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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 ..ory which provides the funds now to the Federal Financing ank. 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 competitive for Treasury bonds than municipals. Municipals can sell cheaper and people will buy them quicker than these bonds, de

pending 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 ..f 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? r. 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 y 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 m state of Oklahoma is trying to build those jobs in economic go 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 .# 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. ZolleR. 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?

Mr. ZolleR. The loan guarantee would be going to the private sector and starting October 1, 1981, as opposed to continuing to use the Federal Financing Bank as we are now doing.

INCREASE IN INTEREST RATES

Mr. Lewis. For the average borrower—I am not sure if we talk about $1 million or $10 million for the average borrower—what will be the difference in the interest rate he gets between a situation where there is a direct loan from the government agency versus a guaranteed loan in the current market? Mr. ZolleR. The two interest rates that we have now under the revolving fund is a special rate of interest at two percent for certain borrowers and a standard rate of interest at five percent. Mr. LEwis. What are the certain borrowers? Mr. ZolleR. Within the Act, those that have a density in the electric program of two or fewer to the mile or have an average adjusted plant revenue ratio of over nine can qualify for the special rate of interest. Currently, 140 electric systems qualify for that rate of interest. Mr. LEwis. So essentially that is a two percent interest rate. It is almost a zip interest rate. Mr. Zoller. It is a very low interest rate. Mr. LEwis. Indeed it is. Mr. Zoller. Insured loans at five percent go to other borrowers. Most of these receive part of the loan requirements from outside lenders at the present time. Mr. LEwis. There are some private lenders who are buying the five percent interest rate? Mr. ZolleR. The private lenders provide some of the supplemental needs by making a loan at the same time the borrower comes to us for a loan at a standard five percent rate. This supplemental funding is running about 11.5 percent. Most of these distribution systems are getting about 30 percent of their needs from supplemental funding now at the 11.5 percent rate. The guaranteed rate at the present is running about 13 percent for the Federal Financing Bank loans. Mr. LEwis. So you are suggesting that separate from the few who are at two percent, there is likely to be a movement as we implement a program like this, from today's relative value, five percent, to maybe 13 percent. Mr. Zoller. There is a proposed reduction in the five percent insured program both in 1981 and 1982. It is also being proposed to discontinue the two percent special interest rate. That legislation has been submitted to the Congress. Until such time as Congress does react to that legislation, we will continue to consider those two percent loans. M; LEwis. What is the Government paying to borrow that money now 4 Mr. Zoller. The Treasury is borrowing at about 12 percent. Mr. Lewis. So what we are really talking about is having these people out there who have government guarantees on their loan to pick up the subsidy directly themselves rather than having on the balance sheet the Government making up the subsidy.

Mr. ZolleR. To lower some of the federal credit activity to move some of that funding to the private sector and to have some of the cost of that paid by the consumer.

Mr. LEwis. Not to the consumer. The rate payer, is the taxpayer, when you talk about a public utility so you are moving from one public account to another almost. Rather than being in the federal deficit account it is going to go to a local agency account of some kind and they pick up the difference in interest rate rather than the Federal Government and their debt picks up the interest rate. Essentially that sounds like what you are saying. In other words if you move from five percent to 13 or 12 percent there is a seven or eight percent differential that will be picked up eventually at the local level by the consumer taxpayers to a utility that essentially is a government agency and so you are saying you are going to pick up the interest subsidy by your rate amount rather than it being in the federal deficit account, is that right? So you are really making clear to the people out there where they are paying their taxes.

Mr. Zoller. It will be picked up by that rate payer, that is correct.

Mr. Lewis. The amazing thing about the way we deal with numbers in government is we try to kid people that we are giving them money. This is one of the direct transfer accounts where the same taxpayer, the consumer is paying it through a federal dollar and the Feds are giving it back as a gift to them. Is it not great we got this gift from the Government? In his case, because we are telling them where it really is, there is a reaction that says maybe we should not do that. We are not getting our gift any longer. It is coming out of our pocket. Is not one of the things we should be doing in government is bringing all of us to the reality there is no free lunch? We pay it in the final analysis and this is one of these clear examples of that where there is a phony subsidy where Uncle Sam says he is giving a gift to somebody. I am not a CPA please but it seems to me that it is pretty clear. I have no further questions.

ADMINISTRATIVE BUDGET

Mr. NATCHER. Let us discuss the proposed fiscal year 1981 salaries and expenses reductions. According to the material that we have before the Committee, you are reducing your fiscal year 1981 permanent full-time staff years by a total of ten. How is this reduction determined?

Mr. Zoller. We are not up to the present staff ceiling. We have not been able to add additional people for some time because of the freeze, the prohibitions last year against filling certain positions when they became vacant by a mechanism of filling only two out of every five vacancies. For a long time now, we have been faced with restrictions as far as adding staff. For 1981, the same year end staff level that we currently have, an approved staff level of 735 is proposed. We are not up to that level currently. Our present fulltime staff is somewhat below 720 total people in REA.

Mr. NATCHER. Your present staff totals something below 720. What is the exact figure. Do you have that?

Mr. ZolleR. 717.

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