February 27, 2004
By Ronald D. Utt, Ph.D. and Charli E. Coon
Among the many
troubling provisions of the costly farm bill signed into law by
President Bush in 2002 were several to provide even more federal
subsidies to rural electric cooperatives, which are already heavily
subsidized. These co-ops produce and distribute low-cost power and
telephone service to those lucky enough to live in the rural areas
they serve. When these new debt guarantee subsidies are finally
implemented, they could expose taxpayers to billions of dollars in
prospective loan losses. The President should ask Congress to amend
the law and eliminate these risky and unnecessary subsidies.
subsidized system of electric co-ops was created in 1935 during the
depths of the Great Depression, which was especially severe in the
rural parts of America. At that time, the availability of electric
power was still largely confined to urbanized areas, and many rural
and farm families still relied upon kerosene for light and wood for
In an effort to
get the economy going and provide relief for rural areas, President
Roosevelt signed an executive order that authorized the USDA to
provide low-cost federal loans to build the infrastructure - power
plants and lines - to provide subsidized electricity to unserved
farms and rural areas. To be eligible for these new loans, rural
electric suppliers had to be organized as cooperatives, that is,
owned by their customers. As cooperatives, these new utilities also
benefited from other valuable government subsidies, such as
exemption from federal income taxes and low-cost federal
By the early
1970s, these electric cooperatives had accomplished their mission:
electrification had reached about 99 percent of rural households
and farms. But rather than declare the mission accomplished and
disband the expensive subsidy program, Congress continued it and
allowed it to become even more generous, as the gap between the
government's subsidized co-op lending rate and market rates
widened. Adding to taxpayers' burden were periodic co-op loan
defaults and bankruptcies that have cost billions of dollars.
upon government largesse and privilege and subject to increased
scrutiny of some in Congress and the White House looking for
opportunities to trim federal spending by reducing corporate
welfare, the electric co-op industry diversified its source of
loans in 1969 by creating the private, not-for-profit National
Rural Cooperative Finance Corporation (CFC). The CFC acts as a bank
for co-ops, using its borrowing clout to raise money in private
financial markets at favorable interest rates. It uses these funds
to provide loans to the thousands of electric co-operatives
scattered around the country. As such, CFC loans are an alternative
to the subsidized federal loans that co-ops still receive from
USDA's Rural Utilities Service (RUS). Today, the CFC is a $20
billion private financial institution with ready access to private
credit markets and acts wholly independent of the federal
While the CFC has
grown to be an important source of private credit for rural
electric co-ops, the federal government remains their largest
lender. Today, the RUS holds over $40 billion in co-op loans
financed with funds made available from the U.S. Treasury and made
at the U.S. Treasury's own borrowing cost or less. Various reports
by the U.S. General Accounting Office reveal that the RUS has
suffered billions of dollars in loan losses over the years.
recent Presidents have successfully reformed the subsidization of
electric co-ops, the process has not been one of smooth progress.
Thanks to industry lobbying and congressional interference, two
steps forward have often been followed by several steps back. For
example, a program was initiated in the late 1980s that allowed
co-ops to repay their government debt at a generous discount if
they promised to leave the public RUS system forever and rely
solely of the private CFC for all future loans. Many co-ops took
the money and left the RUS, but Congress later limited the period
of exile to ten years. Thus, many co-ops that took the money and
left are now back on the federal dole. At the same time, co-ops
that defaulted on their loans in the past - at a cost of billions
of dollars to the taxpayer - are also now back and borrowing again
from the government.
But none of these
lapses are quite as bad as a new privilege slipped into the 2002
Farm Security Act that requires the U.S. Treasury to grant the full
faith and credit of the U.S. Government to $3 billion of debt
issued by the heretofore independent, self-reliant, and private
CFC. Unlike the other setbacks, which only partially undid
important program improvements, this would be an expansion of the
federal government into an area that has been fully independent of
federal government involvement or direct subsidy since 1969. So
far, the required guarantee privilege has not yet been granted due
to delays in developing regulations and an effective system of
oversight, but it will be soon.
testimony from late February 2004, Federal Reserve Chairman Alan
Greenspan warned of the potential risks to the economy and to U.S.
financial markets created by the large government sponsored
enterprises Fannie Mae and Freddie Mac. The U.S. financial system
and the federal government already confront unacceptable risks from
privileged lenders, he said. Greenspan urged Congress to address
this problem before it is too late - in other words, before the
government is on the line for a costly bailout.
recognize that guaranteeing the CFC's loans expose the government
to the same sort of risk. How much in losses are at stake through
all of this federal credit market exposure? It is impossible to say
in advance, but it is worth noting that the savings and loan
bailout of the 1980s cost the federal taxpayers over $130
circumstances, there is no justification for increasing the
government's financial market risk by exposing the taxpayer to yet
another major, private lending institution whose chief borrowers
have had their fair share of financial problems in recent decades.
To this end, the President should ask Congress to amend the law to
delete the guarantee provision, and Congress should act on that
Charli Coon is
Senior Policy Analyst in the Thomas A. Roe Institute for Economic
Policy Studies, and Ronald C. Utt, Ph.D., is Herbert and Joyce
Morgan Senior Research Fellow, at The Heritage Foundation.
Among the many troubling aspects of the costly farm bill were aseries of provisions to provide even more federal subsidies torural electric cooperatives. These should be repealed.
Ronald D. Utt, Ph.D.
Herbert and Joyce Morgan Senior Research Fellow
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Charli E. Coon
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