Annual Report 1999

 1 Stockholder Letter

2 - 5 Fiscal Year 1999 Highlights

6 - 7 Board of Directors and Staff

8 - 11 Financial Statements

12 - 17 Notes to the Financial Statements
2

Rural Telephone Bank

Stockholder Letter

 

Dear Stockholder:

The operating environment of the telecommunications industry is rapidly changing. Today's "basic level" of service is tomorrow's inadequate

level of service if our students are to remain competitive, our citizens healthy, and our economy strong. The Telecommunications Act of 1996

made clear, by mandate, that universally available and affordable telecommunications service be provided to all US citizens--whether in rural

areas or city centers, affluent or poor communities. As we move forward in this dynamic, competitive environment, the Rural Telephone Bank

(Bank) and the Rural Utilities Service Telecommunications Program (Telecommunications Program) will continue to introduce new concepts and

effective policies and serve as a voice for rural America in advocating quality, affordable, advanced telecommunications services.

During fiscal year 1999, we made tremendous progress in streamlining our operations and implementing new initiatives. Eliminating

unnecessary procedures and increasing program delivery through outreach and customer service initiatives have reduced loan processing times

and expedited the delivery of funding. Several of our accomplishments designed to further streamline policies and procedures and to facilitate

the flow of investment to rural America are highlighted below:

Modified Policy for Stock Conversion

The Board of Directors adopted a new policy to allow borrowers to convert Class B

patronage capital to Class C stock before the repayment, in full, of all outstanding

indebtedness to the Bank. The amount eligible for conversion is based on the percent

of loan principal repaid on your Bank loan.

Automatic Lien Accommodations for

Healthy Borrowers

We issued a proposed rule to amend regulations to provide for

automatic lien accommodations for financially sound

borrowers wishing to foster investment in rural

telecommunications infrastructure. The more financially

healthy the borrower, the less our approval is needed.

Acquisition Financing

Financing is available for the acquisition of properties when the

acquisition is necessary and incidental to furnishing or

improving service in rural areas. Borrowers are permitted to

use internally generated funds or funds provided by another

lender to "reduce" the amount of the necessary and incidental

test.

Title Clearance Waiver

We eliminated the undue and costly burden of performing title

searches on multiple, small remote switching sites. We waived

the requirement for title clearance for any site in which the

total investment value is equal to or less than $250,000 per

site; including land, building, and installed equipment costs.

Financial Reporting Requirements

With the deregulation of the telecommunications industry and the

transition to a competitive marketplace, our borrowers raised

concerns about the competitive harm that may result from the

collection and release of information reported in the RUS Form 479,

Financial and Statistical Report. In response to these concerns, we

revised the information collection policy, collecting only that

information necessary to protect loan security and monitor rural

infrastructure.

Limited Liability Company Eligibility

The limited liability company structure is an increasingly used form of

business organization that is often associated with significant income

tax savings. We published a direct final rule specifying that LLCs are

eligible for our financing if the state laws under which the LLC is

organized enable the LLC to accomplish the purposes of the Rural

Electrification Act of 1936, as amended.

Central Office Equipment Procurement

We are providing increased flexibility in the procurement of COE by

negotiation. While our approval is required, we have developed

procedures where borrowers may obtain, in most instances, this

approval the same day of their request.

In fiscal year 1999, the Bank approved a total of $113.9 million in loans. Bank financing represented nearly 25 percent of the total loans

approved by the Telecommunications Program. Bank loans approved in fiscal year 1999 will provide new service to approximately 42,500

residents and businesses and improved service to nearly 165,750 residents and businesses. On average, borrowers of the Telecommunications

Program, including Bank borrowers, invest in telecommunications plant at a rate of nearly $5 to every $1 of Federal investment.

While significant progress is being made in the deployment of advanced telecommunications technologies in rural areas, we will continue to

focus on the challenges that remain in providing rural access to the digital economy and its benefits. From enhanced educational opportunities

over distance learning networks, to life saving procedures through telemedicine, to rural economic development projects involving local

businesses and agribusinesses -- the Bank and the Telecommunications Program are "wiring" rural America for the 21st century.

Sincerely,

Christopher A. McLean

Acting Governor

Rural Telephone Bank
3

Rural Telephone Bank

Fiscal Year 1999 Highlights

 

Loan Funds Advanced

The Federal Credit Reform Act of 1990 restructured the

methodology by which the Bank obtains and advances

loan funds. Specifically, Credit Reform “divided” the

Bank’s loan program by accounting for loans made prior

to fiscal year 1992 (liquidating account loans) differently

from loans made during and after fiscal year 1992

(financing account loans). The Bank advanced $56.5

million in funds to borrowers in fiscal year 1999; $17.8

million in liquidating account loans and $38.7 million in

financing account loans. Over the last five years, Bank

advances have averaged $65.5 million annually.

Interest Rates For Loan Funds Advanced

In addition, Credit Reform results in two interest rates for

loan funds advanced to borrowers after fiscal year 1991.

The interest rate for variable rate loans approved prior to

fiscal year 1992 and advanced in fiscal year 1999 was 6.01

percent (liquidating), the rate for loans approved during

fiscal years 1992 through 1999 and advanced in fiscal year

1999, was 5.54 percent (financing).

