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Congressional Testimony

Statement of Jill Long Thompson
Former Under Secretary for Rural Development

Before the Senate Subcommittee on Agriculture, Rural Development and Related Agencies
March 3, 1998


Mr. Chairman, I am very pleased to be here today to present to the subcommittee the President's Budget request for Rural Development for fiscal year 1999. This request reflects the President's strong commitment to the needs of rural areas even when balancing the Federal Budget has been his highest priority. I think the President's commitment to balancing the budget and the resulting unprecedented economic growth presents us with a very important lesson. The lower deficit has generated the lowest interest rates in decades, thereby lowering the cost of capital which has generated new investment in plants and equipments and created millions of new jobs. In addition, the level of homeownership in this country has reached an all time high of 66%. Perhaps the best news is that the "misery index," the combination of unemployment and inflation, is at its lowest level in 30 years.

Almost all of the new jobs that have been created are in the private sector. The government has been a very important partner in this expansion, but its role has been to create an environment of investor confidence, and this is the way our economy works best. This is also the role we think appropriate in rural areas, to help create the environment that generates confidence and private investment.

I wish I could report to you that the full benefits of this economic expansion have reached rural areas. We are beginning to see some improvement in the net creation of new jobs and some increase in rural salaries, but not as much as I would like to see. After a full decade of decreasing real income, rural wages are beginning to increase because of tight labor markets. However, income levels in rural areas continue to lag behind those in urban areas, and rural areas continue to experience very high poverty rates. Rural median household income is only about 77% of that in urban areas. Additionally, median household income for African American and female-headed households is only about 50% of the overall rural median income. One disturbing fact is that employment still does not always lift a family out of poverty in rural areas. A typical rural wage is below the poverty line and is not sufficient to support a family of four. Poverty in rural areas is 2 percentage points higher than it is in urban areas, 15.6% and 13.4% respectively. Poverty in the rural south is just under 20%. The unemployment rate is 16% higher in rural areas than in urban areas. And as I stated last year, the most devastating effect of rural economies is that 3.2 million rural children live in poverty and 48% of the African-American children in rural areas live in poverty. It is very difficult for these children to attain the educational levels that will be necessary to compete for jobs in this information technology dominated economy.

These are the reasons that the President is committed to continuing Federal investment in rural areas. Yet, he is cognizant that the Federal government alone cannot solve these problems. I recently had an opportunity to review a report prepared by a USDA Task Force on rural poverty. Its authors concluded that a healthy rate of economic growth is essential to the alleviation of rural poverty, but it is not (by itself) a sufficient condition to bring the adjustments needed. The report was written in 1961.

I think the authors also had the answer to much of the problem of rural poverty when they stated, "the problems of rural economic stagnation are so deep-seated and the effects are so widespread on all community facilities, resources and attitudes, that the only development program that will work is one that attacks many problems simultaneously, and in depth." The President recognized this approach when he created the Empowerment Zone/Enterprise Community (EZ/EC) legislation, the concept of which is to address the structural economic problems comprehensively and in depth.

As noted in the President's Budget, the Kentucky Highlands, one of the three rural empowerment zones, has used $11 million of its EZ funds to expand the amount of investment capital. From the amounts obligated to date, they have leveraged an additional $38 million in private capital for 11 new manufacturing enterprises creating 575 new jobs, and they have commitments to create an additional 1,600 jobs. According to one of the EZ/EC Board Members, the current unemployment rate for the three county area is below 6% for the first time in memory. The President's budget provides for a second round of EZ designations -- five for rural areas and 15 for urban areas. This comprehensive and in-depth approach was also part of the Administration's thinking in the Rural Community Advancement Program (RCAP) which we have discussed previously with the subcommittee. The budget again requests the authority to transfer funds among the program areas within RCAP to provide us the flexibility to address problems as they need to be addressed. The budget also provides for the 3% set-aside of the RCAP funding for Federally-recognized Indian tribes as authorized by the 1996 Farm Bill.

