Review of Rural Telephone Bank's 1990 Loan Interest Rate Calculation

Published by the Government Accountability Office on 1990-11-02.

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

          United States
GAO       General Accounting Oflice
          Washington, D.C. 20548

          Comptroller General
          of the United States

          November      2, 1990
          To the President of the Senate and the
          Speaker of the House of Representatives
          Section     408(b)(3)(1)     of the Rural Electrification          Act of
          1936, as amended on December 22, 1987, by the Omnibus
          Budget Reconciliation         Act of 1987 (Public       Law 100-203),
          requires     us to annually      review the interest        rate charged to
          borrowers,     referred    to as the cost of money rate, as
          determined     by the Governor of the Rural Telephone Bank
           (RTB) for the preceding         fiscal   year.   We are to report      to
          the Congress on the accuracy            of the interest       rate
          determination       within   15 days of receiving       it.
          On October 19, 1990, we received            RTB's rate determination,
          which established        RTB's fiscal    year 1990 cost of money rate
          at 5.00 percent,       the minimum rate allowable       by the Rural
          Electrification      Act of 1936, as amended.         We reviewed the
          rate determination        and found it to be in accordance        with
          the requirements       of section     1411(c) of the Omnibus Budget
          Reconciliation      Act of 1987 and 7 CFR Part 1610.          We traced
          the dollar      amounts and rates used in calculating          the cost
          of money rate to RTB records           and recomputed   the
          Enclosed     is a copy of RTB's interest    rate notice    along with
          the details     of its calculation   of the interest    rate to be
          applied    to loans issued during    fiscal  year 1990.
          We are sending copies of this report       to the Director   of the
          Office    of Management and Budget,    the Secretary  of the
          Treasury,    the Secretary of Agriculture,     and the Board of
          Directors    of the Rural Telephone Bank.

                       A. Bowsher
           of the United States
Enclosure                                                                 Enclosure


 Rural Telephone Bank

 7 CFR Part 1610



AGENCY:     Rural Telephone Bank, USDA.

ACTION:     Notice of 1990fiscal year interest rate determination.

SIJRMARY: In accordancewith 7 CFR 1610.10,the Rural Telephone Bank’sFiscal Year
 1990cost of money rate has been establishedat 5.00%. Except for loans approved from
October 1, 1987through December21, 1987where borrowers elected to remain at interest
rates set at loan approval, all loan advances made from October 1, 1989 through
September 30, 1990 under Bank loans approved on or after October 1, 1987 shall bear
interest at the rate of 5.00%.

     The calculation of the Bank’scost of 9oney rate for Fiscal Year 1990is provided in
Table 1. Sincethe calculated rate (4.75%) is lessthan the minimum rate allowed under 7
U.S.C. f 948(b)(3)(A), the cost of money rate is set at the minimum rate of 5.00%. The
methodology required to calculate the cost of money rate is established in 7 CFR

                                           2                         GAO/AFMD-91-32
    Enclosure                                                                 Enclosure

      FOR FURTHER       INFORMATION CONTACT:         F. Lament Heppe, Jr., Chief, Telephone
      Loans and ManagementStaff, Rural Electrification Administration, Room 2250, South
      Building, US. Department of Agriculture, Washington,DC. 20250, telephone number
      (202) 382-9550.

      SUPPLEMENTARY INFORMATION: The cost of money rate methodology developsa
      weighted averagerate for the Bank’s cost of money by consideringtotal fiscal year loan
      advances;the excessof fiscal year loan advancesover amountsreceived in the fiscal year
      from issuancesof ClassA, B, and C stocks,debenturesand other obligations: and the costs
      to the Bank of obtaining funds from thesesources.During Fiscal Year 1990,the Bank paid
      the following dividends: the dividend on Class A stock was 2.00% as established in
      amended section 406(c) of the Rural Electrification Act; no dividends were payable on
      Class B stock as specified in 7 CFR 1610.10(c);and the dividend on Class C stock WAS
      establishedby the Bank at 8.5%.