0

10

20

30

40

50

1995 1996 1997 1998 1999

Advances of Loan Funds

(millions of dollars)

Financing Liquidating

Interest Rates Charged on Loans

0.00%

1.00%

2.00%

3.00%

4.00%

5.00%

6.00%

7.00%

1995 1996 1997 1998 1999

Financing Liquidating
4

 

Interest Income and Patronage Capital

Assignable

Restricted capital and patronage capital at the end of

fiscal year 1999 totaled $100.5 million. During fiscal year

1999, interest and other income was $143 million.

Income from appropriations was $1.4 million. Expenses

amounted to $28 million, leaving an excess of revenues

and other financing sources over total expenses of $116

million. A return of $11 million paid to the U.S. Treasury

and a cash dividend of $14 million paid to Class C

stockholders resulted in patronage capital assignable of

$90.5 million.

Dividends and Patronage Refunds

Ownership of the Bank, in addition to the U.S.

Government, is shared by borrowers, former borrowers,

and other related organizations authorized to invest. The

Bank operates on a cooperative basis and earnings, in

excess of the annual return of two percent required on

the Government’s investment in Class A stock, are

returned to the non-Government owners as patronage

refunds.

The Bank Board of Directors declared a cash dividend of

5.50 percent on Class C stock at its August 6, 1999

meeting. This represented the 27th consecutive annual

dividend by the Bank. Until all Class A stock is retired, the

dividend rate on Class C stock can not be greater than the

average interest rate payable on the Bank's outstanding

debt --- that rate for fiscal year 1999 was 6.90 percent. A

patronage refund was also declared for fiscal year 1999.

83

88

92

115.8

116

1995

1996

1997

1998

1999

 Excess of Revenue and Other Financing

 Sources Over Total Expenses

 (millions of dollars)

Cumulative Class B Stock Outstanding and 

 Cumulative Conversions to Class C Stock

(millions of dollars)

526

556

590

631

659.9

116

145

182

210

276.9

1995

1996

1997

1998

1999

Issues Outstanding Cumulative Conversions
5

Rural Telephone Bank

Fiscal Year 1999 Highlights

 

Stock Sales

Bank borrowers purchased $2.4 million in Class B stock,

bringing the cumulative total purchased to $130.9

million. Total Class B stock outstanding, including

patronage refunds and net of amounts converted to

Class C stock, increased by $28.5 million during fiscal year

1999, to $659.9 million. Cumulative Class C stock rose to

$276.9 million, an increase of $66.4 million during fiscal

year 1999.

Stock Redemption

No additional Class A stock was purchased by the

Government during fiscal year 1999. The cumulative total

of Class A stock purchases to date is $592.1 million. In

accordance with Board Resolution 99-5, $26.4 million in

Class A stock was redeemed on September 30, 1999;

leaving a net outstanding of $501.8 million. This was the

fourth consecutive annual redemption of Class A stock.

Stockholder Equity Shares Outstanding

501.8

659.9

276.9

Class A Class B Class C

(millions of dolloars) 

Retirement of Class A Stock

(millions of dollars)

574.1

556

528.2

501.8

18

18.1

27.8

26.4

1996

1997

1998

1999

Balance Retired
6

 

Cumulative Loans

New Bank loans during fiscal year 1999 totalled $113.9

million. Bank loans since inception, net of rescissions as

of September 30, 1999, totalled $2.7 billion to

commercial company borrowers, $946 million to

cooperative borrowers, and $21.2 million to public body

borrowers.

Repaid Principal and Interest

During fiscal year 1999, borrowers had paid $211.2

million in principal and $91 million in interest. The

interest figure includes $4.8 million in prepayment

premiums. As of calendar year ending 1999, payments

made to the Bank amounted to $1,533.2 million in

principal and $2,241.1 million in interest.

Chart includes notes paid in full.

Interest paid includes prepayment premiums.

Cumulative Total Payments of

Principal and Interest

Calendar Year Ending 1999

0

500,000,000

1,000,000,000

1,500,000,000

2,000,000,000

2,500,000,000

1975 1980 1985 1990 1995 1999

Principal Paid Interest Paid

Distribution of Cumulative Loans

Public Bodies

Cooperatives 1%

26%

Commercial

73%
7

Rural Telephone Bank

Board of Directors and Staff

 

A Vision

for the

Future

Our Board of Directors is committed to directing industry change

to your advantage by planning ahead for a challenging future.

First row (from left): Chairperson Jill Long Thompson, Assistant Treasurer Ken Ackerman, Assistant Governor Roberta Purcell,

Deputy Assistant Governor Jonathan Claffey; second row: Michael V. Dunn, Vice Chair Jimmie Lou Fisher, Larry Sevier, Robert

Lee Stanton, John Dillard, Acting Governor Christopher McLean; third row: David Crothers, Treasurer John McAllister, and

Secretary Curtis Sampson. Not pictured: Dr. I. Miley Gonzalez, Sharron Harris, Michael Jensen, and Carl Whillock.
8

 

Board of Directors at September 30, 1999

Representing the U.S. Department of Agriculture

Jill Long Thompson, Chairwoman

Sworn in on November 3, 1995. She was appointed by President

Clinton and is the Under Secretary for Rural Development, USDA.

