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RURAL TELEPHONE SUPPLEMENTAL FINANCING

THURSDAY, MARCH 13, 1969

FIOUSE OF REPRESENTATIVES,
COMMITTEE ON AGRICULTURE,

Washington, D.C. The committee met, pursuant to recess, at 10:05 a.m., in room 1301, Longworth House Office Building, the Honorable W. R. Poage (chairman) presiding.

Present: Representatives Poage, Abbitt, Purcell, O'Neal, de la Garza, Vigorito, Jones of North Carolina, Montgomery, Sisk, Rarick, Belcher, Teague of California, May, Goodling, Miller, Mayne, Zwach, Kleppe, Myers, Sebelius, and Mizell.

Staff present: Christine S. Gallagher, clerk; William C. Black, general counsel; John A. Knebel, assistant counsel.

The CHAIRMAN. The committee will please come to order.

We have an old friend with us this morning. We are delighted to have you Mr. Hamil, the new and the old Administrator of REA, or shall I say "former"? Not the old Administrator, but new and former Administrator of REA is with us, Mr. David Hamil, who many of you remember and who I think regardless of your political views, all of us regarded as a fine Administrator and a man who did a splendid job. We are looking forward to him taking an even more difficult situation now and handling it successfully. We are pleased to have you with us, Mr. Hamil. And we will be delighted to have any statement that you have in connection with the rural telephone financing bill. (Following is the Department's report on H.R. 7:)

DEPARTMENT OF AGRICULTURE,

Washington, D.C., March 13, 1969. Hon. W. R. POAGE, Chairman, Committee on Agriculture, House of Representatives.

DEAR MR. CHAIRMAN : This is in reply to your request of January 16, 1969, for a report on H.R. 7, a bill "To amend the Rural Electrification Act of 1936, as amended, to provide an additional source of financing for the rural telephone program, and for other purposes."

The direct loan program has been maintained at an annual level of approximately $125 million dollars. In recent years, the Rural Electrification Administration has not been able to satisfy all the requests for capital from its telephone borrowers. The level of loan applications carried over from year to year has been mounting steadily. By the close of calendar year 1968, the backlog of pending applications had reached $296 million.

H.R. 7 would establish a Rural Telephone Bank for the purpose of supplying additional capital for the rural telephone program as a supplement to the present direct REA loan program. The Bank would be capitalized initially by Government subscription with provision for retirement of the Government investment. The financing plan is an adaptation of the Federal land bank system which has

(101)

demonstrated its capability as a means of freeing a lending program from complete reliance on Treasury financing over a period of years.

The bill provides supplemental financing, rather than supplanting immediately and completely the existing REA 2-percent, 35-year loan program, apparently on the premise that there is likely to be a continuing need for low interest rate, long-term financing of rural telephone systems. These systems have subscriber density and revenues which are much lower than those of the Bell system and the Independent telephone systems generally; and their operating and maintenance costs are much higher due to their location in open and rugged country.

Under H.R. 7, those systems which continue to require minimum interest rates would be eligible for loans under section 201 of the Rural Electrification Act. Those which are capable of paying higher interest rates would use the Bank as their source of credit.

This Administration is presently undertaking a comprehensive review and evaluation of all existing Federal credit programs as well as any major proposed changes in such programs. One of the purposes of this review is to identify preferred methods of providing credit assistance under these various programs. The findings of this review will provide a basis for arriving at recommendations on specific programs. We are exploring the feasibility of the approach set forth in H.R. 7 as well as a number of alternative approaches.

As you are undoubtedly aware, this Administration is currently undertaking a major review of the budget for FY 1969 and FY 1970. Since neither this review nor the comprehensive review of credit programs has been completed to date, we are not able to take a position on the merits of H.R. 7 at this time.

The Bureau of the Budget advises that there is no objection to the submission of this report from the standpoint of the Administration's program. Sincerely,

CLIFFORD M. HARDIN,

Secretary of Agriculture. (Enclosure.)

