohorts do not change as Treasury sets fixed borrowing rates on each cohort after 90% of the
loans have been disbursed.


RURAL UTILITIES PROGRAMS

Direct Electric Programs

The Electric Program had an overall upward reestimate of $49 million. This reestimate was
comprised primarily of a $300 million upward reestimate in the FFB program and a
($291 million) downward reestimate in the FFB Underwriter program. The FFB electric upward
reestimate of $300 million represents less than one percent of the outstanding principal balance.
Just over half of the reestimate is due to projected borrowing rates from Treasury rising higher
than initially budgeted for the 2015 through 2017 cohorts. The remaining portion of the
reestimate is due to a model adjustment to reflect a reduction in the expected prepayments,
which will result in higher net borrowing costs in future years. The FFB Underwriter program
received a significant unexpected prepayment of principal in 2018, which will be used to reduce
Treasury borrowings and reduce future net interest expense for the program.




          Page 37           FY 2018 RURAL DEVELOPMENT FINANCIAL REPORT
                                                              FINANCIAL STATEMENTS AND NOTES


NOTE 6: Continued
Direct Water and Environmental Programs

The Direct Water and Environmental Program had an upward reestimate of $72 million,
representing less than one percent of the outstanding principal. The majority of the reestimate
was caused by projected borrowing rates from Treasury rising higher than initially budgeted for
the 2015 through 2017 cohorts.




          Page 38          FY 2018 RURAL DEVELOPMENT FINANCIAL REPORT
                                                             FINANCIAL STATEMENTS AND NOTES


NOTE 6: Continued
GUARANTEED LOANS
Rural Development offers guaranteed loan products, which are administered in coordination with
conventional agricultural lenders, for up to 90 percent of the principal loan amount, with the
exception of the Electric Guarantees, which are guaranteed at 100 percent. Borrowers interested
in guaranteed loans must apply through a conventional lender, which arranges for the guarantee
with the Agency. Guaranteed loans are disclosed on the balance sheet in two ways: estimated
losses on loan credit guarantees, which are valued and carried as a liability; and guaranteed
loans purchased from third party holders, which are carried at net present value in loans
receivable and related foreclosed property, net.

Loan Guarantees Outstanding
Guaranteed loans outstanding at the end of FY 2018 increased compared to the FY 2017
portfolio. Table 6 shows the outstanding balances by loan program. At the end of FY 2018 and
FY 2017, there were $131,840 million and $128,364 million in outstanding principal (face value)
and $117,373 million and $114,435 million in outstanding principal (guaranteed), respectively.

TABLE 6: LOAN GUARANTEES OUTSTANDING
                                                             Post-1991          Post-1991
                                                            Outstanding        Outstanding
                                                              Principal          Principal
                                                            Face Value         Guaranteed
FY 2018
Housing                                                 $      122,966     $       110,632
Community Facility                                               1,141               1,017
Electric                                                           161                 161
Water and Environmental                                             91                  80
Business and Industry                                            7,481               5,483
Total Guarantees Outstanding                            $      131,840     $       117,373

FY 2017
Housing                                                 $      120,408     $       108,329
Community Facility                                               1,129               1,002
Electric                                                           166                 166
Water and Environmental                                            114                 102
Business and Industry                                            6,547               4,836
Total Guarantees Outstanding                            $      128,364     $       114,435




         Page 39           FY 2018 RURAL DEVELOPMENT FINANCIAL REPORT
                                                                  FINANCIAL STATEMENTS AND NOTES


NOTE 6: Continued
Liability for Loan Guarantees
Liability for loan guarantees consists of net cash flows (outflows less inflows) paid or to be paid
by the entity as a result of the loan guarantees. Table 6a shows the loan guarantee liability.
Table 6b shows the liability reconciliation for post-1991 guarantees. In FY 2018, the total
liabilities decreased by $292 million compared to FY 2017.

TABLE 6a: LIABILITY FOR LOAN GUARANTEES
                                                               Liabilities for Loan Guarantees on Post-
                                                                   1991 Guarantees Present Value
FY 2018
Liability for Loan Guarantees
Housing                                                       $                                  (212)
Community Facility                                                                                 51
Electric                                                                                            0
Water and Environmental                                                                             1
Business and Industry                                                                             442
Total Liabilities for Loan Guarantees                         $                                   282


FY 2017
Liability for Loan Guarantees
Housing                                                       $                                  115
Community Facility                                                                                43
Electric                                                                                           0
Water and Environmental                                                                            1
Business and Industry                                                                            415
Total Liabilities for Loan Guarantees                         $                                  574




          Page 40             FY 2018 RURAL DEVELOPMENT FINANCIAL REPORT
                                                                   FINANCIAL STATEMENTS AND NOTES


NOTE 6: Continued
The Agency continued to process claim payments to lenders in FY 2018 related to the
Guaranteed Single Family Housing Program, although the amount in the current year as
compared to the previous year is lower.

TABLE 6b: SCHEDULE FOR RECONCILING LOAN GUARANTEE LIABILITY (POST-1991)
Beginning Balance, Changes, and Ending Balance                         FY 2018             FY 2017
Beginning Balance of the Loan Guarantee Liability                 $        574 $            1,326

Add subsidy expense for guaranteed loans disbursed during the year by
component:
 Interest supplement costs                                                          0           0
 Default costs (net of recoveries)                                                819        821
 Fees and other collections                                                      (820)      (893)
 Other subsidy costs                                                                1           0
Total of the above subsidy expense components                                       0         (72)

Adjustments:
 Loan guarantee modifications                                                        0          0
 Fees received                                                                    603        597
 Interest supplements paid                                                          (8)        (9)
 Claim payments to lenders                                                       (633)      (739)
 Interest accumulation on the liability balance                                      6        26
 Loans acquired                                                                    63         49
 Other                                                                           (147)      (116)
Ending balance of the loan guarantee before reestimates                           458      1,062

Add or subtract reestimates by component:
 Interest rate reestimates                                                         (82)       24
 Technical/default reestimates                                                     (94)     (512)
 Total of the above reestimate components                                        (176)      (488)
Ending Balance of the Loan Guarantee Liability (Post-1991)                 $      282 $      574




          Page 41            FY 2018 RURAL DEVELOPMENT FINANCIAL REPORT
                                                                                                                                    FINANCIAL STATEMENTS AND NOTES


NOTE 6: Continued
Guaranteed Loan Subsidy Expense
Total guaranteed loan subsidy expense is a combination of subsidy expense for new guaranteed loans disbursed in the current year
and the interest rate and technical reestimates to existing loans. Table 7 illustrates the breakdown of total subsidy expense for FY
2018 and FY 2017 by loan program. Total guaranteed loan subsidy expense in FY 2018 was ($176) million compared to ($560)
million in FY 2017, an increase of $384 million.

TABLE 7: GUARANTEED LOAN SUBSIDY EXPENSE BY PROGRAM AND COMPONENT
                               Subsidy Expense for New Guaranteed Loans Disbursed                                   Modifications and Reestimates

                                Interest                  Fees and Other                                  Total
                              Supplement       Defaults     Collections    Other           Total       Modification Interest Rate       Technical      Total    GRAND TOTAL
FY 2018
Housing                   $           0 $           622 $        (753) $           0 $        (131) $           0 $         (88) $            (24) $      (112) $    (243)
Community Facility                    0               5             (1)            0             4              0             0                 5             5         9
Electric                              0               0              0             0             0              0             0                 0             0         0
Water and Environmental               0               0              0             0             0              0             0                 0             0         0
Business and Industry                 0             192           (66)             1           127              0             6               (75)          (69)       58
Total Subsidy Expense,
Guaranteed                $           0    $        819   $      (820) $           1   $           0   $        0   $       (82) $            (94) $      (176) $    (176)


FY 2017
Housing                   $           0 $           708 $        (846) $           0 $        (138) $           0 $          21 $            (351) $      (330) $    (468)
Community Facility                    0               4             (1)            0             3              0             1                12           13         16
Electric                              0               0              0             0             0              0             0                 0            0          0
Water and Environmental               0               0              0             0             0              0             0                 0            0          0
Business and Industry                 0             109           (46)             0            63              0             2              (173)        (171)      (108)
Total Subsidy Expense,
Guaranteed                $           0    $        821   $      (893) $           0   $       (72) $           0   $        24     $        (512) $      (488) $    (560)




                                     Page 42                  FY 2018 RURAL DEVELOPMENT FINANCIAL REPORT
                                                                FINANCIAL STATEMENTS AND NOTES


NOTE 6: Continued
Guaranteed Loans Disbursed
Guaranteed loan volume face value decreased to $19,647 million in FY 2018 from $20,512
million in FY 2017. The housing loan program experienced the largest decrease.