RURAL DEVELOPMENT BUDGET REQUEST

An additional benefit of the economic expansion is that the interest rate sensitive programs administered by Rural Development are 40% less costly than they were in FY 1993. We are in the enviable position of being able to deliver these programs to rural America, at less cost. The budget request for the programs administered by the Rural Development agencies totals $10.4 billion requiring $2.2 billion in budget authority. These are increases of about $450 million and $110 million respectively over the levels enacted for FY 1998. This includes the program level and budget authority, $2.8 billion and $715 million, requested for the programs under RCAP.

Utilities Programs

Mr. Chairman, each of the programs administered by Rural Development contributes significantly to the economic viability of rural communities, but perhaps none are more important than the programs that provide basic infrastructure investment. Economic growth and vitality cannot occur without the systems that provide water and sewer, electric, and telecommunications services. The presence of these systems does not guarantee economic growth. But one thing is an absolute certainty: growth and stability will not occur without them. These programs are responsible for much of the economic growth that has occurred in rural areas during the past fifty years, but as you well know, many rural areas still have not prospered and many of the infrastructure systems that we have built are now old and they need to be replaced. These programs are still very much needed in rural America, but the measurement of need has shifted from prior years when success was the number of farms or households connected to electricity and telephone systems for the first time to the amount of economic activity generated by these investments.

ELECTRIC AND TELECOMMUNICATIONS

The telecommunications and electric industries throughout this country are in the vortex of change. Monopolistic supply is giving way to open competition and while the generally held perception that competition will drive down cost may be true for the two industries from a macro-economic perspective, we must be vigilant that rural areas are treated fairly in the process. The Telecommunications Deregulation Act continued the "universal service" concept which ensures that rural areas will continue to have access to the telecommunications network at reasonable cost. The Administration is in the process of addressing similar issues for electric service. The lack of consumer density in rural systems, combined with the fact that construction cost in rural areas is virtually the same as in urban areas, means the cost per rural consumer is much higher. On average, revenue per mile for urban utility systems is 8 times that of rural areas. This, of course, translates to higher rates in rural areas and puts rural systems at a competitive disadvantage with neighboring systems. We are working with electric borrowers to ensure they are in the best possible competitive position and to ensure that our loan security is protected when the electric industry is deregulated.

BUDGET REQUEST

The budget authority requested for the electric and telecommunication loan programs is $40.3 million. This will support lending levels totaling $1.7 billion and, factoring in the private capital that accompanies this investment, the total investment in electric and telecommunications grows to $5.1 billion. This level of investment will provide new or improved service to at least 1.8 million residents of rural areas and in the process support over 34,000 jobs primarily in the construction trades.

Due to the growing demand for electric loans, we are also proposing a new Treasury rate direct loan program of $400 million which requires budget authority of only $840,000. We are proposing a new direct loan program rather than increasing the request for the Federal Financing Bank (FFB). The reason for this request is, since FFB financing has traditionally been used only for generation and transmission loans, distribution borrowers have expressed some reluctance to use the FFB authority because of the additional time needed to process the loans. This new authority requires authorizing legislation which will be submitted to Congress in the very near future. The total budget authority requested for electric loans is just under $30 million.

The budget authority requested for telecommunications loans, including the Rural Telephone Bank, totals $10.3 million. There are still many rural areas that cannot access the full benefits of modern telecommunications because the basic switching equipment has not been modernized. Most of the exchanges in this category for the past few years are being sold and the new owners are installing newer equipment. We do not provide financing for the purchase of these systems, but we are financing the new equipment, and require that the equipment that we finance will provide the capability to provide subscribers full access to modern telecommunications.

As you know, in prior years the Administration has proposed immediate privatization of the Rural Telephone Bank. Because of concerns of the Bank's ability to suddenly begin operating effectively as a private lending institution in a deregulated environment, without a transition period, the Administration is now proposing the Bank operate as a performance based corporation. As a performance based organization, the Board and managers would be required to set specific strategic and financial goals, one of which would be to achieve privatization in not less than ten years, and more quickly if possible. The Bank would have the authority to hire its own personnel, and funding for salaries and expenses and the subsidy cost of loans would be requested from balances in the liquidating account. Legislation is necessary to effect this proposal.

