the bank would also have to set up reserves against bad loans and the like.

Mr. TEAGUE of California. Was it not also recommended in your report-or contemplated anyway-that the borrowers would use only 1 percent of any loans to buy bank stock rather than the 5 percent provided in this bill?

Mr. KATZIN. I do not remember that. I think we just said a percentage, but we did not give a fixed precentage.

Mr. TEAGUE of California. Did not your report contemplate the retirement of the Federal stock?

Mr. KATZIN. Eventually, yes, in this manner, but by subscription and through any retained earnings or other profits of the bank. Mr. TEAGUE of California. Thank you.

The CHAIRMAN. Mr. Olson?

Mr. OLSON. Just one question, Mr. Katzin. I believe that maybe there is a slight misunderstanding of something-I am sure a clarification will be helpful.

Going back to the 247 rural borrowers who could not pay the interest if it were slightly more than doubled what they are paying, I think that you said that they could not meet their interest obligation alone, saying nothing about retiring the principal that they all owed; is that correct?

Mr. KATZIN. Yes, sir. and paying the interest. rate were increased.

This is simply making your loan to the bank,
They would be in default on their loan if the

Mr. OLSON. Thank you.
The CHAIRMAN. Mr. Dole.

Mr. DOLE. I want to ask Mr. Partridge a question.

On pages 2 and 3 there appear some amendments that you have offered. Do you not believe that the administration plan would phase out the 2-percent money?

Mr. PARTRIDGE. No, sir; we think quite to the contrary that the administration intends to continue the 2-percent program. Mr. Clapp said as much in his testimony yesterday, as did the Secretary of Agriculture. It is our clear understanding that the administration intends that the present program be continued to the extent needed for those systems that must have it in order to achieve the objectives of the rural electrification program.

Mr. DOLE. What costs you more, 2-percent money for 35 years or 3 percent for 15 years?

Mr. PARTRIDGE. The 2-percent money, 35 years, results in a larger annual debt service than does the 3-percent loan. The cost, of course, of the loan at 3 percent is always higher than the 2-percent loan.

Mr. DOLE. In the attachment to the letter dated May 31 from the Secretary, talking about intermediate loans, it states:

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 *** would require debt service payments of $47.28 per $1,000 per year, as compared to $42.40 per $1,000 per year on basic 2-percent, 35-year loans.

And that the rate of 3 percent to be charged under H.R. 14000, under the present debt service payments on 50 years would be $39.76 per $1,000 per year, which is less than for the 2-percent, 35-year loan. And the Secretary indicated the opposite.

Mr. PARTRIDGE. He indicates exactly what I say, Mr. Dole. Our figures agree exactly with this. His figures are correct. A 3-percent 50-year loan has annual debt service requirements per thousand of $39.76. A 2-percent 35-year loan has an annual debt service requirement per thousand dollars borrowed of $42.40.

Mr. DOLE. Are all of the REA cooperatives for this bill?
Mr. PARTRIDGE. No, sir; they are not.

Mr. DOLE. Are you only speaking for those in favor of the bill? Mr. PARTRIDGE. I think I can safely say, sir, that we are speaking for at least 99 out of 100 of the electric cooperatives in support of this legislation. There are a few cooperatives who do not support the supplemental legislation, who take the position that the program should be continued exactly as it is and funded only on Treasury

money.

Mr. DOLE. That is the only significant difference, I understand, between those who are opposed and those who favor either H.R. 14000 or H.R. 14837.

Mr. PARTRIDGE. Yes, sir. There are shades in between. There are some who feel that this supplemental financing particularly the administration's bill, is not satisfactory; and, on the other hand, those who feel that there is a decided need for supplemental financing more along the lines of the Poage, Mills, and Schisler bills.

Mr. DOLE. Is it possible to have included in the record the original report made by Mr. Katzin, so that we can know what the differences are?

The CHAIRMAN. You want the report?

Mr. DOLE. Not to put it into the record, but to be available for the use of the committee.

Mr. KATZIN. I believe I want to correct one of my answers to Mr. Teague. In this report, we did have the 1-percent figure. My recollection was bad on that.

Mr. TEAGUE of California. Thank you.

Mr. KATZIN. The 5 percent was pay out the capital much more rapidly.

The CHAIRMAN. Will you make available a copy of that report for the committee?

Mr. KATZIN. We will be glad to do so.

The CHAIRMAN. Without objection, the clerk will receive the report for the use of the committee.

(The report will be found in the files of the committee.)

The CHAIRMAN. Mr. Findley.