TABLE 8: GUARANTEED LOANS DISBURSED (POST-1991)

                                                   Principal, Face Value     Principal, Guaranteed
                                                         Disbursed                 Disbursed
FY 2018
Housing                                        $                  17,527 $                15,774
Community Facility                                                   105                      93
Water and Environmental                                                2                       1
Business and Industry                                              2,013                   1,553
Total Guaranteed Loans Disbursed               $                  19,647 $                17,421


FY 2017
Housing                                        $                  19,009 $                17,108
Community Facility                                                    92                      81
Water and Environmental                                                8                       7
Business and Industry                                              1,403                   1,084
Total Guaranteed Loans Disbursed               $                  20,512 $                18,280


Subsidy Rates for Loan Guarantees
Subsidy rates are used to compute each year’s subsidy expense. The subsidy rates disclosed in
Table 9 pertain only to the FY 2018 cohort as provided in the Federal Credit Supplement to the
Budget of the U.S. Government. These rates cannot be applied to the guaranteed loans disbursed
during the current reporting year to yield the subsidy expense. The subsidy expense for loans
reported in the current year could result from disbursements of loans from current year and prior
year cohorts.

TABLE 9: SUBSIDY RATES FOR LOAN GUARANTEES (PERCENTAGE)
                                                                Fees and
                                                                 Other
FY 2018                                            Defaults    Collections    Other        Total
Section 502 Single Family Housing                    3.54         -4.25        0.00        -0.71
Section 538 Multi-Family Housing                     4.05         -7.67        0.00        -3.62
Community Facilities                                 4.16         -0.89        0.00         3.27
Business and Industry                                8.02         -3.96        0.00         4.06
Water and Environmental                              1.33         -0.87        0.00         0.46
Renewable Energy                                     5.27         -1.40        0.00         3.87
Biorefinery (Section 9003 Loan Guarantees)          25.88         -4.72        0.08        21.24



          Page 43             FY 2018 RURAL DEVELOPMENT FINANCIAL REPORT
                                                                FINANCIAL STATEMENTS AND NOTES


NOTE 6: Continued
Analysis of Guaranteed Loans
The following is a discussion of events and changes that had a significant and measurable effect
on subsidy expense, reestimates, and allowances.
Rural Housing Program
The Guaranteed Single Family Housing Section 502 program is the largest of RD’s guaranteed
housing program and is a portion of the ($112 million) downward reestimate for the overall
Housing Guaranteed Loan Programs. The Guaranteed Single Family Housing Section 502
Program had an overall downward reestimate of ($100 million). The downward reestimate of
($100 million) is the result of a downward reestimate of ($93 million) in the Blended component
of the program and a downward reestimate of ($7 million) in the Purchase component of the
program. The Blended component’s change is attributed to the upward reestimates for cohorts
2011 through 2017, along with a larger offsetting downward reestimate for cohort 2018 of
$111 million, or less than one percent of the outstanding principal, due to projected losses lower
than originally budgeted. In the Blended component of the program, the upward reestimate for
cohorts 2011 through 2017 is due to the increase in projected loss claims and a decrease in
projected annual fees, reducing the future cash flows and increasing the subsidy cost. The
Purchase component’s change is mainly attributed to cohorts 2008 through 2010.

Business and Industry Program
The downward reestimate change in the Guaranteed Business and Industry Program is a portion
of the overall downward reestimate in the Business and Industry Loans of ($69 million). The
Guaranteed Business and Industry Program had an overall downward reestimate of ($90 million),
which was the result of higher projected recoveries and lower than foreclosed claims paid through
FY 2018.




          Page 44           FY 2018 RURAL DEVELOPMENT FINANCIAL REPORT
                                                                                    FINANCIAL STATEMENTS AND NOTES


NOTE 7: GENERAL PROPERTY, PLANT AND EQUIPMENT, NET
This equipment generally represents computer hardware, software, and other office equipment
used in the Rural Development mission area’s network of offices. Refer to Note 1 for further
information on General Property, Plant and Equipment Net.

                                                     Accumulated                     Estimated      Method of Capitalization
CLASSES                               Cost           Depreciation     Book Value    Useful Life³   Depreciation4 Threshold
FY 2018
Personal Property
Equipment                        $             3      $           2    $        1           5-20       SL        $ 25,000
Internal Use Software                        203                167            36            5-8       SL        $ 100,000
Internal Use Software
   in Development                              3                  0             3                      SL        $ 100,000
Total                            $           209      $         169    $       40


FY 2017
Personal Property
Equipment                        $             3 $                2    $        1           5-20       SL        $ 25,000
Internal Use Software                        195                157            38            5-8       SL        $ 100,000
Internal Use Software
  in Development                               2                  0             2                      SL        $ 100,000
Total                            $           200      $         159    $       41


NOTE 8: OTHER ASSETS
                                                                               FY 2018                      FY 2017
Intragovernmental
 Advances to Others                                                   $                        0 $                      0
 Other Assets                                                                                  0                        0
Total Intragovernmental                                                                        0                        0

With the Public
 Investment in Loan Asset Sale Trust 5                                                        35                       35
 Other                                                                                         2                        2
 Total Other Assets – Non-Governmental                                                        37                       37
Total Other Assets                                                    $                       37 $                     37
_____________________________________________________________
3
  Range of Service Life
4
  SL - Straight Line
5
  In FY 1987, a loan asset sale was conducted as required in the Omnibus Budget Reconciliation Act of 1986 (Public Law
99-509). As a result of these sales, the Rural Development Insurance Fund (RDIF) and the Rural Housing Insurance Fund
(RHIF) maintain investments in the Class C securities of the Community Program, Loan Trust, 1987A, and the Rural Housing
Trust, 1987-1, respectively. These investments represent a residual security in the respective Trust and entitle Rural
Development to residual cash flows resulting from loan repayments not required to pay trust security holders or to fund
required reserves. Rural Development intends to retain the RDIF and RHIF Class C investments into the foreseeable future.




               Page 45                  FY 2018 RURAL DEVELOPMENT FINANCIAL REPORT
                                                                                      FINANCIAL STATEMENTS AND NOTES


NOTE 9: LIABILITIES NOT COVERED BY BUDGETARY RESOURCES
                                                                                            FY 2018                  FY 2017
Intragovernmental
 Unfunded Federal Employees Compensation Act (FECA) Liability                         $                    6 $                    6
Total Intragovernmental                                                                                    6                      6

With the Public
 Federal Employee and Veteran Benefits                                                                   36                    36
 Unfunded Annual Leave                                                                                   32                    34
 Contingent Liability                                                                                   469                    65
 Other Liability                                                                                         70                    65
Total With the Public                                                                                   607                   200
Total Liabilities Not Covered by Budgetary Resources6                                                 613                    206
Total Liabilities Covered by Budgetary Resources                                                  102,112                104,593
Total Liabilities Not Requiring Budgetary Resources 7                                                  (12)                   (10)
Total Liabilities                                                                     $           102,713 $              104,789

6
  Liabilities not covered by budgetary resources represent liabilities for which Congressional action is required before budgetary
resources can be provided.
7 Liabilities not requiring budgetary resources represent liabilities for clearing accounts and liabilities for non-fiduciary deposit
funds for which Congressional action is not required.




              Page 46                 FY 2018 RURAL DEVELOPMENT FINANCIAL REPORT
                                                              FINANCIAL STATEMENTS AND NOTES


NOTE 10: DEBT
                                                          Beginning         Net          Ending
                                                           Balance       Borrowing       Balance
FY 2018
Intragovernmental Debt
  Debt to Treasury                                    $       49,577 $       (2,871) $     46,706
  Debt to the Federal Financing Bank (FFB)                    45,433          1,214        46,647
Total Intragovernmental Debt                                  95,010         (1,657)       93,353

Agency Debt
 Held by the Public                                                0               0           0
 Notes Payable                                                     0               0           0
Total Agency Debt                                                  0               0           0
Total Debt                                            $       95,010 $       (1,657) $    93,353

FY 2017
Intragovernmental Debt
  Debt to Treasury                                    $       49,370 $          206 $      49,576
  Debt to the Federal Financing Bank (FFB)                    43,364          2,070        45,434
Total Intragovernmental Debt                                  92,734          2,276        95,010

Agency Debt
 Held by the Public                                                0              0            0
 Notes Payable                                                     0              0            0
Total Agency Debt                                                  0              0            0
Total Debt                                            $       92,734 $        2,276 $     95,010




          Page 47            FY 2018 RURAL DEVELOPMENT FINANCIAL REPORT
                                                                     FINANCIAL STATEMENTS AND NOTES


NOTE 10: Continued
                                                                        FY 2018            FY 2017
Classification of Debt
 Intragovernmental Debt                                          $              93,353 $        95,010
 Debt Held by the Public                                                             0               0
Total Debt                                                       $              93,353 $        95,010

Borrowing from the Federal Financing Bank (FFB) is either in the form of Certificates of Beneficial
Ownership (CBO) or loans executed directly between the borrower and FFB with Rural
Development unconditionally guaranteeing repayment. Rural Development generally secures
CBO’s outstanding with FFB by unpaid loan principal balances. CBO’s outstanding are related to
Pre-Credit Reform loans and are no longer used for program financing. FFB CBO’s are repaid as
they mature and are not related to any particular group of loans.

