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No. 4: What criteria are applied by REA as to the amount to be paid for telephone operating properties to be acquired by the borrowers, either from the proceeds of the loan or paid from their equity in advance of a contemplated loan to finance subsequent construction?

(The requested information follows:) TELEPHONE LOANS TO COMMERCIAL COMPANIES AS COMPARED TO COOPERATIVES

The telephone amendment to the Rural Electrification Act provides that the Administrator, in making telephone loans, "shall give preference to persons providing telephone service in rural areas, and to cooperatives, nonprofit, limited dividend, or mutual associations." Unlike the situation at the start of the electrification program, there were few areas of any significant size that were not allocated by a State regulatory body to 1 of the more than 5,700 existing telephone systems, many of which were too small to obtain adequate financing to provide the funds needed for overdue replacements and improvements. Through acquisitions, consolidations, and mergers, the number of companies has now dropped to about 2,650.

The following tabulation gives the amount of loans made in the last 5 fiscal years to commercial telephone companies and telephone cooperatives and the percentage of each to the total:

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FARM VERSUS NONFARM TELEPHONE SERVICE REA does not compile information on the number of farms served by its telephone borrowers. In this connection it should be noted that the words "farm” and "farmers" do not appear in the telephone amendment which not onlyauthorizes loans "to furnish and improve telephone service in rural areas" but also authorizes such loans to be made for the improvement, expansion, construction, acquisition, and operation of telephone lines, facilities, or systems without regard to their geographical location when it is determined by the Administrator to be necessary in order to furnish or improve telephone service in rural areas." The term ''rural aren" is defined in the telephone amendment "to mean any area of the United States not included within the boundaries of any incorporated or unincorporated city, village, or borough having a population in excess of 1,500 inhabitants."

Our records indicate that more than 90 percent of all proposed subscribers will be located in rural areas as defined by the act. It is estimated that about 40 percent of these rural subscribers will be farms with the remaining 60 percent other rural residents and rural business establishments. Although statistics have not been kept on this basis, it is believed cooperatives will be serving proportionately more farms than commercial companies.

CUMULATIVE LOAN DATA The listing of cumulative loan data in telephone loan announcements was discontinued in 1960. The present practice is to stress the number of people to benefit from an REA telephone loan, and to close each announcement of a subsequent loan to an existing borrower with a summary of the number of people to benefit from the current and previous loans since this information is believed to be of the most immediate interest to the public.

Detailed information concerning each borrower, including cumulative loan data, is published in an annual statistical report which is available to the public.

EQUITY FUNDS Generally, additional equity funds are not required for supplemental loans to locally owned and controlled systems to the extent that funds are required (1) to extend and improve telephone service within service areas approved in prior loans or (2) to provide service in new areas which are logical extensions to the present system. As a result, it is not unusual for a rapidly growing locally owned system to show a temporary decline in the ratio of equity to total assets following a supplemental loan despite the constant gradual increase in the amount of total net worth. In special cases, a borrower may be required to provide additional equity funds in connection with a supplemental loan and the amount involved may actually result in an improvement of the existing equity ratio. Generally, however, loan security is based on other factors including the required acceptance of specified managerial and financial controls. These are designed to assure a gradual increase of net worth, both in ratio and amount, once the initial period of unusually rapid growth has passed.

At the end of 1962, all telephone borrowers reported a total net worth of $79.9 million which represented 9.6 percent of their total assets. While this ratio has remained rather stable over the past 5 years, the total amount of net worth has appreciated considerably from the $37.7 million reported at the end of 1958. The composite net worth ratio is influenced by the growth of individual borrowers as well as the increase in the total number of borrowers from 588 at the end of 1958 to 760 at the end of 1962,

ACQUISITION OF PROPERTIES BY TELEPHONE BORROWERS If a borrower proposes, as a part of a loan application, to acquire, improve, and extend existing telephone facilities; the price to be paid for the acquisition is a matter of primary concern to REA in view of its effect on the cost of service to the borrowers' subscribers and of its relationship to the general level of prices for acquisition by other borrowers. REA will not approve a loan if, in its opinion, the acquisition price is so high to affect the level of rates to be required for the proposed system or the price level for succeeding acquisitions. The use of loan funds is generally limited to the approximate original cost, less depreciation, of the property with the borrower being required to provide additional equity funds for any excess. However, in situations where the market value of similar properties, as well as the value to the borrower of the particular property to be acquired to achieve program objectives of area coverage rural telephone service justify it, REA may agree to finance acquisitions in a larger amount.