Mr. FINDLEY. Mr. Anderson, I believe your association represents all of the electric cooperatives; is that correct?

Mr. ANDERSON. Not quite all of them. I believe we have 93 percent of all of the REA borrowers in the country.

Mr. FINDLEY. And you make it your business to study their financial needs?

Mr. ANDERSON. We do, yes, as best we can.

Mr. FINDLEY. On page 15 of your statement, you make the state

ment:

There are other systems which can afford to pay a higher rate of interest and are willing to do so if this will give them access to adequate amounts of capital.

Can you tell me how systems"?

many systems are involved in this term "other

Mr. ANDERSON. No, sir. I canot tell you specifically. The REA Administrator used the figures, I believe, this morning, of 25 to 30 percent on the basis of the record that could afford to pay a rate higher than 2 percent.

Mr. FINDLEY. Does that seem to you a reasonable estimate?

Mr. ANDERSON. Yes, sir, I believe our assumptions are using the 25 percent.

Mr. FINDLEY. From your knowledge as to the financial needs of the cooperatives, will you supply for the record the names of the cooperatives that in your judgment no longer need the 2-percent money?

Mr. ANDERSON. I would, if I could, but we do not have that information in that detail. I do not believe that we could supply that. Mr. FINDLEY. Will you furnish for the record at the earliest possible date the names of any cooperatives which in the judgment of your association can get along without 2 percent money?

Mr. ANDERSON. I do not know that we can do that, Congressman Findley, unless we know just what criteria the Administrator is going to establish for determining when a system can move from 2 percent to other rates.

Mr. FINDLEY. You must have had some kind of criteria in order to present to this committee the statement that other systems can afford to pay a higher rate.

Mr. POAGE. If I may interrupt?

The fact is that is like the question asked of a man as to when he stopped beating his wife.

How can this man, who is the head of an organization made up of 900-odd cooperatives pick out certain of his own members and point to them and say: "You have got to pay a higher price than this other fellow"? Do you want him to come in here and testify and hand in his resignation along with it; if you want him to do that, then your question is very much in order, but I do not think that this is the proper man to ask.

The CHAIRMAN. Let me interrupt. I tried to get exactly the same information that you are asking for. I asked the cooperative people of North Carolina this question. There are some who can pay a higher rate and are willing to pay a higher rate, but it is impossible to tell

who.

Mr. FINDLEY. Mr. Chairman, I believe there is at least one cooperative in Illinois which is proud of its record and feels that it can get by without the 2 percent money.

I hope I am not in the position of asking you when you stopped beating your wife. You were the one that told us that there were other systems and you also stated, in response to an earlier question, that your association makes it the business of the association to find out the financial needs of the cooperatives.

So it should not be too difficult for you, at least, to list a few cooperatives which you feel can get by without that 2 percent money. Otherwise, some of the skeptics of this proposal will conclude that this will not reduce 2 percent money.

The CHAIRMAN. Can you furnish it?

Mr. ANDERSON. I think that I can give you the names of a few. I think that we can furnish a few.

(The information above referred to, follows:)

The following excerpts from statements filed with this Committee by officials of several rural electric statewide organizations demonstrate that there are some systems in their respective states which can utilize higher cost capital. Excerpt from statement of Thomas H. Moore, General Manager, Association of Illinois Electric Cooperatives, to House Committee on Agriculture, June 1, 1966.

(In his statement, Mr. Moore reviewed the status of rural electrification program operations in the 27 distribution and 3 generation and transmission cooperatives in Illinois.)

***** In contrast, Corn Belt Electric Cooperative, Inc. is in a better position to pay interest rates on money borrowed for capital improvements that will more nearly reflect the cost of money in the open money market, if there is a financial institution from which it can obtain loans. Even though Corn Belt Electric Cooperative is in a strong financial position, it is doubtful if there is a financial institution other than the Rural Electrification Administration where it could obtain loans to provide for its capital improvements in future years." Excerpt from statement of A. D. Mueller, Executive Vice President and General Manager, Indiana Statewide Rural Electric Cooperative, Inc. to House Committee on Agriculture-Wednesday, June 1, 1966.

** There are many other systems in more favorable circumstances. While they still may have rather heavy indebtedness, they are realizing sufficient net margins to justify paying a somewhat higher rate of interest than is charged by REA

"A number of Indiana REMC's are in this category. Several years ago, well ahead of the time when our National Association was instructed to make a study of future financial requirements, some electric cooperative leaders in The Hoosier State were exploring various possibilities for obtaining capital from private sources."