Michael V. Dunn

Sworn in on May 9, 1995. He was appointed by President

Clinton and is the Under Secretary for Marketing and Regulatory

Programs, USDA.

Dr. I. Miley Gonzalez

Sworn in on February 19, 1998. He was appointed by President

Clinton and is the Under Secretary for Research, Education, and

Economics, USDA.

Sharron Harris

Sworn in on November 4, 1993. She was appointed by President

Clinton and is the Director of the Office of Small Disadvantaged

Business Utilization, USDA.

Carl S. Whillock

Sworn in on February 19, 1998. He was appointed by President

Clinton and is the Special Assistant to the President for

Agriculture and Trade.

Representing the Public

Jimmie Lou Fisher, Vice Chair

Sworn in on May 9, 1995. She was appointed by President

Clinton and is the State Treasurer for the state of Arkansas.

Robert Lee Stanton

Sworn in on May 9, 1995. He was appointed by President

Clinton and is a farmer and businessman from Missouri.

Representing Cooperative-Type Stockholders

David Crothers

Sworn in on November 19, 1998. Elected by stockholders, he is

the Executive Vice President and General Manager of the North

Dakota Association of Telephone Cooperatives.

John McAllister, Treasurer

Sworn in on September 19, 1974. Elected by stockholders, he is

the President of West Carolina Rural Telephone Cooperative, Inc.

Larry E. Sevier

Sworn in on November 16, 1994. Elected by stockholders, he is

the Chief Executive Officer of Rural Telephone Service Company,

Inc.

Representing Commercial-Type Stockholders

John T. Dillard

Sworn in on November 19, 1998. Elected by stockholders, he is

the President and General Manager of Monroe Telephone

Company.

S. Michael Jensen

Sworn in on February 25, 1992. Elected by stockholders, he is

the Chief Executive Officer of Great Plains Communications, Inc.

Curtis S. Sampson, Secretary

Sworn in on September 29, 1988. Elected by stockholders, he is

the Chairman and Chief Executive Officer of Hector

Communications, Inc.

Board of Director's Privatization Committee

Curtis S. Sampson, Committee Chairperson, David Crothers , John

T. Dillard, S. Michael Jensen, John McAllister, and Larry E. Sevier

Governor of the Telephone Bank

Christopher A. McLean, Acting Governor, was nominated by

President Clinton in February, 2000 to serve as Administrator of

RUS and Governor of the Telephone Bank. Upon Senate

confirmation, he would succeed Mr. Wally Beyer who retired in

November, 1999.

As provided by law, the Administrator of the Rural Utilities

Service (RUS) serves as the Governor of the Bank. In this capacity,

the Governor may exercise and perform all of the Bank’s

functions, powers, and duties, except for matters specifically

reserved for the Board of Directors. Overall policy decisions and

management vest in a 13-member board composed of 7

members appointed by the President and 6 members elected by

the Bank’s stockholders. The Bank’s operations are conducted by

the employees of RUS that have similar duties and responsibilities

under RUS’s rural telecommunications program. In addition, RUS

and the U.S. Department of Agriculture’s Office of General

Counsel provide facilities and administrative support to the Bank

without reimbursement.

☎

RTB

Rural Telephone Bank

1400 Independence Avenue, SW

Mail Stop 1510, Room 4051, South Building

Washington, DC 20250-1510

(202) 720-9540

www.usda.gov/rus/rtb/rtb.htm
9

Rural Telephone Bank

Financial Statements

 

STATEMENT OF ASSETS, LIABILITIES, AND NET POSITION at September 30, 1999 (Dollars in thousands)

ASSETS

 Assets for Use by Entity:

 Federal

 Fund Balance with Treasury (Note 2) $ 676,607

 Non-Federal

 Credit Program Receivables, Net (Note 3) 1,200,525

 Total Assets $ 1,877,132

LIABILITIES

 Liabilities Covered by Budgetary Resources:

 Federal

 Accounts Payable $ 625

 Debt (Note 4) 307,831

 Non-Federal

 Other Liabilities (Note 5) 14,005

 Total Liabilities 322,461

COMMITMENTS AND CONTINGENCIES (Note 6)

NET POSITION (Note 7)

 Unexpended Appropriations 19,540

 Federal

 Equity of the U.S. Government

 Capital Stock Class A 501,790

 Subsidy Re-estimates (1,003)

 Total Equity of the U.S. Government 500,787

 Non-Federal

 Investment of Others

 Capital Stock Class B 656,930

 Capital Stock Class C 276,898

 Restricted Capital 10,000

 Patronage Capital Earned 90,516

 Total Investment of Others 1,034,344

 Total Net Position 1,554,671

 Total Liabilities and Net Position $ 1,877,132

The accompanying notes are an integral part of these statements.
10

 

STATEMENT OF NET COST at September 30, 1999 (Dollars in thousands)

Costs:

Program Costs

Federal $ 31,527

Non-Federal

 Loans - Subsidy Expense 8,375

 Other Program Costs (1,546)

Total Program Production Costs 38,356

Less Earned Revenues (Note 8) 144,381

Net Cost of Operations $ (106,025)

STATEMENT OF CHANGES IN NET POSITION at September 30, 1999 (Dollars in thousands)

Net Cost of Operations $ 106,025

Financing Sources (other than exchange revenues):

 Appropriations Used 3,893

 Transfers-out (20,086)

 Changes in:

 Capital Stock - Redemption of Class A Stock (26,410)

 Investment of Others 2,368

Net Change in Cumulative Results of Operations 65,790

Increase (Decrease) in Unexpended Appropriations 3,642

Change in Net Position 69,432

Net Position-Beginning of Period 1,485,239

Net Position-End of Period $ 1,554,671

The accompanying notes are an integral part of these statements.

