Mr. NATCHER. Would you provide furthermore for the record any material you may have on hand that would describe the telephone rate situation in rural areas as opposed to the rate situation in urban areas?

[The information follows:]

TELEPHONE SERVICE RATE COMPARISON

Data on comparable costs of local telephone service are not available as urban rates provide extended areas coverage in the basic monthly service rate. Rural rates, on the other hand, do not cover many calls that would be considered local in urban areas. The rural resident frequently must pay a toll charge to call the doctor or the school which educates the family's children. When these are added to the rate, it is apparent that rural residents pay higher bills than urban residents ine local services.

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GROWTH OF RURAL TELEPHONE SYSTEMS

Mr. NATCHER. Also, provide for the record any material you have which would describe the need for future growth in the telephone program in rural areas of the country.

[The information follows:]

GROWTH OF RURAL TELEPHONE SYSTEMS

During the 1970s, U.S. population grew at a faster rate in rural areas and small towns than in metropolitan areas. This is the first time in more than 160 years this has happended. Preliminary figures from the 1980 Census show that the nonmetropolitan areas grew by 15.4 percent during 1970 to 1980 as opposed to 9.1 percent for metropolitan areas.

The telecommunications needs of these rural people, and therefore the capital needs of rural telephone systems, are related to this growth.

Also increasing the financial needs of rural telephone systems is the rapidly changing telecommunications technology. Rural systems are utilizing these technologies where they are economically feasible.

REA expects to help the rural telephone systems meet this increasing demand for capital by assisting them to obtain private funding, where possible, and by making full use of the telephone loan guarantee authority.

Mr. NATCHER. Mr. Myers.

ELECTRIC PROGRAM CHANGES

Mr. MYERS. Administrator Zoller, the suggestion was made that we move from two percent loans to five percent loans which are still not realistic with the cost of money today. The two percent back when they were originally started was closer to the cost of money at that time. How many loans are we talking about that would be affected by the increase from two to five percent?

Mr. ZOLLER. Presently there are about 140 systems that qualify under the provision of the Act for the special rate of two percent. Mr. MYERS. How many of them will be borrowing money in the next few years? Do you have any idea?

Mr. ZOLLER. I do not have any feeling for it. We estimated in the budget submission for next year it would be approximately $100 million at the two percent rate.

Mr. MYERS. Of course everyone would like to borrow money at the least interest rate possible. I would like to borrow money at two percent or even five percent. I would be delighted. We all would be but we have to look at it realistically. Under the guarantee—a while ago you and I were discussing this-under the guaranteed loan program is there not still some subsidy to interest rates, under the guaranteed loan?

Mr. ZOLLER. A subsidy?

Mr. MYERS. The only subsidy is under the two percent loan or five percent loan, is that right?

Mr. ZOLLER. That is correct. There is no subsidy in the guarantee program. At present, FFB borrows its funds to make advances under those loan guarantees from the Treasury but it is based on the cost of money to the Treasury plus a markup that FFB adds

on.

Mr. MYERS. Do they actually borrow from Treasury or is there a pledge of assets and the Treasury borrows for them in the name of the Treasury. How are the mechanics of it handled?

Mr. VELLONE. With respect to the guarantee program, the loans are made by the Federal Financing Bank and guaranteed by REA. As far as the funding is concerned, the Federal Financing Bank has followed the practice of borrowing from the Treasury, and that is where it gets its funds. After it borrows from the Treasury, it charges its borrowers the rate of interest it had to pay for the particular maturity and adds a surcharge of one-eighth of one percentage point thereto. So in one respect there is a negative subsidy under the guaranteed program. Nevertheless it does constitute favorable treatment for this class of borrowers and that is the concern of this Administration.

Mr. MYERS. I interpret what you are saying if we denied access to the Federal Financing Bank to the REA we do not say they cannot borrow. They go out and then on the open market pay about what they are paying today but they will be in competition with Treasury notes and there will be no control as far as telling them when, what month they may borrow or how much they may borrow. Mr. VELLONE. That is correct. They will borrow from whoever will lend them the money under the 100 percent REA guarantee. But the timing of the funding will no longer be controlled by Treasury which provides the funds now to the Federal Financing Bank.

Mr. MYERS. So actually as far as the national debt is concerned when the Treasury borrows for the Federal Financing Bank and lends it back to REA it would increase that debt but it is really a matter of mechanics rather than actual appropriated funds?

Mr. VELLONE. The national debt is one of the primary concerns of the Administration.

Mr. MYERS. It is a concern of all of us.

Mr. VELLONE. It is approaching one trillion dollars. If the Federal Financing Bank ceases to borrow from Treasury to fund REA guarantees, there will be less of a need to come before the Congress and request an increase in the national debt limit because of the REA program.

Mr. MYERS. Thank you for the clarification.
Mr. NATCHER. Mr. Watkins.

COMPETITION FOR TREASURY BONDS

Mr. WATKINS. Thank you. I will follow what my colleague from Indiana was pursuing. What has been said to me-and this is the only argument they have-it would prevent competition in the marketplace for money. But actually they are not any more competitive in there than tax exempt bonds. Any entity of government across the country can go into the market at the same rates if they go through the Federal Financing Bank, so really and truly it is not giving REA any more favored position.