Rural Development repays borrowings made to finance loans directly between the borrower and
FFB. These borrowings mature as the related group of loans become due. Interest rates on the
related group of loans are equal to interest rates on FFB borrowings, except in those situations in
which an FFB-funded loan is restructured and the terms of the loan are modified.

Supplemental Information Associated with Debt
                                                                      FY 2018              FY 2017
Interest Payable, Federal
 Federal Financing Bank                                      $                   360 $               353
Total                                                        $                   360 $               353

These interest payable amounts associated with borrowings from Treasury and the FFB are
included in the table at the beginning of this note. Interest payments are due to FFB on
September 30 each year.

                                                                      FY 2018              FY 2017
Interest Expense, Federal
 Federal Financing Bank                                     $               1,565 $              1,618
 Treasury                                                                   1,894                2,039
Total                                                       $               3,459 $              3,657




          Page 48           FY 2018 RURAL DEVELOPMENT FINANCIAL REPORT
                                                                            FINANCIAL STATEMENTS AND NOTES


NOTE 11: OTHER LIABILITIES
                                                       Non-Current             Current           Total
FY 2018
Intragovernmental
  Other Accrued Liabilities                        $                 0 $                   8 $              8
  Employer Contributions & Payroll Taxes Payable                     0                     4                4
  Unfunded FECA Liability                                            3                     3                6
  Liability for Deposit Fund & Suspense Accounts                     0                    (1)              (1)
  Other Liabilities                                                  0                     0                0
Total Intragovernmental Debt                     $                   3 $                 14 $             17

 Other Accrued Liabilities                                            0                    70              70
 Accrued Funded Payroll & Leave                                       0                    15              15
 Unfunded Annual Leave                                                0                    32              32
 Liability for Advances & Prepayments                                 0                   (11)            (11)
 Liability for Deposit Fund & Suspense Accounts                       0                     0               0
 Contingent Liabilities                                               0                  469             469
 Other Liabilities                                                   24                    46              70
Total Other Liabilities                           $                  27 $                635 $           662



FY 2017
Intragovernmental
  Other Accrued Liabilities                        $                 0 $                 12 $             12
  Employer Contributions & Payroll Taxes Payable                     0                    4                4
  Unfunded FECA Liability                                            3                    3                6
  Liability for Deposit Fund & Suspense Accounts                     0                    0                0
  Other Liabilities                                                  0                    0                0
Total Intragovernmental Debt                     $                   3 $                 19 $             22

 Other Accrued Liabilities                                            0                    68              68
 Accrued Funded Payroll & Leave                                       0                    15              15
 Unfunded Annual Leave                                                0                    34              34
 Liability for Advances & Prepayments                                 0                   (10)            (10)
 Liability for Deposit Fund & Suspense Accounts                       0                     0               0
 Contingent Liabilities                                               0                    65              65
 Other Liabilities                                                   24                    41              65
Total Other Liabilities                           $                  27 $                232 $           259

These liabilities are or will be covered by Budgetary Resources.




           Page 49              FY 2018 RURAL DEVELOPMENT FINANCIAL REPORT
                                                                 FINANCIAL STATEMENTS AND NOTES


NOTE 12: COMMITMENTS AND CONTINGENCIES
Commitments
Rural Development has commitments under cancelable leases for office space. GSA leases the
majority of buildings in which Rural Development operates. GSA charges rent which is intended to
approximate commercial rental rates.

As related to commitments to extend loan guarantees as of September 30, 2018 and 2017,
there were approximately $3,236 million and $4,986 million, respectively.

Contingencies
Rural Development is subject to various claims and contingencies related to lawsuits. Rural
Development does not accrue amounts in the financial statements for claims where the amount or
probability of judgment is uncertain.

The following contingency-related lawsuits are reportable for the fiscal year ending on
September 30, 2018:

In FY 2018, a Rural Utilities Service borrower asserted the intent to file bankruptcy. The Office of
General Counsel has made the determination that a $400 million unfavorable outcome is
probable. This amount has been accrued on the financial statements.

Rural Development is actively involved in restructuring negotiations.

Multiple breach of contract cases regarding Housing Section 515 loan prepayments were
deemed probable in FY 2014. As of September 2018, the Office of the General Counsel has
made the determination that a $65 million unfavorable outcome is probable. This amount has
been accrued to the financial statements.

In FY 2018, in addition to the breach of contract cases a Housing Section 515 borrower brought
suit for expectancy damages. The Office of the General Counsel has made the determination that
a $4.2 to $7.4 million unfavorable outcome is probable. This amount has been accrued in the
financial statements.

Although the existing Multi-Family Housing portfolio is in fair to good condition, Rural
Development National Office officials have determined that adequate funds have not been
accrued to address future maintenance costs. Adequate maintenance programs are necessary, or
properties and apartment units will physically deteriorate to the point where safety and
sanitation will necessitate a general modernization program to maintain their marketability and
ultimately compete for tenants. The cost is expected to reach into the hundreds of millions of
dollars.

House Resolution 5039, the Saving America’s Rural Housing Act of 2006, was enacted to resolve
these issues. The Act enables Rural Development to offer borrowers a financial restructuring plan
for the Multi- Family Housing development, which may include one or more revitalization benefits.




          Page 50           FY 2018 RURAL DEVELOPMENT FINANCIAL REPORT
                                                               FINANCIAL STATEMENTS AND NOTES


NOTE 12: Continued
A reasonably possible loss of $5 million was reported in the Community Facility Loan Program.
Rural Development will continue to work with the borrower to allow the facility to continue
operating. Since this potential loss is reasonably possible no dollar value has been accrued to the
financial statements.




          Page 51           FY 2018 RURAL DEVELOPMENT FINANCIAL REPORT
                                                                 FINANCIAL STATEMENTS AND NOTES


NOTE 13: Supporting Schedule for Statement of Net Cost

                                                                Area &      Energy
                                         Mortgage Housing      Regional    Supply & Consolidated
                                          Credit  Assistance Development Conservation  Total
FY 2018
Gross Costs:
 Borrowing Interest Expense               $     732 $    16 $          848   $   1,863 $ 3,459
 Grants                                          10   1,275            670           0   1,955
 Loan Cost Subsidies                           (114)      (1)          153        (132)     (94)
 Other                                          755      49            212         770   1,786
Total Gross Costs                             1,383   1,339          1,883       2,501   7,106
Less:
Earned Revenues                                739        17          874        2,213       3,843

Net Cost of Operations                    $    644   $ 1,322 $       1,009   $    288    $ 3,263


FY 2017
Gross Costs:
 Borrowing Interest Expense               $    755 $    14       $     889 $     1,999   $   3,657
 Grants                                         14   1,256             729           0       1,999
 Loan Cost Subsidies                          (377)     23              (22)        30        (346)
 Other                                         581      19             122         599       1,321
Total Gross Cost                               973   1,312           1,718       2,628       6,631
Less:
Earned Revenue                                 781        15          915        2,346       4,057

Net Cost of Operations                    $    192   $ 1,297     $    803    $    282    $ 2,574




           Page 52            FY 2018 RURAL DEVELOPMENT FINANCIAL REPORT
                                                                           FINANCIAL STATEMENTS AND NOTES


