In your clerical help and folks in the lower echelons you have considerable turnover there anyway.

Senator HOLLAND. Presidents never die?

Mr. ToOTELL. They just retire.

Senator MUNDT. Like old soldiers, they fade away.

Mr. ToOTELL. I would like to emphasize again that the matter of who the employees will be, what proportion of them come from the present intermediate credit bank organization and what proportion from the present production credit corporation, is a matter for discretion of the district farm credit boards, and I have already explained how they are organized. It is true that as to the Senior officers of district institutions, the Farm Credit Administration has a veto power. They are employed subject to our approval. I do not know how many years it has been since the governor's office has vetoed any of the district boards employment plans for officers. Certainly not in the 2 years I have been in the office. I do not contemplate that there would be exercise of such veto power except in most unusual cases.

Senator HOLLAND. Well, you have already stated that 88 percent of the loans under this merger would be made to the same group of people?

Mr. ToOTELL. Yes.

Senator HOLLAND. That is the lending institution and the borrowing institution?

Mr. ToOTELL. That is right.

Senator HOLLAND. So all of the economy that could be effected would be completely justifiable because the same people who were making the loans would be receiving 88 percent of the loans, is that right? Mr. ToOTELL. Yes, that is true.

While we are talking on this matter of economizing and streamlining, I would like to further illustrate our good faith in this by telling you a little of what we have accomplished in our own Farm Credit Administration organization here in the little more than 2 years since the Act of 1953 became effective and we have had the Farm Credit Board.

The personnel strength back in December 1953 was 322 employees. That has been reduced to 245 as of this date, and it involves not just a cutting out of positions in the lower echelons, but a very typical cross-section, because we have discontinued 2 deputy governor positions-2 out of 6 deputy governor positions.

We have absorbed the mandatory salary increases that came about through the salary increases decreed by the Congress a year ago last summer, I believe it was, the increase in travel allowance and these other costs, and then the step increases that come through longevity. We have been able to absorb all of those increases and to reduce our requests by $90,000.

Senator HOLLAND. You mean your operating budget?

Mr. ToOTELL. Our operating budget.

Senator HOLLAND. What is the present size of it and what was the size of it in 1953?

Mr. TOOTELL. The present size of it is $2,230,000, sir, so that would mean it was $2,320,000. We reduced it from $2,320,000.

Senator MUNDT. You mentioned the Farm Credit Board. That is the board of Mr. Sam Bober out in Newell, S. Dak.?

Mr. ToOTELL. That is right.

Senator Mt Dr. At that point in the record I would like to incorporate a letter I received this morning from Mr. Sam H. Bober, of Newell. S. Dak.. heartily endorsing the Holland bills.

I think I will have no dificulty getting this in the record. He gives some very valid and persuasive reasons why he supports it.

Senator HOLLAND. Thank you for introducing the letter at this time. Without objection, it will be printed in the record at this point. The document is as follows:)

Hon. KART. E. MUNOT.

United States Senate.

Washington, D. C.

NEWELL, S. DAK.. April 20, 1975.

Dear Kart: Our farmer borrowers of Production Credit will appreciate very much your active support of S. 3564 introdiced by Senator HeLand, which should come before your Agriculture Committee one of these days.

This bill deals with the problem of merging Production Credit Corporations in the Federal Intermediate Credit Banks: provides means for retirement of Government capital and for farmer ownership of these banks. This is the big step. the vast majority of our farmer borrowers wantel, in the direction of farmer ownership of the farmer's own Farm Credit System.

The Federal Farm Credit Board has spent much time to develop this legislation. It has been developed in close cooperation with Production Credit Associations in every Farm Credit District throughout the country. All interested parties had full opportunity to participate in discussing every feature and in suggesting every item in this proposed legislation, before and after the final draft of this bill. We also had the advice of the National PCA Advisory Committee and of the members of District Farm Credit Boards.

Karl, I want to assure you that this piece of legislation is for the best interest of the folks connected with land, as well as for the Government that helped us get this good Farm Credit System going. We have grown, up, we have the experience and should be encouraged to full ownership and control of our own system. The enactment of this bill into law will permit more efficiency and economy in short-term credit lending. From past experience and our personal knowledge, we know that you will give us your full support on good legislation such as this.