The financial statements should be read with the following limitations in mind: (1) The financial statements have been prepared to report

the financial position and results of operations of the Bank, pursuant to the requirements of 31 U.S.C. 3315(b); (2) While the statements

have been prepared from the books and records of the Bank in accordance with the formats prescribed by the Office of Management and

Budget, the statements are in addition to the financial reports used to monitor and control budgetary resources which are prepared from

the same books and records; and (3) The statements should be read with the realization that they are for a component of the U.S. Government, a sovereign entity. One implication of this is that liabilities cannot be liquidated without legislation that provides resources to do so.
11

Rural Telephone Bank

Financial Statements (Continued)

 

STATEMENT OF BUDGETARY RESOURCES at September 30, 1999 (Dollars in thousands)

Budgetary Resources: (Note 9)

 Budget Authority $ 93,208

 Unobligated balances - beginning of period 401,276

 Spending Authority from offsetting collections 348,089

 Adjustments (165,710)

 Total budgetary resources 676,863

Status of Budgetary Resources:

 Obligations incurred 162,174

 Unobligated balances-available 1,516

 Unobligated balances-not available 513,173

 Total, status of budgetary resources 676,863

Outlays:

 Obligations incurred 162,174

 Less: actual spending authority from offsetting

 collections and actual adjustments (386,763)

 Obligated balance, net - beginning of period 961,143

 Obligated balance transferred, net 0

 Less: obligated balance, net - end of period (979,738)

 Total outlays $ (243,184)

The accompanying notes are an integral part of these statements.
12

 

STATEMENT OF FINANCING at September 30, 1999 (Dollars in thousands)

Resources Used to Finance Operations

 Budgetary

 Budgetary Resources Obligated for Items to be Received or Provided to Others $ 162,174

 Less: Offsetting Collections, Recoveries of Prior-year Authority, and Changes

 in Unfilled Customer Orders (386,763)

 Net Budgetary Resources Used to Finance Operations (224,589)

Total Resources Used to Finance Operations (224,589)

Less: Resources Used to Fund Items Not Part of the Net Cost of Operations

 Increase or (Decrease) in Budgetary Resources Obligated to Order Goods or

 Services Not Yet Received or Benefits Not Yet Provided 45,359

 Budgetary Offsetting Collections Not Increasing Exchange Revenue or

 Decreasing Expense (216,886)

 Adjustments Made to Compute Net Budgetary Resources Not Affecting Net Cost

 of Operations 58,194

 Resources Funding Expenses Recognized in Prior Periods 320

Total Resources Used to Fund Items Not Part of the Net Cost of Operations (113,013)

Resources Used to Finance the Net Cost of Operations (111,576)

Components of Net Cost of Operations Not Requiring or Generating Resources

 During the Reporting Period

 Expenses or Exchange Revenue Related to the Disposition of Assets or Liabilities, or

 Allocation of Their Cost over Time 4,548

 Expenses Which Will be Financed with Budgetary Resources Recognized in

 Future Periods 1,003

Total Components of Net Cost of Operations Not Requiring or Generating Resources

 During the Reporting Period 5,551

NET COST OF OPERATIONS $ (106,025)

The accompanying notes are an integral part of these statements.
13

Rural Telephone Bank

Notes to the Financial Statements

 

NOTE 1 SIGNIFICANT ACCOUNTING POLICIES

A. Reporting Entity

The Rural Telephone Bank (RTB), established in May 1971,

provides a supplemental source of financing under the Rural

Utilities Service's telephone loan program. The Rural

Utilities Service (RUS) is a credit agency within the U.S.

Department of Agriculture (USDA) which assists rural

electric and telephone organizations in obtaining the

financing required to provide electric and telephone service

in rural areas. RTB lends principally to rural telephone

organizations.

RTB is a government corporation which functions as an

agency of the U.S. Department of Agriculture, subject to the

supervision and direction of the Secretary of Agriculture. As

provided by law, the Administrator of RUS serves as the

Governor of RTB. In this capacity, the Governor may

exercise and perform all of RTB's functions, powers, and

duties, except for matters specifically reserved for its Board

of Directors. As discussed below, upon retirement of the

Class A stock held by the U.S. Government, the RTB would

no longer operate as an integral agency of the Government.

Adverse changes in the telephone industries could have a

direct and material impact on the financial capacity of RTB

borrowers to provide for the repayment of loans.

B. Basis of Presentation

The accompanying financial statements have been prepared

to report the financial position, net costs, and changes in

net position of RTB, together with budgetary resources and

a reconciliation of net costs to budgetary obligations, as

required by the Government Management Reform Act of

1994 and in conformity with generally accepted accounting

principles (GAAP). GAAP for federal financial reporting

entities recognize the Federal Accounting Standards

Advisory Board (FASAB) as the standards-setting body

designated to establish these principles for these entities.

