The Secretary of the Treasury is authorized and directed to purchase any notes issued by the Federal Telephone Bank pursuant to this subsection (b) and for such purchases may use as a public debt transaction the proceeds from the sale of any securities issued under the Second Liberty Bond Act, as amended, and the purposes for which such securities may be issued under such Act, as amended, are hereby extended to include any such purchases.

"SEC. 607. USE OF DEPARTMENT OF AGRICULTURE FACILITIES AND EMPLOYEES.In order to perform its responsibilities under this title, the Federal Telephone Bank may utilize the facilities and the services of employees of the Rural Electrification Administration or of any other agency of the Department of Agriculture, without cost to the Federal Telephone Bank.

"SEC. 608. ANNUAL REPORTS; FISCAL AGENT.-(a) The Governor of the Federal Telephone Bank shall make an annual report to Congress on the administration of this title VI and any other matters relating to the effectuation of the policies of title VI, including recommendations for legislation.

"(b) The Federal Telephone Bank, when designated for that purpose by the Secretary of the Treasury shall act as fiscal or other agent of the United States and when acting as such shall perform such duties as shall be prescribed by the Secretary of the Treasury.

"(c) At least once each year and at such other times as the Federal Telephone Bank Board deems necessary, the financial transactions of the Federal Telephone Bank shall be audited by auditors designated by the Board.

"SEC. 609. TAX EXEMPTIONS.-The Federal Telephone Bank shall be deemed to be an instrumentality of the United States, and as such, its property, franchise, capital, reserves, surpluses, and other funds, and its income shall be exempt from all taxation now or hereafter imposed by the United States or by any State, Territorial, or local taxing authority, except that any real property and any tangible personal property of the Federal Telephone Bank shall be subject to Federal, State, Territorial, and local taxation to the same extent as other similar property is taxed.

"SEC. 610. LENDING POWER.-(a) The Governor of the Federal Telephone Bank is authorized on behalf of the Federal Telephone Bank to make loans, in conformance with policies established by him, to corporations which have received a loan or loan commitment pursuant to section 201 of this Act, (1) for the same purposes for which loans may be made under title II of this Act, and (2) for the purposes of financing, or refinancing, the construction, improvement, expansion, acquisition, and operation of telephone lines, facilities, or systems, and for other related purposes, in order to improve the efficiency, effectiveness, or financial stability of telephone systems of such corporations financed under sections 201 and 610 of this Act.

"(b) Loans under this section shall be on such terms and conditions as the Governor of the Federal Telephone Bank shall determine, subject, however, to the following restrictions:

"(1) No loan may be made hereunder for a period exceeding fifty years. "(2) Intermediate interest rate loans shall bear interest at a rate equal to (i) the computed average interest rate on all interest-bearing obligations of the United States, or reported by the United States Treasury at the end of the preceding fiscal year, or (ii) 3 per centum per annum, whichever is lower. Loans at the intermediate interest rate shall be made by the Governor of the Federal Telephone Bank in accordance with criteria established by him. Such criteria shall reflect the purpose of objectives of the Federal rural electrification program. All other loans made hereunder shall bear interest at a rate to be determined by the Federal Telephone Bank Board.

"(3) Loans shall not be made unless the Governor of the Federal Telephone Bank finds and certifies that in his judgment the security therefor is reasonably adequate and such loan will be repaid within the time agreed.

"(4) No loan shall be made in any State which now has or may hereafter have a State regulatory body having authority to regulate telephone service and to require certificates of convenience and necessity to the applicant unless such certificate from such agency is first obtained. In a State in which there is no such agency or regulatory body legally authorized to issue such certificates to the applicant, no loan shall be made under this section unless the Governor of the Federal Telephone Bank shall determine (and set forth his reasons therefor in writing) that no duplication of lines, facilities, or systems, providing reasonably adequate services will result therefrom.

"(5) As used in this section, the term 'telephone service' shall have the meaning prescribed for this term in section 203 (a) of this Act, and the term 'telephone lines, facilities, or systems' shall mean lines, facilities, or systems used in the rendition of such telephone service.

"(c) The Governor of the Federal Telephone Bank is authorized to adjust the schedule of payments of interest or principal of loans made under this section upon his determination that with such readjustment there is reasonable assurance of repaying: Provided, however, That no adjustment shall extend the period of such loans beyond fifty years: Provided, further, That loans made by the Federal Telephone Bank will be secured on an equal basis with prior liens of the United States under loans made pursuant to title II of this Act.