SHORT SUMMARY OF H.R. 7 (91ST CONG., FIRST SESS.) A BILL TO AMEND THE RURAL

ELECTRIFICATION ACT OF 1936, AS AMENDED, TO PROVIDE AN ADDITIONAL SOURCE OF FINANCING FOR THE RURAL TELEPHONE PROGRAM, AND FOR OTHER PURPOSES

This proposal creates a Rural Telephone Bank, initially under the supervision of the Secretary of Agriculture, to provide non-Federal sources of financing to supplement the existing telephone loan program now administered by the Rural Electrification Administration.

The bank will initially be managed by a board of 13 directors, consisting of the REA Administrator, the Governor of the Farm Credit Administration and five Presidential appointees, three from the Department of Agriculture, and two from the general public; and six members, representing the rural telephone systems, initially appointed by the President, and thereafter elected for two-year terms by telephone system stockholders of the bank. After conversion of the bank to nonFederal ownership, operation and control, the board is reduced to eight members, the REA Administrator, the Governor of the Farm Credit Administration, and the remaining six elected by the non-Federal stockholders.

Until conversion to borrower control, the REA Administrator will serve as the chief executive officer (Governor”) of the bank, and until then, in addition to using its full-time employees, the bank may partially or jointly use the personnel and facilities of REA or other agencies of the Department of Agriculture, without cost to the bank.

Equity capital will be furnished the bank by the United States and by borrowers and eligible borrowers from the bank. The capital investment of the United States in the bank would be in amounts annually appropriated, beginning in fiscal 1970 and not exceeding $30,000,000 each year, until the Government investment totals $300,000,000. Government investments would be furnished from "net collection proceeds” of the 2 percent REA telephone loan program. Stock held by the United States (Class A) will be retired by the bank as soon as practicable after June 30, 1984, with provision for mandatory minimum retirements after Class A and B stock of the bank reach $400 million. Class A stock will be entitled to a 2 percent annual return, payable from income, and cumulative. Borrowers from the bank will be required to invest 5 percent of their loan funds in nondividend bearing bank stock (Class B). Dividend-bearing bank stock (Class C) will be available for investment by borrowers, potential borrowers, and their organizations.

The bank is authorized to obtain borrowed funds through the sale of its debentures, up to 8 times the amount of paid-in capital and retained earnings of the bank. Debentures will not be guaranteed by the United States. Until conversion to borrower control, Treasury approval of debentures issues is required.

Bank loans, to be fully amortized over a period not exceeding 50 years, may be made to eligible borrowers: (1) until June 30, 1984 or until bank conversion, if earlier, at an "intermediate loan” rate, reflecting the current average market yield on marketable securities of the United States having comparable maturities, but with a 4 percent interest ceiling; or (2) at an interest rate reflecting the average cost of moneys to the bank, including interest on the bank's debentures, return on Class A stock, administrative expenses, reserves and estimated losses. Intermediate loan rates will not be available to borrowers which are capable of both paying the higher bank rate and achieving Federal program objectives. The purposes for which bank loans may be made include the same purposes governing REA 2 percent telephone loans, as well as improving the efficiency, effectiveness or financial stability of borrowers' systems; special limitations are specified in respect of bank loans for acquisitions. Provision is made for loans under section 201 to borrowers with average density of three or fewer subscribers per mile, unless the borrower elects a telephone bank loan. Certain political activities by borrowers are prohibited, and sales of a borrower's property prior to full repayment of indebtedness are not permitted without approval of the Administrator or bank board.

After the Government's investment has been retired by the bank to the extent that stock held by others than the Government equals two-thirds in stated value of all capital stock, provision is made for conversion of the banks to private ownership, control and operation. The bank is deemed a “mixed ownership Government corporation,” and as such is subject to GAO auditing and report procedures.

The proposal also establishes a Rural Telephone Account into which will be transferred appropriations, assets and collections of the REA telephone loan program and from which will come funds for the direct telephone loan program and for Federal investments in the telephone bank.