The financial statements have also been prepared from the

books and records of RTB in accordance with the form and

content for entity financial statements specified by the

Office of Management and Budget (OMB) Bulletin 97-01,

Form and Content of Agency Financial Statements, as

amended, except that credit subsidy reestimates are

presented as a separate line item within total equity of the

U.S. Government. The financial statements also follow

USDA accounting policy guidelines.

C. Basis of Accounting

RTB's transactions are recorded on the accrual basis of

accounting and with respect to certain information

regarding budgetary resources and financing, a budgetary

accounting basis. Under the accrual method, revenues are

recognized when earned, and expenses are recognized

when a liability is incurred. Budgetary accounting facilitates

compliance with legal constraints and controls over the use

of Federal funds.

Any significant interfund and intrafund balances and

transactions have been eliminated in the consolidation of

the pre and post credit reform lending programs.

D. Fund Balance with United States Treasury

RTB maintains all cash accounts with the United States

Treasury. It is the policy of RTB not to maintain cash in

commercial bank accounts, except in the normal course of

processing cash receipts through third-party commercial

banking institutions. Fund Balance with Treasury represents

appropriated and revolving funds that are available to pay

current liabilities and finance authorized loan commitments.

RTB earns interest on all cash balances maintained at the

Treasury in accordance with the terms of the 1973 note

executed by RTB and U.S. Treasury, Section 505(c) of the

Federal Credit Reform Act of 1990 and recent legislation

(Public Law 105-277).

E. Credit Program Receivables, Net

Loans are accounted for as receivables after funds are

disbursed. Loans receivable are carried at the principal

amount outstanding, net of an allowance for estimated

uncollectible amounts for prefiscal year 1992 loans. For

direct loans obligated on or after October 1, 1991, RTB

recognizes these assets at the present value of their

estimated net cash inflows. The difference between the

outstanding principal of the loans and the present value of

their net cash inflows is recognized as a subsidy cost

allowance (Note 3). All loans receivable are due from nonfederal borrowers and accrue interest daily based on the

contractual interest rate.

RTB's allowance is estimated based on delinquency rates,

current economic conditions, borrowers' credit histories,

borrowers' outstanding balances, and an analysis of each

borrower's financial condition.

The projected cost of direct loan defaults (for loans

obligated prior to October 1, 1991) will not necessarily

reflect RTB's future appropriation requests. To the extent

that fund revenues are not sufficient to fund future costs,

financing will have to be obtained from future

appropriations, or other congressionally approved sources.

F. Liabilities

Liabilities are recognized for amounts of probable future

outflows or other sacrifices of resources as a result of past

transactions or events. Since RTB is a component of the

United States Government, a sovereign entity, its liabilities

cannot be liquidated without legislation that provides
14

 

resources to do so. Payments of all liabilities other than

contracts can be abrogated by the sovereign entity.

Liabilities Covered by Budgetary Resources are those

liabilities funded by available budgetary resources including:

(1) new budget authority, (2) spending authority from

offsetting collections, (3) recoveries of unexpired budget

authority, (4) unobligated balances of budgetary resources

at the beginning of the year, and (5) permanent indefinite

appropriation or borrowing authority. All of RTB's liabilities

are covered by budgetary resources.

Accounts Payable

Accounts payable consists solely of interest payable on

notes held by the United States Treasury.

Debt - United States Treasury

As required under Credit Reform legislation, a note was

executed by RTB with the United States Treasury which

provides funds for direct loans approved after September

30, 1991 (Post-1991). The interest rate charged to RTB is

the average annual Treasury rate, as provided by the Office

of Management and Budget (OMB). For loans approved

prior to October 1, 1991 (Pre-1992), Treasury funding is

provided, when needed, in accordance with the terms of a

note executed by RTB and Treasury in July 1973. RTB has

not borrowed against the note in several years.

G. Stock Conversion

In accordance with its authorizing legislation and

amendments, RTB will be converted to independent status

at such time when 51 percent of the Class A stock issued to

the U.S. Government (and outstanding at any time since

September 30, 1985) has been fully redeemed and retired.

When such conversion occurs, RTB will no longer be an

agency of the USDA and the President will cease to appoint

Board members. However, after the conversion, Congress

may still continue its oversight responsibilities for RTB's

operations.

H. Operations

The Rural Electrification Act of 1936, as amended, and RTB's

enabling legislation, authorize RTB to partially or jointly use

the facilities and services of employees of RUS, or of any

other agency of the USDA, without cost. Under the Federal

Credit Reform Act, $3 million of appropriated funds

provided to RTB to cover administrative costs was

transferred to RUS. This amount represents the additional

cost to RUS for managing RTB. In this regard, RTB's

operations are conducted by RUS administrative and

program employees who have similar responsibilities under

RUS's rural telephone loan program. The prorated Pension,

FECA, and Unfunded leave costs, of $74,602, ($36,972),

and ($36,398) respectively, which are associated with the

RTB program, and included in the operating costs of

RUS/RD, are not included in the reported cost of the RTB

operations.

