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Mr. MOTT. Mr. Teague, there is considerable testimony on the record about this from Mr. Phil Lucier, the president of the Continental Telephone Corp., which is the corporation to which you refer. And I think Mr. Lucier explains very well this particular operation. You cannot stop a man from selling his company in our society. Death and taxes are really what make them sell it.
Now, the Continental Telephone Corp. has not, to my knowledge, borrowed any money itself from the REA. One or two of the companies that it acquired, maybe three, had some loan applications pending but I do not think that any of those loans have been granted. Now, I could find that out for the record. Do you know, Jim?
Mr. HARMON. No. Not for sure.
Mr. MOTT. But they simply acquired companies which were REA borrowers and, of course, in most States if you are an REA borrower and you pay 2 percent for your money, the State regulatory commission takes into account in your rate of return the fact that you did borrow money at 2 percent. You do not get as high a rate of return in many States because of the fact that you do borrow money at 2 per
Mr. TEAGUE. Well, I am not criticizing the Continental for this policy. It is undoubtedly good business, but I am raising the questionit is good business for them, that company, but is it good business for the general taxpayers of this country?
Mr. MOTT. Well, sir, we are talking about past loans. We are not talking about new loans. I think you might want to look at it this way. Is it good for the customers who are served-and many of these companies that Continental acquired were starved for capital for reasons which I have given, unavailability of capital, and I can think of one in Virginia that simply threw in the towel because they had had an application pending for an REA loan for a long time and the man went to his stockholders and said, look, we cannot wait any longer because we are giving poor service.
So, they sold out to Continental and Continental has the resources to bring better service to the customers that company served. Now, Mr. Wilbourn.
Mr. TEAGUE. If he cares to say anything further, that is fine. Otherwise, I have one more question, Mr. Chairman.
On page 14 of H.R. 7, line 19, it says, referring to class A stock, which is the stock to be purchased by the Government at $30 million a year for 10 years or a total of $300 million, "and such Class A stock shall be redeemed and retired by the Telephone Bank as soon as practicable after June 30, 1984, but not to the extent the Telephone Bank Board determines that such retirement will impair the operations of the Telephone Bank."
Would you gentlemen agree no matter what the intentions of the proponents of this legislation may be, and I am sure they are good and honorable, no matter what those intentions are, does not this wording mean that there is no assurance whatsoever that the Federal Government will ever get its $300 million back?
Mr. HARMON. Mr. Teague, I would agree with your statement completely if the bill had not been amended to correct that particular defect. If you will read on, you will find that there is an automatic trigger now in the bill. Once the total capitalization becomes $400 mil
lion-this is the first line on the next page-the bank is then forced to pay back the capital stock at the rate of 5 percent for each loan. So, it will have to be paid off.
Mr. TEAGUE. All right. Line 3 says-I just want to get this straight because I explained why, that I have not had time to get into this fully-"Class A stock shall be entitled to a return payable from the income at the rate of two per cent per annum."
Mr. HARMON. Sir, that is the amount of money that the bank will pay for the seed money. The automatic trigger is above it.
"Class A and B stock issued totals 400 million," and then the payment which is down in the lower part, "shall be an amount equal to the class B stock sold by the Telephone Bank during each year."
The amount of class B stock is 5 percent. This was an amendment put in, Congressman Teague, to take care of the objection in the bill. last year.
Mr. TEAGUE. I am glad to have your explanation and your version. It is not entirely clear to me but we do not need to pursue it now. We will get into it when we get into executive session on the bill.
Mr. HARMON. Yes, sir.
Mr. TEAGUE. Thank you.
The CHAIRMAN. Any other questions of Admiral Mott?
Mr. GOODLING. On page 3 of your testimony you say:
Let me hasten to add that many of our REA borrowers can afford to pay more than 2 percent.
Have you people ever supported a bill designed to do this, make them pay more than 2 percent? I think that bills in the past did do this.
Mr. MOTT. Mr. Goodling, we recognize that it is rather difficult to support something like this when a bill never comes to a hearing and none of those bills ever came to a hearing in the last 15 years. But as I have testified before, sir, we did write a letter to the President of the United States, and this is in previous testimony, in which we said to him in effect, "Mr. President, you are putting the lights out in the White House to save money but you have an economically unsound situation where people who can afford to pay more than 2-percent money are going down to the REA Administrator and offering to pay it and he says 'No, I am sorry, I cannot make it more than 2 percent.'
