plus) of the bank. Treasury back-up will b terest and principal on the bank's debentures. es. rmediate loans termihe Congress by July recommendations › such provisions. 14000 that bank nsitional step provision of 'overnment be applicnortized "e debt 0 per Bank loans, not exceeding a period of 50 years, may be rowers at an "intermediate loan" rate, based on a formula re interest rate on securities of the United States, but with an i Provision is made for loans at other interest rates. The purposes for loans may be made include the same purposes governing REA 2 per as well as improving the efficiency, effectiveness or financial stability t ers' systems. After the Government's investment has been fully retired by each bank sion is made for the conversion of the bank to fully private ownership, and operation. hich ere 00 The bills also establish Rural Electrification and Telephone Accounts which will be transferred appropriations, assets and collections of the REA percent loan programs and from which will come funds for the 2 percent loan programs, for the payment of principal and interest on loans from the Secretary of the Treasury for the 2 percent loan programs, and for Federal investments in the electric and telephone banks' Class A stock. Enclosed is a listing of the significant differences between the bills and our comments thereon which support our view that H.R. 14837 provides the more orderly and effective program for the emergence of REA-financed electric and telephone systems from their present state of dependence on the existing two percent loan program. The basic 2 percent 35-year REA loan authority would be retained unchanged under both bills. However, H.R. 14837 more clearly provides a progression from the basic loan program through intermediate bank loans to a bank loan program reflecting the full cost of bank operations. H.R. 14837 appropriately provides for Government control of the banks until the Government investment is retired. It permits Congressional supervision during the period of Government operation which is absent from H.R. 14000. H.R. 14837 also imposes a lesser burden upon the Treasury while providing sufficient Treasury support to make the supplemental financing program of the banks viable. In this Department's letter of April 13, 1966, transmitting the Administration proposal to the Congress and recommending its enactment, we reviewed the background of and need for this legislation. We request that the contents of that letter be considered as part of this report. The Bureau of the Budget advises that there is no objection to the presentation of this report and that enactment of the provisions of H.R. 14837, as recommended herein, would be consistent with the Administration's objectives. Sincerely yours, ORVILLE L. FREEMAN, Secretary. SIGNIFICANT DIFFERENCES BETWEEN H.R. 14000 AND H.R. 14837, PROVIDING SUPPLEMENTAL FINANCING FOR RURAL ELECTRIFICATION AND RURAL TELEPHONE PROGRAMS, AND U.S. DEPARTMENT OF AGRICULTURE COMMENTS THEREON Amount of Government investment in Class A stock of the banks.-H.R. 14837 provides $50 million annually to the Electric Bank and $20 million annually to the Telephone Bank for fifteen years, for total investments of $750 and $300 million "(b) Until all class A stock has been retired by the Federal Telephone Bank, all sections of title IV, as modified by subsection (a), shall remain applicable to the Federal Telephone Bank, its operations, and its property. Whenever all class A stock issued to the United States has been retired pursuant to sections 605 (c) and 611(a) (4) of this Act "(1) the Federal Telephone Bank shall cease to be an agency or instrumentality of the United States, but shall continue in existence in perpetuity as a banking corporation with borrowing and lending powers, operating under the control of its class B and class C stockholders; "(2) the members of the Board who are employees of the United States shall cease to be members of the Board, and the number of its members shall be accordingly reduced; "(3) the following sections of this title shall no longer apply to the Federal Telephone Bank, its operations or its property: sections 601, 603, 604 (a) and (b), 607, and 609; "(4) the following sections of this title, as modified by the provisions in this section 611, shall continue to apply to the Federal Telephone Bank, its operations and its property; sections 602, 604 (a), (c), (d), (e), (f), (g), 605, 606, 608, and 610. "SEC. 612. Borrowers from the Rural Electrification Administration which have received loans under this section that have not been repaid shall have their operations, generating plants, electric transmission and distribution lines or systems subject only to the jurisdiction of the Administrator, and of State authorities even though any of these facilities and operations are involved in interstate commerce. "SEC. 613. CUMULATIVE NATURE OF TITLE VI; AMENDMENTS THERETO.