"SEC. 611. CONVERSION OF FEDERAL TELEPHONE BANK TO PRIVATE OWNERSHIP, CONTROL AND OPERATION.-(a) Whenever, after retirement of class A stock issued to the United States has begun pursuant to section 605 (c) of this Act, the total amount of class B and class C stock exceeds the amount of class A stock—

"(1) the voting strength of the elected members of the Board shall be increased from one-half to one vote each;

"(2) all powers and authority granted to the Administrator by this title VI, other than powers and authority arising from his membership on the Board pursuant to section 604 (b) shall vest twelve months thereafter in the Federal Telephone Bank, and shall be exercised and performed through the Governor and such other employees as the Board may designate;

"(3) the authority of the Federal Telephone Bank to utilize the facilities and the services of employees of the Rural Electrification Administration or of any other agency of the Department of Agriculture under section 607 shall terminate twelve months thereafter;

"(4) the Federal Telephone Bank shall continue to be obligated to retire class A stock in accordance with the requirements of section 605 (c). "(b) Until all class A stock has been retired by the Federal Telephone Bank, all sections of title VI, as modified by subsection (a), shall remain applicable to the Federal Telephone Bank, its operations, and its property. Whenever all class A stock issued to the United States has been retired pursuant to sections 605 (c) and 611(a) (4) of this Act—

"(1) the Federal Telephone Bank shall cease to be an agency or instru mentality of the United States, but shall continue in existence in perpetuity as a banking corporation with borrowing and lending powers, operating under the control of its class B and class C stockholders;

"(2) the members of the Board who are employees of the United States shall cease to be members of the Board, and the number of Board members shall be accordingly reduced;

"(3) the following sections of this title shall no longer apply to the Federal Telephone Bank, its operations or its property: sections 601, 603, 604 (b) and (c), 607, and 609;

"(4) the following sections of this title, as modified by the provisions in this section 611, shall continue to apply to the Federal Telephone Bank, its operations and its property; sections 602, 604 (a), (d), (e), (f), (g), (h), 605, 606, 608, and 610.

"SEC. 612. CUMULATIVE NATURE OF TITLE VI; AMENDMENTS THERETO.-Notwithstanding anything in this Act, powers and authority provided for in this title VI shall be cumulative, and nothing herein shall be deemed to limit powers and authority provided for in any other title of this Act. The right to repeal, alter, or amend this title VI at any time is expressly reserved."

SEC. 4. Section 201 of the Government Corporation Control Act, as amended (31 U.S.C. 856), is amended by striking "and" immediately before "(5)", and by inserting ", and (6) the Federal Electric Bank and the Federal Telephone Bank" immediately before the period at the end.

SEC. 5. The second sentence of subsection (d) of section 303 of the Government Corporation Control Act, as amended (31 U.S.C. 868), is amended by inserting "the Federal Electric Bank, the Federal Telephone Bank," immediately following the words “shall not be applicable to".

SEC. 6. This Act shall take effect July 1, 1966.

DEPARTMENT OF AGRICULTURE,
Washington, D.C., July 11, 1966.

Hon. ALLEN J. ELLENDER,

Chairman, Committee on Agriculture and Forestry,
U.S. Senate, Washington, D.C.

DEAR MR. CHAIRMAN: This is in reply to your request of June 2, 1966, for a report on S. 3337, a bill "to amend the Rural Electrification Act of 1936, as amended, to facilitate the extension and improvement of rural electric and telephone service, and to strengthen and stabilize rural electrification and telephone systems by supplementation of the existing sources of Federal financing as provided by titles I and II of the Rural Electrification Act, to furnish additional sources of capital funds, and for other purposes."

This Department is in full accord with the objectives of the bill which are the same as those contained in a similar Administration proposal sent to the Congress on April 13, 1966, and introduced in the House of Representatives on May 3, 1966, as H.R. 14837. For the reasons stated herein, we recommend enactment of the provisions of the Administration proposal rather than S. 3337.

The following provisions are common to both bills. They provide for the creation of two Federal banks under the supervision of the Secretary of Agriculture, one for rural electric systems and one for rural telephone systems, to supplement the 2 percent loan programs now administered by the Rural Electrification Administration with other sources of financing.

Each bank will be managed by a board of directors which includes officials of the Department of Agriculture and representatives of electric or telephone systems. The REA Administrator will serve as the chief executive officer ("Governor") of each bank; the personnel and facilities of the banks may be drawn from REA or other agencies of the Department of Agriculture.