"So, Mr. President, we think," and now this is the association, "we think, Mr. President, that you should at the very least sponsor a bill from the administration which would introduce a needs test and give the Administrator the authority to decide who can afford to pay what rate of interest."
I understand from some of my scouts over at the White House that this kind of stuck the President, the former President, and he replied in rather colorful language that he did not want to have any bureaucrat with this burden on his shoulders of deciding who would pay what rate of interest, and that this would not help him one bit to increase the rate of interest because he would still have to come up to the House Appropriations Committee and get the money in direct
appropriations regardless of the rate of interest, so that he was not interested in a bill which would simply raise the rate of interest. And that is why the previous administration backed the bank bill. The President simply felt that this would not help him at all in his budget.
Mr. GOODLING. You gentlemen are all businessmen. Otherwise you would not have the positions you have today. How can you ever justify 2-percent money at this time? Years ago when REA was instituted it was fine. It cost the Government about 2 or 214 percent. Today the Government is paying 6-percent interest on the money it borrows.
Now, how can you ever ask for 2-percent money as business people? Mr. MOTT. Mr. Goodling, we are not. There is no 2-percent money in this bank. We are trying to get away from it as much as we can.
Mr. GOODLING. Are you not going to pay 2 percent on all the money the Government pays into this bank? Are you not going to pay 2 percent
Mr. MOTT. That is only on the seed money.
Mr. GOODLING (continuing). On the investment?
Mr. Mort. That is only on the seed money.
Mr. GOODLING. The money that this bill will require the Government to put in the bank as I understand it, you are going to pay 2 percent on that money; is that correct?
Mr. MOTT. That is correct, sir. That is correct, sir, but that money will be used to borrow money from the commercial markets at much higher rates and as I understand it, about the ratio of 8 to 1, and the interest that the bank charges will-you cannot tell exactly but I would guess that it would be pretty close to 6 percent.
Mr. GOODLING. But the taxpayer is picking up the difference.
Mr. GOODLING. You are never going to pay it back, so it is not temporary.
Mr. MOTT. We just explained to Mr. Teague how you would pay back
Mr. GOODLING. Pay the 300 million back?
Mr. MOTT. Yes, sir.
Mr. GOODLING. If as you told Mr. Teague you will, there is some question in my mind whether you can ever be required to pay it back. You mentioned General Telephone.
Mr. MOTT. Yes, sir.
Mr. GOODLING. Is General Telephone getting 2-percent money?
Mr. MOTT. General Telephone has acquired a number of REA companies. For instance, it acquired one up in your native State of Pennsylvania, and I do not believe that loan has been paid off yet.
The last time I looked, General Telephone had about $10 million in loans outstanding. Now, they may have reduced that since the last time I looked. And there are various reasons why they have not paid it off perhaps. You will have a General Telephone witness on after me and maybe he knows the answer.
Mr. GOODLING. If they can get 2-percent money, I do not blame them. I would think them stupid if they never paid it off so long as they can get 2-percent money and General Telephone happens to be my telephone company.
Mr. MOTT. I know it is.
Mr. GOODLING. And I know they can afford to pay more than 2-percent money.
Mr. MOTT. They have never borrowed any 2-percent money. The only way they got it is the same way Continental got it, by acquiring a company that had an existing 2-percent loan.
Mr. GOODLING. One more question. Do your member companies pay income tax on their earnings?
Mr. MOTT. Yes, sir.
Mr. GOODLING. To the Federal Government?
Mr. MOTT. Yes, sir. All the commercial companies do. The co-opsMr. GOODLING. I mean, your co-op companies.
Mr. MOTT. I think you had better ask Mr. Fullarton that question. He is the next witness or he will be on this morning. I know they pay a lot of taxes but whether they pay Federal income taxes, I simply do not know. We have about 70 co-op members in our association, but Mr. Fullarton has a great many more.
Mr. GOODLING. That is all, Mr. Chairman.