I. Intra-Governmental Relationships and Transactions

In the course of its operations, RTB has relationships and

financial transactions with other Federal agencies. The

more prominent of these are with RUS and the United

States Treasury. RUS determines the annual cost allocations

associated with the administration of RTB by RUS

employees and the Treasury receives the collections of

proceeds from direct loans issued on behalf of RTB. At the

Government-wide level, the liabilities related to the debt

payable to Treasury on RTB's financial statements and the

corresponding assets on the Treasury's financial statements

should be eliminated.

J. Comparative Data

OMB Bulletin 97-01, "Form and Content of Agency Financial

Statements" provides that comparative financial statements

are permitted but not required until reporting periods

beginning after September 30, 1999. RTB management has

elected not to present comparative data in the financial

statements for the fiscal year ending September 30, 1999.

NOTE 2 FUND BALANCE WITH TREASURY

Amounts are presented in thousands of dollars.

September 30, 1999

Assets for use by Entity:

Revolving Funds $ 657,067

Appropriated Funds 19,540

Fund Balance with Treasury $ 676,607

NOTE 3 CREDIT PROGRAM RECEIVABLES, NET

Amounts are presented in thousands of dollars.

Accounting Policy - Present Value (PV) Disclosure:

Direct loan obligations made prior to FY 1992 are reported

on a net realizable value (NRV) basis. Direct loan

obligations made after FY 1991 are governed by the Federal

Credit Reform Act. The Act provides that the 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 be recognized as a

cost in the year the loan is made. The net present value

(NPV) of loans receivable at any point in time is the amount

of the gross loan receivable less the present value of the

subsidy at that time.
15

Rural Telephone Bank

Notes to the Financial Statements (Continued)

 

Loans Subject to Credit Reform:

September 30, 1999

Summary Schedule

Loans Receivable, Gross $1,213,516

Interest Receivable, Gross 2,680

Less: Related Allowance (15,671)

Credit Program Receivables, Net $1,200,525

This summary schedule is calculated from the detail

amounts shown in the following sections.

September 30, 1999

Direct Loans Obligated Prior to FY 1992:

Loans Receivable, Gross $ 986,067

Interest Receivable, Gross 2,642

Less: Allowance for Credit

 Program Receivables (RV) (6,556)

Credit Program Receivables (NRV) $ 982,153

September 30, 1999

Direct Loans Obligated After FY 1991:

Loans Receivable, Gross $ 227,449

Interest Receivable, Gross 38

Less: Allowance for Subsidy Cost (PV) (9,115)

Credit Program Receivables (NPV) $ 218,372

Subsidy Expense for Post-1991 Loans and Credit

Receivables:

September 30, 1999

Current Year's Direct Loans

Interest Differential $ 523

Defaults 8

Total Current Year's

 Direct Loans Subsidy Expense 531

Fiscal Year Direct Loan Reestimates 7,844

Total Direct Loan Subsidy Expenses $ 8,375

The percentage rate used to segregate the four

components of subsidy is based on the rate in effect during

FY 1999. Appropriated funds, totaling $3 million, provided

to RTB to cover administrative costs were transferred to

RUS.

NOTE 4 DEBT

Amounts are presented in thousands of dollars.

September 30, 1999

Federal Debt

Interest Bearing:

 Debt to the Treasury

 Beginning Balance $ 432,229

 Net Borrowing (124,398)

 Ending Balance $ 307,831

Legislation limits outstanding borrowings from the U.S.

Treasury to an amount which shall not exceed twenty times

RTB's equity. As of September 30, 1999, RTB's maximum

borrowing authority approximated $31 billion. All Federal

debt is covered by budgetary resources.

NOTE 5 OTHER LIABILITIES

Other liabilities include dividends declared and unpaid on

Class C stock to non-federal recipients, approximated $14

million, and are payable on December 15, 1999.

This liability is covered by budgetary resources.

NOTE 6 COMMITMENTS AND CONTINGENCIES

The Rural Telephone Bank has in the course of its loan

making activities, unliquidated loan obligations which, in

the absence of contractual violations or cancellations, will

require disbursements. Unliquidated loan obligations at

September 30, 1999, total approximately $965.9 million.

As of September 30, 1999, there were no obligations due to

canceled appropriations for which there is a contractual

commitment for payment.

NOTE 7 NET POSITION

Amounts are presented in thousands of dollars.

September 30, 1999

Unexpended Appropriations

Unobligated-Available $ 7,086

Undelivered Orders 12,454

Total Unexpended Appropriations $ 19,540

RTB does not have any future financing sources.
16

 

Rural Telephone Bank (RTB) Capital Stock

A summary of the RTB capital stock structure follows:

September 30, 1999

CAPITAL STOCK CLASS A ($1 par value)

 Shares authorized 600,000

 Shares issued and outstanding 501,790

 Cash dividends $ 10,564

CAPITAL STOCK CLASS B ($1 par value)

 Shares authorized Unlimited

 Shares issued and outstanding 656,930

 Stock dividends 89,595

CAPITAL STOCK CLASS C ($1,000 par value)

 Shares authorized Unlimited

 Par Value, shares issued and outstanding $ 276,898

 Cash dividends (paid or accrued) $ 13,969

Although USDA Rural Development owns all Class A stock

on behalf of the United States Government, the cash

dividends are paid to the U.S. Treasury. On September 30,

1999, in accordance with Section 406 (c) of the Rural

Electrification Act of 1936 (RE Act) as amended, the fourth

redemption of Class A stock occurred. In accordance with

Bank Board resolution 99-5, $26.4 million was redeemed.