NOTE 13: Continued

Other Disclosures
                                                          ACTIVITY
                                                        INCLUDED IN
                                         BUDGET          FINANCIAL                LOAN/GRANT PROGRAMS
  FUNCTION         SUBFUNCTION        SUBFUNCTION       STATEMENTS                   INCLUDED IN BUDGET
  LEVEL TITLE       LEVEL TITLE           CODE        (where applicable)              SUBFUNCTION CODE
                                                                             • Single Family Housing
                                                                             (Direct & Guaranteed)
  Commerce &
                   Mortgage Credit        371       Rural Housing Programs
    Housing
                                                                             • Multi-Family Housing (Direct &
                                                                             Guaranteed)
                                                                             • Domestic Farm Labor Grants
                                                                             • Very Low-Income Housing Repair
                       Housing                                               Grants
 Income Security                          604       Rural Housing Programs
                      Assistance                                             • Construction Defects
                                                                             • Rental Assistance Program
                                                                             • Other Housing Grants
                                                                             • Rural Community Facility
                                                    Rural Housing Programs (Direct & Guaranteed)
                                                                             • Rural Business & Industry
                                                    Rural Business Programs (Direct & Guaranteed)
                                                                             • Rural Economic Development
                      Community                                              (Loans & Grants)
                    Development                                              • Rural Energy for America Program
  Community &                             451
                   Area & Regional                                           • Disaster Assistance Fund
    Regional                              452
                    Development
  Development                             453                                • Healthy Food Initiative
                    Disaster Relief
                                                                             • Energy Assistance Payments
                    and Insurance
                                                                             • Intermediary Relending
                                                                             • Rural Water and Environmental
                                                    Rural Utilities Programs (Direct & Guaranteed)
                                                                             • Distance Learning & Telemedicine
                                                                             • Broadband


                   Energy Supply &        271
     Energy                                         Rural Utilities Programs • Rural Electric & Telecommunications
                     Conservation         272


                     Agricultural
   Agriculture       Research &           352       Rural Business Programs • Research Loan
                      Services




USDA and the individual agencies preparing their own financial, statements are required to
prepare the Statement of Net Cost at the subfunction level. The Statement of Net Cost, as
prepared by Treasury, shows these activities at their function level.



            Page 53                 FY 2018 RURAL DEVELOPMENT FINANCIAL REPORT
                                                                 FINANCIAL STATEMENTS AND NOTES


NOTE 13: Continued
Credit Reform
The amount of subsidy expense on direct loans made post-1991 equals the present value of
estimated cash outflows over the life of the loan less the present value of cash inflows, discounted
at the interest rate of marketable Treasury securities within a similar maturity term. A major
component of subsidy expense is the interest subsidy cost/interest differential. This is defined as
the excess of the amount of direct loans disbursed over the present value of the interest and
principal payments required by the loan contracts, discounted at the applicable Treasury rate.
One of the components of interest subsidy cost/interest differential is interest revenue. This
interest revenue is earned from both federal and non-federal sources. For further discussions of
revenue and present value refer to Notes 1 and 6.

Exchange Transactions with Non-Federal Sources
When a new direct loan program becomes a reality, the applicable public law normally
addresses the interest rates to be charged to borrowers. Public laws can be specific, state a
minimum and/or maximum rate, or be in general terms. The following general discussion about
borrower interest rates is in relation to loan programs within each of our mission areas.

Rural Housing Programs
The two largest loan programs (Single Family Housing and Rural Rental and Cooperative Housing)
have a statutory basis for rates that are not less than the current average market yield on
outstanding U.S. marketable obligations of comparable maturities. These rates have been
determined to be the 25-year Treasury rates.

Rural Business-Cooperative Program
The main loan program (Business and Industry) has a statutory basis for a rate which is not less
than the Treasury rate determined by considering: (1) Current average market yield on
outstanding U.S. marketable obligations of comparable maturities; (2) Comparable private
market rates; and (3) Cost of Secretary of Agriculture’s insurance plus an additional charge to
cover losses.

Rural Utilities Program
Water and Environmental loans have a statutory basis for rates, which have a range between less
than or equal to five percent, to not greater than the current market yield for outstanding
municipal obligations of comparable maturities adjusted to the nearest eighth of one percent.
Telecommunication cost-of-money loans have a statutory basis for rates equal to the current cost-
of-money to the Federal Government for loans of a similar maturity, but not to exceed seven
percent. Electric municipal loans have a statutory basis for rates equal to the current market yield
on outstanding municipal obligations, subject to a seven percent maximum, with remaining periods
to maturity similar to the term selected by the applicant. Telecommunication and Electric hardship
loans have a statutory basis for a rate of five percent. The rate on Telecommunication and Electric
loans purchased by the Federal Financing Bank shall be the rate applicable to similar loans being
made or purchased by the Federal Financing Bank.




          Page 54           FY 2018 RURAL DEVELOPMENT FINANCIAL REPORT
                                                                FINANCIAL STATEMENTS AND NOTES


NOTE 13: Continued
Exchange Transactions with Federal Sources
Rural Development serves as a temporary source of supervised credit until borrowers are able to
qualify for private sector resources. As the lender of last resort, Rural Development is unable to
recoup all the costs associated with its loan making and loan servicing activities. The main reason
is that the costs associated with borrowings from Treasury exceed the interest income received
from borrowers plus any interest income earned from Treasury.

NOTE 14: APPORTIONMENT CATEGORIES OF NEW OBLIGATIONS
AND UPWARD ADJUSTMENTS: DIRECT VS. REIMBURSABLE
OBLIGATIONS
                                                      Direct          Reimbursable       Total
FY 2018
Category A-Apportionment by Fiscal Quarter       $            677 $              11 $          688
Category B-Apportionment by Special Activities             21,288               670         21,958
Total Obligations Incurred                       $         21,965 $             681 $       22,646

FY 2017
Category A-Apportionment by Fiscal Quarter       $            672 $              11 $          683
Category B-Apportionment by Special Activities             29,343                 0         29,343
Total Obligations Incurred                       $         30,015 $              11 $       30,026


NOTE 15: AVAILABLE BORROWING AUTHORITY, END OF PERIOD
As of September 30, 2018, and 2017, the amount of available borrowing authority was
$25,304 million and $20,926 million, respectively.




           Page 55              FY 2018 RURAL DEVELOPMENT FINANCIAL REPORT
                                                               FINANCIAL STATEMENTS AND NOTES


NOTE 16: TERMS OF BORROWING AUTHORITY USED
Requirements for Repayments of Borrowings
Rural Development repays borrowings on SF 1151, Nonexpenditure Transfer Authorization, as
maturity dates become due. For liquidating accounts, maturity dates are one working day prior to
the anniversary date of the note. For financing accounts, maturity dates are based on the period
of time used in the subsidy calculation, not the contractual term of the Agency’s loans to
borrowers. This period of time used in the subsidy calculation will normally be longer than the
contractual term of the Agency’s loans to borrowers.

Financing Sources for Repayments of Borrowings
Rural Development utilizes reestimates, cash flows, liquidating account appropriations, and
residual unobligated balances to repay Treasury borrowings.

Other Terms of Borrowing Authority Used
In general, borrowings are for periods between one year and approximately fifty years
depending upon the loan program/cohort. Interest rates on borrowings in the liquidating accounts
were assigned on the basis of the Treasury rate in effect at the time of the borrowing. Interest
rates on borrowings in the financing accounts are assigned on the basis of the Treasury rate in
effect during the period of loan disbursements. Rural Development disburses some individual
loans over several quarters or years.

Consequently, several interest rates can be applicable to an individual loan. Thus, a single
weighted average interest rate is maintained for each cohort and is adjusted each year until the
disbursements for the cohort have been made. Each year, the current average annual interest rate
is weighted by current year disbursements and merged with prior year weighted averages to
calculate a new weighted average.

Prepayments can be made on Treasury borrowings in the liquidating and financing accounts
without penalty; however, they cannot be made on Federal Financing Bank Certificates of
Beneficial Ownership in the liquidating accounts without penalty.




          Page 56          FY 2018 RURAL DEVELOPMENT FINANCIAL REPORT
                                                                FINANCIAL STATEMENTS AND NOTES


NOTE 17: PERMANENT INDEFINITE APPROPRIATIONS
Existence, Purpose, and Availability of Permanent Indefinite Appropriations
Permanent indefinite appropriations are mainly applicable to program accounts for reestimates
related to upward adjustments of subsidy. Under unique situations, both liquidating and financing
accounts may receive appropriations. These appropriations become available pursuant to
standing provisions of law, without further action by Congress, after transmittal of the Budget for
the year involved. However, they are not stated as specific amounts but are determined by
specified variable factors, such as cash needs for the liquidating accounts, servicing actions, and
subsidy reestimates for the program accounts.

