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Congressional Testimony

Statement of Dayton J. Watkins
Former Administrator, Business Programs

Before the Senate Subcommittee on Agriculture, Rural Development and Related Agencies
April 15, 1997

Mr. Chairman and members of the Committee, I am pleased to present the Administration's fiscal year (FY) 1998 budget for the Rural Business-Cooperative Service (Business Programs).

Business Programs is a component of the Rural Development mission area and has made significant contributions to enhance the lives of rural Americans. Like our counterparts, we share the belief that a strong rural America requires an investment in people, education, technology, health care, infrastructure, and social and community affairs. These investments will enable rural Americans to continue advancing in the economic mainstream of this great nation and help them build sustainable rural communities. Business Programs's significant contribution to this effort has been in our ability to make our resources available to rural Americans. These resources build partnerships within these communities which leverage public, private, and nonprofit resources to stimulate economic growth. New jobs paying higher wages will be created and they will maintain the current ones. It means positioning rural residents to be able to meet the needs of their individual families for basic necessities. This can be accomplished by allowing rural residents to have income to pay for educational expenses of their children, the family's housing needs, and to enhance their personal pride and self-esteem. It also means being able to meet the credit and financing needs of rural business owners who are unable to find them from other sources. It means helping the new entrepreneurs implement their dream of owning and operating their own businesses and helping agricultural producers analyze alternative business forms, like cooperatives, which may offer them greater economic opportunities than currently offered by the marketplace in this highly competitive environment. Each of these efforts will touch rural America. Our responsibility is to provide efficient access to our programs so that rural Americans can maximize the benefits that will result.

At Business Programs, we strive to enhance the quality of life for all rural Americans by assisting rural business owners and new entrepreneurs to develop businesses that are sustainable and provide a product or service which consumers demand. We assist these businesses in providing employment for local residents, owners and their families. We help them identify new opportunities and markets for their goods and services. These commitments help improve the performance of rural businesses consistent with efforts to reduce the size of the Federal government and balance the Federal budget. Even in this environment we must still provide efficient services to rural residents. One of our objectives is to use this opportunity to be creative in developing new concepts and approaches to serve our customers. To ensure that rural Americans continue to have access to our programs and services, we are developing new and exciting initiatives. These initiatives will focus more resources on individuals, businesses, and communities that have not traditionally participated in our programs. By doing this, we can be instrumental in increasing the contribution made to the overall growth of rural America by putting under-utilized resources to better use. This is consistent with the overall goals and objectives of the Rural Development mission area.

To meet our goals, objectives, and the growing demand for our services and resources, our strategy is to increase strategic alliances through creative partnerships with other Federal Departments, other agencies of the Department of Agriculture (USDA), corporate America, educational institutions, nonprofit organizations and others. Together, we can leverage resources to maximize their availability to rural America. Through strategic alliances, we can serve more people and communities because more organizations are available to serve them. Let me highlight an example of a completed strategic alliance and others currently in the developmental stages.

These are a few of the strategic relationships we are encouraging throughout the rural business arena which will have a direct and positive impact on the growth of rural communities.

Business Programs is also very conscious of its customer service image and the types of services we provide to rural Americans. We continue to rethink and evaluate our programs and the way they are delivered to serve our customers more efficiently. Our goals are to reduce the cost to operate these programs for the taxpayers, while improving our service delivery. Through the enactment of sweeping changes in the Business and Industry (B&I) Guaranteed Loan program, we have demonstrated that this can be accomplished.

The recently published B&I guaranteed loan regulations are shorter, clearer, and more logically organized. The material in the new regulations is about one-half that of the previous regulations. Program changes shift some responsibility for loan documentation and analysis from the Government to the lenders. This makes the program more responsive to the needs of lenders and businesses, and creates easy and fast processing of applications.

In recognition of this tremendous effort, Business Programs received Vice President Gore's Hammer Award for our automated application procedure for B&I lenders. Ten states participated in the user validation demonstration program for testing this new product. The new system alleviated some concerns expressed by our customers regarding requests for repetitive information, and cumbersome and complicated regulations, forms and agreements. This automated application software is schedule for release soon and nationwide implementation. In addition, we have developed a B&I video with a new program brochures and an information kit to use in outreach activities within the states to make the public more aware of the program.

In expanding visibility of our programs, Business Programs held a series of Business Financing Forums with financial institutions around the country. Participants included members of the American Bankers Association, Independent Banker's Association, Farmer MAC, the National Association of Guaranteed Lenders, the National Association of Investment Companies, and other trade associations. This effort increased our relationship with the lending community and has substantially increased program usage throughout the financial community. Additional efforts are planned for this fiscal year because of the heightened interests in our resources and capabilities.