Section 201 of the Rural Electrification Act is amended to authorize direct telephone loans to public bodies now providing rural telephone service.

STATEMENT OF DAVID A. HAMIL, ADMINISTRATOR, RURAL ELEC

TRIFICATION ADMINISTRATION, U.S. DEPARTMENT OF AGRICULTURE, ACCOMPANIED BY EVERETT C. WEITZELL, DEPUTY ADMINISTRATOR, REA; GEORGE P. HERZOG, DIRECTOR, OFFICE OF THE BUDGET, REA; JOSEPH VELLONE, ACTING ASSISTANT ADMINISTRATOR FOR BORROWERS DEVELOPMENT; AND EDGAR F. RENSHAW, ASSISTANT ADMINISTRATOR, TELEPHONE

Mr. HAMIL. Mr. Chairman and members of your committee, I am pleased to be here again this morning. I guess what you said is correct, Mr. Chairman; the first of the Administrators to come down for a second hitch. I happen to have been the sixth Administrator and now I am back here as the eighth.

I do not think this microphone is working so I will just have to talk a little louder.

The CHAIRMAN. I do not think it is either, but we can hear you. Mr. HAMIL. I will talk a little louder.

Mr. CHAIRMAN. I do have a statement. A great deal of it merely repeats information that I know that the committee already has, and with your permission I would like to only read that portion of it which closes the statement. And if I may have your permission, the balance of it I am sure will be filed for the record. The CHAIRMAN. We will be glad to have you

read

any care to.

of it you

Mr. HAMIL. All right. On page 4, I will start:

This administration is presently undertaking a comprehensive review and evaluation of all existing Federal credit programs as well as any major proposed changes in such programs. One of the purposes of this review is to identify preferred methods of providing credit assistance under these various programs. The findings of this review will provide a basis for arriving at recommendations on specific programs. We are exploring the feasibility of the approach set forth in H.R. 7, as well as a number of alternative approaches.

As you are undoubtedly aware, this administration is currently undertaking a major review of the budget for fiscal year 1969 and fiscal year 1970. Since neither this review nor the comprehensive review of credit programs has been completed to date, we are not able to take a position on the merits of H.R. 7 at this time.

(The statement follows:)

STATEMENT OF DAVID A. HAMIL, ADMINISTRATOR, RURAL ELECTRIFICATION

ADMINISTRATION, U.S. DEPARTMENT OF AGRICULTURE I am privileged to appear before this Committee regarding H.R. 7 and similar legislation as the eighth Administrator of the Rural Electrification Administration.

The rural telephone program became effective on October 28, 1949. From that date to January 1, 1969, loans totalling $1,584,272,744 have been made to 867 systems in 46 States. In that time, service has been furnished or improved for more than six million people in over two million rural establishments. The percentage of farms without telephone service in the country has decreased from 61 percent in 1949 to 18 percent today.

The percentage of farms without telephone service is a poor measure of the present financial needs of these rural telephone systems. In 1949, when many rural subscribers had to share their telephone lines with up to 25 other families, reducing the number of parties on a line to a maximum of eight appeared to be a substantial improvement in the quality of service. At that time, providing a better grade than eight-party service for rural people in high-cost, low-density areas did not appear feasible.

Reducing the number of parties on a line as well as the improved quality of service encouraged greater utilization of the telephone facilities. As a result, it has now become increasingly difficult to obtain the use of a party line. The resulting frustration has led to a growing demand for upgrading of service. Fortunately, in the intervening years, the cost of constructing facilities to provide rural telephone service has dropped sharply, due in a large part to new construction techniques and materials pioneered by REA engineers and REA borrowers. Upgrading of service is therefore both necessary and economically feasible provided funds at reasonable interest rates can be found to do the job.

The level of loan applications carried over from year to year has been mounting steadily. On January 1, 1969, REA had 327 telephone loan applications on hand totalling 296.5 million dollars. About 60 percent of the funds required in these applications will be used for upgrading of telephone service. The backlog of applications on hand is more than twice as large as the current level of loans being authorized anpually by the Congress in the appropriations acts.