Mr. WHITTEN. Mr. Clapp, we wish to thank you for a very fine presentation. This is an area in which we are all interested, and it is also an area where there is quite a bit of pushing and pulling. Each case has a different situation and the facts differ, too.

We are glad to have Mr. Baker with us here, too. We have worked with him for many years.

Mr. CLAPP. Mr. Chairman, we appreciate the courtesy and time of the committee.

WEDNESDAY, March 11, 1964. FEDERAL CROP INSURANCE CORPORATION

WITNESSES J. N. LUFT, MANAGER, FEDERAL CROP INSURANCE CORPORATION J. H. MORRISON, DEPUTY MANAGER, FEDERAL CROP INSURANCE

CORPORATION J.P. SKEFFINGTON, DIRECTOR, BUDGET AND FINANCE DIVISION,

FEDERAL CROP INSURANCE CORPORATION N. H. BOLIN, CHIEF, BUDGET BRANCH, FEDERAL CROP INSURANCE

CORPORATION CHARLES L. GRANT, DIRECTOR OF FINANCE AND BUDGET OFFICER, DEPARTMENT OF AGRICULTURE

Mr. WHITTEN. Gentlemen, we turn now to the Federal Crop Insurance Corporation. We would like to have pages 182 through 200 of the justifications included in the record at this point.

(The material requested follows:)

FEDERAL CROP INSURANCE CORPORATION

PURPOSE STATEMENT The Federal Crop Insurance Corporation is a wholly owned Government Corporation created February 16, 1938 (7 U.S.C. 1501), to carry out the Federal Crop Insurance Act. The purpose of this act is to promote the national welfare by improving the economic stability of agriculture through a sound system of crop insurance and providing the means for research and experience helpful in devising and establishing such insurance.

Crop insurance offered to agricultural producers by the Corporation provides protection from losses caused by unavoidable natural hazards, such as insect and wildlife damage, plant diseases, fire, drought, flood, wind, and other weather conditions. It does not indemnify producers for losses resulting from negligence or failure to observe good farming practices.

The 1964 crop insurance program will operate in 1,196 counties furnishing insurance coverage of approximately $566 million on apples, barley, beans, cherries, citrus, combined crops, corn, cotton, flax, grain sorghum, oats, peaches, peanuts, peas, potatoes, raisins, rice, safflower, soybeans, sugarbeets, tobacco, tomatoes, and wheat. It is estimated that 465,000 crops will be insured for the 1964 crop year, as compared to 418,077 for the 1963 crop year.

A summary of insurance operations and changes in capital for fiscal year 1963, and estimates for the fiscal years 1964 and 1965 follows:

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The crop insurance programs are developed and analyzed in the Washington headquarters office and are administered in the field by 4 area offices and 23 State offices. Sales and servicing of contracts at the county level is performed

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NOTE -The 1965 budget estimate includes $3,649.000 for administrative and operating expenses of the Corporation payable from premium income and $6,942,000 by annual appropriation. For clarity and completeness, the following project statement and justification covers the total estimate required for administrative and operating expenses of the Corporation,

Summary of increases, 1965
Increase in cost of space rent for the Washington office.---
Increase in contract sales and servicing----
For increased pay act costs (Public Law 87-793)------

$28,000

11, 000 103, 000

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$1, 117,000 8,429,000 1,045, 000

1. t'nderwriting and actuarial analysis.. $1,003, 798 $1,099, 000 +$15,000 +$3,000 2 Contract sales and servicing....... 7, 827, 2898, 325,000 +73, 000 +31,000 à Crop inspection and loss adjustments. 900, 312 1,025,000 +15,000 + 5,000 Subtotal ..

9,731, 399 | 10, 449,000 +103,000 +39,000 Decluct. Obligations payable from premium income

1-3,017, 042-3, 505,000 - 103,000 -41,000 Total increased pay act cost (Public Law 87-793).....

---- --- - (108, 000)! (+115, 000)| (+2,000) Total available or estimate....... 6,714, 357 6.944,000 ........... -2,000

10, 591, 000 -3, 649, 000

(225, 000) 6,942, 000

Excludes $248,208 unobligated balance under the limitation on administrative and operating expenses pegable from premium income.

BASIS FOR 1965 ESTIMATE

The 1965 budget estimate is based on the operation of the crop insurance program at approximately the same level as in 1964, with no expansion of the crop insurance program to additional counties or commodities. The following table summarizes the planned program for fiscal year 1965 compared to 1963 and 1964:

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