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I would like for the committee to see them and have access to them before we take a vote.

Mr. POAGE. Thank you. We appreciate that.

We will now hear from Eugene F. Rinta, executive director and research director of the Council of State Chambers of Commerce. We will be glad to hear from you now, Mr. Rinta.

STATEMENT OF EUGENE F. RINTA, EXECUTIVE DIRECTOR AND RESEARCH DIRECTOR, COUNCIL OF STATE CHAMBERS OF COMMERCE

Mr. RINTA. Mr. Chairman and members of the committee. In order to conserve your time, I shall not read about 42 pages of this statement which is basic descriptive material.

My name is Eugene F. Rinta. I am executive director and research director of the Council of State Chambers of Commerce. This is an association of 31 State and regional chambers of commerce which, among their various activities, concern themselves with Federal and State legislation as it affects their members.

One area of Federal Government activity which the Council of State Chambers has studied and followed closely for the last two decades is Federal fiscal policy and programs, including spending and taxation. This explains our interest in pending legislation to create a Federal electric bank for the purpose of broadening and expanding the financing of rural electric cooperatives.

The Federal Finance Committee of the Council has for some years urged that Federal financing of rural electric cooperatives be limited primarily to construction and acquisition of distribution systems for carrying power from available sources to the rural consumers. The committee has opposed REA loans for co-op owned power generating and transmission facilities when power is available in adequate amount and at reasonable rates from existing sources. This opposition is based on the ground that the Government should not subsidize activities or services which can be provided by other sources without subsidies. The member State chambers of commerce in the council have generally supported the council committee's position. It appears clear to us that the primary use of financing to be made available by the electric bank would be for acquisition and construction of generating and transmission facilities. Only one-half or less of total REA loans in recent years have been for distribution purposes, and there is little likelihood that congressional approval of funds for these purposes under the existing REA program would pose a serious problem. Thus it can be expected that the Federal subsidies involved in the electric bank proposal would be largely related to generating and transmission loans over which Congress would not have the controls that are now exercised by Congress over such loans.

These subsidies include direct Treasury subsidies through purchase of the bank's stock in the amount of up to $750 million under H.R. 14837 and up to $1 billion under H.R. 14000 and additional subsidies in the provision for covering principal and interest defaults on loans. The Federal subsidies also include a significant indirect subsidy in

the form of exemption of rural electric co-ops from Federal income

taxes.

For these reasons the executive committee of the Council's Federal Finance Committee voted unanimously on June 7 to oppose the electric bank proposal. As this statement was written, we had received work from 27 of the 31 member State chambers of commerce in the council endorsing our committee's opposition to the proposed legislation. These 27 State chambers are listed at the end of my statement. Inasmuch as most aspects of the legislation have been adequately covered by other witnesses, I shall limit this presentation to a few comments relating to its purpose and to a discussion of one aspect that apparently has not been covered in detail. That is a comparison of the proposed electric bank with the existing agricultural credit banks that have previously been established by Congress.

The primary stated purpose of this legislation is to provide additional sources of financing for the rural electrification and rural telephone programs. But the bills do not define the objectives of the legislation. Nevertheless, H.R. 14837 would by its terms provide a huge potential lending capacity in the electric bank, totaling about $13 billion in 15 years, and H.R. 14000 would create an electric bank a third larger than that under H.R. 14837. From this it would appear that proponents of the legislation contemplate an expansion of the rural co-op electric systems during the next 15 years which will greatly exceed the total systems developed over the past 30 years when cumulative REA electrification loans amounted to $5 billion. Moreover, this tremendous expansion would be effected with the original purpose of the Rural Electrification Act already having been largely fulfilled.

In recent years investments in rural electric co-op facilities have been about one-tenth of the total annual investments in electric facilities of all systems, including investor-owned, Federal, co-op, and all others. Under the proposed legislation, however, it would appear that investments in co-op facilities over the next 15 years could average about one-fifth of the total annual investments despite a substantial increase expected in the aggregate annual total. These figures are based on ratios of $300 million electric co-op investments to $3 billion aggregate annual electric power investments in recent years and a possible $1 billion co-op investments to $5 billion aggregate investments annually during the next 15 years.

Mr. POAGE. Let me advise the witness of his rights, as they are. Maybe you have some understanding from earlier proceedings here that the committee will not allow you to submit your statement into the record. I wish that you would, to shorten the proceedings.

Mr. RINTA. I will finish with this paragraph, and then I have a few comments at the end. I am skipping four pages here.

Mr. POAGE. If there is no objection, your entire statement will be made a part of the record at the conclusion of your comments.