-Notwithstanding anything in this Act, powers and authority provided for in this title VI shall be cumulative, and nothing herein shall be deemed to limit powers and authority provided for in any other title of this Act. The right to repeal, alter, or amend this title VI at any time is expressly reserved." SEC. 4. Section 201 of the Government Corporation Control Act, as amended (31 U.S.C. 856), is amended by striking "and" immediately before “(5)", and by inserting ", and (6) the Federal Bank for Rural Electric Systems and the Federal Bank for Rural Telephone Systems" immediately before the period at the end. SEC. 5. The second sentence of subsection (d) of section 303 of the Government Corporation Control Act, as amended (31 U.S.C. 868), is amended by inserting "the Federal Bank for Rural Electric Systems, the Federal Bank for Rural Telephone Systems," immediately following the words "shall not be applicable to". SEC. 6. This Act shall take effect July 1, 1966. DEPARTMENT OF AGRICULTURE, Hon. HAROLD D. COOLEY, Chairman, Committee on Agriculture, DEAR MR. CHAIRMAN: This is in reply to your request of March 30, 1966, for a report on H.R. 14000, a bill "to amend the Rural Electrification Act of 1936, as amended, to establish REA electrification and telephone loan accounts and Federal banks for rural electric and rural telephone systems to provide supplemental financing for the rural electrification and rural telephone programs, and for other purposes." This Department is in full accord with the objectives of the bill which are the same as those contained in a similar Administration proposal sent to the Congress on April 13, 1966, and introduced in the House on May 3, 1966, as H.R. 14837. For the reasons stated herein, we recommend enactment of H.R. 14837 rather than H.R. 14000. The following provisions are common to both bills. They provide for the creation of two Federal banks under the supervision of the Secretary of Agriculture, one for rural electric systems and one for rural telephone systems, to supplement the 2 percent loan programs now administered by the Rural Electrification Administration with other sources of financing. Each bank will be managed by a board of directors which includes officials of the Department of Agriculture and representatives of electric or telephone systems. The REA Administrator will serve as the chief executive officer ("Governor") of each bank; the personnel and facilities of the banks may be drawn from REA or other agencies of the Department of Agriculture, without cost to the bank except for the administrative expenses obtained from the bank's borrowers on loans made at rates other than the "intermediate loan" rate. Equity capital will be furnished each bank by the United States and by borrowers and elgibile borrowers from each bank. The Government investment in the banks' Class A capital stock would be furnished from "net collection proceeds" of the 2 percent REA electric and telephone loan programs. Stock held by the United States will be retired by each bank as soon as practicable. Borrowers from each bank will be required to invest 5 percent of their loan funds in non-dividend-bearing Class B bank stock, but such borrowers will be entitled to patronage refunds. Dividend-bearing Class C bank stock will be available for purchase by both borrowers and potential borrowers, and, in the case of the electric bank, by electric consumers of such actual or potential borrower (Class D stock). Each bank is authorized to obtain borrowed funds through the sale of its debentures, up to 10 times the amount of paid-in capital and retained earnings (or surplus) of the bank. Treasury back-up will be provided for the payment of interest and principal on the bank's debentures. Bank loans, not exceeding a period of 50 years, may be made to eligible borrowers at an "intermediate loan" rate, based on a formula relating to yield or interest rate on securities of the United States, but with an interest ceiling. Provision is made for loans at other interest rates. The purposes for which bank loans may be made include the same purposes governing REA 2 percent loans, as well as improving the efficiency, effectiveness or financial stability of borrowers' systems. After the Government's investment has been fully retired by each bank, provision is made for the conversion of the bank to fully private ownership, control and operation. The bills also establish Rural Electrification and Telephone Accounts into which will be transferred appropriations, assets and collections of the REA 2 percent loan programs and from which will come funds for the 2 percent loan programs, for the payment of principal and interest on loans from the Secretary of the Treasury for the 2 percent loan programs, and for Federal investments in the electric and telephone banks' Class A stock. Enclosed is a listing of the significant differences between the bills and our comments thereon which support our view that H.R. 14837 provides the more orderly and effective program for the emergence of REA-financed electric and telephone systems from their present state of dependence on the existing two percent loan program. The basic 2 percent 35-year REA loan authority would be retained unchanged under both bills. However, H.R. 14837 more clearly provides a progression from the basic loan program through intermediate bank loans to a bank loan program reflecting the full cost of bank operations. H.R. 14837 appropriately provides for Government control of the banks until the Government investment is retired. It permits Congressional supervision during the period of Government