to ownership are regulated in most all States. Existing telephone systems which are financially able to provide modern facilities in adjacent rural areas have done this only where the estimated returns warranted it from an investment standpoint. It is REA's experience that when such systems extend their facilities into rural areas with REA financing, it is because of the favorable financing terms. Of the telephone loan examples included in this testimony, it is my impression that borrowers E and F offer possibilities of financing with private funds under the terms of the legislative proposals.

AMENDMENTS TO REA ACT

Mr. Chairman, I will now refer briefly to the proposed amendments which the Department has submitted to the Congress. These amendments to the Rural Electrification Act of 1936 are in the form of two new titles designated as titles III and IV of the act.

Under title III of the proposed amendment to the act provision is made for a revolving fund to consist of

(1) Notes, bonds, and other obligations delivered or signed to REA pursuant to loans made under titles I and II, including notes and bonds held in trust on behalf of the Secretary of the Treasury;

(2) Undisbursed balances of REA;

(3) All collections of principal and interest on notes and other obligations made pursuant to titles I and II;

(4) Such appropriations and authorizations for borrowing from the Secretary of the Treasury as are from time to time made available by Congress in appropriation acts; and

(5) Proceeds from the sale of bonds, debentures or other obligations.

This fund shall be available for loan purposes and administrative expenses. This would permit showing as one figure the net amount for the REA program in a particular fiscal year. Under present procedures the estimated receipts from loan repayments are shown on the receipt side of the budget and the authorization for new loans and for administrative costs on the expenditure side of the budget.

Provision also is made under title III for the issuance of bonds or debentures for sale in the investment market to obtain loan funds to assist in financing REA programs.

Title IV authorizes the Secretary to establish an insured loan program whereby funds made available from sources other than the Federal Government would be used to carry out the objectives of the act. The insured loans would be made for the same purposes as loans are now made from appropriated funds.

Title IV would also authorize the Secretary to subordinate prior liens of the United States when that is determined to be an advantageous way to assist individual borrowers in obtaining funds from private sources. There would be a determination that financing can be obtained at reasonable rates and terms, that the security for the loans will be adequate and they would be repaid within a reasonable time. Authority is contained in the amendment to make necessary modifications of loan maturities.

INTEREST RATES

Under the proposed bill the rates of interest to borrowers on loans from the various sources covered by the bill would be as follows:

1. Bonds and debentures: As determined by the Secretary of Agriculture, taking into consideration the rates at which money is obtained by the sale of bonds or debentures.

2. Insured loans: At a rate approved by the Secretary of the Treasury which will encourage participation by private lenders, plus an insured charge of not less than 1 percent until such time as the Secretary determines that the fund is adequate.

3. Subordination: Determination by the Secretary of Agriculture that outside financing is at reasonable rates and terms.

4. Amounts appropriated or made available in appropriation acts: Loans made from these funds bear a 2 percent interest rate unless and until a different rate is prescribed by the Congress. In other words, nothing in the proposed bill would affect the present statutory interest rate on loans made from appropriations and authorizations for borrowing from the Secretary of the Treasury as are made available by the Congress in appropriation acts.

Under these proposed legislative changes the REA programs will continue to be subject to the customary annual review and control by the Congress through appropriation acts.

No authority is being taken away. It is simply a proposal to start using some private loan funds rather than depending entirely on Federal funds. The method proposed would insure adequate funds on favorable terms and at reasonable cost. Appropriated funds would be available to give Government financing terms to the systems that require such aid.

There is nothing unusual about this proposal. As a matter of fact it is entirely in keeping with actions which the Congress has taken in the past when federally sponsored and financed systems have developed to the point that they no longer needed complete Federal financing.

It would be in the best interests of these systems to start using private funds to the extent they are able to do so. We believe that many of these rural systems have become sufficiently well established that there is no longer a need or justification to provide their loan requirements from Federal funds.