Mr. RINTA. It would seem that, before Congress considers authorizing the financial means of accomplishing this great change in the position of rural electric co-ops in the overall electric power structures in this nation, it will first want to decide what the future purposes of federally-subsidized electric co-ops should be, and only then determine

to what extent, if any, subsidies should be provided to help the co-ops fulfill the purposes. It should not be forgotten that, to the extent that future investment in electric power facilities is to be shifted from investor-owned companies to co-ops, the future Federal income tax base will be eroded proportionately.

The remainder of my statement is a comparison of the proposed electric banks with the existing agricultural banks.

On pages 4, 5, 6, 7, to the middle of page 8, we discuss the three types of farm credit banks, and then discuss the pertinent sections of H.R. 14837.

We can now point out some of the significant differences between the proposed electric bank and the agricultural credit banks as follows: 1. The organizational structure and management controls would be different. The electric bank would be "subject to the supervision and direction of the Secretary of Agriculture," its policies set by a board of directors dominated by the Secretary, and the REA Administrator would wear a "second hat" as Governor of the bank. On the other hand, Congress established the Farm Credit Administration as an independent agency under the direction of a 13-man board of directors, 12 of whom represent the 12 farm credit districts throughout the United States, and only one represents the Secretary of Agriculture.

2. The amount of Federal contribution would be much larger for the electric bank than for the farm credit banks even though no comparable need has been demonstrated. Proponents of the electric bank are seeking $750 million-or $1 billion under H.R. 14000-from the Federal Treasury. The maximum Federal involvement in all 37 agricultural banks was $683,392,995 in 1939; in 1966 this involvement had been reduced to $174,615,000. The proposed electric bank in 15 years, according to reasonable assumptions, would have a lending capacity of almost $13 billion based on H.R. 14837 and $17 billion based on H.R. 14000. It could issue debentures exceeding by at least $5 billion the total debentures of all the 37 agricultural banks outstanding on June 30, 1965, which was $6.7 billion.

3. The proposed electric bank would pay nothing for the use of the Federal investment, whereas Congress has imposed a franchise tax on each of the agricultural banks, to be paid out of net earnings so long as there is any Federal stock in the bank.

4. The proposed electric bank would begin to retire the Federal subscription "as soon as practicable after June 30, 1981," but not if the Board determines that such retirement "will impair the operations" of the bank, whereas Congress has imposed procedures on agricultural credit banks designed to repay the Federal investment. In some cases, as long as any Government stock remains outstanding, patronage refunds can be paid only in stock which is used to replace the Government subscription. In other cases, the rates of interest charged to borrowers are high enough to repay the Government investment expeditiously.

5. Participation by private lenders would be different. Only about 20 percent of the total agricultural credit needs are furnished through the agricultural credit banks, whereas 100 percent of the needs of the cooperatives would probably be furnished either through the bank or the REA, and private lenders would not be utilized.

6. The proposed electric bank would make loans under generous terms and conditions-50 years, 100 percent of value, and only second mortgages required. By contrast, the Federal land banks can lend only up to 65 percent of the appraised value of the property and on the basis of first mortgages. The Federal intermediate credit banks cannot make a loan for more than 7 years, and the banks for cooperatives for more than 20 years and normally only up to 60 percent of the value of the property involved.

7. The interest rate charged by the proposed electric bank on intermediate loans would be subsidized indefinitely at 3 or 4 percent, whereas the interest rates charged by the agricultural credit banks are generally high enough to cover operating costs, costs of administration, and payments toward retirement of the Federal subscription.

8. The persons served by the agricultural credit banks are farmers, whereas the beneficiaries of the proposed electric bank will be a segment of the electric power industry. The objectives of the existing banks are to serve agricultural needs, whereas the objectives of the proposed electric bank are to expand public power development.

In summary, the proposed electric bank would be materially different from the Farm Credit Administration banks in organization, size, the charge for the Federal subscription, the repayment of the Federal subscription, the participation by private lenders in the program, the rates of interest charged, and the persons benefited by the Federal participation. In my opinion, the significant differences far outweigh any superficial similarities.

(The four pages from the statement of Eugene F. Rinta which he did not read follow :)

COMPARISON OF PROPOSED FEDERAL ELECTRIC BANK WITH AGRICULTURE CREDIT BANKS

Proponents of these bills have claimed that the proposed bank is patterned after the banks of the Farm Credit Administration. In order to analyze this claim, I shall first briefly describe the three types of agricultural credit banks; second, refer to some of the provisions in the bills to establish an electric bank; and third, point out some of the significant differences between the agricultural credit banks and the proposed electric bank.