Now I'd like to briefly address our program funding request.


The B&I loan program guarantees all types of businesses including those engaged in agricultural production when it is a part of the integrated operation. These companies create and save jobs, upgrade the infrastructure, and improve the lives of rural residents.

FY 1996 was a banner year for us in rural business and the best year we have had since the late 1970s. Last year, Business Programs provided $638 million in guaranteed B&I loans and was able to provide financial guarantees to 560 loans to businesses which maintained their existing employees and often created many new ones.

An example of the types of business and communities benefiting from the B&I program is the Southern Industrial Mechanical Maintenance Company (SIMMCO). This company was founded in 1977 and is in Brownsville (pop. 10,019 ), Tennessee. The company is a leading employer in the Brownsville community. The 1990s have caused the need for the automation of the manufacturing process and updating of the physical plant site and equipment. The company performs shut down mechanical maintenance service for other companies on a contract basis and manufactures liquid propane gas tanks. These are the two core operations of SIMMCO.

In order to implement the expansion of the company, United American Bank of Memphis is providing a loan for $3.1 million with a B&I loan guarantee. Funds will be used for expansion of an existing business. The business will construct and equip a building on real estate the business owns in Brownsville, Tennessee. The expansion will help preserve 85 jobs and provide approximately 143 new jobs. Most of the new job opportunities are expected to come from census tracts within the Haywood/Fayette Enterprise Community. This loan will also allow the business to be more feasible in its L.P. Gas Tank Operation. The employment rate in the Enterprise Community is 8.3 percent, the wage rates run as high as $18.00 per hour for such jobs as welding.


Many rural areas lack a competitive capital market, which leads to inadequate sources of financial assistance, especially for new businesses. Recent statistics show extensive areas of the country where, despite outreach efforts, the need for financial assistance for business development is not being met. This is especially true in areas with long term persistent poverty, such as the Mississippi Delta; areas experiencing fundamental structural changes in their economic base, such as the Pacific Northwest; and areas of long term population decline, most notably the Central Plains States. The President's 1998 Budget includes $50 million for B&I direct loans and to fill gaps that cannot be met through B&I Guaranteed Loans.


The intermediary relending program (IRP) invests Federal funds to leverage local funds in support of rural businesses and jobs. Loans go to nonprofit intermediaries who in turn relend them to rural businesses to improve business, industry, community facilities, jobs, and economic diversity of rural areas. The program makes investment capital available to entrepreneurs who cannot otherwise obtain financing from conventional sources.

Data shows that for every $1.00 lent to an ultimate recipient, an additional $3.75 of leveraged funding is provided. In FY 1996, $37.6 million funded 47 loans which resulted in more than $141.3 million of other funds being leveraged. For every $100,000 of program loan funds, 20-25 jobs are created or saved. It is projected that once the 47 loans made in FY 1996 have been reloaned (an average of 3.4 times during the life of the loan), these funds will create or save an estimated 25,000 - 32,000 jobs over the life of the loan.

An example of how this program is used is as follows: After a devastating fire, the Route 1 Fashions Retail clothing store in Fort Kent, Maine contacted the Northern Maine Development Council (NMDC) for counseling and assistance. The NMDC quickly responded, collaborating with a local bank and the Town of Fort Kent. The Town packaged a loan for part of the needed funds from the State of Maine Development Fund. The NMDC packaged a restructured loan with their bank and an NMDC/IRP loan. In a short time, the store was back in business and the hole left by the fire on Fort Kent's Main Street was filled with a new building. The business could maintain full-time jobs that would have otherwise been lost. The business provides an important addition to the community and the cooperation shown through this project is a true northern Maine asset.


The rural business enterprise grants (RBEG) program finances and facilitates the development of small and emerging private business enterprises. This program can be used to finance and facilitate development of small emerging businesses in the rural areas and incorporated towns and cities with a population of less than 50,000.

Last year 332 grants for $45 million were made, and approximately 3,531 businesses were assisted resulting in the potential for 10,483 jobs being created and 6,961 jobs saved.

Examples of how the program was utilized are as follows: A storm ravaged the Maine coast at the end of January 1996, and left two tugboats that service the port of Eastport inoperable. An RBEG was given to the Eastport Port Authority in the amount of $80,000 to rehabilitate a tugboat which was acquired through the Federal surplus property program. The Eastport Port Authority and the Port of Eastport are major employers in the region. The unemployment rate in Eastport is 13.5 percent, compared to 6.5 percent for the State. Maintaining viable port operations is essential to the community. Business Programs funding saved 70 jobs and there is the potential of creating 62 other jobs.

