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Congressional Testimony

Statement of Michael E. Neruda
Former Deputy Under Secretary for Rural Development

Before the House Committee on Appropriations

Mr. Chairman, Members of the Committee, it is a pleasure to present to you the President's FY 2003 Budget request for the Rural Development Mission Area of USDA.

The Rural Development mission area consists of three agencies, the Business Programs (Business Programs), the Housing Programs (Housing Programs), and the Utilities Programs (Utilities Programs). These agencies are responsible for delivering programs authorized by the Consolidated Farm and Rural Development Act, the Farm Security Act of 1985, the Rural Electrification Administration Act of 1936, the Cooperative Marketing Act of 1926, the Agricultural Marketing Act of 1946, the Housing Act of 1949, and the Rural Economic Development Act of 1990, as amended. The mission area also administers the rural portion of the Empowerment Zones and Enterprise Communities (EZ/EC) Initiative, and assists the National Rural Development Partnership, a nationwide network of rural development leaders and officials. This listing of responsibilities is suggestive of the remarkably wide variety of programs in Rural Development's purview, to help improve the quality of life for rural Americans.

Rural Development assists rural individuals, communities, and businesses obtain the financial and technical assistance needed to address their diverse and unique situations. This financial and technical assistance may come solely from Rural Development or be combined with assistance from one of the numerous public and private organizations involved in the development of rural communities. Rural Development agencies deliver over 40 different loan, loan guarantee, and grant programs in the areas of business development, cooperative development housing, community facilities, water supply, waste disposal, electric power, and telecommunications, including distance learning and telemedicine. Rural Development staff also provide technical assistance to rural families and community leaders to ensure success of those projects it has financed. In addition to their loan-making responsibilities, Rural Development staff are also responsible for the servicing and collection of a loan portfolio that exceeds $83 billion.

Rural Development's large portfolio displays one dimension of the successes of the program funding this Committee has provided. However, numbers do not reveal the human side of these successes. Later, in testimony from the agencies, you will hear clearly how the program funding the Committee provides dramatically improves the lives of rural Americans. These success stories are remarkable.

Rural Development Budget Request

Mr. Chairman, the President's commitment to improving conditions in rural America is reflected in this budget request for FY 2003. The Rural Development budget request totals $2.6 billion in budget authority. Budget authority at that level will support $11.6 billion in direct loans, loan guarantees, grants and technical assistance, and pay administrative expenses. This level of support is consistent with the program levels achieved in recent years, although it is below the appropriated estimate of $14.3 billion that is available for 2002. Implementation of new, more accurate cash flow models that incorporate recent program experience and new economic assumptions resulted in changes in program subsidy rates for FY 2003. The impact of these new rates on individual program levels varies from program to program - some increasing and some decreasing - but the net effect is a lower total program level that can be supported with the same amount of budget authority. However, our 2003 Budget does not reflect an across the board reduction. Rather, we are requesting increases in certain programs and reductions in others, as will be described later. I will now discuss the requests for specific programs.

Utilities Programs

The Utilities Programs (Utilities Programs) provides financing for electric, telecommunications, and water and waste disposal services that are essential for economic development in rural areas. The Utilities Programs program request totals $4.8 billion, which is comprised of $2.6 billion for electric loan programs, $495 million for rural telecommunication loans, $50 million for Distance Learning and Telemedicine loans, $25 million for Distance Learning and Telemedicine grants, $80 million in loans and $2 million in grants to support broadband transmission and local dial-up Internet service, $889 million for direct and guaranteed Water and Waste Disposal loans, $587 million for Water and Waste Disposal Grants, and $3.5 million for Solid Waste Management Grants.

Electric program funding will benefit about 3.4 million consumers from systems improvement, through upgrading almost 220 rural electric systems. Approximately 60,000 jobs will be created as a result of facilities constructed with electric program funds. Almost 133,000 new subscribers will receive telecommunications service, over 495,000 existing subscribers will receive improved service, and about 11,385 jobs will be generated as a result of facilities constructed with Telecommunications funds. Under the Distance Learning and Telemedicine programs, approximately 140 schools will receive distance learning facilities and 55 health care providers will receive telemedicine facilities. Over 38,000 jobs will be generated as a result of facilities constructed with Water and Waste disposal program funds, as 540 rural water systems and about 275 rural waste systems are developed or expanded in compliance with the Safe Drinking Water Act and Federal and State environmental standards.

The Fiscal Year 2003 budget reflects the Administration's commitment to a fully privatized RTB that does not require Federal funds to finance the loans it makes. The Rural Telephone Bank (RTB) was established in 1972 to provide a supplemental source of credit to help establish rural telephone companies. This has proved to be remarkably successful, and efforts have been underway to privatize the bank. In 1996, the RTB began repurchasing Class "A" stock from the Federal government, thereby beginning the process of transformation from a Federally-funded organization to a fully privatized banking institution. A privatized bank would be able to expand and tailor its lending practices beyond current limitations imposed as a government lender.

Business Programss

One key to creating economic opportunity in rural areas is the development of new business and employment opportunities. However, many rural areas do not have sufficient access to the capital needed to sustain local businesses and generate new rural growth. Agricultural producers may not have a mechanism or information to utilize the equity available in farmland for other business purposes. Such equity could be leveraged into other activities, providing capital infusions into capital starved areas. Business Programss (Business Programs) programs, particularly the Business and Industry (B&I) loan guarantee program, supplement the efforts of local lending institutions in providing capital to stimulate job creation and economic expansion. Business Programs also provides research and technical assistance to assist in the identification and creation of new business structures that could support innovative capital formation and utilization in rural America.