DISTANCE LEARNING/TELEMEDICINE LOANS AND GRANTS

For Distance Learning/Telemedicine loans and grants the budget requests a lending level of $150 million and a grant level of $15 million. The request for grants is an increase of $2.5 million. The loan request is the same as enacted for 1998. The demand for this program continues to grow, not only because of the education and medical benefits that it provides rural areas, but also because more and more people are beginning to realize its potential as an economic development tool. As firms are assessing areas for opportunities to locate facilities in rural areas, among the first questions asked are about the quality of education and health care. This program provides the opportunity to rural areas to reap immediate benefits in education and medical care, but the presence of these capabilities also provides the longer term benefits of attracting new growth.

WATER AND WASTE DISPOSAL LOANS AND GRANTS

Mr. Chairman, the value and benefits of this program are best demonstrated by comments made in 1995 by the manager of a water system in the southwestern part of the country -- "Thanks to the Department of Agriculture, we have running water in our faucets. We hauled water in barrels and water tanks until you gave us a loan and grant ... for the first time since the town was founded the citizens were able to get a drink of water from a faucet. Without your help, it never would have happened." This statement was made following completion of a Water 2000 project awarded in 1995.

The 1980 Census reported 2.1 million rural Americans did not have any drinking water flowing into their homes. The 1990 Census reported that this number had been reduced to just over 1 million and since the Water 2000 Initiative was implemented in FY 1995, Rural Development has invested $1.3 billion in loans and grants that have afforded just under 300,000 people the opportunity to have safe, clean water in their homes for the first time.

Water 2000, as ambitious, challenging and rewarding as it is, is a small part of the water and waste disposal program in rural America. The Drinking Water Infrastructure Needs Survey conducted periodically by the Environmental Protection Agency estimates the total investment needed in small systems (serving less than 3,300 people) to bring them into compliance with the Nation's Drinking Water standards is $37 billion. A similar investment is needed for water disposal systems. At present the applications for loan and grant assistance through this program total over $3 billion.

The budget requests $1.3 billion in loans and grants for this program, a slight increase over the amount made available for FY 1998. This level of funding would provide new water service to about 500,000 rural residents, improved water service to an additional 400,000 rural residents, provide new or improved waste disposal service to about 410,000 rural residents and in the process support about 30,000 jobs primarily in the construction trades.

Housing Programs

No single factor contributes more to community stability than does homeownership. Since the early 1970s USDA's rural housing programs have played a key role in improving the availability and quality of housing in rural America. These programs reach families and individuals who cannot otherwise afford decent, safe, and sanitary housing. The Housing Programs (Housing Programs) has financed over 2 million single family homes since the inception of its homewnership program. Housing Programs has been particularly successful in reaching those residents that the private market and other government programs cannot reach -- low and very low income families living in isolated rural areas.

SINGLE FAMILY HOUSING

The budget request for the rural housing and community facilities programs is $5.5 billion requiring $895 million in budget authority, 65% of which is for rental assistance payments. This represents an increase in the program level of $300 million over the 1998 level and an increase of $27 million in budget authority. The request for the homeownership program, the flagship program, is $4.0 billion of which $1.0 billion is for direct loans, the same amount enacted for 1998. The average income for families borrowing under this program is $17,000, barely above the poverty level. For the guaranteed ownership program we are requesting $3.0 billion. These two programs will finance over 60,000 new and improved homes. Each home constructed provides 1.75 years of employment, over $50,000 in wages and over $20,000 in taxes for the local economy.

In addition, we are again proposing legislation that would permit use of the guaranteed loan program for refinancing direct loans. These loans would be made available to borrowers who do not have enough equity in their homes to refinance in the private market and are paying us interest in excess of the existing market rates. We are currently prohibited from refinancing direct loans.