The CHAIRMAN. May I comment just a moment on some of the questions which have been asked because they are exactly the same questions, of course, that were asked last year, and they are legitimately asked again, because they are the crux, I think, of this whole situation.
It seems to me that the first assumption is that we no longer need any cheap money for rural telephones because certain companies which are engaged in the rural business are perfectly able to borrow money at a higher rate. Of course, that goes to your concept of the purposes of this supplemental financing, and that financing from my standpoint is for the purpose of getting service in rural areas, not for the purpose of helping Continental or General or Bell Telephone Co. or anybody else but for the purpose of getting service to people in rural areas who otherwise could not have the type of service which they are now getting as a result of this Government assistance.
I am discusing simply your questions, Mr. Goodling, which seem to me to go to the crux of this whole thing. I was just saying, as I said last time, that it seems to me that the difference of opinion here is one of the purpose of this program. If indeed the program be simply to help General Telephone Co. or Smith Telephone Co. or Continental Telephone Co., then obviously, there ought not be any program of any kind. They all ought to have to pay 10 percent or whatever the market requires.
But if the purpose is to get good telephone service in rural areas, then it seems to me to make no difference who gives that service, whether it is given by Mr. Fullarton's cooperative or whether it is given by the Bell Telephone Co.
What we are trying to do is to get out on to these farms and get them telephone service. Now, neither Bell nor General nor the ABC Cooperative is going to be able to give good service if it costs them more than they get back from the service. Obviously, the cost of giving service where you only have a few customers per mile is much greater than the cost of giving it in Washington, D.C., or in some other place where you have a large number of customers. Consequently, we have felt that it was necessary to do for telephone service what we have done for public roads and that is to have a governmental investment.
We made that investment in the form of a reduced interest rate. There are at the present time a number of companies which are providing service in rural areas who admittedly could pay more than 2 percent, who would pay more than 2 percent if they had the opportunity. Under the existing law there is no rate that you can get from REA for telephone service except 2 percent.
Under the terms of this bill, at least a portion, not all but at least some of these telephone companies would pay a higher rate than 2 percent. Nobody has claimed that the passage of this bill would result in everybody paying the full cost of money, but it is obvious that if they loan $1 from this bank that it will require a lesser degree of subsidy from the U.S. Treasury than is required today when they all get the money at 2 percent.
Admiral Mott has pointed out that some of these companies want to pay more than 2 percent, are ready and willing and able to pay more than 2 percent. This bill would make it possible for them to get money and pay more than 2 percent and to the extent that they avail themselves of it, the Government is relieved of that much expense. It may not be as large a percentage as we would like. It will not be as large a percentage as it would have been last year because of the increase in interest.
Obviously, today this bill will not be as effective as it would have been a year or two ago, but it will still have some effect and to the extent that it is effective, it reduces the subsidy which the U.S. Government has to pay and unless you pass this or some other legislation, the subsidy must always remain the difference between 2 percent and the cost of money to the Government.
Now, Admiral Mott has pointed out that the purpose of this bill is to take a given amount of money and use it as the basis of bank credit. When it takes Government money at 2 percent, and that is all the bank has to pay for it the banking process multiplies that money about eight fold that is, the bank can loan about eight times as much as it borrows. That is the virtue of using the banking system. That is the reason we offered the banking system rather than the guarantee system. There is no multiplication in the guarantee system, but there is a multiplication of about eightfold in the banking system. We voted it, this committee voted it just last year.
We authorized the farm credit system to multiply by 20 times, the amount of capital that goes into it as compared with their loans. This legislation confines this to eight times or less than half of what we authorized for the farm credit system. It has proven over a good many years that that could be done. So, we are suggesting that if the Government advances a dollar at 2 percent to the bank, and they loan $8 instead of $1 that the Government saves seven-eighths of what it would cost the Government if they were simply continuing to make the loans at 2 percent through the REA.
We are offering a very substantial saving to the Government. It does not eliminate 2-percent money and many of those who are opposing it come up and say, well, you ought not to pass this because it still leaves 2-percent money, and it does leave 2-percent money where it can be shown that the borrower, whether he be corporate or cooperative, cannot pay more, and that number will be a whole lot bigger this