The Rural Development (RD) mission area strives to improve the quality of life in rural America by providing financial assistance and working with rural communities through partnerships, empowerment and technical assistance. Three agencies comprise the RD mission area: the Utilities Programs (Utilities Programs), the Housing Programs (Housing Programs) and the Business Programs (Business Programs). Under the Departmentís streamlining and reorganization effort, the field office delivery system for the three agencies was consolidated within USDA Service Centers.
The 2002 budget includes $12.4 billion in loans, grants and related assistance for rural residents and communities.
The major provisions of the RD budget include:
! The 2002 budget maintains most of the rural development programs at the same levels as provided through the regular appropriations for 2001. It does not, however, provide additional funding to continue programs at levels that were augmented through 2001 emergency supplementals.
! The budget reflects flexibility within funding streams under the Rural Community Advancement Program (RCAP) that was enacted as part of the 1996 Farm Bill. RCAP allows funds to be transferred between programs to ensure better coordination in meeting local priorities. The table on page 34 indicates the program levels included in RCAP.
! $2.6 billion in direct loans and loan guarantees for rural electric systems, the same as 2001.
! $495 million in direct loans for the telecommunication program and $300 million in direct loans and $25 million in grants for the distance learning and telemedicine program. The budget assumes continued progress toward privatization of the Rural Telephone Bank (RTB) and, therefore, does not provide for the use of Federal funds for the RTB to make new loans.
! Proposal to make $100 million in direct loans and $2 million in grants for a grant/loan combination to finance installation of broadband transmission capacity (i.e. the fiber optic cable capacity needed to provide enhanced services such as the Internet or high speed modems) for rural communities. The other purpose for which a loan and grant combination would be provided is local dialup Internet service to under served areas. These funds could be targeted to communities that currently lack Internet access via a local call.
! $529 million in grants, $809 million in direct loans, and $75 million in guaranteed loans for water and waste disposal projects.
! $1.1 billion in direct loans and $3.1 billion in guaranteed loans for single family housing, the same as available for 2001. Direct loans are available only to low-income and very low-income families, those with less than 80 percent of area median income, who can receive an interest subsidy. Guaranteed loans are available to families with incomes up to 115 percent of area median income. The 2002 program levels will allow the agency to provide loans and grants to provide about 56,000 homeownership opportunities and to improve about 12,000 existing units.
! $114 million for direct loans and $100 million in guaranteed loans for multi-family housing, the same as available for 2001. The guaranteed loan program was first introduced in 1997 and is used to leverage other Federal, state and local or private financing.
! $694 million for rural rental assistance payments, up from $679 million appropriated for 2001 excluding emergency supplemental funding. The higher level of assistance is needed to provide for the renewal of existing contracts, to support new multi-family and farm labor housing projects, and to provide limited funding for servicing existing projects. This assistance makes up the difference between what the tenant pays and the rent required for the project owner to meet debt servicing requirements. Tenants receiving this assistance are mostly elderly, have very low-income and minimal financial assets.
! $15 million in grants for Round II Empowerment Zones and Enterprise Communities (EZ/EC). Five new rural empowerment zones were authorized by the Taxpayer Relief Act of 1997. Twenty new enterprise communities were authorized by the 1999 Appropriations Act, and $15 million in discretionary funds was appropriated each year in 1999, 2000 and 2001. This funding is in addition to funding targeted to EZ/ECís under RDís on-going programs, which is estimated to be about $172 million in 2002.
! An increase of $16 million from $580 million in 2001 to $596 million in 2002 to cover pay increases for salaries and expenses.
RURAL UTILITIES SERVICE (Utilities Programs)
The electric and telecommunications programs administered by Utilities Programs provide loans to establish, expand, and modernize facilities to improve service to rural residents.
The Presidentís proposal to stop making new Rural Telephone Bank (RTB) loans with Federal funds is to continue the progression of the RTB toward becoming a private bank. The RTB has the potential to obtain funding from the major capital markets, and remain a vital source of credit for telephone borrowers. The RTB was established in 1971 as a supplemental source of funding for telephone loans. The first step toward privatization was taken in 1996 with the retirement of $18 million in government-owned, Class A stock. Since 1996, an additional $97.4 million in such stock has been retired, leaving an outstanding balance of $476.7 million. Current law authorizes a two-phase process for privatizing the RTB. During the first phase, 51 percent of the Class A stock is redeemed. The second phase occurs when 100 percent of the stock is redeemed.
The Presidentís budget includes a proposal for a broadband program. This program would fund $2 million in grants and $100 million in Treasury rate loans in 2002 to be used in a grant/loan combination to finance installation of broadband transmission capacity (i.e. the fiber optic cable capacity needed to provide enhanced services such as the Internet or high speed modems) for rural communities. The other purpose for which a loan and grant combination would be provided is local dialup Internet service to under served areas. These funds could be targeted to communities that currently lack Internet access via a local call. Recipients of these loans and grants would be Rural Utilities Service telecommunication cooperatives and businesses serving rural areas and communities. If the proposal is not approved, the funding for grants will remain part of the DLT program available for DLT grants.