MULTI-FAMILY HOUSING/RENTAL ASSISTANCE

For the multi-family housing programs, we are requesting $250 million, of which $100 million is for direct loans, requiring $48 million in budget authority. This is a decrease from the level enacted for 1998. This level of funding will provide over 1,100 new units and will provide for the rehabilitation of just under 5,000 units. The average income of tenants in this program is $7,300.

We are also requesting $150 million for the guaranteed multi-family housing program which has operated as a pilot program for the past two years. This program serves tenants with much higher incomes, up to 115% of area median income, than in the direct program and is therefore much less costly. The budget would provide for the construction of about 4,100 units.

For rental assistance, the budget requests $583 million, a $42 million increase over the 1998 level. Of this amount $544 million is needed for expiring contracts and the remainder will be used for rehabilitation, new construction, and servicing, as well as for farm labor housing consistent with the recommendations of the Civil Rights Action Team. Rental assistance payments are made to the developers of the projects as the difference between the 30% of income required by the tenants and the market rental cost of the unit.

MUTUAL AND SELF-HELP HOUSING GRANTS

We are again requesting $26 million for the mutual and self-help program which provides the technical assistance required for families engaging in the construction of their own homes. As you are well aware, Mr. Chairman, this is one of the most rewarding programs that we administer. It provides not only a decent, safe housing unit, but it also provides a measure of self confidence and self assurance for the family and it is the only way the participants will ever have the opportunity to own a home. One measurement of success for this program is that the delinquency rate is significantly below that of the direct loan program. The participants are incredibly and justifiably proud of their accomplishment.

COMMUNITY FACILITIES

For the community facilities programs we are requesting a total of $418 million, $200 million for direct loans, $210 million for guaranteed loans, and $8 million for grants. These programs finance a wide variety of facilities throughout rural America, but the priorities are health and safety projects. During the past two years Housing Programs has also placed an emphasis on funding child care centers. The decrease in real income for rural families during the 1980s; the fact that close to 50% of rural workers have income that is near or below the poverty level; and the fact that women are filling many of the new jobs created in rural areas dictate that child care facilities be available in rural areas. This is critical for families to make the transition from welfare to work. Housing Programs, working with a national non-profit organization, began the rural child care initiative in 1996 and since then we have increased the number of child care projects funded from 6 in 1992 to 44 in 1997 and we expect to fund even more in 1999.

Business Programs

The key to improving economic conditions in rural areas is the creation of business opportunities and jobs and the role of the Federal government is to assist in creating the environment that generates private investment. Economic growth tends to occur with concentrations of population and investment capital, or is associated with the abundance of extractable natural resources. For too many years, this country has been attempting to apply what is known about economic growth in urban areas to rural areas. This is not practical. And it is equally true that there is no single "solution" that can be employed in each situation. Rural areas hold two key advantages in economic development, the abundance of natural resources, including agricultural production, and a labor pool that has a tremendous work ethic.

We can be more effective if investment is channeled into businesses associated with what is readily available in rural areas. The concentration of agricultural production and processing causes the migration of investment capital out of rural areas and the population tends to follow in hopes of economic improvement. In addition, the out-migration of capital and people diminishes prospects for attracting external capital.

The question is, "how do we maximize the advantages that rural areas have to offer?" One solution is to ensure that a larger portion of the income generated from agricultural production remains in rural areas. One way this can be done is through the establishment of more businesses engaged in processing and marketing of agricultural commodities. The processing of food and non-food as well as feed and non-feed uses of agricultural commodities in rural areas helps retain income and capital needed for other investments in rural areas.

With the $1.0 billion requested for the Business and Industry loan guarantee program, I intend to set aside $200 million exclusively for the use of cooperative businesses. These funds will be available only for cooperatives for a certain time, and if not used for this purpose will be available for other loans. We will also continue to work closely with AARCC and other organizations to ensure that no investment opportunity is missed and we will continue to work with cooperative associations to develop other investment opportunities, both for the Business Programs and for AARCC.