Equity capital will be furnished each bank by the United States and by borrowers and eligible borrowers from each bank. The Government investment in the banks' Class A capital stock would be furnished from "net collection proceeds" of the 2 percent REA electric and telephone loan programs. Stock held by the United States will be retired by each bank as soon as practicable. Borrowers from each bank will be required to invest 5 percent of their loan funds in non-dividend-bearing Class B bank stock, but such borrowers will be entitled to patronage refunds. Dividend-bearing Class C bank stock will be available for purchase by both borrowers and potential borrowers, and, in the case of the electric bank, by electric consumers of such actual or potential borrower (Class D stock).

Each bank is authorized to obtain borrowed funds through the sale of its debentures, up to 10 times the amount of paid-in capital and retained earnings (or surplus) of the bank. Treasury back-up will be provided for the payment of interest and principal on the bank's debentures.

Bank loans, not exceeding a period of 50 years, may be made to eligible borrowers at an "intermediate loan" rate, based on a formula relating to yield or interest rate on securities of the United States, but with an interest ceiling. Provision is made for loans at other interest rates. The purposes for which bank loans may be made include the same purposes governing REA 2 percent loans, as well as improving the efficiency, effectiveness or financial stability of borrowers' systems.

After the Government's investment has been fully retired by each bank, provision is made for the conversion of the bank to fully private ownership, control and operation.

The bills also establish Rural Electrification and Telephoning Accounts into which will be transferred appropriations, assets and collections of the REA 2 percent loan programs and from which will come funds for the 2 percent loan programs, for the payment of principal and interest on loans from the Secretary of the Treasury for the 2 percent loan programs, and for Federal investments in the electric and telephone banks' Class A stock.

Enclosed is a listing of the significant differences between the bills and our comments thereon which support our view that the Administration proposal provides the more orderly and effective program for the emergence of REA-financed electric and telephone systems from their present state of dependence on the existing two percent loan program.

The basic 2 percent 35-year REA loan authority would be retained unchanged under both bills. However, the Administration proposal more celarly provides a progression from the basic loan program through intermediate bank loans to a bank loan program reflecting the full cost of bank operations. It appropriately provides for Government control of the banks until the Government investment is retired. It permits Congressional supervision during the period of Government operation which is absent from S. 3337 and imposes a lesser burden upon the Treasury while providing sufficient Treasury support to make the supplemental financing program of the banks viable.

In the Department's letter of April 13, 1966, transmitting the Administration proposal to the Congress and recommending its enactment, we reviewed the back. ground of and need for this legislation. We request that the contents of that letter be considered as part of this report.

The Bureau of the Budget advises that there is no objection to the presentation of this report and that enactment of the provisions of the Administration proposal, as recommended herein, would be consistent with the Administration's objectives.

Sincerely yours,

JOHN A. SCHNITTKER, Acting Secretary.

SIGNIFICANT DIFFERENCES BETWEEN S. 3337 AND THE ADMINISTRATION BILL (REFERRED TO HEREIN AS H.R. 14837, FOR CONVENIENCE), PROVIDING SUPPLEMENTAL FINANCING FOR RURAL ELECTRIFICATION AND RURAL TELEPHONE PROGRAMS, AND U.S. DEPARTMENT OF AGRICULTURE COMMENTS THEREON

Amount of Government investment in Class A stock of the banks

H.R. 14837 provides $50 million annually to the Electric Bank and $20 million annually to the Telephone Bank for fifteen years, for total investments of $750 and $300 million respectively, unless appropriation acts specify lower annual amounts; and requires that a report be made to the Congress by July 1, 1971, on the status of Government capitalization of each bank with recommendations concerning continuation thereafter of such capitalization.

S. 3337 provides that Government capital to be furnished each Bank shall be in an amount equal to all net collection proceeds of the 2 percent REA electric and telephone loan programs, until a total of $1 billion is provided to the Electric Bank and $500 million is provided to the Telephone Bank, and makes no provision for a report at the close of five years of operation.

Comment: It is believed that the $750 million Government capitalization at the annual $50 million rate provided for the Electric Bank in H.R. 14837 is adequate to support the bank's loan program and will supply the equity capital in the amounts as, and at the times when, needed. The provision of $300 million in annual increments for the Telephone Bank is similarly designed to provide the needed Government capital as and when needed. Provision of capital to the banks in an amount or at a rate greater than needed to support the banks' loan program is undesirable because it unnecessarily increases the burden on the Budget. Further, the 5-year report provision assures a desirable opportunity for appraisal of the operation of these provisions.

Dividends on Government-held Class A stocks

H.R. 14837 provides that Class A stock shall receive dividends from earnings otherwise available in their entirety for patronage dividends in proportion to the total amount of Class A and B stock outstanding. S. 3337 provides that no dividends shall be payable on Class A stock.