In June 1996, a $39,580 grant was made to the Emmonak Alaska Tribal Council. The grant was made to purchase and install a primary fish processing line to their processing facility. The new line will do the initial preparation process of salmon without disrupting the production process. The new line will add four new jobs to the current 20 seasonal summer jobs in this remote Alaskan Community. The RBEG was leveraged with $120,000 in funds from state and local sources.

The Walhalla Rural Health Association received a $50,000 RBEG. This grant was used to purchase medical equipment such as a portable x-ray machine, ultra sound machine and a coulter counter which assists in diagnosing serious blood diseases such as leukemia and anemia. The equipment will be leased to the Walhalla Clinic's management group (the ultimate recipient) for utilization in their clinic. The Walhalla community has raised and spent approximately $20,000 in getting the clinic approved for operation.


The rural economic development loan program promotes rural economic development and job creation projects. These zero-interest rate loans made to Utilities Programs electric and telephone borrowers are reloaned to provide start-up financing, project feasibility studies, and other expenses associated with creating business enterprises in rural communities. Under this program last year we provided funds to 65 electric and telephone systems, which is anticipated to provide zero-interest loans or grants totaling $13,093,398 to more than 70 businesses, and creating approximately 2,600 jobs.

Baker Electric Cooperative, Inc. received a $400,000 grant to establish a revolving loan fund. The initial loan covered by the grant was to the Towner County Hospital Authority in Cando, North Dakota. The purpose of the loan was to aid in constructing and equipping a new outpatient clinic and service center to update the existing hospital facility. The project beneficiaries are the residents of Towner County and the surrounding counties who will receive health care from the new hospital and clinic facility. The employees of the hospital and clinic will also benefit due to the enhanced prospects of retaining the hospital and clinic.


Cooperative Services (CS) devotes its efforts to promoting the understanding and use of the cooperative form of business as a viable option for rural residents. As government support programs are changed and encouragement is given to more a market driven policy, farm operators, ranchers and other rural residents are realizing that they need more effective forms of group action in the marketplace to represent their economic interests.

CS conducts studies, alone or in conjunction with other Federal or state institutions, to provide farmers with information on economic, financial, organizational, legal, and social aspects of cooperative activity. Technical advice assists farmer cooperatives in the development and operation of viable organizations to better serve the Nation's family farmers. Educational assistance provides farmers and other rural residents with a proper understanding, use and application of the cooperative tool.

The nation's agricultural sector is currently experiencing rapid structural changes often referred to as the "industrialization of agriculture." United States businesses involved in agriculture are finding it increasingly necessary to have a coordinated or controlled supply of a narrowly defined raw product. As previously mentioned, we intend to devote more resources to assisting small farmers in forming cooperatives. Cooperatives are adapting their structure and activities to ensure that the cooperative businesses and their independent producer members remain competitive in this new industrialized system. CS, through cooperative research agreements and in- house staff, has an extensive research program that is helping the agricultural cooperative sector deal with these major structural changes. This has been especially valuable in the rapid structural changes of the pork industry. Various research publications have been developed and symposiums or other types of outreach meetings have been conducted or are being planned to get the findings of these studies out to the cooperatives, agricultural producers, and other resource providers.

Meat goat producers, predominantly small farmers, from Mississippi and the southern part of the U.S. have experienced difficulties in gaining access to a profitable market for their livestock. These small producers depended on individual markets and operated in an environment with little information, as the industry is in an embryonic stage. Southern States Goat Cooperative was incorporated with our assistance in 1996 and held their first auction in June of 1996. The cooperative is now holding two auctions per month and membership has expanded to more than 300 producers. As the industry develops, the cooperative will explore the feasibility of a processing facility.

As another example of cooperative development assistance, the economy of Smith Island, Maryland depends on the seafood business including watermen's harvested catch of crab. Historically, crab picking has been done in "out- kitchens" in each waterman's house. Although Smith Island crabmeat has always been a high quality product, the "out-kitchens" did not meet the Maryland Health regulations for seafood processing. The crab pickers are predominately women who were told they could no longer sell to the public unless the crabmeat was processed in an approved facility.

In October 1996, the new and approved facility was dedicated. CS helped develop a business plan and assisted the board and management of this new cooperative improve their operations, establish a bookkeeping system, review financial performance, and provided guidance for board decisions. The Smith Island Crabmeat Cooperative provides a valuable source of income for the island women and their families.


