JUSTIFICATION OF INCREASES AND DECREASES

(1) An increase of $36,971,000 to cover interest expenses of the RETRF applicable to the electric program ($135,074,000) projected for 1981): Advances to borrowers from the RETRF in excess of principal repayments and interest receipts deposited into the fund are covered on an interim basis by borrowings from the Treasury. On March 31 and September 30 of each year, Certificates of Beneficial Ownership (CBO's) are sold in an amount necessary to repay the interim borrowings, plus an amount to cover interest and expenses accrued on these borrowings and on the balance of the CBO's outstanding at the beginning of the period. Interest expense on both the interim borrowings and the CBO's outstanding are expenses of the revolving fund. During fiscal year 1981, interest expense to the electric program is estimated at $135.1 million, and $172.0 million in 1982.

(2) An increase of $7,029,000 to cover interest expenses of the RETRF applicable to the telephone program ($11,926,000 projected for 1981): Advances to borrowers from the RETRF in excess of principal repayments and interest receipts deposited into the fund are covered on an interim basis by borrowings from the Treasury. On March 31 and September 30 of each year, Certificates of Beneficial Ownership (CBO's) are sold in an amount necessary to repay the interim borrowings, plus an amount to cover interest expense accrued on these borrowings and on the balance of CBO's outstanding during the period. Interest expense on both the interim borrowings and the CBO's outstanding are expenses of the revolving fund. During fiscal year 1981 interest expense to the telephone program is estimated at $11.9 million and $19.0 million in 1982.

(3)

A decrease of $156,000 in insured telephone loans from the RETRF (250,156,000 projected for 1981): As a result of a carryover of unused funds from prior year authorizations there were $156,000 in additional funds above the minimum authorized by the Act in 1981. There is no carryover projected in 1982.

STATUS OF PROGRAM

The Rural Electrification Administration is authorized by the Rural

Electrification Act of 1936, as amended, to provide capital through insured loans and guarantees of loans by other lenders to qualified rural electric and telephone organizations. The objective of these programs is to help improve the quality of life in rural areas by assisting people in eligible rural communities in obtaining reliable electric and telephone service.

The Federal Financing Bank (FFB) has to date been the principal source of funds under REA guarantee. The FFB has agreed to provide loan funds to rural electric and telephone systems under REA guarantee up to a specific total; the amount available for guarantee by FFB is revised as required.

GENERAL PROGRAM ADMINISTRATION

Borrowers' Financial Condition - As of September 30, 1980, approximately $4.1 billion in regular principal payments and $2.8 billion in interest payments has been made by electric borrowers. Telephone borrowers had paid $761.1 million in principal and had made interest payments of $584.1 million. On September 30, 1980, there were no electric borrowers in arrears, an improvement of $37,225 from the previous year. Three telephone borrowers were in arrears, with the delinquencies totaling $271,113, an increase of $39,448 from last year.

The balance of advance payments by electric and telephone borrowers was $88.3 million on September 30, 1980, a decrease of $7.4 million from a year earlier and $230.7 million from June 30, 1972. In the electric program, the advance payment balance dropped to $67.0 million as of September 30, 1980, a decrease of $7.1 million from a year earlier and $227.2 million from June 30, 1972. In the telephone program, the advance payment balance dropped to $21.3 million as of September 30, 1980, a decrease of $.3 million from September 30, 1979, and a decrease of $3.9 million from June 30, 1972. Electric borrowers are continuing to utilize their accumulated advance payments in lieu of making their regular payments, thereby enabling them to finance a larger portion of their construction with their own funds.

Accounting and Auditing - REA field accountants are responsible for conducting accounting surveys and reviews of borrower accounting systems and procedures in both the electric and telephone programs. The main objectives of these reviews are to determine the propriety of loan fund expenditures, to evaluate the effectiveness of borrowers' internal accounting control systems, and to review the adequacy of the annual CPA audits. During fiscal year 1980, REA field accountants completed 393 Loan Fund and Accounting Reviews in the electric and telephone programs. In 159 of these completed LFAR reviews, it was found that loan funds were disbursed from the borrowers' construction fund account in error for reasons of inadequate documentation or duplication of previously claimed expenditures or claims for expenses not covered under REA financing. These disallowances amount to $23.1 million. REA is interested not only in the effectiveness of the methods of recording and controlling of borrowers' assets, liabilities, and operations, but also in the validity of the resulting reports. Reliable reports aid management's control of operations, planning, forecasting, cash flow projections, loan security, and program appraisal. REA accountants are also responsible, in both the electric and telephone programs, for advising REA borrowers in the development, establishment, and proper maintenance of acceptable public utility accounting records systems. These areas of responsibility are carried out primarily at the field level by the permanent field accounting and auditing staff with supervision and technical assistance provided by the Washington office.

Through review of annual CPA audit reports, the Washington headquarters accounting staff brings significant disclosures and comments, with explanatory analysis, to the attention of appropriate Agency officials. These reviews enable the accounting staff to emphasize CPA and/or REA field accountant recommended actions to correct weaknesses and deficiencies in borrower accounting and reporting.

In addition, the review and evaluation of CPA's working papers supporting the audit reports of selected CPAs by Washington headquarters accounting staff determines CPA compliance with REA audit requirements. Following a review, the CPA is provided with a comprehensive report of REA's evaluation of their working papers. If the review indicates the need, a follow-up visit is scheduled. This program has increased compliance with REA audit requirements, and in a minority of instances removed CPAs from audits of borrowers' financial records.

