have resulted in a net loss of only $44,478 to the government. This was from a total of $5.5 billion loaned to borrowers as of June 30, 1965.

We favor legislation to provide rural electric cooperatives an opportunity to create a member-owned and member-controlled financial structure. We believe the bill before the Committee should be improved in several respects to assure the accomplishment of this objective. Therefore, the following changes are

suggested:

1. Member ownership of rural electric cooperatives

S. 3337 does not deal with the question of member ownership of rural electric cooperatives. We recommend that this bill include a provision requiring that an electric cooperative borrower, in order to be eligible for loans from the bank, must establish each member's proportionate share of ownership in the cooperative. Each member's share should be proportional to his contribution to the net worth of the cooperative. Such shares should be negotiable to the extent that they would be transferable to eligible persons on the books of the cooperative under conditions prescribed in the by-laws of the cooperative.

The so-called capital credits plan used by many electric cooperatives does not establish member ownership and control. In most cases, the capital credits for all patrons on the books of the cooperative add up to less than the net worth of the cooperatives, thus leaving unsettled the ownership of the equity other than that in capital credits accounts. In practice, the capital credits plan often weakens rather than strengthens the financial structure of rural electric cooperatives. Something better is long overdue. When a workable device for clearly establishing ownership is developed and put into operation, provision should also be made for members to invest additional funds in their cooperatives. This is as it should be.

2. One bank with two separate accounts

In formulating a supplemental financial structure for rural electric and rural telephone borrowers, we question the need for two separate banks administered by two staffs performing similar credit functions. One bank could be established, with one board of directors, one administrator, and two accounts-one for the electric cooperative borrowers and one for telephone borrowers. This would minimize overlapping and duplication of effort.

It has been our thought that the supplementary credit needs of rural electric and rural telephone systems could be met through an expansion of the Farm Credit System. We still believe this approach has merit.

The Farm Credit System has had invaluable experience and has achieved outstanding success in helping farmers and their cooperatives to meet their expanding capital requirements. It began as a government-controlled and financed system, but it has evolved into a system which is largely owned and controlled by borrowers. Each year farmers and cooperatives raise about $6,000,000,000 in the private money market to provide financing for production, marketing, and farm ownership purposes. This evolution has been a slow process over three decades. It has been aided by various enactments by the Congress, which we have welcomed the opportunity to support.

We envisioned a similar evolutionary process for the financing of rural electric and telephone service. This would be facilitated and speeded up if the banks were placed under the general guidance of the Farm Credit Administration. 3. Board of directors composed of seven members

With respect to the membership of the board of directors during the period when government capital constitutes more than half of the capital of the bank, we favor a board consisting of seven directors-four appointed by the President with the advice and consent of the Senate and three elected by the borrowers, each with an equal vote. Further, we recommend that the legislation require that Presidential appointees shall not be full-time government employees and that only members who are not managers or other employees of the electric cooperative borrowers shall be eligible to serve as elected members of the board of directors of the bank.

After Class B and C stock totals 51 percent of the total stock outstanding in the bank, the membership of the board should be composed of six members elected by the borrowers and a seventh member appointed by the President as a representative of the government.

4. Only two classes of borrowers

S. 3337 provides for three classes of loans at different rates of interest and for repayment schedules which would be different for the three classes of borrowers. One class of borrowers would borrow funds from the bank at market rates of interest; the second class would be eligible for bank loans at intermediate interest rates and a different repayment schedule; and the third class would be composed of those new borrowers and others eligible for 2 percent loans from REA.

We favor revision of the legislation to provide two classes of loans; (1) those made available through the bank on a non-subsidized basis at the cost of money and (2) those made at subsidized rates of interest by REA.

5. Gradual transition from REA loans to use of the bank

Some method must be provided to encourage the borrowers of low-interest money to graduate to the use of the bank after the borrowers no longer need subsidized credit to continue serving rural people. We recommend that when a borrower's net worth is in excess of 20 percent of its assets, the cooperative would no longer be eligible for low interest money from REA but would be eligible to secure the needed financing from the bank or from other sources.

