2. Capitalization.-Initially, CFC will raise money through membership fees and member subscriptions to capital term certificates. Later, CFC will raise additional money through membership fees and member subscriptions to capital term certificates. Later, CFC will raise additional money through the sale of long-term obligations to private investors. 3. Loans and Interest Rates.-CFC will make loans to its members for purposes related to rural electric system objectives within their statutory authority. The interest rate on such loans will be determined by the cost of money in the open money market. 4. Membership Applications.-As of mid-April, 1970, 778 rural electric organizations (individual rural electric cooperatives, power supply cooperatives, statewide associations, and NRECA) had sent in their membership applications and fees. Slightly more than 75 percent of the nation's rural electric systems have thus indicated their intention to join the new institution. 5. REA and CFC.-In the words of REA Administrator David A. Hamil "CFC right now is our best hope to bring urgently needed capital into our electric program". In line with this statement, REA has accepted the general principle of "accommodation" of REA liens on the property of rural electrics. Ân REA Study Group and the CFC's REA Coordinating Committee have been meeting to work out the details of this accord. This CFC Committee also is developing the new institution's loan policies and related procedures. 6. Loan Operations. As in the past, all rural electric system loan applications will go first to REA for determination for eligibility for available funds under the REA 2 percent loan program. Loan applications considered eligible for supplemental financing will be forwarded by REA to CFC with appropriate information, including an indication of REA to willingness to accomodate its liens to provide equal loan security for CFC. It is anticipated that for most loan applications REA will make part of a loan and CFC the balance. 7. Internal Revenue Service (IRS) and CFC.-In October of last year the IRS ruled favorably upon the CFC application for exemption from Federal income tax as a non-profit social welfare organization. This action will enable CFC to proceed with the plan of member participation in subscribing to the new institution's capital term certificates. 8. In 1970.-During the coming year the CFC Board of Directors will choose a chief executive officer, to be known as the Governor, of CFC. He will be responsible for day-to-day operations of the new institution. On or about July 1, 1970, the Board also will issue a call for member subscription to Capital term certificates. With the present number of applicants that call will raise, during the initial three-year subscription period approximately $115 million in "seed" capital for the new institution. 9. CFC expects to make its first loan to a member system by year-end. PROPOSED BILL TO AMEND THE DISTRICT OF COLUMBIA COOPERATIVE PURPOSE OF BILL To exempt from the D.C. laws regulating the loaning of money and interest rates, cooperative associations formed under the D.C. Cooperative Association Act and their financing transactions with members. Enactment of the bill is requested by National Rural Utilities Cooperative Finance Corp. (CFC), a nonprofit cooperative association organized under the D.C. Cooperative Association Act for the purpose of providing its rural electric system members with capital supplemental to that provided by the Federal Government under the Rural Electrification Act of 1936. The National Rural Electric Cooperative Association, the national service organization of the Nation's rural electric systems, headquartered in the District of Columbia, also requests its enactment. WHY THE BILL IS NEEDED CFC financing operations with its member rural electric systems are subject to the provisions of the D.C. Code which require the licensing of all organizations (except those expressly exempted) engaged in the business of loaning money at more than six percent interest and which impose an interest ceiling of eight percent on all written financing instruments. These statutes impose onerous regulatory requirements which, however appropriate for organizations engaged in making small loans on personal security for profit, serve no public purpose or interest when applied to financing transactions between a nonprofit cooperative and its members. REASONS FOR EXEMPTING COOPERATIVE ASSOCIATIONS AND THEIR FINANCING The lending operations of nonprofit cooperative associations such as CFC whose loans restricted to members are not within the regulatory intent of these laws and should be expressly exempted therefrom for the following reasons: 1. Cooperative associations incorporated under D.C. law must be operated for the primary and mutual benefit of their patrons. By virtue of member-borrower ownership and control, they are self-regulated and cannot exploit their borrowermembers. 2. Cooperative associations are required to operate on a non-profit basis. Without a profit motivation, cooperative associations such as CFC fix their interest charges on loans at the lowest possible rates designed to return the cost of money to them, operating expense and reasonable reserves for losses. The District Cooperative Association Act contains express limitations upon the rate of return which may be paid upon share or membership capital and requires the annual allocation of the net savings of cooperative associations at a uniform rate to all patrons of the association in proportion to their individual patronage. CFC by-laws, conforming to the District Code requirements, make such provisions for the annual allocation of net margins on a patronage basis. CFC's nonprofit status is expressly recognized by the Internal Revenue Service which has approved its application for exemption from Federal income tax. 3. The business of cooperative finance associations merits the same exemption from the lenders' licensing law as is now accorded by the D.C. Code to the "legitimate business" of banks, trust companies, building and loan associations, small business investment companies, real estate brokers and life insurance companies. The same considerations of public policy which support the exemptions now provided by statute apply to cooperative finance association transactions with members. In fact a stronger case is made for exempting organizations operating on a nonprofit cooperative basis, since they are owned and controlled by their member-borrowers and are self-regulating. 