holder representation. There is no assurance that each of the geographical areas will include enough Class B and C stockholders in the early years of operation to assure meaningful representation of the areas. Conversion of the banks to private ownership and control.-Under H.R. 14000 provision is made for the conversion of each bank to private ownership and control in two stages: (1) after the total of Class B and C stock exceeds the amount of Class A stock held by the Government, control of the ten-man Board of Directors is divided equally between Federal and non-Federal directors, the voting strength of each non-Federal director being increased to a full vote, the REA Administrator ceases to be Governor of the bank, and Department of Agriculture employees and facilities may no longer be utilized by the banks; and (2) after all Class A stock has been retired, each bank ceases to be a Government agency (although Treasury back-up for future bank debentures would continue), the Federal members of the board cease to be board members, certain statutory rights and privileges of the banks cease, and control and operation passes into private hands. Under H.R. 14837, provision is made for the submission to Congress of recommended legislation, after all Class A stock has been retired. to effectuate the transfer to non-Federal stockholders of fuil ownership and control of each bank and to terminate Treasury back-up. Comment: We believe a more orderly procedure for transition to private ownership and control is provided in H.R. 14837. It does not appear to be advisable to make such definite provisions as appear in H.R. 14000 for events which will, in all probability not occur until more than fifteen years hence. H.R. 14837 provides flexibility in meeting requirements of the future as they develop. Exemption from FPC jurisdiction.-H.R. 14000 contains provisions not contained in H.R. 14837, intended to exempt Electric Bank borrowers from Federal Power Commission jurisdiction. Comment: This is a question more suitable for consideration in other legislation. This Department is supporting legislation serving this same purpose which has passed the Senate and is now pending before House Committee on Interstate and Foreign Commerce. Banks as "Wholly-Owned" or "Mixed Ownership” Government Corporations.— H.R. 14000 provides that both banks shall be deemed to be "mixed-ownership Government corporations", thereby making applicable to the banks provisions of the Government Corporation Control Act requiring audits and reports by the General Accounting Office. H.R. 14837 defines the banks as "wholly-owned Government corporations", thereby making applicable to them provisions of the Government Corporation Control Act relating to the preparation of annual budgets and budget programs, as well as those requiring GAO audits and reports. In addition, H.R. 14837, but not H.R. 14000, expressly provides that neither bank shall undertake new types of activities not included in the annual budget programs. Comment: Until the substantial Government investments in the banks' capital have been retired, the Government ceases to operate the banks, and Treasury back-up for future debentures has been terminated, the banks essentially are, and should be treated as, "wholly-owned Government corporations." H.R. 14837 consistently deals with the banks as such. Hon. HAROLD D. COOLEY, COMPTROLLER GENERAL OF THE UNITED STATES, Chairman, Committee on Agriculture, DEAR MR. CHAIRMAN: We have reviewed the provisions of H.R. 14000 and H.R. 14837. These bills, if either is enacted, would amend the Rural Electrification Act of 1936, as amended, to establish a Federal Electric Bank and a Federal Telephone Bank in the Department of Agriculture for the purpose of obtaining a supply of funds from Federal and nonfederal sources to finance loans to rural electric and telephone systems. Except for provisions requiring the General Accounting Office to make annual audits of the banks, the proposed legislation concerns policy matters for congressional consideration and therefore, we make no recommendations concerning enactment of the bills. However, we offer certain observations and suggestions for clarification with respect to several sections of the bills. The proposed sections 402 and 602 of the Rural Electrification Act of 1936, as amended, as contained in both bills establish the general powers of the banks. These powers are specifically stated in H.R. 14837 but are stated in general terms in H.R. 14000. In the absence of stating the specific powers of the banks, there might be a question as to the laws that would govern the expenditure of funds. For example, proposed section 402(g) in H.R. 14837 states that the bank shall determine the character of and the necessity for its obligations and expenditures, and the manner in which they shall be incurred, allowed, and paid. In the absence of this type of language in H.R. 14000, there might be a question as to whether the expenditures would be subject to the laws applicable to public funds