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Act of 1936, as amended, and by the subsequent shift of these loans to funding under the Rural Development Act of 1972.
In this statement I will outline for the Committee the basic facts of our members operations and the reasons why our membership feels this Administration action is such a serious matter. I would also like to comment on the bill proposed by the distinguished Senator from North Carolina, Mr. Ervin, and other Senators, which would have the effect of eliminating the assumed Presidential prerogative to unilaterally impound appropriated funds.
Until January 1, 1973 the member systems of NTCA obtained their entire longterm capital financing under the provisions of the Rural Electrification Act of 1936. This Act provides for 35-year REA loans at 2% interest and similar longterm financing, at interest rates between 4% and 8% from the recently created Rural Telephone Bank.
I think the success story of the REA telephone loan program is well-known to the members of this Committee. First class rural telephone service has helped farm families improve their standard of living. It has saved countless lives. It has benefitted the nation's consumers by increasing the efficiency of food and fiber production. Finally, it has helped create a multi-billion dollar market for urban manufacturing industries in rural areas.
From the outset of the REA telephone loan program until the present day, the task facing borrowers has always been a difficult one. Initially the goal was to provide basic telephone service to all those who needed and wanted it. No one was, or ever has been, excluded from service because they lived too far out in the country. In the early days of the REA telephone program, adequate service meant up-grading 16 and 20 party lines to standard 8 party service. But as agriculture became more modern and technical, so the need for updated and more modern telephone service grew.
Today, eight party service can no more be tolerated than the horse-drawn plow. Quick, efficient and modern service is no luxury to farmers. It is an essential tool.
Thus, despite the remarkable achievements and progress which REA borrowers have made over the past 23 years, much remains to be done.
Statistics relating to the rural telephone program are the best way to concretely illustrate our program's continuing needs. In 1949 only about 39% of American farms were receiving telephone service. Today more than 84% of rural establishments have phone service. But, as I noted subscribers are continually demanding improved service. Eight party rural lines, although obviously out-moded, are still a fact of life in too many rural areas. The following table, from REA's most recent yearbook, illustrates this fact. Percent of REA residence subscribers with various types of service as of
December 31, 1970
Subscriber percentage 1 and 2 Party
51.4 4 and 5 Party-
25. 6 8 Party----
22.9 As can be seen, more than 20 percent of REA borrower subscribers-one out of five still have eight party service and almost half—49%—have to tolerate no better than four party service. And REA projections indicate that some eight party service will still be with us well into the 1980's.
There are reasons for this, of course. As a group, REA telephone cooperatives are very high cost, low return businesses. They have the lowest subscriber density in the industry; just 2.72 subscribers per mile as compared to 6.9 subscribers per mile for other independent companies financed by REA and in excess of 40 subscribers per mile for the Bell System nationwide. Because of this, telephone co-ops also have the lowest operating revenue per mile-$385 as opposed to $856 for other REA borrowers. The figures for the Bell system are very much greater.
All of this means that the cost of captial-interest-is a most significant factor in the rural system's financial statement. We estimated that debt service accounts for fully one-third of the average telephone cooperatives operating budget.
Another important factor to bear in mind about these systems is their very low net worth. Many of them started their corporate life 100 percent debt financed. Equity amounted to almost nothing. Even today fully 85% have a net worth of less than 30% and almost half have a net worth less than 15%. The following table, also taken from the most recent REA yearbook clearly shows this:
Net worth of telephone borrowers Dec. 31, 1970 Net worth as a percent of assets
Subscriber percentage Less than 95_
100 Less than 50_.
98 Less than 40
95 Less than 30_
86 Less than 25_
74 Less than 20.
62 Less than 15
46 Less than 10.-
27 Less than 5--
12 Negative net worth..
5 Telephone co-ops are able to provide modern telephone services despite all these adverse factors. This is partly because of good management and partly through the benefit of a subsidized interest rate. But it is also because in the cooperative way of doing business the users of the service not only control the business but have, and feel, responsibility for its successful operation. This is one reason telephone co-ops have the lowest amount of uncollectable accounts in the nation. And this record of good credit extends past the individual subscribers to the borrowers as well. As of June 30, 1971 REA telephone borrowers had repaid over $500 million to the Treasury in principal and interest. And, in addition had made more than $25 million in advance payments on their indebtedness. A small fraction of one percent of all REA loans are in arrears. It was somewhat startling to read that, at a recent press conference, Secretary Butz described REA borrowers as "husky individuals”, well able to bear increased interest costs. It may be he is looking at different statistics than those published by his own REA, but I would defy anyone to look at the figures I have just quoted and ind evidence in them of financial "huskiness”.
I would be the first to claim that our members are not "sickly”, financially, but they are far from "husky". And this issue goes beyond mere semantics. A million dollar loan at 5% could easily eliminate the entire projected annual margin of a telephone cooperative that had previously counted on paying 2%. And a business whose balance sheet leaves no margin for the uncertainties of the future is a business which is running perilously close to financial disaster.