The periods of availability for these appropriations are as follows: (1) Annual authority is
available for obligation only during a specified year and expires at the end of that time; (2)
Multi-year authority is available for obligation for a specified period of time in excess of one
fiscal year; and (3) No-year authority remains available for obligation for an indefinite period of
time, usually until the objectives for which the authority was made available are achieved.

Annual and multi-year authority expire for the purpose of incurring new obligations. However, the
authority is available for adjustments to obligations and for disbursements that were incurred or
made, but not recorded, during the period prior to expiration. Unless specifically authorized in
law, the period that the expired authority is available for adjustments to obligations or for
disbursements is five fiscal years (beginning with the first expired year). At the end of the fifth
expired year, the authority is “cancelled.” Thereafter, the authority is not available for any
purpose.


NOTE 18: LEGAL ARRANGEMENTS AFFECTING USE OF
UNOBLIGATED BALANCES
The availability or use of budget authority (i.e., unobligated balances) for obligation and
expenditure are limited by purpose, amount, and time.

Purpose
Rural Development obligates and expends funds only for the purpose authorized in appropriation
acts or other laws.

Amount
Obligations and expenditures may not exceed the amounts established by law. Rural
Development classifies amounts available as either definite (i.e., not to exceed a specified
amount) or indefinite (i.e., amount is determined by specified variable factors).

Time
The period of time during which budgetary resources may incur new obligations is different from
the period of time during which the budgetary resources may be used to disburse funds.




          Page 57           FY 2018 RURAL DEVELOPMENT FINANCIAL REPORT
                                                               FINANCIAL STATEMENTS AND NOTES


NOTE 18: Continued
The time limitations on the use of unobligated balances are the same as those previously discussed
in the last two paragraphs of the Permanent Indefinite Appropriations footnote disclosure
(Note 17).

Any information about legal arrangements affecting the use of unobligated balances of budget
authority will be specifically stated by program fiscal year in the appropriation language, or in
the general provisions’ section, at the end of the Appropriations Act.


NOTE 19: EXPLANATION OF DIFFERENCES BETWEEN THE COMBINED
STATEMENT OF BUDGETARY RESOURCES (SBR) AND THE BUDGET OF
THE UNITED STATES GOVERNMENT
The 2020 Budget of the United States Government, with the “Actual” columns completed for FY
2018, has not yet been published as of the date of these financial statements. The Budget is
currently expected to be published and delivered to Congress in 2019. The Budget will be
available from https://www.whitehouse.gov/omb/budget.

The 2019 Budget of the United States Government, with the “Actual” columns completed for
FY 2017, was published in February of 2018 and reconciled to the SBR.

The reconciling items represent:

   •   Expired budgetary authority available for upward adjustments of obligations, which is
       excluded from the President’s Budget “Actual” columns per OMB Circular No. A-11 but is
       included in the SBR.

   •   In FY 2017, Working Capital (12X4609) and Biomass Research and Development,
       Natural Resources Conservation Services (12X1003) was included in the SBR, but was not
       included in the Rural Development Budget section.

   •   In FY 2017, adjustments were made in GTAS to record prior year obligation activity to
       correctly reflect Rural Development’s activity in the Budget.

   •   In FY 2017, Alternative Agricultural Research and Commercialization Corporation
       Revolving Fund (12X4144) was not included in the SBR, but was included in the Budget.

   •   Amounts due to rounding.




          Page 58           FY 2018 RURAL DEVELOPMENT FINANCIAL REPORT
                                                                 FINANCIAL STATEMENTS AND NOTES


NOTE 19: Continued
 Reconciliation Between FY 2017 Combined Statement of Budgetary Resources and the President’s Budget

  Applicable       Amount       Applicable Line from         Amount from       Legitimate Reporting
Line from SBR     from SBR       President’s Budget        President’s Budget Differences   Errors
    Total                                                                     $      122
  Budgetary                   Total Budgetary Resources                       E      122
                   45,451                                        45,329                     None
Resources (Line                Available for Obligation                       R        1
    1910)                                                                     A       (1)
      New                                                                     $        1
 Obligations                                                                  E        4
 and Upward        30,026       Total New Obligations            30,025       R        1    None
 Adjustments
  (Line 2190)                                                                A      (4)
  Distributed                                                                $      (1)
  Offsetting                 Treasury Combined Statement
                   (8,512)                                      (8,511)                      None
 Receipts (Line                (Receipts by Department)                      R      (1)
    4200)
                                                                             $      2
 Net Outlays
                   12,022              Outlays                  12,020
 (Line 4190)                                                                 R      2
                                                                                             None

Legend
E = Expired Budgetary Authority
R = Rounding
A = Adjustment




           Page 59           FY 2018 RURAL DEVELOPMENT FINANCIAL REPORT
                                                                FINANCIAL STATEMENTS AND NOTES


NOTE 20: UNDELIVERED ORDERS AT THE END OF THE PERIOD
Beginning in FY 2018, the reporting requirement for undelivered orders was changed to include
Federal and Non-Federal, Paid and Unpaid categories.

                                                                  Undelivered Orders
                                                  Federal            Non Federal       Total
FY 2018
Paid                                         $                  0 $              0 $           0
Unpaid                                                      1,526           28,235        29,761
Total Undelivered Orders                     $              1,526 $         28,235 $      29,761

FY 2017
Paid                                         $                  0 $              0 $           0
Unpaid                                                      1,477           25,627        27,104
Total Undelivered Orders                     $              1,477 $         25,627 $      27,104




           Page 60         FY 2018 RURAL DEVELOPMENT FINANCIAL REPORT
                                                           FINANCIAL STATEMENTS AND NOTES


NOTE 21: INCIDENTAL CUSTODIAL COLLECTIONS
                                                           FY 2018          FY 2017
Sources of Collections
 Recoveries and Refunds                               $              5 $              10
Total Revenue Collected                                              5                10

Disposition of Collections
 Amount Transferred to Treasury Receipt Accounts                     5                10
Total Disposition of Revenue                                         5                10

Net Custodial Activity                                $              0 $              0




          Page 61           FY 2018 RURAL DEVELOPMENT FINANCIAL REPORT
                                                                 FINANCIAL STATEMENTS AND NOTES


NOTE 22: BUDGET AND ACCRUAL RECONCILIATION
Budgetary and financial accounting information are complementary, but the types of information
and the timing of their recognition are different. Budgetary accounting is used for planning and
control purposes and relates to the receipt and use of cash, as well as reporting the federal
deficit. Financial accounting is intended to provide a proprietary picture of the government's
financial operations and financial position. More specifically, the financial accounting includes
information about costs arising from the consumption of assets and the incurrence of liabilities. To
better understand these differences, the Budget and Accrual Reconciliation (BAR) provides
information on the relationship between net outlays and accrual-based amounts used in financial
accounting during the reporting period.

The Components of Net Cost of Operations need to be adjusted by:

   •   Components of net cost that are not part of net outlays; and
   •   Component of net outlays that are not part of net cost.

During FY 2018 the agency reported significant components of net operating cost not part of
budgetary outlays. Intergovernmental activity for Year End Credit Reform Subsidy reestimates of
($1,301) million represents the FY 2018 upward reestimate accruals not resulting in an outlay
until FY 2019. The $1,663 million in Debt is a result of a decrease in the total liability for the
outstanding debt not attributed to a reduction to a budgetary outlay. A large increase in
repayments of Federal Financing Bank outstanding debt was the most significant factor for the
decrease in total debt. The $973 million for Credit Reform Subsidy reestimates represents the
liability accrued for upward reestimates in FY 2017 and outlayed in FY 2018. Activity with the
public of $1,563 million represents an increase in the assets value of the total loans receivable,
and the ($390) represents an increase in the contingent liability related to probable future losses.
Such losses do not utilize a budgetary outlay in the current period.

During FY 2018 the agency reported significant components of net outlays that are not part of
net cost. All activity was related to the budgetary change in the amount of debt owed to
Treasury. More specifically, the agency satisfied debt with actual repayment of debt through
non-expenditure transfers, prior year funds converted to cash, and offsets by the realized
borrowing authority necessary to fund activity throughout FY 2018.