operation which is absent from H.R. 14000. H.R. 14837 also imposes a lesser burden upon the Treasury while providing sufficient Treasury support to make the supplemental financing program of the banks viable. In this Department's letter of April 13, 1966, transmitting the Administration proposal to the Congress and recommending its enactment, we reviewed the background of and need for this legislation. We request that the contents of that letter be considered as part of this report. The Bureau of the Budget advises that there is no objection to the presentation of this report and that enactment of the provisions of H.R. 14837, as recommended herein, would be consistent with the Administration's objectives. Sincerely yours, ORVILLE L. FREEMAN, Secretary. SIGNIFICANT DIFFERENCES BETWEEN H.R. 14000 AND H.R. 14837, PROVIDING SUPPLEMENTAL FINANCING FOR RURAL ELECTRIFICATION AND RURAL TELEPHONE PROGRAMS, AND U.S. DEPARTMENT OF AGRICULTURE COMMENTS THEREON Amount of Government investment in Class A stock of the banks.-H.R. 14837 provides $50 million annually to the Electric Bank and $20 million annually to the Telephone Bank for fifteen years, for total investments of $750 and $300 million respectively, unless appropriation acts specify lower annual amounts; and requires that a report be made to the Congress by July 1, 1971, on the status of Government capitalization of each bank with recommendations concerning continuation thereafter of such capitalization. H.R. 14000 provides that Government capital to be furnished each Bank shall be in an amount equal to all net collection proceeds of the 2 percent REA electric and telephone loan programs, until a total of $1 billion is provided to the Electric Bank and $250 million is provided to the Telephone Bank, and makes no provision for a report at the close of five years of operation. Comment: It is believed that the $750 million Government capitalization at the annual $50 million rate provided for the Electric Bank in H.R. 14837 is adequate to support the bank's loan program and will supply the equity capital in the amounts as and at the times when needed. The provision of $300 million in annual increments for the Telephone Bank is similarly designed to provide the needed Government capital as and when needed. Provision of capital to the banks in an amount or at a rate greater than needed to support the banks' loan programs is undesirable because it increases the burden on the Budget. Further, the 5-year report provision assures a desirable opportunity for appraisal of the operation of these provisions. Dividends on Government-held Class A Stock.-H.R. 14837 provides that Class A stock shall receive dividends from earnings otherwise available in their entirety for patronage dividends in proportion to the total amount of Class A and B stock outstanding. H.R. 14000 provides that no dividends shall be payable on Class A stock. Comment: By far the greater proportion of the earnings of the banks will accrue as the result of the availability and use of Government capital, and the use by the banks of Government facilities and personnel. The Government receives no return on its investment other than the dividends on its Class A stock which are payable only if earned. To the extent the banks produce net earnings, it seems appropriate that the Government participate therein with the borrowers from the banks. Sale of bank debentures.-H.R. 14837 requires approval of the Secretary of the Treasury as to time of issue, interest rates and other terms and conditions. Under H.R. 14000, consultation only with the Secretary of the Treasury is required. In addition, while the amount of debentures outstanding at any one time under both bills may not exceed 10 times paid in capital and retained earnings (or surplus) of each bank, H.R. 14837 also provides that Congressional appropriation acts may specify lower amounts. Comment: Treasury approval rather than consultation is required in the interest of orderly debt operation and to assure avoidance of conflict with Treasury and other issues. The provision in H.R. 14837 for Congressional participation through appropriation acts is appropriate so long as the banks remain Federal agencies and issue debentures with Treasury back-up. Loan purposes.-Although the provisions for loan purposes in both bill are substantially similar, H.R. 14837 does not authorize consumer loans of the type now made under section 5 of the Rural Electrification Act, and includes limitations on loans of the Electric Bank for acquisitions, exchanges of facilities, and generation and transmission facilities, while H.R. 14000 permits section 5-type loans, omits the foregoing limitations, and authorizes loans "for other related purposes." In H.R. 14000, limitations are imposed on Telephone Bank loans for facilities outside of places having a population in excess of 1,500 inhabitants which are absent from H.R. 14837. Further, H.R. 14837 specifically permits the financing of commercial community antenna television facilities; H.R. 14000 makes no such provision. Comment: So long as the banks are largely Government-capitalized and operated, and are treated as Government corporations, it appears appropriate to impose the limitations upon their loan purposes prescribed in H.R. 14837. These limitations do not impair the basic purpose for which the broadened loan authorization is provided or prevent the banks from meeting essential loan needs which cannot be met under the restrictions applicable to two-percent loans. The CATV financing authority found in H.R. 14837 is designed to enable Telephone Bank financed systems to render the same service in this field as do other telephone systems. This area of operations is becoming increasingly important to telephone systems. Loan terms and conditions.