Excerpt from statement of J. C. Hundley, Executive Manager, Tennessee Rural Electric Cooperative Association to House Committee on Agriculture-Tuesday, May 31, 1966.

*** We do have a few systems who are in a financial position to pay the full interest cost of borrowed money by the government."

Mr. FINDLEY. I will yield.

Mr. BELCHER. I was not questioning the fact that there are systems that can afford to pay higher rates of interest, but I have never had a single cooperative tell me that they were willing to pay a higher rate of interest; and, if so, if some of them have stated this, I would like to have the names of those.

The CHAIRMAN. I have had one tell me that. I will not give his name here now, of course. [Laughter.]

Mr. FINDLEY. Mr. Katzin, on page 8 of your statement, you say that 247 distribution co-ops and 21 G. & T.'s could not cover their interest charges if they paid a full 434-percent rate on their borrowings. Then, in response to a question by Mr. Burton, you indicated that of these 274

Mr. KATZIN. 247.

Mr. FINDLEY. 247, yes, were unable to pay 434 interest. What I would like to know is, in your estimate, how many of those 922 borrowers could pay more than 2 percent?

Mr. KATZIN. I make the statement a little further on, sir, that there are 204 distribution co-ops-and no G. & T.'s who could cover their interest costs two times, with the common analytical standard, if all their present loans were replaced by 434-percent borrowings.

Mr. FINDLEY. Did you make any estimate in the course of your studies as to what percentage increase in the rates charged would be needed in order to meet a higher rate of interest?

Mr. KATZIN. No; we did not. That will vary from area to area.

Mr. FINDLEY. You made no investigation of this point whatever? May I ask Mr. Anderson if the association has ever made a study of what percentage increase in rates will be necessary for the cooperatives to go on the public market to get their money and to get away from the 2-percent interest rate?

Mr. ANDERSON. What interest rate they would have to pay in the market?

Mr. FINDLEY. Yes-whatever the going interest rate is.

Mr. ANDERSON. I assume that they would presently be paying in the neighborhood of 512 to 6 percent if they went into the market.

Mr. FINDLEY. Have you estimated what percentage increase you would have to charge that would be necessary in order to make this system of financing work?

Mr. ANDERSON. No, sir; we did not.

The CHAIRMAN. Mr. Burton.

Mr. BURTON. Mr. Anderson, is it not true that under the terms that this could be over a 15-year period in excess of $20 billion as a program, that you could have an outflow from the bank more than that, taking all of the programs into consideration-all of your programs that are Government financed?

Mr. ANDERSON. If the banks were fully capitalized at $750 million as provided in the bill, with the provision that, I believe, they can borrow 10 times the capital, so that would be $7.5 billion.

Mr. BURTON. That would be $7.5 billion. That does not take into account the fact that every time you lend one of the REA's in making a loan, that they have to buy 5 percent of the bank stock?

Mr. ANDERSON. No. It does not. We can supply for the record, if you would like it, the figures that we have used in pricing out the plan and using the assumptions we have made on the cooperatives' capital and give you an answer to your question.

Mr. BURTON. I would like to have that, Mr. Anderson. I would like the record to show that. My multiplication here indicates that it could be a $20 billion program in 15 years.

The information requested above follows:)

The memorandum of May 24, 1966 from NRECA staff economist, Ronnie J. Straw to Kermit Overby, Director, Legislation and Research Department, NRECA, prices-out the supplemental financing plan proposed by H.R. 14837.

Memorandum to: Kermit Overby.
From: Ronnie Straw.

MAY 24, 1966.

Subject: Price-out of the Administration's Supplemental Financing Plan (H.R. 14837).

The following are summary conclusions of my analysis of the Administration's rural electrification supplemental financing proposal (H.R. 14837):

(1) With $750 million of government capital subscribed at the rate of $50 million per year the Bank just "squeezes by" in each of the 15 years of its operation.

(2) The net margins are small in each of the 15 years under study and the accumulation of surplus reaches only $12.2 million by 1982.

(3) The earnings of the Bank after expenses and dividends are inadequate to permit any significant patronage refunds on Class A and B Stock.

(4) The Bank can pay a 4% dividend on Class C Stock up to 1981 but it cannot pay the same rate of dividend in 1982. It drops to 3.9%. The dividend rate will continue to drop from 1982 and ultimately the Bank will not be able to pay dividends on Class C Stock unless some action is taken to correct this situation. The Bank will gradually begin to incur losses and impair capital if the inter