The Water and Waste Disposal Program provides financing for rural communities to establish, expand or modernize water treatment and waste disposal facilities. For the most part, eligibility is limited to communities of 10,000 or less in population, and that cannot obtain credit elsewhere. Grants are limited up to 75 percent of project costs, and are available only to those communities with low median household income levels. Typically, the grants are only 35 to 45 percent of the project cost because the regulations stipulate the grant amount should only be as much as necessary to bring the user rates down to a reasonable level for the area. Interest rates on loans range from 4.5 percent for poverty communities to a ceiling of 7 percent, and grant and loan funds are usually combined based on the income levels of users.
RURAL HOUSING SERVICE (Housing Programs)
The single family housing direct loan program provides subsidized loans for the purchase of modest housing in rural areas. Direct loans are made at a graduated interest rate level from 1 percent to 150 basis points over the Treasury rate, depending on family income. Direct loans are limited to families who have income under 80 percent of the area median income. The average annual income of a direct loan borrower is generally about 55 percent of area median income or about $17,000 on a national basis. Loan guarantees primarily serve families with moderate incomes, with the interest rate negotiable between the lender and borrower.
The 2002 budget includes $1.1 billion in direct loans and $3.1 billion in guaranteed loans for single family housing, the same as 2001. These levels will provide homeownership opportunities for about 56,000 rural families. The fee on guaranteed loans was raised from 1 percent to 2 percent in 2001.
The section 515 multifamily housing loan program provides direct loans to construct and maintain multifamily rental projects that serve low and very low-income families. Projects receive payment assistance to make rents affordable. The average annual income of a section 515 tenant is $7,900. The 2002 budget provides for the construction of 1,700 new units and the rehabilitation of about 5,100 existing units.
The section 538 multifamily housing loan guarantee program provides guarantees of loans that are made by private lenders. The program is designed to leverage other sources of financing. It serves rural families with incomes up to 115 percent of the area median income, who can afford to pay unsubsidized rents.
The rental assistance program provides funding for five year contracts with project owners for reducing rent payments to make up the difference between the 30 percent of income the low-income tenant pays and the rent required for the project owner to meet debt servicing requirements. Most of the funding for this program is used to renew expired contracts.
The community facilities program provides direct loans, guarantees and grants to finance essential community facilities, with priority given to health and safety facilities. There are three interest rates available on direct loans, with the lowest, 4.5 percent, offered to communities where the median income is below the poverty level and for projects to meet health and safety standards. For community facility programs, the 2002 budget provides $249 million in direct loans, $210 million in guarantees, and $19 million in grants. This level of funding will support over 560 new or improved health care facilities, child care, fire and emergency services and other facilities lacking in rural America.
RURAL BUSINESS-COOPERATIVE SERVICE (Business Programs)
Business Programs administers the Departmentís rural business assistance programs, including technical assistance, development, and research on agricultural cooperatives. The agency delivers a wide variety of services to its clients. Business and Industry (B&I) loan guarantees, for example, provide protection against loan losses so that private lenders are willing to extend credit to establish, expand, or modernize rural businesses. Special efforts are being made to help rural communities diversify their economies, particularly into value-added processing, by focusing on cooperative ventures.
The 2002 budget supports a $1 billion program level for business and industry guaranteed loans. In recent years, the program has operated at the $1 billion level for guaranteed loans, after sustained growth from a $100 million level that prevailed in the early 1990's. Direct loans were first introduced in 1997 and have remained a relatively modest part of the overall program. For 2001, there is sufficient funding to support a level of $2.7 billion in guaranteed loans and $50 million in direct loans, including amounts funded through emergency supplementals. However, there is no longer a significant backlog of loan requests and demand may not be sufficient to result in full utilization of the funding that is available. Therefore, a $1 billion level in guaranteed loans is adequate for 2002. The direct loan program has had authority to provide $50 million in loans since 1997 (the first year of the program), but has yet to utilize the full amount. Further, the subsidy rate has gone from being negative in 1997 through 2000 to 6 percent in 2001, and to 28 percent for 2002, indicating a much higher default rate than anyone anticipated. Direct loan borrowers must have been rejected from a private bank in order to qualify. The high default rate indicates that the program is not providing long-term, stable jobs to rural America. For these reasons, it is appropriate to discontinue funding.
Subsidy costs for guaranteed loans have increased appreciably due, in part, to increased losses. While these losses occurred on loans made in the past, they were used to compute subsidy rates on new loans. For example, the subsidy rate for 2001 is less than 1 percent. Without any change in the program, the rate for 2002 would increase to 3.74 percent. In order to partially offset this cost increase, the budget includes a proposal to increase the guarantee fee, which is paid by private lenders at the time of the guarantee. Currently, this fee is 2 percent. The proposal would increase it to the equivalent of 3.25 percent. This will be achieved through a regulatory change, new legislation is not required.
Business Programs also administers a wide variety of relatively small programs that provide specific assistance. Most of these programs are maintained at their 2001 level. Exceptions include the national sheep industry improvement center which received $5 million in 2001, but also has some carry-over funds; rural economic development grants which are funded with earnings on ďcushion of credit accountĒ of rural electric borrowers, these earnings will be used in 2002 to fund loans; value added agricultural product market grants and the agricultural marketing resources center that received funding from the ARPA.
The 2002 budget also includes $15 million in grants for Round II Empowerment Zones and Enterprise Communities, the same as last year.
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