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ARTICLE

Pulling the Plug on The REA

The REA has cost the American taxpayers billions of dollars.

SEPTEMBER 01, 1993 by AL BELLERUE

Albert R. Bellerue is a real property analyst and consultant from Gold Canyon, Arizona.

Franklin D. Roosevelt created the Rural Electrification Administration (REA) as a temporary government agency on May 11, 1935, by issuing Executive Order No. 7037. The Order was authorized by the Emergency Relief Appropriation Act, which was a general program of unemployment relief.

This relief program authorized the immediate spending of $100 million to help correct the unemployment problems of the ‘30s. The Order required that 25 percent of these funds should be spent for labor and 90 percent of the labor should be taken from the relief rolls. This requirement nearly stopped the REA in its tracks, because skilled labor was needed to build electric power systems, and sufficient skilled labor could not be found on the relief rolls.

Morris L. Cooke, former director of Public Works for Philadelphia, was appointed the REA administrator May 20, 1935. As it became evident that REA would not qualify as a relief program under the Executive Order, Cooke, in true political style, launched a lobbying program maintaining that the REA would have to be a loan agency instead of a temporary emergency unemployment relief program.

On August 8, 1935, President Roosevelt issued Regulation No. 4 establishing the REA as a lending agency, which freed it from earlier regulations and gave it authority to make its own exceptions to any other regulations that might restrict it.

Regulation No. 4 transformed a temporary emergency unemployment relief program into a not-for-profit, taxpayer-supported national lending agency—all by Presidential Executive Order.

According to REA publications, the interest rates charged the electric power cooperatives from 1936 to 1952 ranged from two percent to three percent, approximately equal to the cost of Treasury issues. From 1951 to 1971, a period of 20 years, only two percent interest was charged for these REA loans, whereas the Treasury issues rate increased annually to six percent in 1973, when the REA rate was raised to 3.7 percent. In 1981 and 1982 the REA rate averaged about 4.4 percent while the cost of money to the Treasury Department averaged 12.3 percent. From 1983 through 1991, the REA interest charge was slightly less than five percent while the Treasury rate dropped slowly from 10.8 percent to eight percent. Taxpayers have been forced to fund these subsidies for 58 years.

Following is a chart showing comparisons with the going cost of money (Treasury issues rates) and the taxpayer-supported REA loans rates. Treasury borrowing rates did not exceed REA loan rates until 1952.

That REA loan rates equaled the interest rates paid by the U.S. Treasury until 1952 does not mean that the electrification program was unsubsidized during the early years. The taxpayers were forced to underwrite the additional REA costs for federal management of these loans.

Although there is no need to continue this welfare program for roughly one thousand REA cooperatives, taxpayer support continues. Today, according to the REA, 99 percent of the 2.3 million farms in the U.S.A. have electricity. Since 1949, REA has also been making loans for telephones. Today more than 96 percent have phones.

So, what’s keeping Congress from getting the taxpayers out from under this unnecessary burden?


 

 

Interest Rate on REA Loans vs. Cost of Money to the Government

            REA       Treasury

            Loans       Issues

      Fiscal       Rate*       Rate**


* Weighted average for loans approved during the year.

 

**Source: Monthly Statement of the Public Debt of the United States, Department of the Treasury.


      Year       Percent       Percent

1936       3.00       2.530

1940       2.69       2.492

1945       2.00       1.718

1950       2.00       1.958

1955       2.00       2.079

1960       2.00       3.449

1965       2.00       3.800

1970       2.00       5.986

1975       4.42       6.533

1980       4.37       9.608

1985       4.99       10.383

1990       4.97       8.843


 

Welfare for the Wealthy

On July 5, 1992, CBS News presented its 60 Minutes feature “Welfare for the Wealthy” wherein Steve Kroft exposed the most recent Rural Electrification Administration boondoggles, clearly not in the best interests of U.S. taxpayers.

Kroft interviewed Harold Hunter, former REA Administrator, who agreed that the REA was a “boondoggle.”

Kroft pointed out that the REA made huge loans to several holding companies such as GTE, Century Telephone, ALL-TELL, and TDS. In addition, REA made low-interest, taxpayer-subsidized loans to ski resorts in Aspen and Vail, Colorado, and to recharge golf carts in Hilton Head, South Carolina. This is nothing new. It has been going on for 30 years or more, and Congress has known all about it and done nothing to correct it. Kroft also informed his viewers that taxpayers are forced to support REA loans on the island of Saipan in Micronesia. REA, in cooperation with the Agency for International Development (A.I.D.), has organized dozens of cooperatives abroad as part of a foreign aid program.

But what can be done? Jim Miller, former Budget Director; Harold Hunter, former REA Administrator; and Roland Vautour, former Undersecretary of Agriculture, all proposed to Congress that the REA be phased out. Congress has taken no action.

Steve Kroft brought out the fact that one of the reasons no Congressman can be found to clean up this mess and save the taxpayers a billion dollars a year is that the REA co-ops have a powerful political lobby for perpetuation of their welfare program.

The lobbyist is the taxpayer-supported National Rural Electric Cooperative Alliance (NRECA), the powerful national union of REA co-ops. There is no Congressman brave enough to support the taxpayer against this union that can bring some 1,000 co-op members to Washington.

John Becker, former manager of the Wisconsin Development Authority, recalled a conversation he had in the ‘40s with Robert B. Craig, an REA Administrator and acknowledged father of the NRECA.

Craig told him that in the NRECA, “We will have one million members which means four million votes. Further we will have manufacturers doing millions of dollars worth of business with us, and during the campaign we can raise lots of money for our friends from these sources . . . . [W]ith four million votes and several hundred thousand in campaign funds, we will maintain in public offices enough friends that even the devil himself can’t hurt us.”

The REA has cost the American taxpayers billions of dollars. Perhaps it’s time to pull the plug.

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September 1993

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