With kind personal regards. I remain

Sincerely yours,

SAM H. BOBER.

Mr. TOOTELL. Mr. Chairman, on merger of these two institutions we would have about this situation: The day before the merger took place, we would have 12 intermediate credit banks that would have a consolidated net worth statement of approximately $110 million. That would be on December 31, 1956, we hope.

On January 1, 1957, the new credit banks would have a net worth of $149,186,000, in other words just a little more than $39 million increase in the capital structure of the intermediate credit banks, so definitely this would make for a stronger financial institution.

No only would the capital of the production credit corporations be transferred to the new institution, but also its surplus estimated at a little under $13 million.

Senator HOLLAND. How much?

Mr. TOOTELL. A little under $13 million of surplus in the production credit corporations. And the surplus in the intermediate credit banks themselves amounting to just under $50 million.

That is our best estimate of what it will be as of December next. Senator HOLLAND. Those figures are based upon your hope that S. 3564 will be enacted rather than S. 3550, is that right?

Mr. TOOTELL. That is correct. Well, in either event, sir, they would be the same. The difference between those two would be this, and I might just as well cover it at this point.

It is one of the three exceptions which the Bureau of the Budget took to the Federal Board's proposal. The Bureau would not prevent the surplus from the corporations and the credit bank from becoming part of the permanent capital structure of this new institution. Its proposal would take effect only in case of liquidation of the credit banks at some future time. If the credit banks should be liquidated at any time before all of the Government capital is entirely retired, you would have provision in the present law for the disposition of the surplus, if there were any remaining, because it would be prorated to the interests of the A and B stockholders. But if the credit banks were to be liquidated after all the Government capital were retired, the Budget Bureau would want to see the Government continue to have some interest in the surplus.

Senator HOLLAND. What interest under the requests of the Bureau of the Budget as represented in S. 3550?

Mr. TOOTELL. It did not specify except that it would have an interest in the surplus which was built up prior to the effective date of this legislation.

Senator HOLLAND. What interest?

Senator MUNDT. The surplus?

Mr. ToOTELL. It would be all of it.

Senator MUNDT. They would want the surplus returned.

Senator HOLLAND. And what does that amount to at present? Mr. ToOTELL. Just a little under $50 million. It is $50 million of the surplus in the credit bank plus a little more than $13 million in the production credit corporation.

Senator HOLLAND. Then the difference between the suggestion of the Bureau of the Budget and the suggestion of the directors of the Farm Credit Administration is this: that aproximately $63 million of surplus now belonging to the two institutions would under the recommendations of the Bureau of the Budget, belong ultimately to the Government, and that would be true even after the complete liquidation of the Government-owned stocks, whereas under the recommendations of the directors of the Farm Credit Administration, that $63 million would, after the complete retirement of the Governmentowned stocks, belong to and become the property of the new institution and its stockholders?

Mr. ToOTELL. That is right, sir.

Senator HOLLAND. And the stockholders would, upon retirement of the Government-owned stocks, be exclusively the users of the institution?

Mr. ToOTELL. And of course that is what they are desiring to accomplish, to become exclusively the owners of the system.

Senator HOLLAND. In other words, at present the users of the system are certain institutions who ultimately are farmers?

Mr. ToOTELL. That is right.

Senator HOLLAND. And one group of users own $50 million surplus and another group $13 million surplus, if the recommendations of the directors as embodied in 3,564 are enacted?

Mr. ToOTELL. That is right, sir; all surplus would be farmer owned.

Senator HOLLAND. They become the exclusive owners only upon the retirement of the Government-owned stock?

Mr. TOOTELL. That is right.

Senator MUNDT. But it actually makes a difference only in case the bank is dissolved?

Mr. ToOTELL. That is right.

Senator MUNDT. The situation runs along parallel under either of the bills with or without the recommendations of the Budget Bureau so long as the institution functions?

Mr. ToOTELL. That is right.

Senator MUNDT. The question arises if the bank is dissolved, Does the Government get back its money or does the surplus turn out to the farmers as dividends?

Mr. TOOTELL. That is right; and of course we think the question is academic.