We refer to exhibit A of our testimony, which contains a table taken from the 1965 Report of the Rural Electrification Administration. It shows the percentage of borrowers from REA and the net worth of the borrowers as a percent of assets. Our amendment simply states that 38 percent of the borrowers would be eligible to use low-interest money and the facilities of the bank. The remaining borrowers would be eligible for loans from the bank or other sources. 6. Loans for generating and transmission facilities

As noted in the above quoted policy resolution, we support loans to borrowers for generation and transmission facilities where satisfactory arrangements cannot be made for the purchase of power by distribution cooperatives at competitive rates. We believe such loans should be made only where it is clearly determined that an adequate source of power at reasonable rates is not available. We believe that future generation and transmission loans should not be subsidized by the government. They should be made through the bank. Proposals for generation and transmission facilities should be sufficiently sound to be financed on an economic basis by means of loans made available through the newly created bank on the basis of the cost of money.

7. Capitalization of the bank

With respect to the capital structure of the banks, we are relatively less concerned with the alternative methods of getting government capital into the banks and relatively more concerned with provisions relating to its retirement. The proposal before the Committee appears to be based on the assumption that government capital will be retired; however, there is no timetable in the bill for the retirement of such capital. In fact, there is little incentive in the bill to retire government capital. We believe the legislation should contain more specific requirements relative to the retirement of government capital, using the Farm Credit laws as a guide.

In conclusion, we reiterate our support of a sound financial structure to provide the rural electric and telephone borrowers access to establish sources of private capital. We support legislation designed to help meet the necessary capital requirements. Exhibit B. attached to this statement, contains drafts of amendments to S. 3337. These amendments and the suggestions we have made with regard to the legislation now before the Committee are designed to clearly establish member ownership, strengthen borrower control and make possible sound growth of these services so vital to the future of American agriculture.

Source: "Annual Report of the Department of Agriculture, 1965-Report of the Administrator, Rural Electrification Administration," p. 34.

EXHIBIT B-AMENDMENTS TO S. 3337

MEMBER OWNERSHIP OF RURAL ELECTRIC COOPERATIVES-AMENDMENT NO. 1

We believe that members of any rural electric or rural telephone cooperative should own their cooperative. There is no such provision in the proposed bill that would accomplish this objective. This would provide for member ownership by requiring that a cooperative must establish in its by-laws the issuance of certificates of ownership. The instrument would set forth each member's proportionate share in the net worth of the cooperative. This would be a requirement in order for the cooperative to be eligible to borrow from the bank. The amendment is as follows:

Section 3 is amended by adding at the end of subsection (b) of Sec. 410 the following new paragraph:

"(4) Loans shall be made to cooperatives only if such cooperatives have adopted by-laws which

“—require the issuance of 'certificates of ownership' to each member establishing the members' proportionate share of ownership in the net worth of the cooperative, and

"-provide that 'certificates of ownership' are transferable to other members of the cooperative under conditions prescribed by the by-laws.”

ONE BANK WITH TWO SEPARATE ACCOUNTS-AMENDMENT NO. 2

We are recommending the establishment of only one bank, with two separate accounts-one for rural electric borrowers and one for rural telephone borrowers-with one board of directors and administrative staff. An amendment of this type would require a complete redraft of the proposed bill.

The one bank concept is consistent with the structure of the Farm Credit System. We would recommend, however, that both electric and telephone borrowers be represented on the board of directors. The establishment of one bank would minimize overlapping and duplication of effort and would provide a sound structure for the use of both eligible rural electric and telephone borrowers. With reference to the retirement of government capital, section 406 (c) is patterned after the Farm Credit System and does provide guidelines for the retirement of class A stock.

BOARD OF DIRECTORS COMPOSED OF SEVEN MEMBERS—AMENDMENT NO. 3

This amendment would change the make-up of the board of directors to bring it more in line with the pattern established by the Farm Credit System. The suggested changes would:

1. provide for a seven-member board of directors.

2. provide for Presidential appointment, with the advice and consent of the Senate, of four members of the board of directors for two-year terms.

3. provide for three members of the board of directors to be elected by the class B and class C stockholders of the bank.

4. exclude employees of cooperatives from serving on the board of directors. 5. provide that after class B and class C stock is 51 percent of the total stock outstanding in the bank, six board members shall be elected by the holders of class B and class C stock and the seventh member shall be appointed by the President as a representative of government.

In order to have the board of directors effectively administer the operation of the bank, S. 3337 would have to be amended to make the bank an instrumentality rather than an agency of government as now constructed. The current House version (H.R. 14837-committee print) contains the necessary language.