—(a) The interest rate on intermediate loans under H.R. 14837 is determined by the average market yield on outstanding marketable obligations of the United States with comparable maturities, or 4 percent, whichever is lower. H.R. 14000 prescribes a formula based on the average rate payable on all interest-bearing obligations of the United States, or 3 percent, whichever is lower. (b) Under H.R. 14837, all other loans made by the banks must bear interest at a rate which reflects the current average rates payable by the banks on their debentures, and administrative expenses and estimated losses in respect of such loans. H.R. 14000 leaves the determination of the interest rate on such other loans to the bank boards. H.R. 14837 prohibits intermediate loans to borrowers which are capable of paying the higher rate and also meeting program objectives. H.R. 14000 contains no such prohibition but provides for criteria to be established for intermediate rate loans which reflect program objectives. (c) Under H.R. 14837, the banks' authority to make intermediate loans terminates at the end of 15 years, and a report is to be made to the Congress by July 1, 1971, on the status of the intermediate loan program with recommendations concerning its continuation thereafter. H.R. 14000 contains no such provisions. (d) H.R. 14837 does not contain the provision found in H.R. 14000 that bank loans be secured on an equal basis with loans made by REA. Comment: (a) Since the intermediate loan is designed as the transitional step to loans at rates fully reflecting the bank's costs, the interest rate provision of H.R. 14837 for such loans appears more realistic. 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, with a three-year principal deferment, would require debt service payments of $47.28 per $1,000 per year, as compared with $42.40 per $1,000 per year on basic 2 percent 35-year loans. If the 3 percent rate, which would be charged under H.R. 14000 under present market conditions, were applied, the debt service payments on 50-year loans would be $39.76 per $1,000 per year which is less than the $42.40 needed for 2 percent 35-year loans. (b) Since one of the objectives of the supplemental financing plan embodied in this proposal is ultimate freedom from Federal financial assistance, it is deemed advisable to establish an interest rate which reflects cost to the bank of the financing for those borrowers which no longer need such assistance. The provisions of H.R. 14837 establishing a rate reflecting full bank cost as the top rung of the credit ladder are realistic and are needed to achieve this objective. (c) The inclusion in H.R. 14837 of a 15-year termination date for the intermediate loan program, while affording an adequate period for its operation geared to estimated requirements, is clear recognition of the intermediate and transitional nature of this program. The 5-year report provision assures the opportunity for a full appraisal of the program at an earlier date. (d) It is believed that giving bank loans equal security standing with REA loans during the period of Government control is unnecessary in view of the Treasury back-up for bank obligations which will provide adequate security to purchases of bank debentures. Back-up of bank debentures.-Both bills provide for Treasury loans to the banks when needed for payment of principal or interest on their debentures. H.R. 14000 also provides that the assets in the electric and telephone accounts established in Titles III and V of the bill may be used to pay any difference between the interest cost of bank debentures and interest earned by the banks on their intermediate loans. Comment: This additional back-up is not needed for marketability of the bank debentures. Properly administered, the bank operations should not require the use of non-repayable Federal funds as provided in H.R. 14000. Election of directors.-H.R. 14837 provides for bank boards of seven members, consisting of four officials designated by the Secretary of Agriculture and three non-Federal members, initially appointed by the Secretary and thereafter elected for two-year terms by the stockholders of each bank. H.R. 14000 provides for a board of 10 directors for each bank, specifies four of the five directors representing the Government, and after providing for initial appointment by the President of five non-Federal board members, each with only one-half vote, establishes procedures for the election, from specified geographical areas, of their successors, first by eligible borrowers from the bank and thereafter by bank stockholders. Comment: The election procedures prescribed in H.R. 14000 for non-Federal board members are unduly cumbersome and do not adequately provide for stock |