Comment: By far the greater proportion of the earnings of the banks will accrue as the result of the availability and use of Government capital, and the use by the banks of Government facilities and personnel. The Government receives no return on its investment other than the dividends on its Class A stock which are payable only if earned. To the extent the banks produce net earnings, it seems appropriate that the Government participate therein with the borrowers from the banks.

Sale of bank debentures

H.R. 14837 requires approval of the Secretary of the Treasury as to time of issue, interest rates and other terms and conditions. Under S. 3337, consultation only with the Secretary of the Treasury is required. In addition, while the amount of debentures outstanding at any one time under both bills may not exceed 10 times paid-in capital and retained earnings (or surplus) of each bank,

H.R. 14837 also provides that Congressional appropriation acts may specify lower amounts.

Comment: Treasury approval rather than consultation is required in the interest of orderly debt operation and to assure avoidance of conflict with Treasury and other issues. The provision in H.R. 14837 for Congressional participation through appropriation acts is appropriate so long as the banks remain Federal agencies and issue debentures with Treasury back-up.

Loan purposes

Although the provisions for loan purposes in both bills are substantially similar, H.R. 14837 does not authorize consumer loans of the type now made under section 5 of the Rural Electrification Act, and includes limitations on loans of the Electric Bank for acquisitions, exchanges of facilities, and generation and transmission facilities, while S. 3337 permits section 5-type loans, omits the foregoing limitations, and authorizes loans "for other related purposes." In H.R. 14837, limitations are imposed on Telephone Bank loans for acquisitions which are absent from S. 3337. H.R. 14837 specifically permits the financing of commercial community antenna television facilities; S. 3337 makes no such provision.

Comment: So long as the banks are largely Government-capitalized and operated, and are treated as Government corporations, it appears appropriate to impose the limitations upon their loan purposes prescribed in H.R. 14837. These limitations do not impair the basic purpose for which the broadened loan authorization is provided or prevent the banks from meeting essential loan needs which cannot be met under the restrictions applicable to two-percent loans. The CATV financing authority found in H.R. 14837 is designed to enable Telephone Bank financed systems to render the same service in this field as do other telephone systems. This area of operations is becoming increasingly important to telephone systems.

Loan terms and conditions

(a) The interest rate on intermediate loans under H.R. 14837 is determined by the average market yield on outstanding marketable obligations of the United States with comparable maturities, or 4 percent, whichever is lower. S. 3337 prescribes a formula based on the average rate payable on all interest-bearing obligations of the United States, or 3 percent, whichever is lower.

(b) Under H.R. 14837, all other loans made by the banks must bear interest at a rate which reflects the current average rates payable by the banks on their debentures, and administrative expenses and estimated losses in respect of such loans. S. 3337 leaves the determination of the interest rate on such other loans to the bank boards. H.R. 14837 prohibits intermediate loans to borrowers which are capable of paying the higher rate and also meeting program objectives. S. 3337 contains no such prohibition but provides for criteria to be established for intermediate rate loans which reflect program objectives.

(c) Under H.R. 14837, the banks' authority to make intermediate loans terminates at the end of 15 years, and a report is to be made to the Congress by July 1, 1971, on the status of the intermediate loan program with recommendations concerning its continuation thereafter. S. 3337 contains no such provisions.

(d) H.R. 14837 does not contain the provision found in S. 3337 that bank loans be secured on an equal basis with loans made by REA.

Comment: (a) Since the intermediate loan is designed as the transitional step to loans at rates fully reflecting the banks' costs, the interest rate provision of H.R. 14837 for such loans appears more realistic. Under present Government security market conditions, the 4 percent rate would in all probability be applicable to intermediate loans made in fiscal 1967. Loans at this rate, amortized over a 50-year term, with a three-year principal deferment, would require debt service payments of $47.28 per $1,000 per year, as compared with $42.40 per $1,000 per year on basic 2 percent 35-year loans. If the 3 percent rate, which would be charged under S. 3337 under present market conditions, were applied, the debt service payments on 50-year loans would be $39.76 per $1,000 per year which is less than the $42.40 needed for 2 percent 35-year loans.

(b) Since one of the objectives of the supplemental financing plan embodied in this proposal is ultimate freedom from Federal financial assistance, it is deemed advisable to establish an interest rate which reflects cost to the bank of the financing for those borrowers which no longer need such assistance. The provisions of H.R. 14837 establishing a rate reflecting full bank cost as the top rung of the credit ladder are realistic and are needed to achieve this objective.