generally. The proposed sections 403 and 603 in H.R. 14000 provide that as long as the majority of the stock of the electric and telephone banks is owned by the United States, the chief executive officer of the banks (Governor) shall be the Administrator of the Rural Electrification Administration. The bill provides that whenever a majority of the stock of the banks is no longer owned by the Government, the Governor will be chosen by a majority vote of the Board of Directors of the banks. We believe a stalemate could develop in the election of a Governor and in other proceedings of the Board, because, according to section 411, the voting strength of the five nongovernmental Board members would be increased to five votes which are equal to the five votes available to the Government's five representatives on the Board. We note that H.R. 14837 would continue control by the Government until conversion of the banks to private ownership. The proposed sections 405(h) and 605(f) in H.R. 14837 provide for the payment of dividends on the outstanding class A stock held by the Government and of patronage refunds of class B stockholders out of earnings remaining after the payment of expenses and dividends and after provision for reserves. Thus, no earnings would be available for retirement of the Government's investments until new legislation is enacted. H.R. 14000 does not provide for the payment of dividends on class A stock and calls for the retirement of the Government's investment as soon as practicable. The proposed sections 410 (b) and 610 (b) in both bills do not provide for annual insufficient funds in the assets of both the electric and telephone banks available for the payment of interest or principal on their debentures, the banks will obtain funds for this purpose by making and issuing notes to the Secretary of the Treasury. We note that these provisions give the banks unlimited borrowing authority from the Treasury in addition to the bank's authority to borrow funds in connection with the capitalization of the banks. The proposed sections 408 (c) and 607 (c) in H.R. 14000 provide that at least once a year and at such other times as the banks deem necessary, the financial transactions of the banks will be entitled by auditors designated by the bank boards. We wish to point out that the Secretary of Agriculture has established the Office of the Inspector General to carry out audits of the activities under the Secretary's responsibility. The above sections would apparently permit the designation of other auditors to review the financial transactions of the banks. The proposed section 410(b) and 610(b) in both bills do not provide for annual limitations on aggregate amounts of intermediate and other loans which may be made under such sections. We note that proposed sections 302(b) and 502(b) in both bills provide for annual limitations on the amounts of 2-percent loans which may be made. The Congress may also wish to consider the advisability of providing annual congressional review for section 410(b) and section 610(b) loans by establishing a provision that no such loans shall be made in any year in excess of amounts previously authorized in appropriation acts. The proposed sections 410(b) (2) and 610(b)(2) in both bills provide for interest rates to be computed on the basis of certain interest bearing obligations of the United States or a specified rate (3 or 4 percent), whichever is lower. In this connection we note that in April 1966 the Treasury Department's computed average interest rate on all interest bearing obligations of the United States which is the basis for computing interest under H.R. 14000 was 3.919 percent. As of April 1966 the computed interest on outstanding marketable obligations of the United States with remaining periods of more than 23 years to maturitywhich is the basis indicated for computing interest under H.R. 14837—in effect, was 4.5 percent. Since the interest rates charged under H.R. 14000 and H.R. 14837 are limited to 3 and 4 percent, respectively, the Government would not be reimbursed for interest costs of about 1 percent under H.R. 14000 and about .5 percent under H.R. 14837. In addition, we note that neither bill provides for full recovery of administrative expenses to be incurred by the Department of Agriculture for such expenses as the use of its employees and facilities in the operation of the banks. The proposed sections 410 (b) (2) and 610(b)(2) in H.R. 14000 provide that all other loans made under such sections (i.e., other than intermediate loans) I will bear interest at a rate to be determined by the boards. Unlike the corresponding provisions in H.R. 14837, the term "all other loans" is not clearly defined. We note that proposed sections 410(b) (2) and 610(b) (2) in H.R. 14837 provide that intermediate loans shall not be made to a borrower who is determined by the Governor of the bank involved (under standards to be established by the Secretary of Agriculture) to be capable of both paying the interest rate applicable to loans other than