Class B stock, a voting class of stock, is issued only to

borrowers of RTB, in proportion to actual loan advances.

RTB requires borrowers to purchase Class B stock in the

amount of 5 percent of advanced loan amounts. RTB may

not pay cash dividends on Class B stock. Rather, holders of

Class B stock are entitled to patronage refunds (paid in the

form of Class B stock dividends) equal to the amount of

patronage capital in excess of $10 million. Patronage

refunds are allocated based on the ratio of interest revenue

to RTB from each holder to RTB's total interest revenue from

all Class B stockholders. Subscriptions receivable relating to

unadvanced loans approximated $45 million at September

30, 1999, and are not reflected in the accompanying

principal financial statements.

Class B stock is nontransferable, except in connection with a

transfer of ownership, approved by RTB, of all or part of a

RTB loan. A borrower may exchange Class B stock for Class

C stock: 1) upon retiring all debt with RTB; or 2) effective

November 9, 1999, prior to retiring all debt on a

proportionate basis equal to the percentage of each note

repaid. Class B stock can be redeemed only after all shares

of Class A stock, a nonvoting class of stock owned by the

U.S. Government, have been redeemed and retired.

Class C stock, a voting class of stock, is issued only to RTB

borrowers, or to corporations and public entities eligible to

borrow from RTB under Section 408 of the RE Act as

amended, or by organizations controlled by such

borrowers, corporations, and public entities. RTB may pay

cash dividends on Class C stock.

Restricted Capital

The Omnibus Budget Reconciliation Act of 1987 required

the RTB to establish a contingency reserve for interest rate

fluctuations. As a result, the RTB Board of Directors

amended the Bylaws of RTB regarding the allocation of

patronage capital and established a reserve of $10 million.

Any amounts in the reserve for interest rate fluctuations,

classified as restricted capital on the Balance Sheet, in

excess of $10 million will be allocated as Class B stock

dividends to those borrowers holding Class B stock during

the fiscal year the amounts were earned. At September 30,

1999, restricted capital was approximately $10 million.

Patronage Capital Earned

Patronage capital earned consists of all revenues of the RTB

for any fiscal year in excess of the amount thereof necessary

to:

1. Pay expenses of the RTB, including without limitation,

payments in lieu of property taxes.

2. Pay interest on telephone debentures accruing during

the fiscal year.

3. Provide reasonable allowances for depreciation,

obsolescence, and losses on loans and interest

receivable.

4. Pay to the holders of Class A stock an amount equal to

2% per annum of the capital furnished to the RTB for

such stock.

5. Pay to the holders of Class C stock dividends at the rate

determined by the Board, provided the following criteria

is met:

(a) No dividends shall be declared on Class C stock until

arrearages, if any, on payments to holders of the

cumulative Class A stock have been paid.

(b) Until all Class A stock has been retired, the Board

shall not declare any dividends on Class C stock at

an annual rate in excess of the then current average

rate payable on the RTB's telephone debentures.

Unexpended Appropriations

Unexpended Appropriations include the undelivered orders

and unobligated balances of the program accounts which

receive Congressional appropriations through the budgetary

process.

As appropriated funds incur obligations, the obligated

amount is recorded as an undelivered order. Undelivered

orders are reduced by either an expenditure or an

obligation cancellation. Appropriated funds which are not

obligated are treated as unobligated amounts. At the end

of the fiscal year, certain multi-year appropriations which

have unobligated balances remain available for obligation
17

Rural Telephone Bank

Notes to the Financial Statements (Continued)

 

in future periods. Unobligated appropriations are returned

to the U.S. Treasury when their period of availability expires.

Capital Stock Class A

Public Laws 92-12 and 97-98 authorized Congress, in fiscal

years 1971 through 1991, to appropriate no more than $30

million per year for the purchase of RTB Class A stock. Class

A stock has a guaranteed annual dividend of 2 percent of

the total funds received. The law provides that Congress

annually appropriate funds until such purchases

approximate $600 million. As of September 30, 1999, RTB

Class A stock appropriations amounted to approximately

$592.1 million, the total funding USDA Rural Development

will receive from Congress. Beginning in 1996, RTB was

required to repurchase this stock; however, in accordance

with Public Law 105-86, Section 718, the maximum Class A

stock that may be retired is 5 percent. According to

enabling legislation and amendments, the Bank will be

converted to independent status when 51 percent of the

Class A stock issued to the United States has been fully

redeemed and retired. On September 30, 1999, in

accordance with Bank Board resolution 99-5, the fourth

redemption ($26.4 million) of Class A stock occurred,

leaving a balance of $501.8 million outstanding.

Cumulative Results of Operations

Cumulative Results of Operations are allocated to the

various components of Net Position based on the

requirements of the RE Act. Specifically, current year results

of operations are recorded as Patronage Capital Earned and

redistributed to the Class B stock and Restricted Capital

accounts. Cash dividends are paid out of Cumulative

Results of Operations.