Senator MUNDT. You do not intend to dissolve the bank?

Mr. ToOTELL. We are not planning the liquidation of the intermediate credit banks and we don't believe that they will be at any time in the foreseeable future.

Secondly, if they should be, they are going to be broke and there would be no surplus.

And, thirdly, the Congress would have to make specific provision for their liquidation because present law does not do so.

Senator HOLLAND. Well, isn't there this additional difference between the two points of view-that the question of dividends in the meantime would be affected?

Mr. ToOTELL. Senator Holland, as to the surplus which has been built up to date, as the effective date of the act, the Board's draft makes it very specific that none of this surplus could be paid out; and no dividends may be paid out of earnings so long as there is any Government capital in the system. That is sewed up tight and in a manner satisfactory to the Bureau of the Budget.

Senator HOLLAND. After the Government capital is retired then what?

Mr. TOOTELL. After the Government capital is retired the credit banks could, and we feel would, pay dividends either in cash or in additional B stock and participation certificates.

Senator HOLLAND. Would there be any control of their policy looking to payment of dividends from the Farm Credit Administration? Mr. ToOTELL. By law, yes.

Senator HOLLAND. That is included in this present legislation that you have suggested?

Mr. TOOTELL. I believe I am right on that, but that is one of the things which would be delegated to the district institution and its board of directors, and the authority of the Farm Credit Administration would not be invoked unless it was felt that there was serious mismanagement. Is that correct, Mr. Bagwell?

Mr. BAGWELL. Under this bill, Senator Holland, the surplus that we have been speaking of, the $62 or $63 million, could never be paid out as dividends either before retirement of Government stock or after.

It is always there. It can be used to meet losses, but earnings of the banks would have to be used to restore the fund if it should be depleted by losses.

After the retirement of all Government-owned stock, dividends could be paid as determined by the bank, but there is a limit in the bill of 5 percent.

Dividends never could be in excess of 5 percent out of current earnings, but they could not be paid in any amount out of this surplus, Senator HOLLAND. Then the savings to the then users of the bank, after the retirement of Government stock was accomplished, would be reflected in reduced annual charges?

Mr. BAGWELL. That is right.

Senator HOLLAND. Rather than in payment out of the surplus? Mr. TOOTELL. They would be permitted, however, to pay patronage refunds to their users annually.

Mr. BAGWELL. That is right.

Mr. ToOTELL. To PCA's in the form of B stock and to OFI's in the form of participation certificates.

Senator HOLLAND. We might as well bring this clearly into the record now because of course the Bureau of the Budget will have a witness in here to disclose their side of this recommendation which they have made.

Just what is it that the Bureau of the Budget finds offensive in the possibilities that would exist after the retirement of the Governmentowned stock in the new merged institution?

Just what is it that they find offensive in the operation after that time, after the retirement of the Government stock?

Mr. BAGWELL. Apparently, Senator Holland, they feel that the surplus should go back to the Treasury, primarily I assume, for the reason that it was built up at a time when these corporations were wholly Government owned.

Senator HOLLAND. That is only in the event of liquidation, though? Mr. BAGWELL. That is right.

Senator HOLLAND. What is the situation with reference to the possibilities of operation after the retirement of Government stock that they find objectionable under the act requested by the Farm Credit Administration?

Mr. BAGWELL. They apparently feel that is it unsound or wrong for the farmers to be declared the owners of this surplus after all Government capital is retired. We think it is an academic question, as the Governor said, because we do not visualize the credit banks ever being liquidated.

It is important only in this respect: The Farm Credit Act of 1953 envisioned farmers becoming the owners of the system, and how could they be the owners of the banks if the Government owns 100 percent of the surplus!

They could not in any real sense be the owners of the banks. But it is academic as far as the surplus being paid out in the form of liquidating dividends, because we do not envision the liquidation of the bank.

Senator HOLLAND. Well, now how does it affect from the standpoint of the Budget Bureau the possibilities of greater or less annual dividends?

Mr. BAGWELL. It does not affect the annual dividends at all, because no dividends can be paid until all Government capital is retired, and as I have just indicated, this bill makes it perfectly clear that the surplus can never be used to pay dividends, so really this matter of