4. CFC Loans will be made in the District of Columbia to cooperative and public corporations in as many as 46 states. In the interest of uniformity and establishing the highest degree of acceptance in the money market for CFC paper supported by its borrowers' loan instruments, these instruments will state the intent of the parties that the laws of the District of Columbia shall govern. The statutory interest ceiling of eight percent is, in view of present money market conditions, unrealistic and can seriously interfere with CFC's operations. The current prime interest rate is 8 percent and is available only to concerns with the highest credit ratings. While CFC will set interest rates on its loans at the lowest possible levels consistent with prudent management, it faces the necessity for paying more than eight percent for the funds it will borrow in the private money markets for reloaning to its members, and must pass these costs on to its members. Senator EAGLETON. Mr. Smith, I am in favor of the traditional rural electric program. I am wondering what effect CFC will have on the 2 percent REA program. Mr. SMITH. This is a good question and this was asked of us many times. We're starting what we call a supplemental program. We recognize in our moving on a concept that we must have REA as our prime source of financing. We are moving though to the approach or philosophy that we're going to provide this supplemental financing only to those systems who have the ability to pay a higher interest rate than they might be paying to REA. We have about a thousand rural electric systems in the country, some are very small, some are located in strictly rural areas, others are located in areas that you may know of in your State, Kansas City, St. Louis, Mo., metropolitan areas where they pay a little more for their money. We are working with REA to develop this program. I would like to say for the record, the Administrator David Hamil has been very cooperative in working with us and assisting us regarding this program. He has endorsed it. It is designed to sort of fill this gap between our need and what we actually appropriate. We have a formula which will set forth the amount of REA money that will be in that loan and the amount of CFC money that will go into that loan. This will be based on ability to pay that system. We have systems which can pay, say, 2 percent rate all the way up to 10 percent, maybe 9 or 10 percent. But this formula we will be working on will be predicated on ability to pay concept and this will not destroy the feasibility of any rural electric system. It will enable them to meet their utility responsibilities and also provide us some supplemental finding to do this job. We are going to have to work hard at maintaining REA appropriation at the highest possible level to meet our need in keeping with the determination of the needs of the program for this kind of funding. Senator EAGLETON. Would this in any way permit you to loan money to consumers in the District? Mr. SMITH. No; it would not. It is strictly to rural electric organizations who in turn would invest its money in the facilities. Senator EAGLETON. Just for my information, how many of the 41 co-ops in the State of Missouri have joined the CFC? Mr. SMITH. I believe it-It runs, in my mind-38. Mr. SAMENOW. If you bear with me for a moment. (Pause.) I think there are a total of 47 systems in the State of Missouri and my recollection is that 41 have applied for membership. Yes, there are 47 and 44 have applied. Senator EAGLETON. Forty-four out of 47? Mr. SMITH. Right. This is voluntary. Senator EAGLETON. Thank you, Mr. Smith. Does any of your other copanelists have anything they wish to add? Mr. SMITH. No. Thank you for your kindness. Senator EAGLETON. I repeat what I said at the outset. This subcommittee will hold a further hearing on this legislation in the near future to hear the views of the District of Columbia government and anyone else concerned with this matter. This hearing is adjourned, subject to the call of the Chair. (Whereupon, at 12:40 p.m., the hearing was adjourned to be reconvened at some future date.) MONEY LENDING, FEDERAL PAYMENT, ISSUE BONDS, WATER AND SEWER RATES, FIX FEES, AND TAXATION OF INVESTMENT COMPANIES MONDAY, JUNE 8, 1970 U.S. Senate, COMMITTEE ON THE DISTRICT OF COLUMBIA, Washington, D.C. The subcommittee met, pursuant to notice, at 12 p.m., in room 6226, New Senate Office Building, Senator Thomas F. Eagleton (chairman of the subcommittee) presiding. Also present: Edward Maeder, counsel; and Judy Burnett, clerical assistant. Senator EAGLETON. The Subcommittee on Fiscal Affairs of the United States Senate Committee on the District of Columbia is now in session to take testimony on a series of bills, some submitted by the administration, others are in the more specific and perhaps parochial category. Our first witness this morning is the Mayor of the District of Columbia, the Honorable Walter E. Washington who will address himself, I take it, primarily to S. 3903 and S. 3904. S. 3904 is a bill to authorize the issuance of various bonds, et cetera for capital improvements-capital improvements relating to freeways, roads, schools, sewage facilities, police, fire stations, and other capital improvements. Many of them I take it to be commendable and worthwhile and are needed. S. 3903 concerns itself with the Federal payment. Insofar as I am concerned, speaking as one individual, I deem the two to be inseparable and intertwined. That is, I do not support the concept of more lavish capital improvement and then deny the District of Columbia the operating revenue and where-with-all to maintain and continue their ongoing services or to put it more bluntly, I do not support the idea of building fancier highways to the poorhouse, and I will treat the two bills as being separate and as being intertwined. Others will perhaps treat it differently, that is their prerogative. I will also have more to say on the general subject matter of the financial plight of the District of Columbia before the Senate some day this week. I will now place in the record copies of S. 3903 and S. 3904 and the letters of transmittal proposing the legislation. (11) |