Mr. MYERS. They would not be tax exempt. REA borrowers are not tax exempt.

Mr. VELLONE. They cannot issue tax exempt bonds.

Mr. WATKINS. Municipals and others can go into the marketplace at low rates. You are not in any more favored position.

Mr. MYERS. If you will yield, they are going to be more competifor Treasury bonds than municipals. Municipals can sell

cheaper and people will buy them quicker than these bonds, depending what income tax bracket they are in.

Mr. WATKINS. I appreciate you making that point.

Mr. MYERS. They will be more competitive against the Treasury.

COMMUNITY DEVELOPMENT EFFORTS OF REA BORROWERS

Mr. WATKINS. I would like to ask a question here. Some people in my part of the country have entered into agreements working with some housing programs through an authority. Has any REA cooperative worked in economic development status trying to assist or put together the vehicle to help the economic development of an depressed rural area or combination of those?

Mr. ZOLLER. They have worked in helping economic development, when it is within their areas of service, through assistance to other agencies and community development activities as part of their help to that community.

Mr. WATKINS. Have they actually set up personnel et cetera to help assist in the economic development other than the director of REA? They go to a lot of meetings, but have they made-we have TVA and other groups doing a lot of things in economic development which I think is very good but in some of the rural depressed areas-what I am trying to find is a vehicle. If your bylaws et cetera have been set up to a point where maybe by working together with the co-ops we could have a strong body mechanism of personnel and all working for economic development growth.

Mr. ZOLLER. Since mid-1961, REA-financed systems have helped establish or expand more than 14,600 community and industrial facility projects and created more than 704,000 jobs in rural areas, working with the other agencies and organizations within their service areas.

Mr. WATKINS. I am familiar with that phase of REA. What I am trying to find out-and I know you do not have a mandate-but TVA is able to do a great deal not only in their power production but their human resource development. They have a directive. They are working in areas including economic development. What I am wondering about is: If we are looking at the Economic Development Administration being terminated and a number of other things, how am I going to help those rural areas down there that cannot fill the Chamber of Commerce and I am trying to determine if REA might have a directive or if they feel like their bylaws, their charters, et cetera, would allow them to directly set up an all out effort for economic development.

Mr. ZOLLER. Certainly most of the organizations have a member service group and are working very closely with the other agencies in their area and do participate and provide resources to help the overall area as far as economic development, creating jobs and bringing in new industry, as part of their service to the members. Mr. WATKINS. And you are able to fund that activity as a legitimate expenditure, helping do this.

Mr. ZOLLER. It would involve employees of the co-ops themselves. It is not funded by REA loans.

Mr. WATKINS. I serve on the Energy and Water Subcommittee also and one of the things I am trying to do for the area of my state of Oklahoma is trying to build those jobs in economic growth

and development and I plan on trying to get REC's, Southwest Power Administration, Corps of Engineers, Water and Power Resources Service Group, Soil Conservation together. I would like to ask your cooperation and your help in providing someone who might give us a strong commitment in trying to assist in the economic development. Maybe we could even set up the mechanism, the authority and maybe the personnel to help us do it. I think anything we do in rural America will benefit rural electric people and help produce jobs. Many times they will have homes on their lines and we are able to give them a livelihood in rural America which today many of them do not have. I would like to ask you for your help in that area. I am concerned about cutbacks in the telephones. I am concerned about the direction of trying to get on some teletype activity from your programs. I know this Administration is not only rescinding but cutting it out. I do not have any other questions.

Mr. NATCHER. Mr. Lewis.

DIFFICULTY IN REDUCING SERVICES

Mr. LEWIS. In reading your testimony my sense is that you are dealing with one of the more difficult problems that anybody in public affairs deals with. That is when you once find a government agency or government entity delivering a service to somebody, and then you try to retract that service, no matter how small you retract it we have a revolution out there because people like what they get. They do not like what you take away. Is that essentially where you are?

Mr. ŽOLLER. The program over its period has been well received in the rural areas as far as the work it has accomplished.

Mr. LEWIS. I gather from reading your testimony that the Administration is reacting with some concern, with expansion of direct loans from the Federal Treasury for the services we are talking about and attempting to contract that to some extent. Rather than saying you will go to the private marketplace per se they have said maybe we can hedge on the effective reaction from those who have been receiving from federal subsistence—maybe we can go half-way and instead of making the loans ourselves we can guarantee the loans, not remove that part of the package and so ease the pain of removing the services. Is that somewhere where you are?

Mr. ZOLLER. Certainly. The Secretary, in looking at the total credit program of REA, determined to lower that subsidy. Reducing federal credit is basic to the President's program of trying to lower inflation rates and high interest costs. Looking at the REA program and reducing it is part of that overall concern to try to get a handle on what this growing inflation has been in the past year. Mr. LEWIS. So what you are really doing in this particular category is saying if we make loans directly that falls on the side of the balance sheet that says this is going to be accountable within the national debt, we can provide a similar service at maybe more expense to the receivers of that service by continuing the loan guarantee program but cutting out the loan side, the direct loan side of it. Is that right?