The USDA's Losing Effort

In 1999, members of Washington state's congressional delegation urged the USDA to guarantee a $20 million loan to a troubled sugar beet refinery near Moses Lake. The agency agreed, even though the borrower was already in default on existing loans. Within months the plant failed and defaulted on its newest loan, sticking taxpayers with a $12.1 million loss.

Thomas C. Dorr, USDA undersecretary for rural development, did not dispute The Post's findings. He said the USDA is developing new tools to measure the effectiveness of its business programs and lately has begun to see more high-quality jobs created. He attributed the high loss rate in the loan program to a handful of "aggressive lenders."

"We are making a legitimate effort to deal with all of these issues," Dorr said. "We've made a substantial change in how we go about doing our business and are much more concerned about creating value and not just giving out grants. I think that's beginning to show up."

A 'Bank for Rural America'

Most Americans probably are not aware that the USDA is in the lending business. But while they represent a small fraction of overall USDA spending, which includes programs from farm subsidies to school lunches, the programs administered by the agency's Rural Business-Cooperative Service account for more than $1 billion annually in loan guarantees, loans and grants.

In 2006 alone, the USDA backed more than $766 million in private loans to businesses, guaranteeing up to 90 percent of the face value of some loans. It awarded $75 million in grants to nonprofits, local governments and businesses, including $100,000 to the agricultural giant Welch's to market grape juice in Mexico.

"We are essentially an investment bank for rural America," Dorr said in a speech in November 2006.

The efforts date back to the 1930s, when rural credit was lacking and unemployment among farmers was high. In 1946, the Farmers Home Administration Act authorized the USDA to insure bank loans. Over time, the initiative expanded, with additional types of loans and grants added to the mix.

Some economists, government groups and lenders contend that the USDA's efforts duplicate those of the Small Business Administration and other federal agencies. The USDA operates 50 state programs, each with its own business staff. They are supported by a national staff.

"From our perspective, it's highly inefficient," said Anthony Wilkinson, the head of a trade group representing banks and lenders that participate in government-guaranteed loan programs. "We'd like to see it centralized with a few experts in one place, like the SBA does it. The amount of time it takes to process applications gets dragged out. It's a bureaucratic nightmare."

In addition to providing support for businesses, the USDA also backs lending efforts for utilities and rural housing initiatives. The agency requires the businesses, utilities and nonprofits it funds to estimate the number of jobs they expect to "create or save." USDA officials use those figures as proof that the programs are working. But until recently, they didn't verify that the jobs existed or track what they paid.

"You may create jobs in an undeveloped area, and that's good," said Thomas G. Johnson, a University of Missouri economist who is helping the USDA develop a more sophisticated tool for measuring the impact of its business programs. "But you may also displace workers at another, similar business. So what you really want to know is the number of net new jobs."

In 2004, Mickey Buffaloe discovered that the USDA had guaranteed a $4.2 million loan to a developer to build a 10-screen multiplex theater just a mile and a half from his older theater in Smithfield, N.C. The retired firefighter had purchased the Howell Theater, built in 1935, several years earlier with a private bank loan.