ONLY TWO CLASSES OF BORROWERS—AMENDMENT NO. 4

We believe there should be only two classes of loans to cooperatives—(1) loans for cooperatives that are not yet in a position to pay interest rates to reflect the cost of money and (2) loans to established cooperatives that are capable of paying the going rate of interest established by the bank. We believe the intermediate credit arrangement as provided for in S. 3337 is not necessary if the guidelines that we recommend with regard to the two types of credit are followed. The following amendment would exclude “intermediate loans." Section 3 is amended

(1) by changing paragraph (2) of subsection (b) of Sec. 410 to read as follows:

"(2) All loans made hereunder shall bear interest at a rate which reflects the current average rate payable by the electric bank on its electric debentures, and administrative expenses and estimated losses of the electric bank in respect of such other loans, all as determined by the Governor of the electric bank."

(2) by changing paragraph (2) of subsection (b) of Sec. 610 to read as follows:

"(2) All loans made hereunder shall bear interest at a rate which reflects the current average rate payable by the telephone bank on its telephone debentures, and administrative expenses and estimated losses of the telephone bank in respect of such other loans, all as determined by the Governor of the telephone bank."

GRADUAL TRANSITION FROM REA LOANS TO USE OF THE BANK-AMENDMENT NO. 5

Some method must be provided to encourage the low interest rate borrowers to graduate to the bank. The proposed amendment would provide that, when a cooperative's net worth is in excess of 20 percent of its assets, the cooperative would no longer be eligible for low-interest money from REA and would have to secure its financial needs from the bank. This would provide a gradual transition from government financed systems to the bank. (See page 34, Table II, Report of Administrator, REA-1965.)

Section 3 is amended

(1) by adding to Sec. 410 a new subsection as follows:

"(d) Notwithstanding any other provision of law, loans shall not be made under section 4 of this Act to any corporation or public body which during the immediately preceding year had a net worth in excess of 20 percent of its assets."

(2) by adding to Sec. 610 a new subsection as follows:

"(d) Notwithstanding any other provision of law, loans shall not be made under section 201 of this Act to any corporation or public body which during the immediately preceding year had a net worth in excess of 20 percent of its assets."

LOANS FOR GENERATING AND TRANSMISSION FACILITIES-AMENDMENT NO. 6 All loans for the purpose of financing or refinancing generating and transmission facilities should be made through the bank.

The following amendment would require that all loans for generating and transmission facilities be made through the bank in compliance with provisions contained in S. 3337.

Section 3 is amended by adding to Sec. 410 a new subsection as follows:

“(d) Notwithstanding any other provision of law, loans shall not be made under section 4 of this Act for the purpose of financing or refinancing the construction, improvement, expansion, acquisition, or operation of electric generating plants or electric transmission lines."

STATEMENT OF JOHN C. LYNN, LEGISLATIVE DIRECTOR,
AMERICAN FARM BUREAU FEDERATION

Mr. LYNN. Mr. Chairman and members of the subcommittee. We welcome this opportunity to present our views with regard to this legislation.

The Farm Bureau has a long history of support of the rural electric cooperatives and the telephone cooperatives. It was in 1944 that our delegates suggested that there should be provided a supplemental finance plan in order to get these rural electric cooperatives on a program somewhat like the farm credit system rather than to continue to depend on the Federal Government for low-interest money.

We estimate that about two-thirds of our members are users of rural electric cooperatives, so we have a vital interest in this legislation.

I think the record of the rural electric cooperatives and the telephone cooperatives is outstanding. With slightly less than 1,100 borrowers, the delinquencies have been very few, and we think that is a compliment to this program, but we also think that with the situation changing so dramatically in rural America that there needs to be real thought given to basic changes in the approach to this problem. So, beginning on page 4, I would like to outline about six recommendations for amendments designed to improve this legislation. These amendments, you will notice, are geared to the old bill. We did not get the new bill in, in time. It will only mean a change in line number in order to make them applicable to the new bill.

Our first amendment-and we have legal language attached to be inserted at the proper place has to do with the ownership of the rural electric cooperatives. This is a point that is not well understood. In some States in case of a liquidation of a rural electric cooperative, it is our understanding that they would revert to the State's ownership. In other States, it becomes the property of the Federal Government according to our best information. This should be corrected.

We are suggesting an amendment to this legislation that when a rural electric cooperative our primary thought is toward the rural electric cooperative, and the same would apply to the telephone cooperative, that when it becomes eligible to use a bank, then the bylaws of that rural electric cooperative should be amended to actually provide clear-cut ownership of the assets of this cooperative by its membership. We propose that this be based, as is normal in most cooperatives, on patronage of the customer in the rural electric cooperative. Since the State laws vary, we think that the most practical way to do this is to require that the rural electric cooperative amend its bylaws so as to show real ownership. We would suggest that this