Community Development As grass-roots organizations, rural electric and telephone systems financed by REA have a direct impact on the economic development of the areas in which they are located. Working in conjunction with other local groups REA borrowers frequently provide leadership in getting support for needed community development activities. In 1979, for example, REA borrowers helped to create over 47,000 jobs in rural areas through 1,536 commercial, industrial and community facilities projects launched with their help. Assistance was in the form of helping to arrange financing; securing or providing development, marketing or managerial assistance; and in providing office and meeting space, typing and clerical assistance.

Since mid 1961, REA-financed systems have helped establish or expand more than 14,600 community and industrial facilities projects creating more than 704,000 jobs in rural areas.

Locating financial and technical assistance is one of the primary ways in which rural electric and telephone systems assist community development projects. Obtaining this information has been simplified by the Federal Assistance Program Retrieval System (FAPRS). By use of a computer terminal, REA is able to obtain from the FAPRS a list of Federal programs applicable to a specific community development proposal. REA borrowers are still making good use of this service. Commonly sought information concerns financing for Community facilities for recreation, sewer and water, public buildings, and sewage treatment plants, as well as information on business and industrial development.

Insurance Requirements REA borrowers are required to meet the insurance requirements set forth in their mortgage and loan contracts. REA assists its borrowers in meeting these requirements and provides consulting services for evaluating individual insurance proposals designed to provide for the individual borrower's requirements and protection.

Labor Relations - In representing the Government as mortgagee and in furthering the objectives of the Rural Electrification Act, REA is concerned that its 1,800 active borrowers, employing 78,000 workers, adhere to sound labor management policies. REA provides advice to its borrowers to assist them in maintaining compliance with applicable Federal, state, and local laws and regulations. Economic data relating to employment and current wage developments of interest to these employers are also made available to them, through publications and at meetings sponsored by state and national associations. This information assists borrowers' management in achieving good working relationships with their employees and encourages stability in the day-to-day operations of REA-financed electric and telephone systems.

Occupational Safety - REA encourages its borrowers to establish comprehensive safety programs to protect employees, their customers, and the general

public. As a minimum these programs should recognize and comply with the mandatory requirements established by Federal, state and local laws. REA personnel serve on safety committees and with national code-and-rule-making bodies, as needed, to ensure that problems peculiar to rural electric and telephone systems are considered.

Paperwork Reduction - In an effort towards streamlining loan procedures REA has significantly reduced the number of forms and contracts borrowers are required to submit for loan approval, and is proceeding with an ongoing review of current bulletins and forms for identifying additional areas for possible paperwork elimination. This will have the two-fold result of saving REA borrowers' systems about 11,000 worker-hours and of helping REA comply with the President's order calling for a reduction in government paperwork for the public.

Civil Rights It is the policy of the Rural Electrification Administration that no person in the United States shall, on the grounds of race, color, religion, or national origin, be excluded from participation in, be denied the benefits of, or be otherwise subjected to discrimination under the REA electric and telephone loan programs. Provisions requiring the extension of service on an area coverage basis have been in REA loan contracts since the 1940's; consequently, allegations of discrimination in the extension of service by borrowers are extremely rare. It is also REA's policy that employment opportunities created by construction work involving Federal financial assistance through REA loans are made equally available to all qualified persons, without regard to age, race, color, religion, sex, or national origin.

REA encourages its borrowers to actively involve more minority group members in their programs and activities and has developed guidelines which borrowers may use for increasing minority member participation in the activities and affairs for cooperative-type borrowers. REA has a full-time Civil Rights Coordinator and an Assistant Civil Rights Coordinator, and two full-time professional staff members who coordinate the efforts of REA and its borrowers in carrying out this program. The Assistant Civil Rights Coordinator serves as chairperson of a task force of 12 select REA professional employees who conduct civil rights progress reviews in the field to determine the extent to which borrowers are complying with civil rights rules and regulations.

Minority members participate in REA-financed programs through: (1) obtaining electric and telephone service, (2) employment, (3) attendance at annual meetings, (4) membership on committees and advisory bodies, and (5) membership on cooperatives' boards of directors. REA is working to increase involvement and participation by minorities in all areas that will improve their quality of life in rural America. Special efforts shall continue to be made to keep REA-financed systems aware of the need for outreach efforts, to seek out minority groups to extend and expand new services, and involve minorities and women in meaningful activities and affairs of the cooperatives.

REA continues to achieve good results in initiatives to promote patronage of minority business enterprises by REA borrowers and to promote training and employment opportunities for minorities and women. Also, REA shall continue efforts to broaden outreach with minority organizations and institutions by working cooperatively with USDA agencies to strengthen and expand the capacity of historically black colleges and universities to serve the national interest through quality education.

Major civil rights accomplishments during fiscal year 1980 were as follows:

--Received, processed and analyzed civil rights compliance and participation reports submitted by 859 REA-financed electric borrowers and 833 REA-financed telephone borrowers.

--Conducted a successful civil rights training program for REA task force members in Washington, D.C. during the week of February 25-29, 1980, and for the REA field staff during the week of June 23-27, 1980.

--Completed 53 in-depth Title VI civil rights progress reviews of selected REA electric and telephone borrowers.

--Met with presidents, managers, and staff representatives of 31 REA-financed systems; attended 8 annual members' meetings; attended 2 statewide association meetings, and attended and participated in selected professional meetings to promote Title VI compliance and REA's total equal opportunity effort.

--Initiated a research proposal with an outside contractor to conduct a comprehensive Title VI evaluation of REA's civil rights program effectiveness and to identify new directions and program emphasis for the 1980's. This study is being recommended for expansion to include Hispanics and American Indians. If approved, the study will be completed by December 31, 1980.

REA's civil rights program has been directed toward one goal: complying with the equal opportunity statues with minimum delay and maximum benefits to REA borrowers. To get minority representation at the policy-making level, cooperatives or mutual-type borrowers are encouraged to create at-large positions on boards of directors and select minority members to initially fill the newly created positions.