1. The 12 Federal Land Banks' provide long-term (40 year) mortgage credit to farmers to purchase farms, buy additional farm land, provide buildings and farm improvements, and for other agricultural purposes. The loans are secured by first mortgages. The program is administered through 12 Federal Land Banks and 719 land bank associations. Of the original subscription by the Government of $8,892,000 in 1917, all but $204,698 had been retired by 1931. During the depression years, Congress authorized additional participation by the Government of $125 million in 1932 and $189 million in 1933. Even so, by June 30, 1947, the Government stock had been retired, and the banks have since been using their own capital. In 1965, the average rate of interest charged by the banks was 5.21%, while the average rate of interest paid by the banks on their bonds was 4.22%. The interest rate charged is high enough to pay all administrative costs of the banks, as well as a pro rata share of the administrative costs of the supervisory Farm Credit Administration.

2. The 12 Intermediate Credit Banks do not lend to farmers directly, but purchase notes held by others, mainly the 471 local Production Credit Associations. The associations, in turn, provide short-term loans to finance seasonal

1 Established by the Federal Farm Loan Act of 1916, Public Law 64-158; 39 Stat. 360; 12 USCA 641-1020.

2 Established by the Agricultural Credit Act of 1923, Public Law 67-503, 42 Stat. 1454. 12 USCA 1021-1131.

8 Established by the Farm Credit Act of 1933, Public Law 73-75, 48 Stat. 259, 12 USCA 1131d-h.

operating expenses, and intermediate term loans (up to seven years) for such purposes as the purchase of machinery, livestock, and making farm improve

ments.

The rates of interest charged to the Production Credit Association by the banks in 1965 averaged 5%, and the associations charged borrowers from 5% to 8%, or an average rate of 6.5%.

The original subscription by the Federal Government in 1923 amounted to $60 million, and had risen to $123,489,120 by 1965. In contrast to the other two types of agricultural credit banks, the intermediate banks have not made progress in retiring the Federal investment.

A Federal franchise tax is imposed equal to 25% of net earnings but not greater than the average rate of interest paid by the United States on its interest-bearing debt issued in the previous year as applied to the Government stock. In 1965, this amounted to $3,092,371 on Governmental stock of $123,489,120. The Farm Credit Administration estimated that from 1963 through 1965 the franchise tax failed by $5,723,948 to cover the interest on the Government's investment.

4

3. The 13 Banks for Cooperatives (12 regional and one central bank), make loans to agricultural cooperatives to cover the production, storage, processing and marketing of agricultural commodities and food-stuffs.

In 1964, the interest rate charged by the banks on loans to cooperatives ranged from 4.25% to 5.5%. The average rate of interest paid by the banks on their outstanding debentures in 1965 was 4.49% (up from 4.02% in 1964, and 3.27% in 1963).

In 1934 the Government furnished $137,500,000 for capital stock, which had been reduced to $52,126,000 by 1965. The Farm Credit Administration estimates that by 1970 all of the Government's investment in these banks will be retired. Since 1953 these banks have paid a Federal franchise tax similar to the tax imposed on the Federal Intermediate Credit Banks. The tax in 1965 amounted to $1,739,000.

II

Let us now look at some of the provisions in the bills pending before this Committee. For simplicity, I will deal only with H.R. 14837, since the bank to be established by H.R. 14000 would, in general, operate even more insolvently that the bank contemplated by H.R. 14837.

Section 401 would establish a bank "subject to the supervision and direction of the Secretary of Agriculture." The bank is to obtain supplemental funds "to the extent feasible" from non-Federal sources, and to conduct its operations "to the extent practicable" on a self-sustaining basis. These are very flexible statutory provisions which will not require the bank to obtain outside financing nor to operate as a sound banking institution.

Section 403 provides for a Board of Directors dominated by the Secretary of Agriculture who may appoint four of the seven members.

Section 404 provides that the REA Administrator shall "serve as the chief executive officer of the electric bank."

Section 405 concerns the capitalization of the proposed electric bank and provides for $750 million of Government subscribed capital, without any franchise tax or charge for use of the funds. Subsection (c) provides that Class A stock shall be redeemed and retired by the bank "as soon as practicable after after June 30, 1981," but not to the extent that the electric bank Board deems that such retirement "will impair the operations of the electric bank." Thus, there is no meaningful repayment schedule for retirement of the Federal subscription.

Subsection (g) permits cooperatives to invest in the bank in circumvention of State laws. Subsection (h) provides that the cooperatives and their customers shall receive dividends before the United States does.

Section 406 concerns the borrowing power of the proposed bank. Subsection (a) proclaims that the electric debentures are not guaranteed by the United States; but the significance of this is greatly reduced by subsection (b) which provides that the bank may obtain the funds it needs to meet its obligations simply by making and issuing notes to the Secretary of the Treasury which the Secretary is directed to purchase.

Section 407 provides that the bank may utilize facilities and services of the REA "without cost" to the bank.

Established by the Farm Credit Act of 1933, Public Law 73-75, 48 Stat. 257, 12 USCA 1134.

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