Understanding, from the above, the various financial and other factors which constantly bear upon the average REA telephone borrower, I believe this Committee can readily understand the disastrous threat the Administration's impoundment of all REA loan funds possess.
The Administration's action is in fact a two-fold threat. It is a threat not only to the Congressional authority to legislate, but, also to the Congressional authority to appropriate.
First off, this fund, impoundment threatens the Congress' authority to legislate, for it is really more than just the cut-off of funds. Specifically, not only are funds being impounded, but the impoundment process is a tool with which the Administration is making all manner of administrative changes ... changes in no way contemplated or mandated by Congress.
In the case of REA, both Senator Talmadge and Senator Humphrey, the architects of the Rural Development Act, have unequivocally stated that use of this Act to fund REA programs was never intended by them.
Nowhere in the entire legislative history of the Rural Development bill, from hearings, to mark-up, to floor debate, to conference, was any such proposal ever discussed-even by the Administration,
This joint impoundment and transfer of authority represents, in fact, legislation by decree and without any shred of due consideration. We have seen no evidence that the Administration gave this change the same kind of detailed and in-depth consideration which Congressional Committees have traditionally given to pending legislative changes of this magnitude. And, as always happens when actions are taken precipitiously, the result is chaos.
The effect of this decision on the Rural Telephone Bank is a perfect example. I would take strong issue with the remarks made by Secretary Butz recently that this change would positively affect the Rural Telephone Bank. In fact, the change will create grave problems for the bank.
The Bank law was designed to precisely mesh with Section 201. When Con gress wrote the bank law, borrower financial needs and abilities were very
fully considered and the result was an amended REA Act where the basic criteria for telephone loans is “ability to pay". The borrower, who because of his financial condition or the low density of his system could only pay 2% was assured of a continuity of this type of financing. But the borrower able to pay more-even a fraction of a percent more must pay that higher rate. There are no if's, and's or but's !!
Yet the arbitrary termination of 2% financing, means that co-op borrowers unable to pay even a small amount more than 2% must now pay 5%! Similarly, unless exceptions are made, the commercial borrower unable to borrow through the bank because of poor financial condition must now pay 7% or 8% for a guaranteed loan. Or, taking the other side of the coin, the borrower who could pay bank rates—say 8 percent, now may find he can get government “insured” loans at 5 percent, a more inequitable situation could not be imagined. Such is the positive effect of this legislative change through impoundment on the Telephone Bank.
The second grave threat this impoundment of funds poses is to the Congressional authority to appropriate.
As written, the REA Act of 1936, as amended, reserves to Congress the sole right to appropriate funds which will be loaned to borrowers. However, the new OMB method of financing REA loans, using the insured and guaranteed loan provisions of the Rural Development Act, bypasses entirely the Congressional appropriations process. Because funds for insured and guaranteed loans need not be appropriated by Congress. Rather, they are obtained through a revolving fund approach that is independent of Congressional control. Thus, if the Administration wishes to allocate $140 million through this fund to be loaned to rural telephone borrowers they have the authority. And, just as important, if the Administration wishes to allocate $100 million, or $50 million, or for that matter zero million, they assume that authority.
And that, our Association feels, is a very clear and present danger.
We believe the authority to appropriate and designate funds for government programs must remain with the Congress. Congress established the Rural Telephone Loan program and Congress, through the years, has met its responsibilities to provide loan funds for borrowers. We have not always felt the budgeted amount of these loan funds sufficient, but we have always believed Congress to have acted ably and responsibly.
If Congress had wished to give the Executive the right to determine the exact amount of funding for government programs, we believe that Congress would have specifically so acted. In our case, when Congress recently amended the REA Act it had that opportunity. But Congress did not give the Executive the appropriations authority as far as REA is concerned. In our opinion, the Executive has no "natural right” to abrogate to itself the entire funding process.
I would now like to address myself to the bill introduced by Senator Ervin and his distinguished colleagues.
Our Association believes this bill to be the most realistic approach to counter the action taken by the Administration impounding REA funds as well as funds for many other worthwhile federal projects.
We believe the thrust of this legislation could not be clearer. No funds shall be impounded for longer than 60 days without express Congressional approval of such actions.
We do not believe that this Administration would have ever impounded the full amount of Congressionally appropriated funds for REA, switched REA telephone loans to an entirely new and untried lending source, and casually announced it via a press release, if this bill had been law last December 29th.
And we do not believe that if this bill becomes law in the near future that the Administration will continue impounding REA funds, or REAP funds, or housing funds, or funds for many other Congressionally mandated programs, for that matter.
We do not believe that the President has the right to openly flaunt the expressed will of Congress by, terminating a Congressionally established program through the procedure of total fund impoundment.
Before concluding I would like to make three technical points in regard to this legislation. I am not a constitutional lawyer but, from our careful study of the bill, these points seem worth mentioning.
The first point concerns the actual impoundment process. By that I mean, at what stage in the fiscal year do funds technically become impounded. Perhaps this point is best understood by reference to our REA telephone loan program, at least the program we knew until January 1, 1973.