          Page 62           FY 2018 RURAL DEVELOPMENT FINANCIAL REPORT
                                                                        FINANCIAL STATEMENTS AND NOTES


NOTE 22: Continued
Rural Development is not required to disclose amounts from prior reporting periods for
comparative purposes in the initial year of implementation. Therefore, FY 2017 amounts have not
been disclosed.
                                                                                          FY 2018
                                                                             Intergovernmental With the Public
Net Operating Cost (SNC)                                                     $          3,369 $          (106)

Components of Net Operating Cost Not Part of Budgetary Outlays
Property, plant and equipment depreciation                                   $              0 $             (9)
Property, plant and equipment disposal & reevaluation                                       0                0
Unrealize valuation loss/(gain) on investment                                               0                0
Year End Credit Reform Subsidy re-estimates                                            (1,301)               0
Other                                                                                       0                9
Increase/decrease in assets
Accounts Receivable                                                                      288                0
Loans Receivable                                                                           0            1,563
Other Assets                                                                               0                5
Investments                                                                                0                0
Increase/decrease in liabilities
Accounts Payable                                                                            (6)              2
Salaries and Benefits                                                                        0               0
Insurance and Guarantee Program Liabilities                                                  0            292
Environmental and disposal liabilities                                                       0               0
Other Liabilities                                                                       2,680            (409)
  Debt                                                                                  1,663                0
  Credit Reform Sudsidy re-estimates                                                      973                0
  Contigent Liabilities                                                                      0           (390)
  Other Liabilites                                                                         44              (19)
Other Financing Sources
Federal Employee Retirement Benefit Costs                                               (160)              0
Other Imputed Finance                                                                      0               0
Total Components of Net Cost of Operations Not Part of Budget Outlays                  1,501           1,453

Effect of prior year agencies credit reform subsidy reestimates                             0                0
Acquisition of capital assets                                                               0                0
Acquisition of inventory                                                                    0               16
Acquisition of other assets                                                                 0                0
Debt and Equity securities                                                                  0                0
Transfers out (in) without reimbursement                                                    3                0
Other                                                                                      (5)          (1,663)
 Actual Repayment of Debt                                                                   0         (10,317)
 Resources Realized from Borrowing Authority                                                0            9,250
 Borrowing Authority Converted to Cash                                                      0             (596)
 Other                                                                                     (5)               0
Total Components of Net Outlays that are Not Part of Net Cost                              (2)         (1,647)

Net Cost of Operations                                                       $         4,868 $          (300)

Related Amounts on the Statement of Budgetary Resources

Outlays, gross                                                                                    $    19,010
Actual Offsetting Collections                                                                     $   (12,754)
Distributed Offsetting Receipts (SBR 4200)                                                        $    (1,688)
Outlays, Net (SBR 4210)                                                                           $     4,568

Difference                                                                                        $         0




             Page 63              FY 2018 RURAL DEVELOPMENT FINANCIAL REPORT
                                                                FINANCIAL STATEMENTS AND NOTES


NOTE 23: FIDUCIARY ACTIVITY
Refer to Note 1 regarding the implementation of SFFAS 31, Accounting for Fiduciary Activity.

Rural Housing Insurance Fund (RHIF) was established by Public Law 89-117 pursuant to section
517 of Title V of the Housing Act of 1949, which authorized Rural Development to collect escrow
payments on behalf of new and existing Single Family Housing borrowers. Other fiduciary
activities by Rural Development include but are not limited to collections from borrowers, interest
paid on escrow accounts, and payments to insurance agencies and taxing authorities.


Schedule of Fiduciary Activity for the Years Ended
September 30, 2018 and 2017
                                                                   FY 2018            FY 2017

Fiduciary Net Assets, beginning of year                    $                 116 $              113
Contributions                                                                445                432
Disbursements                                                                437                429
Increase/Decrease in Fiduciary Fund Balances                                   8                  3
Fiduciary Net Assets, end of year                          $                 124 $              116



Schedule of Fiduciary Net Assets for the Years Ended
September 30, 2018 and 2017

                                                                    FY 2018          FY 2017

Cash and Cash Equivalents:
 Escrow Funds held at Treasury                                 $              10 $           10
 Investments – Short Term                                                     74             16
 Investments – Long Term                                                      40             90
Total Fiduciary Net Assets                                     $             124 $          116




          Page 64           FY 2018 RURAL DEVELOPMENT FINANCIAL REPORT
                                                                                     FINANCIAL STATEMENTS AND NOTES


REQUIRED SUPPLEMENTARY INFORMATION (Unaudited)
Schedule of Combined Statement of Budgetary Resources by Major Fund
Amounts Presented in Millions


                                                                                        2018                                  2017
                                                                                   Non-Budgetary                         Non-Budgetary
                                                                   2018            Credit Program        2017            Credit Program
                                                                 Budgetary       Financing Accounts    Budgetary       Financing Accounts

                                                             Rural Community Rural Community Rural Community Rural Community
                                                               Advancement     Advancement     Advancement     Advancement
                                                                 Programs        Programs        Programs        Programs
Budgetary Resources:
 Unobligated Balance from Prior Year Budget Authority, Net   $            114 $              1,005 $            145 $            1,084
 Recoveries of Prior Year Unpaid Obligations                                87                 234                91               340
 Other Changes in Unobligated Balance                                      (23)               (734)              (14)             (972)
 Unobligated Balance from Prior Year Budget Authority, Net                178                  505              222                452
 Appropriations                                                         1,771                    0            1,052                  0
 Borrowing Authority (Notes 15 and 16)                                       0               5,374                 0             4,679
 Contract Authority                                                          0                   0                 0                 0
 Spending Authority from Offsetting Collections                             49                 165                13               989
Total Budgetary Resources                                               1,998                6,044            1,287              6,120


Status of Budgetary Resources:
  New Obligations and Upward Adjustments (Note 14)                      1,599                5,393            1,173               5,115
  Unobligated Balance, End of Year:
   Apportioned, Unexpired Accounts                                        376                  310               83                845
   Exempt From Apportionment, Unexpired Accounts                            0                    0                0                  0
   Unapportioned, Unexpired Accounts                                       23                  341               31                160
   Unexpired Unobligated Balance, End of Year                             399                  651              114              1,005
   Expired Unobligated Balance, End of Year                                 0                    0                0                  0
   Total Unobligated Balance, End of Year                                 399                  651              114              1,005
Total Budgetary Resources                                               1,998                6,044            1,287              6,120

Outlays, Net:
Outlays, Net                                                                 991             1,474                 941            1,298
Distributed Offsetting Receipts                                                0              (534)                  0             (364)
Agency Outlays, Net                                          $               991 $             940 $               941 $            934




                 Page 65                    FY 2018 RURAL DEVELOPMENT FINANCIAL REPORT
                                                                                    FINANCIAL STATEMENTS AND NOTES


REQUIRED SUPPLEMENTARY INFORMATION (Unaudited)
Schedule of Combined Statement of Budgetary Resources by Major Fund
Amounts Presented in Millions


                                                                                         2018                                   2017
                                                                                   Non-Budgetary                         Non-Budgetary
                                                                      2018         Credit Program         2017           Credit Program
                                                                  Budgetary      Financing Accounts   Budgetary        Financing Accounts
                                                                     Rural              Rural            Rural                 Rural
                                                                Electrification/   Electrification/ Electrification/      Electrification/
                                                             Telecommunication Telecommunication Telecommunication     Telecommunication
                                                                     Funds              Funds            Funds                 Funds
Budgetary Resources:
 Unobligated Balance from Prior Year Budget Authority, Net   $          6,985 $             3,788 $           6,090 $              5,208
 Recoveries of Prior Year Unpaid Obligations                                1                 253                 1                  488
 Other Changes in Unobligated Balance                                    (141)             (3,177)             (165)              (3,287)
 Unobligated Balance from Prior Year Budget Authority, Net              6,845                 864             5,926                2,409
 Appropriations                                                           990                   0             1,446                    0
 Borrowing Authority (Notes 15 and 16)                                      0               5,882                 0                5,175
 Contract Authority                                                         0                   0                 0                    0
 Spending Authority from Offsetting Collections                         1,783               2,263             2,076                3,765
Total Budgetary Resources                                               9,618               9,009             9,448              11,349


Status of Budgetary Resources:
  New Obligations and Upward Adjustments (Note 14)                       2,349             6,422              2,463               7,561
  Unobligated Balance, End of Year:
   Apportioned, Unexpired Accounts                                      1,563              2,587              6,401               3,666
   Exempt From Apportionment, Unexpired Accounts                            0                  0                  0                   0
   Unapportioned, Unexpired Accounts                                    5,702                  0                581                 122
   Unexpired Unobligated Balance, End of Year                           7,265              2,587              6,982               3,788
   Expired Unobligated Balance, End of Year                                 4                  0                  3                   0
   Total Unobligated Balance, End of Year                               7,269              2,587              6,985               3,788
Total Budgetary Resources                                               9,618              9,009              9,448              11,349