BUDGET REQUEST

Mr. Chairman, the budget request for the Business Programs programs totals $1.2 billion, requiring $77.6 million in budget authority. For the flagship program, guaranteed Business and Industry loans, we are requesting $1.0 billion, and $50 million for direct B&I loans. Direct lending will be targeted to those traditionally under-served areas of the country. For the Rural Economic Development loan and grant programs (cushion of credit) we are requesting $15.0 million in loans and $11 million in grants; $35.0 million for Intermediary Relending loans and $40.3 million for Rural Business Enterprise Grants.

For assistance to cooperatives, we are requesting $1.7 million in Rural Cooperative grants and $2.0 million for Federal/State Research on Cooperatives. Research on cooperatives has not kept pace with the growth in cooperatively owned businesses, particularly with respect to non-traditional cooperative activity such as processing and retail and export cooperatives. In addition, we are also requesting $2.0 million for the Appropriate Technology Transfer for Rural Areas program. The volume of requests handled by this office has grown significantly in recent years and the level of financial support has remained constant. We need to increase funding for this activity in order to respond quickly to customers.

AARCC

For the Alternative Agricultural Research and Commercialization Corporation we are requesting a total of $10.0 million, $8.5 million for investments and $1.5 for administrative costs. This level of funding is expected to help bring 6 new products to market and will create about 1,000 new jobs in rural America based on agricultural commodities. Mr. Chairman, this helps retain more income in rural America and I would like to do more of this. This program can take what has been a waste product like wheat straw or peanut hulls, which actually have a negative value, and develop new products and creating positive economic values for farmers and producing jobs for other rural residents. Other countries invest much more in this type of activity than we do and we are losing business opportunities. For example, a firm in England is exporting non-load bearing wall panels made from wheat straw to this country, of all places. The largest wheat producing country in the world is importing products made from wheat straw.

SALARIES AND EXPENSES

The request for Salaries and Expenses for Rural Development, $527 million, is an increase of $18 million over 1998. There are several reasons for this increase. First, because of all of the organizational changes that have occurred within Rural Development over the past few years, we have lost a disproportional share of the lower level employees, even though we have used every means available to keep them, such as buyouts and early retirements of our more senior employees. This has caused our average salary costs to increase significantly. While this is a situation I would not have preferred, it is something that has to be dealt with because the alternative is no better. If sufficient funding is not available for salaries and expenses then it will be necessary to execute a Reduction-in-Force (RIF) to remain within available funding. This action will only exacerbate the problem because a RIF will, in-turn, eliminate additional lower level employees driving the average salary cost even higher. The vast majority of these staff are in our field offices and are primarily responsible for delivering the programs we are discussing today. We need to keep them employed.

Rural Development is blessed with very dedicated and hard working staff that have maintained a positive attitude toward public service through our reorganization, restructuring and streamlining efforts. They know the value of the programs we deliver because most of them live and work in the communities in which we provide assistance.

Another reason for requesting an increase is that in order to retain our employment level through FY 1998, we have deferred investment in information technology and training, something we cannot again afford to do. Investments in information technology and training are means through which we can realize additional efficiencies. In fact, the Secretary's plan for achieving efficiencies through convergence of the administrative services of the three county based mission areas is dependent on investments in the common computing environment and re-engineering of our business practices. Achieving additional savings through administrative efficiencies will provide the flexibility for all three mission areas to continue to support the staffs responsible for delivering the programs. We will also better utilize support staffs by directing their efforts to more critical needs rather than maintaining antiquated, staff intensive systems. Of the $18 million increase for salaries and expenses, $8.5 million in the budget is for investments in information technology; most of this is for maintenance of our existing systems, proceeding with service center implementation, and accomplishing the changes in systems necessitated by the Century date change.

Providing support to the very dedicated employees of Rural Development is a priority equal to funding any of the programs we have discussed. Without the employees we will not be able to continue to deliver the programs as effectively as we have in prior years and many needs in rural areas will not be met. I ask for your very serious consideration of this request.

This concludes my comments. Thank you for the opportunity to appear before the subcommittee. The Administrators and I will be most happy to answer any questions you and members of the subcommittee may have.

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