Loan funds appropriated by Congress have usually been released to the REA Administrator on a quarterly basis and, generally, the Administrator received about one-fourth of whatever OMB budgeted for the year each quarter. Thus, the fact of impoundment of the difference between the budget and what Congress appropriated was really not clear until the very close of the fiscal year when it would be obviously evident that more funds were appropriated that had been committed to loans. Technically, however, this was the only time those funds could be said to have been impounded. If the same is true with other areas perhaps this question as to the timing of the impoundment process should be spelled out in the legislation. Or, perhaps some method of recognizing impoundment on, say, a quarterly basis, should be spelled out in the legislation.
A second point. What is to stop the President from immediatey re-impounding the funds for a project or an agency assuming Congress refuses to act within the specified 60-day period. Presumably the Executive could, on the 61st day, reimpound the monies released as of the 60th day, and the process would start all over again. This is a technicality, but if this Committee feels it a valid point, perhaps language should be drafted to specify that funds, once impounded and allowed to be released cannot be re-impounded.
The final point I would like to make is philosophical. I do not believe that Congress has ever formally recognized the Executive's right to impound funds. This legislation, by addressing itself to, and correcting some of the evils of impoundment, at the same time legitimizes this right. I think it is a matter for the Committee to consider.
In summary, the technical questions notwithstanding, our Association believes this legislation is of great importance and will restore to Congress its rightful authority in our governmental process. We support such legislation.
Senator CHILES. Our next witness will be Mr. Jack P. Nix, who is the Superintendent of the Georgia Public Schools representing the Council of Chief State School Officers.
STATEMENT OF WILLIAM TALMADGE, STAFF MEMBER OF
SENATOR HERMAN E. TALMADGE
Mr. TALMADGE. My name is Bill Talmadge. I work for Senator Herman Talmadge from Georgia. Senator Talmadge had originally planned to be here to introduce Dr. Nix to the committee but has been detained on the Senate floor. He asked me to appear here to do that for him.
Dr. Nix has been a schoolteacher in Georgia. He has been a county school supervisor. He has been head of our vocational education program. He is eminently qualified to testify before the committee and Senator Talmadge expressed his regret that he couldn't be here and asked I commend Dr. Nix and his testimony to the committee.
Senator CHILES. Thank you very much, we are very delighted to have that introduction, and Mr. Nix we are delighted to have you with us today. STATEMENT OF JACK P. NIX, SUPERINTENDENT OF SCHOOLS,
STATE OF GEORGIA Dr. Nix. Thank you, Mr. Chairman, and members of the committee. I would like to thank' Mr. Talmadge for his being here and making those comments about me.
I have prepared a written document and I have submitted it to your staff.
Senator CHILES. We will accept that in full for the record.
Dr. Nix. And I will in recognition of the late hour briefly comment about some of the things that I have in there, Mr. Chairman, and to leave you with two suggestions.
First, it is a privilege to be here and to comment on behalf of our council. This is a council composed of all of the 50 State superintendents and superintendents of the territories and we are united on a national level and trying to have some input into the Congress in terms of legislation that is good for public education throughout the country.
I would also like to express to you and to the members of this committee our sincere appreciation for all of the legislation and appropriations that you have made possible throughout the years in helping us to put together a more effective program of public education for the people of this Nation.
As you are well aware, we have some very staggering problems in the whole process of education in this country and we need all of the support that we can get from the Federal level, from the State level, and from the local level not only in funds but also in helping us to have some certainty as to when and what amount of funds will be made available to us.
In the past we have recognized the problems that are surrounding the whole process of a continuing resolution and we have expressed ourselves through the Members of the Congress over the years, but I find myself today somewhat in the position of looking at this continuing resolution we are operating under now as being a blessing and a bonanza to some extent with this impoundment problem we are confronted with.
It is true that the Congress has been good enough to pass two appropriations bills and you have passed two continuing resolutions and you have expressed your priorities and your concerns, but we have this impoundment problem now that is confronting us not only for fiscal year 1973, but who knows what will come in 1974 or 1975 unless this Congress takes some action to assure that the intent of the Congress is carried out in the expenditure of the funds that the Congress appropriates. Also, in order to make it possible for those of us who are school administrators to effectively plan for the utilization of the Federal funds in order to get the most education for the dollars spent, the uncertainty that surrounds the whole business of whether or not we are going to get funds makes it extremely difficult for us to staff, for us to have facilities, materials, and equipment to get the educational job done.
In fact, in our State, under the NDA-3 and impact aid programs our system, boards and local superintendents planned and budgeted last fall for the utilization of these funds. Now we find that there is a great deal of a question as to whether or not we will even get those funds. Some of the systems have employed staff, they have bought equipment, they have bought material, and if these funds are not forthcoming then it will mean that either the program will have to be eliminated or seriously curtailed or in some instances local property taxes will have to be raised, and this I think is a concern not only to those of us within
a State but to the Congress as well. And some of our systems, Mr. Chairman, that I checked with just in the last few days have reached their maximum constitutional millage limitation