Outlays, Net:
Outlays, Net                                                              450              1,139                251                 675
Distributed Offsetting Receipts                                             0               (447)                 0                (873)
Agency Outlays, Net                                          $            450 $              692 $              251 $              (198)




                 Page 66                    FY 2018 RURAL DEVELOPMENT FINANCIAL REPORT
                                                                                          FINANCIAL STATEMENTS AND NOTES


REQUIRED SUPPLEMENTARY INFORMATION (Unaudited)
Schedule of Combined Statement of Budgetary Resources by Major Fund
Amounts Presented in Millions


                                                                                             2018                                        2017
                                                                                        Non-Budgetary                               Non-Budgetary
                                                                     2018               Credit Program           2017               Credit Program
                                                                   Budgetary          Financing Accounts       Budgetary          Financing Accounts

                                                                      Rural                 Rural                 Rural                 Rural
                                                                 Telephone Bank        Telephone Bank        Telephone Bank        Telephone Bank
                                                                      Funds                 Funds                 Funds                 Funds
Budgetary Resources:
 Unobligated Balance from Prior Year Budget Authority, Net   $                  3 $                  17 $                  3 $                  20
 Recoveries of Prior Year Unpaid Obligations                                    1                    38                    0                     8
 Other Changes in Unobligated Balance                                          (4)                  (55)                   0                   (28)
 Unobligated Balance from Prior Year Budget Authority, Net                      0                     0                    3                     0
 Appropriations                                                                 7                     0                    1                     0
 Borrowing Authority (Notes 15 and 16)                                          0                     7                    0                     2
 Contract Authority                                                             0                     0                    0                     0
 Spending Authority from Offsetting Collections                                 0                     0                    0                    26
Total Budgetary Resources                                                       7                     7                    4                    28


Status of Budgetary Resources:
  New Obligations and Upward Adjustments (Note 14)                                7                     7                     1                 11
  Unobligated Balance, End of Year:
   Apportioned, Unexpired Accounts                                             0                      0                    0                   17
   Exempt From Apportionment, Unexpired Accounts                               0                      0                    0                    0
   Unapportioned, Unexpired Accounts                                           0                      0                    0                    0
   Unexpired Unobligated Balance, End of Year                                  0                      0                    0                   17
   Expired Unobligated Balance, End of Year                                    0                      0                    3                    0
   Total Unobligated Balance, End of Year                                      0                      0                    3                   17
Total Budgetary Resources                                                      7                      7                    4                   28

Outlays, Net:
Outlays, Net                                                                   7                    (26)                   1                   (33)
Distributed Offsetting Receipts                                                0                      0                    0                     (2)
Agency Outlays, Net                                          $                 7 $                  (26) $                 1 $                 (35)




                 Page 67                    FY 2018 RURAL DEVELOPMENT FINANCIAL REPORT
                                                                                         FINANCIAL STATEMENTS AND NOTES


REQUIRED SUPPLEMENTARY INFORMATION (Unaudited)
Schedule of Combined Statement of Budgetary Resources by Major Fund
Amounts Presented in Millions


                                                                                            2018                                    2017
                                                                                       Non-Budgetary                           Non-Budgetary
                                                                     2018              Credit Program          2017            Credit Program
                                                                   Budgetary         Financing Accounts      Budgetary       Financing Accounts


                                                                     Rural                 Rural               Rural                 Rural
                                                                 Housing Funds         Housing Funds       Housing Funds         Housing Funds
Budgetary Resources:
 Unobligated Balance from Prior Year Budget Authority, Net   $                 174 $             2,337 $              179 $             7,683
 Recoveries of Prior Year Unpaid Obligations                                     18                101                 35                  94
 Other Changes in Unobligated Balance                                           (95)              (865)              (115)               (848)
 Unobligated Balance from Prior Year Budget Authority, Net                       97              1,573                 99               6,929
 Appropriations                                                                662                   0                993                   0
 Borrowing Authority (Notes 15 and 16)                                            0              2,003                  0               2,635
 Contract Authority                                                               0                  0                  0                   0
 Spending Authority from Offsetting Collections                                  63              1,283                106               2,687
Total Budgetary Resources                                                      822               4,859              1,198              12,251


Status of Budgetary Resources:
  New Obligations and Upward Adjustments (Note 14)                             685               3,349              1,024                9,914
  Unobligated Balance, End of Year:
   Apportioned, Unexpired Accounts                                              36               1,465                 96               2,337
   Exempt From Apportionment, Unexpired Accounts                                 0                   0                  0                   0
   Unapportioned, Unexpired Accounts                                            35                  45                  0                   0
   Unexpired Unobligated Balance, End of Year                                   71               1,510                 96               2,337
   Expired Unobligated Balance, End of Year                                     66                   0                 78                   0
   Total Unobligated Balance, End of Year                                      137               1,510                174               2,337
Total Budgetary Resources                                                      822               4,859              1,198              12,251

Outlays, Net:
Outlays, Net                                                                   202                 664                   523             6,868
Distributed Offsetting Receipts                                                  0                (622)                    0            (7,202)
Agency Outlays, Net                                          $                 202 $                42 $                 523 $            (334)




                 Page 68                    FY 2018 RURAL DEVELOPMENT FINANCIAL REPORT
                                                                                     FINANCIAL STATEMENTS AND NOTES


REQUIRED SUPPLEMENTARY INFORMATION (Unaudited)
Schedule of Combined Statement of Budgetary Resources by Major Fund
Amounts Presented in Millions


                                                                                        2018                                  2017
                                                                                   Non-Budgetary                         Non-Budgetary
                                                                   2018            Credit Program        2017            Credit Program
                                                                 Budgetary       Financing Accounts    Budgetary       Financing Accounts

                                                                   Rental             Rental            Rental              Rental
                                                                 Assistance         Assistance         Assistance          Assistance
                                                                 Programs           Programs           Programs            Programs
Budgetary Resources:
 Unobligated Balance from Prior Year Budget Authority, Net   $              62 $                 0 $              11 $                  0
 Recoveries of Prior Year Unpaid Obligations                                 3                   0                 6                    0
 Other Changes in Unobligated Balance                                        1                   0                 1                    0
 Unobligated Balance from Prior Year Budget Authority, Net                  66                   0                18                    0
 Appropriations                                                          1,398                   0             1,448                    0
 Borrowing Authority (Notes 15 and 16)                                       0                   0                 0                    0
 Contract Authority                                                          0                   0                 0                    0
 Spending Authority from Offsetting Collections                              0                   0                 0                    0
Total Budgetary Resources                                                1,464                   0             1,466                    0


Status of Budgetary Resources:
  New Obligations and Upward Adjustments (Note 14)                       1,399                   0             1,404                    0
  Unobligated Balance, End of Year:
   Apportioned, Unexpired Accounts                                          53                   0                53                    0
   Exempt From Apportionment, Unexpired Accounts                             0                   0                 0                    0
   Unapportioned, Unexpired Accounts                                         2                   0                 0                    0
   Unexpired Unobligated Balance, End of Year                               55                   0                53                    0
   Expired Unobligated Balance, End of Year                                 10                   0                 9                    0
   Total Unobligated Balance, End of Year                                   65                   0                62                    0
Total Budgetary Resources                                                1,464                   0             1,466                    0

Outlays, Net:
Outlays, Net                                                             1,224                   0             1,221                    0
Distributed Offsetting Receipts                                              0                   0                 0                    0
Agency Outlays, Net                                          $           1,224 $                 0 $           1,221 $                  0




                 Page 69                    FY 2018 RURAL DEVELOPMENT FINANCIAL REPORT
                                                                                        FINANCIAL STATEMENTS AND NOTES


REQUIRED SUPPLEMENTARY INFORMATION (Unaudited)
Schedule of Combined Statement of Budgetary Resources by Major Fund
Amounts Presented in Millions


                                                                                           2018                                      2017
                                                                                      Non-Budgetary                             Non-Budgetary
                                                                     2018             Credit Program           2017             Credit Program
                                                                   Budgetary        Financing Accounts       Budgetary        Financing Accounts