intermediate loans and achieving the objective of the Federal rural electrification program; and that those sections also contain loan authority termination provisions. If H.R. 14000 is given favorable consideration, we suggest you may wish to include the same provisions in proposed sections 410(b) (2) and 610(b) (2) in such bill. Also, since, under H.R. 14000 the Board shall determine the interest rates, it would appear to be possible to set such rates at a level which would not compensate for interest cost and administrative expenses. Both bills would make the banks subject to the provisions of the Government Corporation Control Act. We note that section 4 of H.R. 14000 would place the banks in the category of mixed-ownership Government corporation and, thus not subject to annual budgetary controls; while section 4 of H.R. 14837 would place the banks in the category of wholly owned Government corporations, and thus subject to annual budgetary controls. Further, in this connection, we note that sections 402 and 602 of H.R. 14837 provide that the banks shall undertake no new types of activities not included in the annual budget program under the Government Corporation Control Act. Also, we have the following suggestions for editorial or technical changes. (1) Proposed section 608 (c) in H.R. 14000 begins with the words "At best"; this should read "At least" to conform to section 408 (c) in the same bill. (2) Proposed section 405(b), line 15, H.R. 14000 should read "class C stock" instead of "class stock." (3) Proposed sections 404 (c) and 604 (c) in H.R. 14000 list the geographical areas to be considered in the election of Board members. We believe the State of Colorado should be added to the listing for Area 4. DEAR GOVERNOR TOOTELL: Reference is made to the bills recently introduced in Congress to provide additional sources of financing for the Federal rural electrification and rural telephone programs. We are interested that there be no misunderstanding as to the relationship of the lending under such electrification and telephone programs, existing and proposed, to the lending by the banks and associations that operate under supervision of the Farm Credit Administration. In particular, we would like to anticipate inquiries that may arise as to the possible impact on the lending by the production credit associations, which make operating and intermediate-term loans to farmers and ranchers, and the lending by the banks for cooperatives, which make loans to eligible farmer cooperative associations that are engaged in marketing farm products, furnishing farm supplies, or rendering farm business services. There would seem to be no occasion to undertake similar clarification with respect to the Federal land banks which make long-term land mortgage loans to farmers and ranchers. The proposed legislation for additional financing of the electrification and telephone programs, as presented by the Secretary of Agriculture (the Administration's program), is represented by H.R. 14837. Proposed legislation with the same general objective, but with substantially different provisions, has also been introduced independently as H.R. 14000 and H.R. 14048. All of these bills are now pending in the 89th Congress. Inquiries may arise as to loans under the electrification program, existing and proposed, for the purpose of financing the wiring of premises and the acquisition and installation of electrical and plumbing appliances and equipment by consumers of electric systems. As you know, under section 5 of the existing Rural Electrification Act, the RE Administrator has long been empowered to make loans of this nature to REA borrowers. Under REA policies, and in accordance with reports of appropriations committees of the Congress, section 5 loans are not made in competition with private sources of credit or as a substitution for loan funds available under other Federal programs, and REA will not approve the use of section 5 funds where the necessary financing is available from other sources. In connection with REA borrower's general or non-loan funds, REA has provided its borrowers with specific guidelines for and periodically reviews the amount and management of such funds. It is not intended or expected that the availability of the proposed additional source of financing for REA borrowers will have any pertinent effect on the foregoing REA policies or on the amount or management of REA borrowers' general funds. Under the Administration bill (H.R. 14837), the proposed Federal Bank for Rural Electric Systems (the "Electric Bank") would not be authorized to make section 5 type loans, nor is there any intention that the proposed Electric Bank engage in this area of financing. In the event the legislation passed should permit the banks to make such loans, we expect to apply to them the same policies we now enforce to prevent competition with other sources of the necessary financing. As already indicated, the same is also true of the continued lending by REA itself under section 5. Thus, except for