The rural cooperative development grants (RCDG) program, formerly the rural technology and cooperative development grant program, has the primary purpose of improving the economic condition of rural areas through the development of new cooperatives and improvement of operations for existing cooperatives. The RCDG program provides grants to nonprofit corporations and institutions of higher education to establish and operate centers for cooperative development. The RCDG program is used to facilitate the creation or retention of jobs in rural areas through the development of new rural cooperatives, value-added processing, and rural businesses. Grants are competitive and awarded based on specific selection criteria.


In FY 1997, $1.3 million of the RCDG funding ($3 million) is being used for the ATTRA program through a cooperative agreement. This program encourages agricultural producers to adopt sustainable agricultural practices which allow them to maintain or improve profits, produce high quality food, and reduce adverse impacts to the environment. ATTRA functions as a center for information and technical assistance, staffed with sustainable agricultural specialists and accessible nationally through a toll-free telephone number. The ATTRA program was transferred to USDA in FY 1996 from the Department of Interior's National Fish and Wildlife Service. In FY 1996 it responded to a record 18,246 requests of which 11,810 were from farmers, and 6,436 from extension, agribusiness, university, state and Federal agencies.


The National Sheep Industry Improvement Center will be used to help build the capacity of the U.S. sheep and goat industries, including infrastructure development, business development, resource development and market and environmental research.

The Board of Directors, appointed in January 1997, will operate the National Sheep Industry Improvement Center. The Center is funded through a revolving fund account which allows up to 3 percent for administrative purposes. Initially the National Sheep Industry Improvement Center's revolving fund was $20 million. Although $30 million is authorized during the next 10 years of the program, no additional appropriations are requested for FY 1998.


The Rural Development 1890 Land Grant Initiative involves cooperative agreements with the 1890 Land Grant Universities and Community-Based Organizations to develop income-producing projects for underdeveloped rural communities. This effort supports the President's desire to reach out to low-income, rural communities to improve their economic conditions. This initiative also supports the Executive Order to work with Historically Black Colleges and Universities. It has been funded at approximately $2 million annually for the past three years, and is included in the salaries and expense account for 1998.

The intent of this project is direct jobs creation in communities that are traditionally agriculturally-dependent or other natural resource-dependent. The land grant universities are among the best agriculture science and business educational programs in the nation. These agreements build on the strength of these institutions to ensure quality education related to small business development and to improve the quality of life in rural communities.

A notable example involves Michael James and JWH Industries of Florence, South Carolina. In 1996, Mr. James and JWH Industries had a faltering worm business. Mr. James requested technical assistance from South Carolina State University through Business Programs's Rural Development Initiative (RDI).

Prior to his request to RDI, his business consisted of one lone employee and 10 worm beds on a two-acre family-worked site in Florence, South Carolina. After receiving technical assistance he now has 10 acres in Manning, South Carolina, five acres in Summerville, South Carolina, a five-acre breeding facility in Trio, South Carolina and another acre in North Carolina. Mr. James now employs 15 people and tends more than 360 worm beds at his various sites.

Also, the Japanese have expressed interest in his process of treating soil with special worms called vermicomposting that he has developed. Mr. James has developed the knowledge of how the various worms can enrich the soil, resulting in organically rich compost.


I would like to highlight the following points from the 1998 Budget proposal. The primary B&I programs are requested for 1998 as part of the Rural Community Advancement Program (RCAP). Within that program, the Budget proposes $660 million for B&I loans of which $610 million would be for guaranteed loans and $50 million would be for direct loans. Rural business enterprise grants are also proposed as part of the RCAP program at a program level of about $40.375 million. The appropriation needed to support these programs in 1998 is $46.296 million. This appropriation is needed to support the guaranteed loan and grants program, however, the direct B&I loan program is not projected to require any subsidy cost.

Intermediary relending under the Rural Development Loan Fund is proposed at $35 million for 1998. This is a slight program level reduction from the 1997 level. The budget authority appropriation required to support this activity is $17 million.

Rural Economic Development Loans are proposed at $25 million in 1998. In addition, the request for the rural economic development grant program is $11.3 million. The Budget proposes that these loans and grants should be funded from the cushion of credit deposits in the Electrification and Telephone Revolving Fund; therefore no appropriation of new funds is needed. The Rural Cooperative Development Grant Program is proposed at the $3 million level for 1998, the same as the current 1997 level.

For administrative expenses, the Budget requests $31 million. This is an increase of $4.6 million above 1997 which is primarily requested for activities in cooperative business assistance.

Mr. Chairman, the Business Programs is proud of its achievements. Through your continued support, we intend to be full partners in serving the needs and enhancing the quality of life for residents in rural America. I would be pleased to answer any questions you or the other members may have.

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