                                                                     Rural                Rural                Rural                Rural
                                                                 Housing Grants       Housing Grants       Housing Grants       Housing Grants
Budgetary Resources:
 Unobligated Balance from Prior Year Budget Authority, Net   $                 10 $                  4 $                 14 $               11
 Recoveries of Prior Year Unpaid Obligations                                    2                    1                    5                 14
 Other Changes in Unobligated Balance                                           0                   (5)                   0                (25)
 Unobligated Balance from Prior Year Budget Authority, Net                     12                    0                   19                  0
 Appropriations                                                                70                    0                   62                  0
 Borrowing Authority (Notes 15 and 16)                                          0                 188                     0                 30
 Contract Authority                                                             0                    0                    0                  0
 Spending Authority from Offsetting Collections                                 0                    0                    0                 23
Total Budgetary Resources                                                      82                 188                    81                 53


Status of Budgetary Resources:
  New Obligations and Upward Adjustments (Note 14)                             74                 154                    71                 49
  Unobligated Balance, End of Year:
   Apportioned, Unexpired Accounts                                              7                  34                     7                 4
   Exempt From Apportionment, Unexpired Accounts                                0                   0                     0                 0
   Unapportioned, Unexpired Accounts                                            1                   0                     3                 0
   Unexpired Unobligated Balance, End of Year                                   8                  34                    10                 4
   Expired Unobligated Balance, End of Year                                     0                   0                     0                 0
   Total Unobligated Balance, End of Year                                       8                  34                    10                 4
Total Budgetary Resources                                                      82                 188                    81                53

Outlays, Net:
Outlays, Net                                                                   60                  47                    62                44
Distributed Offsetting Receipts                                                 0                 (21)                    0                 (6)
Agency Outlays, Net                                          $                 60 $                26 $                  62 $              38




                 Page 70                    FY 2018 RURAL DEVELOPMENT FINANCIAL REPORT
                                                                                       FINANCIAL STATEMENTS AND NOTES


REQUIRED SUPPLEMENTARY INFORMATION (Unaudited)
Schedule of Combined Statement of Budgetary Resources by Major Fund
Amounts Presented in Millions


                                                                                          2018                                    2017
                                                                                     Non-Budgetary                           Non-Budgetary
                                                                   2018              Credit Program        2017              Credit Program
                                                                 Budgetary         Financing Accounts    Budgetary         Financing Accounts



                                                             Salaries & Expense Salaries & Expense Salaries & Expense Salaries & Expense
Budgetary Resources:
 Unobligated Balance from Prior Year Budget Authority, Net   $                31 $                 0 $                41 $                0
 Recoveries of Prior Year Unpaid Obligations                                    7                  0                    7                 0
 Other Changes in Unobligated Balance                                          (4)                 0                   (8)                0
 Unobligated Balance from Prior Year Budget Authority, Net                    34                   0                  40                  0
 Appropriations                                                              231                   0                 226                  0
 Borrowing Authority (Notes 15 and 16)                                          0                  0                    0                 0
 Contract Authority                                                             0                  0                    0                 0
 Spending Authority from Offsetting Collections                              472                   0                 462                  0
Total Budgetary Resources                                                    737                   0                 728                  0


Status of Budgetary Resources:
  New Obligations and Upward Adjustments (Note 14)                           704                   0                 697                  0
  Unobligated Balance, End of Year:
   Apportioned, Unexpired Accounts                                            21                   0                  19                  0
   Exempt From Apportionment, Unexpired Accounts                               0                   0                   0                  0
   Unapportioned, Unexpired Accounts                                           0                   0                   0                  0
   Unexpired Unobligated Balance, End of Year                                 21                   0                  19                  0
   Expired Unobligated Balance, End of Year                                   12                   0                  12                  0
   Total Unobligated Balance, End of Year                                     33                   0                  31                  0
Total Budgetary Resources                                                    737                   0                 728                  0

Outlays, Net:
Outlays, Net                                                                 220                   0                 222                  0
Distributed Offsetting Receipts                                                (4)                 0                   0                  0
Agency Outlays, Net                                          $               216 $                 0 $               222 $                0




                 Page 71                    FY 2018 RURAL DEVELOPMENT FINANCIAL REPORT
                                                                                       FINANCIAL STATEMENTS AND NOTES


REQUIRED SUPPLEMENTARY INFORMATION (Unaudited)
Schedule of Combined Statement of Budgetary Resources by Major Fund
Amounts Presented in Millions


                                                                                          2018                                      2017
                                                                                     Non-Budgetary                             Non-Budgetary
                                                                   2018              Credit Program          2017              Credit Program
                                                                 Budgetary         Financing Accounts      Budgetary         Financing Accounts



                                                                  Other                  Other              Other                  Other
Budgetary Resources:
 Unobligated Balance from Prior Year Budget Authority, Net   $              429 $                 466 $                424 $                409
 Recoveries of Prior Year Unpaid Obligations                                188                     40                   20                  15
 Other Changes in Unobligated Balance                                         5                  (271)                  (26)               (207)
 Unobligated Balance from Prior Year Budget Authority, Net                  622                   235                  418                  217
 Appropriations                                                             828                      0                   84                   0
 Borrowing Authority (Notes 15 and 16)                                        0                   216                     0                 196
 Contract Authority                                                           0                      0                    0                   0
 Spending Authority from Offsetting Collections                             228                    (44)                208                  315
Total Budgetary Resources                                                 1,678                   407                  710                  728


Status of Budgetary Resources:
  New Obligations and Upward Adjustments (Note 14)                           294                 210                   281                  262
  Unobligated Balance, End of Year:
   Apportioned, Unexpired Accounts                                        1,154                  101                   286                 305
   Exempt From Apportionment, Unexpired Accounts                              0                    0                     0                   0
   Unapportioned, Unexpired Accounts                                        222                   96                   130                 161
   Unexpired Unobligated Balance, End of Year                             1,376                  197                   416                 466
   Expired Unobligated Balance, End of Year                                   8                    0                    13                   0
   Total Unobligated Balance, End of Year                                 1,384                  197                   429                 466
Total Budgetary Resources                                                 1,678                  407                   710                 728

Outlays, Net:
Outlays, Net                                                                 (14)                (182)                 20                    (71)
Distributed Offsetting Receipts                                                0                   (60)                 0                    (65)
Agency Outlays, Net                                          $               (14) $              (242) $               20 $                (136)




                 Page 72                    FY 2018 RURAL DEVELOPMENT FINANCIAL REPORT
                                                                                        FINANCIAL STATEMENTS AND NOTES


REQUIRED SUPPLEMENTARY INFORMATION (Unaudited)
Schedule of Combined Statement of Budgetary Resources by Major Fund
Amounts Presented in Millions


                                                                                          2018                                       2017
                                                                                     Non-Budgetary                              Non-Budgetary
                                                                   2018              Credit Program           2017              Credit Program
                                                                 Budgetary         Financing Accounts       Budgetary         Financing Accounts



                                                                   Total                 Total                Total                 Total
Budgetary Resources:
 Unobligated Balance from Prior Year Budget Authority, Net   $          7,808 $                7,617 $             6,907 $             14,415
 Recoveries of Prior Year Unpaid Obligations                              307                    667                 165                   959
 Other Changes in Unobligated Balance                                    (261)                (5,107)               (327)               (5,367)
 Unobligated Balance from Prior Year Budget Authority, Net              7,854                  3,177               6,745               10,007
 Appropriations                                                         5,957                      0               5,312                     0
 Borrowing Authority (Notes 16 and 17)                                      0                13,670                    0               12,717
 Contract Authority                                                         0                      0                   0                     0
 Spending Authority from Offsetting Collections                         2,595                  3,667               2,865                 7,805
Total Budgetary Resources                                              16,406                20,514               14,922               30,529


Status of Budgetary Resources:
  New Obligations and Upward Adjustments (Note 15)                         7,111                 15,535               7,114            22,912
  Unobligated Balance, End of Year:
   Apportioned, Unexpired Accounts                                      3,210                 4,497                6,945                7,174
   Exempt From Apportionment, Unexpired Accounts                            0                     0                    0                    0
   Unapportioned, Unexpired Accounts                                    5,985                   482                  745                  443
   Unexpired Unobligated Balance, End of Year                           9,195                 4,979                7,690                7,617
   Expired Unobligated Balance, End of Year                               100                     0                  118                    0
   Total Unobligated Balance, End of Year                               9,295                 4,979                7,808                7,617
Total Budgetary Resources                                              16,406                20,514               14,922               30,529

Outlays, Net
Outlays, Net                                                               3,140                  3,116               3,241              8,781
Distributed Offsetting Receipts                                                (4)               (1,684)                  0             (8,512)
Agency Outlays, Net                                          $             3,136 $                1,432 $             3,241 $              269




                 Page 73                    FY 2018 RURAL DEVELOPMENT FINANCIAL REPORT
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