financing electric and telephone systems as contemplated under the proposed bills, there is no intention to otherwise finance farmer cooperative associations that can be financed by the banks for cooperatives. It is hoped that the foregoing may be helpful in assuring that the lending policies contemplated under the proposed bills should not overlap or have any adverse effect on lending by the banks for cooperatives and the production credit associations that operate under supervision of the Farm Credit Administration. Sincerely yours, JOHN A. BAKER, STATEMENT OF HON. ORVILLE L. FREEMAN, SECRETARY OF AGRICULTURE; ACCOMPANIED BY JOHN A. BAKER, ASSISTANT SECRETARY; NORMAN M. CLAPP, ADMINISTRATOR, RURAL ELECTRIFICATION ADMINISTRATION; AND JOHN C. BAGWELL, GENERAL COUNSEL, U.S. DEPARMENT OF AGRICULTURE Secretary FREEMAN. Mr. Chairman and members of the committee, may I begin by expressing my appreciation for your welcoming me here this morning. I am pleased that the members of this committee have come to this hearing in the light of the busy time of the year and the close proximity of yesterday's Memorial Day proceedings all over the country. I hope that I will not be out of order but I am enough of a politician to want to congratulate the chairman on his very excellent showing in the primary. The CHAIRMAN. Thank you very much. Secretary FREEMAN. May the record show that the Assistant Secretary for Conservation and Rural Development, Mr. John A. Baker, and the Administrator of the Rural Electrification Administration, Mr. Norman M. Clapp, are with me here at the witness table this morning, as well as John C. Bagwell, General Counsel of the Depart ment. I was recalling to my mind, in driving up here this morning, that this is the first time that I have ever appeared before the committee in connection with the Rural Electrification Administration. We have not had substantive legislation before this year. It is again my privilege to appear before this committee. This time I come to speak in behalf of legislation which will enable some 1,850 rural business organizations to obtain the capital they need to continue their contribution to the Nation's growth. This proposed legislation would amend the Rural Electrification Act of 1936, as amended, to provide additional sources of financing for the federally sponsored rural electrification and rural telephone programs. It adds to, rather than replaces, the present 2-percent loans which will still be available to the extent borrowers need them. In the Department of Agriculture's report on this legislation, we recommend enactment of H.R. 14837, the administration bill, rather than H.R. 14000, for the reasons stated in the report. I offer for insertion in the record of these hearings a short summary and a section-by-section analysis of H.R. 14837. The CHAIRMAN. Without objection, that will be made a part of the record at the conclusion of your prepared statement. Secretary FREEMAN. Thank you. As important as this bill is to the rural electric and telephone systems which look to REA for financing, it is even more important to our continuing efforts to strengthen and rebuild rural America, and to remove some of the causes of poverty in many of these areas. For good electric and telephone service is an important ingredient in the formulation of the Great Society for rural areas. The proposal we discuss here is the product of months of study by the Department of Agriculture, by the Rural Electrification Administration, by REA borrowers themselves and by their associations. It is the result of a long search for a means of meeting the growing capital needs of these two great programs outside the Federal budget. The search, this effort, has had the support of President Johnson, who knows firsthand the problems and the opportunities of the rural systems. In a message to rural electric leaders last fall he had this to say about the need for more capital for these programs: In view of the many observers, it is reasonable to expect that your requirements for new capital in the years ahead will exceed the amounts that can be provided though the traditional REA loan program ***. I also believe the government, as part of its responsibility in this partnership that has developed the rural electrification program, must continue to work with you to develop and implement your plans for the future. This great program which has done so much and which has so much yet to do must not become stagnant. It must-as every other vital program must-adapt itself to new situations and circumstances. I am confident that you, the Administration, and the Congress, will be able to develop a sensible financing program which will provide you with the opportunity to expand with the rest of the economy. Then the President added: "The need is urgent and will soon become critical." It is urgent now because the capital needs will soon be outrunning the amount of funds which can reasonably be expected to be available for rural electrification and rural telephone loans. And I believe it |