The thousands of local men and women who are responsible in a large measure for the successful development of these fine rural systems are justly proud of the accomplishments. They see the opportunities for even greater service to their rural areas in the future. Their principal desire is to have assurance of adequate financing for future requirements on reasonable terms. I believe they would prefer to use private loan funds when they see that their financing needs can be adequately met in that manner.

We will urge the Congress to approve these amendments promptly so that this new authority may be used during fiscal year 1959.

Mr. Chairman, I appreciate very much your permitting me to go into this lengthy statement. Mr. Hamil is here, with members of his staff. He is prepared to present additional facts about the budget and anything you would like to know about the system. Of course, we will all be glad to do our best to respond to any questions.

PRESENTATION OF BUDGET BEFORE THE COMMITTEE

Mr. WHITTEN. Mr. Scott, as I understand it, you are an Assistant Secretary of Agriculture?

Mr. SCOTT. I am Director of the Agricultural Credit Services. Mr. WHITTEN. Under the Secretary?

Mr. SCOTT. That is right.

Mr. WHITTEN. And the REA is under you?

Mr. SCOTT. REA and Farmers' Home Administration.

Mr. WHITTEN. May I say it is my understanding that all the agencies of the Department of Agriculture operate for the time being under existing law. You operate at all times under the law as it now

stands?

Mr. SCOTT. That is correct.

Mr. WHITTEN. It is also my understanding, and I am sure yours too, that through the years the Bureau of the Budget approves the budget request on the part of the executive department for funds to run the various agencies of Government. That is correct, is it not? Mr. SCOTT. That is correct. They submit our proposals

Mr. WHITTEN. To the Congress. Then the order of procedure is that the Appropriations Committee, divided up into various subcommittees, then holds hearings at which time representatives of the Department come before us to justify the appropriation request. Is that not true?

Mr. SCOTT. That is right.

Mr. WHITTEN. Do you not think it is unusual that you, in charge of this justification for funds under existing law, bring in a 25-page statement, at a time when you are supposed to be here to justify the appropriations under existing law, and you never make a reference to justifying a penny under existing law but spend your time on a proposal for changing the law, a proposal not even introduced?

Mr. SCOTT. This is the manner in which the Administrator and I have discussed the presentation of facts. If I erred I regret it. Mr. WHITTEN. It is not an error. It does speak for itself.

Mr. SCOTT. I was to tell you about these legislative proposals which, the way the budget has been submitted, are intended to provide a part of the funds needed. Mr. Hamil is prepared to talk about the appropriation part of the budget.

Mr. WHITTEN. Anyone reading this would think you had little if any interest in justifying the appropriation for your operations in the administration of the REA

LENDING PROCEDURE UNDER PROPOSED LEGISLATION

Proceeding further, Mr. Scott, it is my understanding, under the 3 sections you have there, that in 1 section you would set aside in this revolving fund all the notes, mortgages, and security that you had, plus all the money that you might have on hand; that would be set up to secure this revolving fund. Is that right?

Mr. SCOTT. Yes, it all goes in the fund.

Mr. WHITTEN. The second section is that the Government guarantees to these private lenders the full amount of any loans they might make including interest which, as you say, would be at a higher in

terest rate. That in my judgment would increase the liability of the Government. Do you agree with that?

Mr. Scorr. There is a direct liability on the part of the Government under the insured loan program.

Mr. WHITTEN. You guarantee the full amount of the loan including the interest due?

Mr. SCOTT. Yes.

Mr. WHITTEN. And the interest would be at a higher rate which would increase the liability of the Government?

Mr. SCOTT. Larger sums, that is right, sir.

Mr. WHITTEN. Then we come to the third section where the Secretary can waive the first lien you have on this $3.6 billion worth that the present REA cooperatives have, which would mean the Government would have a second lien?

Mr. Scort. That is what would be involved on any individual loans subordinated.

Mr. WHITTEN. And the holder of the first lien can always foreclose if the borrower is in default?

Mr. SCOTT. Yes.

Mr. WHITTEN. Proceeding a little further in that direction. If the act is passed as you recommend, all three authorities would be in there and it would be up to the Secretary to determine which course to follow?