The Business Programs budget request for FY 2003 totals about $844 million in Business Programs loan and grant assistance, the bulk of which represents $733 million in B&I loan guarantees. This level of funding for the B&I program alone will create or save over 20,400 jobs in rural America. $44 million is requested for the Rural Business Enterprise Grant program, $3 million for the Rural Business Opportunity Grant program, $40 million for the Intermediary Relending Program, almost $15 million for Rural Economic Development loans, and $9 million for Rural Cooperative Development Grants. In total, the budget for Business Programs programs is expected to create or save over 89,300 rural jobs.

Included in the Rural Cooperative Development Grant request is $2 million for cooperative research agreements for cooperative energy alternatives. A comprehensive program of research is needed to determine how the cooperative form of business can be adopted to increasing domestic fuel supplies, both traditional and alternative, while increasing economic returns to farmers. The program will be carried out through cooperative research at the National Office and through cooperative research agreements with universities and appropriate nonprofit program organizations.

Housing Programs

The budget request for the programs administered by the Housing Programs (Housing Programs) totals $5.2 billion. This commitment will improve housing conditions in rural areas, and, in particular, improve homeownership opportunities. The request for single family direct and guaranteed homeownership loans totals $3.7 billion, which will assist 46,000 households who are unable to obtain credit elsewhere to purchase a home of their own. This level of construction activity will stimulate almost 34,000 jobs in rural areas. The Housing Programs request also includes $35 million for housing repair loans and almost $32 million for housing repair grants, which will be used to improve 12,000 existing single family houses, mostly occupied by low income elderly residents.

We are proposing a multi-family housing request of $60 million for direct loans, $100 million for guaranteed loans, $36 million for farm labor housing loans $17 million for farm labor housing grants, and $712 million in rental assistance. This request represents a refocusing of attention on multi-family housing, with the $60 million loan program directed solely to repair and rehabilitation of existing projects. Housing Programs has an existing multi-family housing portfolio of $12 billion, that includes over 17,600 projects. Many of these projects are 20 years old or older, and face rehabilitation needs. Rural Development is taking a critical overall look at the multi-family housing new construction program to ensure that it is maintained on a proper course, to provide maximum benefits for rural America. Our budget request includes $2 million to fund an independent study to discover alternatives to fund new construction in a more cost efficient manner. Given the needs for repair/rehabilitation of existing projects, and the requested study of alternatives for new construction, Housing Programs is proposing to defer making direct loans for new construction under the section 515 Rural Rental Housing program. However, direct loans would continue to be made for new construction under the Farm Labor Housing program. Further, funding for new construction would continue to be available under the Section 538 Guaranteed Loan program.

This budget provides an increase in the farm labor housing program, which will address pressing needs for farm worker housing across the country. This program provides housing to the poorest housed workers of any sector in the economy, and supports agriculture's need for dependable labor to harvest the abundance produced by rural farms.

The budget includes $706 million for Section 521 Rural Rental Assistance payments, a slight increase over the current level. These payments are used to reduce the rent in rural rental housing projects to no more than 30 percent of the income of very low- income occupants (typically female heads of households, with annual incomes averaging under $8,000). Currently, almost a quarter of a million households are receiving such assistance. The 2003 Budget provides for the renewal of expiring five year contracts for more than 42,000 of the units occupied by these households.

The request for community facilities funding totals $250 million for direct loans, $210 million for guaranteed loans, and $17 million for grants. Community facilities programs finance rural health facilities, child care facilities, fire and safety facilities, jails, education facilities, and almost any other type of essential community facility needed in rural America. These funds will support 4,000 beds in new or improved elder care facilities, 180 new or improved health care facilities, 170 new or improved fire and rescue facilities, 50 new or improved child care centers, and 70 new or improved schools.

Administrative Expenses

These requested program levels provide ambitious targets for accomplishments, for which this Committee will be proud. However, delivering these programs to the remote, isolated, and low income areas of rural America requires administrative expenses sufficient to the task. With an outstanding loan portfolio exceeding $83 billion, fiduciary responsibilities mandate that Rural Development maintain adequately trained staff, employ state of the art automated financial systems, and monitor borrowers' activities and loan security to ensure protection of the public's financial interests.

For 2003, the budget proposes a total of $685 million for Rural Development S&E. Within this FY 2003 request, there is a total of $56 million to cover the costs of items previously paid from central accounts within USDA or on a governmentwide basis, including GSA rental payments, Federal Employees Compensation Act and Civil Service retirement and retiree health benefits. The Explanatory Notes provided to the Committee provide information on the comparable levels for these items in FY 2001 and FY 2002.

Our request includes support for initiatives such as the multi-family housing study mentioned earlier and maintaining the commitment to modernizing financial systems, along with assuming new mission area responsibilities for employee retirement costs and GSA leases. It also includes funding for new equipment to support state-of-the-art technologies utilized in our Centralized Servicing Center (to enhance servicing of single family housing borrowers), support for reviewing large and complex electric and telecommunications infrastructure loans, and increased funding for training. Rural Development is very appreciative of the funding provided in the FY 2002 appropriation for automated financial systems development, which allowed Rural Development to continue to support the development of systems for guaranteed loans, multi-family housing loans, Utilities Programs systems modernization, and the Program Funds Control System. This funding allows Rural Development to address long delayed automated systems development needs. The funding we are requesting for 2003 will allow us to continue several projects that require multi-year funding.

Mr. Chairman, Members of the Committee, this concludes my formal statement. We would be glad to answer any questions you may have. Thank you for the opportunity to appear before you to discuss the Rural Development budget request.

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