           The total amount receivedby the Bank in Fiscal Year 1990from the issuanceof Class
      A stock was $28,710,000. Total advancesfor the purchaseof Class B stock and cash
      purchasesfor ClassB stock were $8688,650. Rescissionsof loan funds advancedfor Class
      B stock amountedto $1,033,871.Thus, the amount receivedby the Bank from the issuance
      of ClassB stock,per 7 CFR 1610.10(c),was$7,654,779($8,688,650- $1,033,871).The total
      amount received by the Bank in Fiscal Year 1990from the issuanceof Class C stock was

           The Bank did not issuedebenturesor any other obligations during Fiscal Year 1990.
     Consequently, no cost was incurred related to the issuanceof debentures subject to 7
     U.S.C. 5 948 (b)(3)(D).

                                             3                           GAO/AFMD-91-32
Enclosure                                                                   Enclosure

        The excessof Fiscal Year 1990loan advancesover amountsreceived from issuances
   of ClassA, B, and C stocksand debenturesand other obligationsamounted to S71,320,146.
   The cost associatedwith this excessis the historical cost of money rate as defined in 7
   U.S.C. § 948(b)(3)(D)(v). The calculation of the Bank’s historical cost of money rate is
   provided in Table 2. The methodologyrequired to perform this calculation is describedin
   7 CFR 1610.10(c).The cost of moneyrates for fiscal years 1974through 1987are defined
   in section 408(b) of the RE Act, as amendedby Pub. L 100-203,and are listed in 7 CFR
   1610.10(c)and Table 2 herein.

        Dated:      OCT16 18%


   Governor, Rural TelephoneBank

                                          4                            GAO/AFMD-91-32
Enclosure                                                                                                Enclosure
                                                 TABLE 1
                                       RURAL TELEPHONE BANK M 1990
                                           COST OF MONEY RATE

           source of                                                            Amount
                                                                                -   - X                (Amount X Rate)
        Bank Funds                  Amount                                      cod Rate                 /Advances

  of Class A Stock                 S28,71O,ooO                  2.00%               S574,200               0.5332%

  of Class 9 Stock                  $7,8!%,779                  0.00%                      so              0.0000%

  of Class C Stock                     s10.066                  8.50%                    S8?j6             0.0008%

  of Debenturesand
  Other Obligations                          $0                   _.I                      so              0.0000%
  1990lssuances                    S71,320,146                  6.36%             S4,535,961               4.2119%

 TotalWl99OAdvances            5107,694,991             CALCULATED COST OF MONEY RATE                          4.75%

                                                        MINIMUMCOSTRATE~WABLE                                  5.00%

                                                  TABLE 2
                                           RURAL TELEPHONE BANK
                                          HISTORICAL COST OF MONEY

                          Bank                                                                    (Advancc?sX
               Foal      cost of             BankLoan                     AdVWXlSX                 cost RaOe)!
               Year      Money               Advances                      CostRats              TotalAdvances

               1974       5.01%                  5111,022,574               S&562,231                 0.317%
               1975       5.85%                  s130,663,197               s7,643,797                0.436%
               1976       5.33%                   s99.915,cw                S5A25.473                 0.304%
               rsn        5.00%                   S80,907,425               S4"045,371                0.231%
               1978       5.87%                  $142,297,190               S6,352,845                0.477%
               1979       5.93%                  5130.540.067               57.741.026                0.442%
               1980       8.10%                  S199,94235                $16,1%,483                 0.924%
               1981       9.46%                  5146,599,372              s14,057,501                0.802%
               1982       8.39%                  5112,232,127               S9,416,275                0.537%
               1983       6.99%                   593,402&38                56.528.858                0.372%
               1984       6.55%                   S90.450,549               S5,924,511                0.338%
               1985       5.00%                   572,563,394               S3,629,170                0.207%
               1986       5.00%                   571,652.363               S3.592.819                0.205%
               1987       5.00%                   S51,974,938               S2.598.747                0.148%
               1988       5.00%                  5119,488,367               S5,974,418                0.341%
               1989       5.w%                    $97.046347                S4,852,347                0.277%

                  TOTAL ADVANCES             51,752,920,667             COSTOFMONEYRATE                 6.36%

(916040)                                                5                                        GAO/AFMD-91-32