NOTE 8 EARNED REVENUES (Budget Function Code 452)

Amounts are presented in thousands of dollars.

September 30,1999

Federal:

 Interest Revenue-Subsidy $ 1,379

 Interest Revenue from Treasury 51,979

Total Federal 53,358

Non-Federal:

 Interest and Penalties Revenue 91,023

Total Non-Federal 91,023

Total Earned Revenues $ 144,381

Credit Reform

The amount of subsidy expense on post-1991 direct loans

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 with 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 a further discussion of

present value, refer to Note 1E, and for all of the

components of subsidy expense and their respective dollar

amounts by entity, refer to Note 3.

Exchange Transactions With Non-Federal Sources

Rural Telephone Bank loans have a statutory rate that is

established on an annual basis depending on the Bank's

cost of raising capital.

Exchange Transactions With Federal Sources

As also discussed in Note 1A, the history of RTB is one of

financial and technical assistance to rural America. RTB

serves as a temporary source of supervised credit until

borrowers are able to qualify for private sector resources.

Although a lender of last resort, RTB is able to recoup all of

the costs associated with its loan making because RTB

establishes its cost of money on an annual basis in a

manner which enables it to recover all costs.

NOTE 9 DISCLOSURES RELATED TO THE STATEMENT OF

BUDGETARY RESOURCES

Amounts are presented in thousands ($000) of dollars.

A. The net amount of budgetary resources obligated for

undelivered orders as of September 30, 1999, is

approximately $965,900.

B. The amount of borrowing authority available as of

September 30, 1999, is approximately $817,800.

C. Requirements for repayments of borrowings:

Borrowings are repaid on Form SF 1151,

Nonexpenditure Transfers, as maturity dates become

due. For liquidating accounts, maturity dates are fifty

years from the close of the fiscal year the funds were

advanced by Treasury, to the Bank. 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.

Terms of borrowing authority used: In general, borrowings

are for periods of up to fifty years depending upon the

cohort. Interest rates on borrowings in the liquidating
18

 

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 at the end of the year of

loan disbursement. Since individual loans are typically

disbursed over several years, several interest rates may be

applicable to an individual loan. A single weighted average

interest rate which is adjusted each year, until all the

disbursements for the cohort have been made, is

maintained.

Prepayments can be made on Treasury borrowings in the

liquidating and financing accounts without penalty.

Financing sources for repayments of borrowings: Included

are reestimates and cash flows (i.e., borrower loan principal

repayments), appropriations received in liquidating

accounts for "cash needs", residual unobligated balances,

where applicable, and other Treasury borrowings.

• Adjustments during the fiscal year to budgetary resources

available at the beginning of the year are as follows:

 Actual Recoveries of Prior Year Obligations $ 38,674

 Redemption of Debt (172,384)

 Other Authority Withdrawn (32,000)

 Total Adjustments $ (165,710)

Actual recoveries of prior year obligations represent

cancellations or downward adjustments of obligations

incurred in prior fiscal years that did not result in an outlay.

For expired accounts, these recoveries are available for

upward adjustments of valid obligations incurred during

the unexpired period but not recorded.

Redemption of debt represents the amount of principal

repayments paid to the Treasury on outstanding

borrowings. It does not include interest payments, which

are shown as an obligation and an outlay.

Other authority withdrawn represents the withdrawal of

unobligated balances of indefinite budget authority realized

in no-year or multiple year accounts through downward

adjustments of prior year obligations.

• Existence, purpose, and availability of permanent

indefinite appropriations: Permanent indefinite

appropriations are mainly applicable to liquidating accounts

which have the ability to apportion them and for

reestimates related to upward adjustments of subsidy in the

program accounts. These appropriations become available

pursuant to standing provisions of law without further

action by Congress after transmittal of the Budget for the

year involved. They are treated as permanent the first year

they become available, as well as in succeeding years.

However, they are not stated as specific amounts but are

determined by specified variable factors, such as "cash

needs" for the liquidating accounts and information about

the actual performance of a cohort or estimated changes in

future cash flows of the cohort in the program accounts.

The period of availability for these appropriations are as

follows: Annual authority is available for obligation only

during a specified year and expires at the end of that time.

Multi-year authority is available for obligation for a

specified period of time in excess of one fiscal year. 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 during the

period prior to expiration, but not recorded. 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.

• Legal arrangements affecting the use of unobligated

balances of budget authority: The availability/use of

budgetary resources (i.e., unobligated balances) for

obligation and expenditure are limited by purpose, amount,

and time.

(a) Purpose - Funds may be obligated and expended only

for the purposes authorized in appropriations acts or

other laws.

(b) Amount - Obligations and expenditures may not exceed

the amounts established in law. Amounts available are

classified as either definite (i.e., not to exceed a specified

amount) or indefinite (i.e., amount is determined by

specified variable factors).

(c) 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.

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.

Any information about legal arrangements affecting the use

of unobligated balances of budget authority will be

specifically stated by program and fiscal year in the

appropriation language or in the alternative provisions

section at the end of the appropriations act.

Contributed capital received during the report period

approximated $18 thousand.