H.R. 7 would establish a rural telephone bank to provide rural telephone systems with the additional funds required. To help the Bank get started, the Government would use "net collection proceeds” from the present two percent REA telephone loan program in amounts not exceeding 30 million dollars annually as appropriated annually by the Congress to purchase the Bank's two percent Class A stock until the Government's investment totals 300 million dollars. Each borrower from the Bank would be required to invest five percent of its loans in non-dividend-bearing Class B stock. In addition, dividend-bearing Class C stock would be available to borrowers and potential borrowers. This financing plan is an adaptation of the Federal Land Bank System which has demonstrated its capability as a means of freeing a lending program from complete reliance on Treasury financing over a period of years.

With this equity capital as a base, the Bank would be able to raise additional funds through the sale of its debentures. The bill limits such borrowings to eight times the amount of paid-in capital and retained earnings and requires Treasury approval of debenture issues until the Bank has been converted to

borrower control. Retirement of the Government's Class A stock would be started in 1984. Debentures would not be guaranteed by the United States.

The Bank may make loans to eligible borrowers either at an “intermediate” loan rate or at an interest rate reflecting the average cost of moneys to the Bank, including interest on the Banks debentures, return on Class A stock, administrative expenses, and provision for reserves and estimated lossés.

The intermediate loan rate, available only until the Bank is converted to borrower control on June 30, 1984, whichever comes first, would be set at the current average yield of marketable securities of the United States having comparable remaining maturities, or at four percent, whichever is lower. The intermediate loan rate would not be available to borrowers capable of paying the higher Bank rate and still achieving program objectives.

The bill also provides for a rural telephone account into which will be transferred appropriations, assets and collections of the present two percent telephone loan program. Funds for both the present two percent telephone loan program and for the annual Federal investment in the Telephone Bank would come from this account.

This Administration is presently undertaking a comprehensive review and evaluation of all existing Federal credit programs as well as any major proposed changes in such programs. One of the purposes of this review is to identify preferred methods of providing credit assistance under these various programs. The findings of this review will provide a basis for arriving at recommendations on specific programs. We are exploring the feasibility of the approach set forth in H.R. 7 as well as a number of alternative approaches.

As you are undoubtedly aware, this Administration is currently undertaking a major review of the budget for Fiscal Year 1969 and Fiscal Year 1970. Since neither this review nor the comprehensive review of credit programs has been completed to date, we are not able to take a position on the merits of H.R. 7 at this time.

The CHAIRMAN. Well, now, Mr. Hamil, would it be fair to say that you are speaking officially this time, could you say that you oppose this measure ?

Mr. HAMIL. Are you asking me a personal question, Mr. Chairman?

The CHAIRMAN. No; I am asking you now I will ask you a personal question in a minute, but now as administrator and as an official would you say that you are opposed to this bill?

Mr. HAMIL. In my own right, I am not opposed to the bill. I had suggested a bill similar to H.R. 7 to Members of the Congress and to the administration as far back as 1958. And there might be a few minor details which I am sure could be worked out, but in its principle and in the basic concepts of the bill, I believe that H.R. 7 offers a means of obtaining additional credit resources for the fine telephone program which has been developed under the Rural Electrification Administration. I believe that it offers a means whereby the telephone program can go from total Treasury support to total, I would hope, support from resources other than the Treasury. And the finest example we have of such a transition has been the farm credit program. And it would be my judgment that the rural telephone program as it has been developed by REA could follow and would follow in exactly the same course.

The CHAIRMAN. Well, let us get this clear. Is the Department here opposing this bill?

Mr. HAMIL. Frankly, I talked to the Secretary of Agriculture this morning and I think I am at liberty to say they are not opposing the bill, Mr. Chairman.

The CHAIRMAN. That is what I want in the record. Then the Department is not opposing the bill and you as an individual, not as an administrator but as an individual, you feel that it is a good bill.

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