Mr. SCOTT. That is right.

POSSIBILITY OF PRIVATE UTILITIES GETTING CONTROL OF REA OPERATIONS UNDER PROPOSED CHANGES IN REA ACT

Mr. WHITTEN. When was REA created? It was in 1934, was it not?

Mr. HAMIL. 1935.

Mr. WHITTEN. What is your understanding as to why the Government entered into such a program? I am talking about your understanding. I think this is a matter of common knowledge.

Mr. SCOTT. To provide central station electric service out in rural areas where it did not exist.

Mr. WHITTEN. And behind it was the feeling that the private utilities up to that time had not done it. Many of them felt they were not financially able to do it.

Mr. SCOTT. That is my understanding.

Mr. WHITTEN. In that period since 1935, 22 years, as you point out, you have built it up to where it has a net worth of approximately $3.6 billion-95 percent of the farmers are served. It is a sound operation. If the Secretary were to subordinate the Government's prior lien on this big operation that the Government has built upand which everybody agrees is a sound operation and has done a marvelous job for the farmers of America-and you sold debentures giving a first mortgage to secure those debentures, and private utilities bought those debentures and got a first lien, then if this recession went to anything like it was in the 1930's, the private utilities could take over this $3.6 billion operation that the Government has built up, could they not?

In other words, under this proposed law, if the Secretary used that uthority to take a second lien and give a first lien to the buyers of

the debentures, if the private utilities bought the debentures and the borrowers should be in default, you and the Secretary would be turning over this great business of $3.6 billion to the private utilities. That could happen, could it not?

Mr. SCOTT. It could not.

Mr. WHITTEN. Why not?

Mr. SCOTT. Because the Congress would not let it happen.

Mr. WHITTEN. Well, I rather think you are right. But in the absence of congressional action it could happen if this act stayed in full force and effect and the Congress did not act, could it not? Will you please respond to my question. Under your proposed act that could happen unless Congress prevented it, could it not?

Mr. SCOTT. If there was default on these debentures and nothing was done to make the payments, why surely the holders of those debentures could step in.

Mr. WHITTEN. So the answer is "Yes"?

Mr. SCOTT. Yes, but I do not think it would happen.

Mr. WHITTEN. You do not think the Congress would let it happen? Mr. SCOTT. Nor the administration either.

Mr. WHITTEN. But it could happen, and would you not say it might be better to prevent it from every happening?

Mr. SCOTT. I think the wonderful record of this system, the great progress it has made, the splendid record of repayments, the future outlook for growth and sound operation, is such that there is no reason to think these payments are not going to be made promptly as they have in the past. I have great faith in this system, as I am sure you and the other members of the committee have.

Mr. WHITTEN. I agree with that, but if I had spent 22 years building up this operation, and with the present debt of this Government, I do not think I would want to turn over my first mortgage to the "Johnny-come-latelys" who might lend you some money now. That is what you recommend.

Mr. SCOTT. Is it not about the same as when our children grow up and we let them go out on their own?

Mr. WHITTEN. Yes, but I do not know that I would kick one out. Mr. Scorr. But these systems cannot get out unless we open the door. There will be no big barriers in front of them. I sincerely think, particularly this title III, the issuance of debentures from the revolving fund, would get funds at reasonable rates.

Mr. WHITTEN. If you put all these notes and mortgages into the revolving fund and make the revolving fund available as security for the debentures, your law would make it possible for the purchasers of the debentures to take over.

Mr. SCOTT. Yes, that is inherent, but it is very remote.

Mr. WHITTEN. I do not condemn the private utilities in the least for wanting the cooperatives to increase the rates where they compete or even generally. I do not censure them for advocating a law under which some day they might possibly be able to obtain this sound operation. Since we have built it up a lot of folks would like to take it over. I would like to own one myself. However, those of us in Congress do have some responsibility. I would hate for my children to come along and feel I had been a party to giving away this $3.6