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Congressional Testimony

Statement of Hilda Gay Legg
Administrator, Utilities Programs

Before the House Subcommittee on Agriculture, Rural Development, Food and Drug Administration, and Related Agencies
March 19, 2003


The FY 2004 budget reflects President Bush's support for investing in the infrastructure of rural America. It includes $4.9 billion in loan and grant assistance for the on-going electric, telecommunications, and water and waste programs, which compares to $4.8 billion in the FY 2003 budget.

TELECOMMUNICATIONS PROGRAM

The building and delivery of an advanced telecommunications network is having a profound effect on our nation's economy, its strength, and its growth. In discussing the importance of advanced, high-speed access -- commonly referred to as "broadband service" -- at the Economic Forum in Waco this past summer, President Bush said: "In order to make sure the economy grows, we must bring the promise of broadband technology to millions of Americans. And broadband technology is going to be incredibly important for us to stay on the cutting edge of innovation here in America."

Just as our citizens in our cities and subuBusiness Programs benefit from access to broadband services, so should our rural residents. Broadband service is a necessity in rural America, it plays a vital role in solving the problems created by time, distance, location, and lack of resources. The promise of broadband is not just "faster access".

Today's advanced telecommunications networks will allow rural communities to become platforms of opportunity for new businesses to compete locally, nationally and globally, and the funding we are seeking in the FY 2004 budget request will help us continue to meet the "new communications needs" of rural America and ensure that no rural resident - from students to parents and teachers, from patients to doctors, or from consumers to entrepreneurs - will be left behind in this new century.

Treasury Rate, Guaranteed, and Hardship Loans

Since 1995 -- when Rural Development implemented Congress' visionary policy requiring that all Rural Development-financed facilities be "broadband capable" -- every telephone line constructed with Rural Development financing is capable of providing advanced services using digital and fiber technologies. These loan programs target the most rural of our rural communities, towns with populations of less than 5,000 people.

The FY 2004 budget further targets rural areas experiencing extreme financial hardship, by nearly doubling the amount of Hardship loan funds available to those borrowers that serve the most rural, highest cost areas. The budget proposes over $145 million in direct hardship loans, an increase of approximately $70 million over the 2003 program level. These loans bear a fixed 5 percent interest rate to ensure project viability and feasibility, and due to the extraordinary repayment history, carry a zero subsidy cost -- so no increase in budget authority is necessary. The budget also proposes $350 million in Treasury rate loans and loan guarantee authority - which can be provided for a modest subsidy cost of only $125,000. This represents a cost of just over two one-thousandths of a cent for every resident in rural America!

Rural Telephone Bank

This budget also reflects the Administration's commitment to accelerate privatization of the Rural Telephone Bank - as required by law -- and therefore does not request budget authority to support lending for FY 2004. Today, the bank operates as a supplemental lender to entities eligible to borrow from the Rural Development program. A privatized bank would be able to expand or tailor its lending practices beyond the current limitations imposed as a governmental lender, as well as leverage its substantial loan portfolio and cash reserves to extend favorable credit terms to rural companies that do not quality to borrower from Rural Development.

Broadband Loans and Grants

We are seeking continued support from Congress for funding to facilitate the deployment of broadband service in rural areas. As part of the Administration's continuing commitment to invest in rural America, in January, Rural Development announced the opening of its "Access to Broadband" Program as authorized by the Farm Security and Rural Investment Act of 2002, P.L. 107-171. It is the culmination of a 2-year pilot program under the Bush Administration that financed $180 million of loans dedicated to bringing broadband service to rural communities - where nearly 100,000 customers will receive first-time broadband service!

This new program will have a profound affect on the lives of rural Americans. Over the next year, it is expected that $1.4 billion in loans and loan guarantees will be made to bring the promise of high-speed access - or Broadband - to our rural communities. This substantial investment level - nearly $680 million greater than original estimates - is a result of two years of mandatory budget authority for FYs 2002 and 2003 and a very favorable subsidy cost/rate. This funding is "no-year" money and will remain available until expended. Because of this enormous lending level leveraged by low subsidy rates, the FY 2004 budget proposes to eliminate the mandatory budget authority of $20 million and replace it with approximately $9.1 million in discretionary authority. This will result in a total loan and loan guarantee program of approximately $1.7 billion over the first three years of funding (FYs 2002 through 2004), versus the estimated $1.2 billion when the Farm Bill was passed.

Even during these fiscally challenging times, Congress has overwhelmingly supported funding for broadband projects. The proposed budget seeks to minimize taxpayer costs while providing the investment level envisioned by Congress and the Administration in the Farm Bill.

The budget also proposes $2 million in grants to provide broadband service to areas that cannot afford loans. This past year, as part of the pilot program, Rural Development made available grant funds in a program called "Community Connect" -- a new and exciting approach to community funding. Funding is available to provide broadband service to "connect" the schools, libraries, police and fire stations, hospitals, community centers, businesses, and residents - everyone in the community - and introduce them to the benefits of advanced communications infrastructure. For some communities, this program will provide the seeds for sustained economic growth and community prosperity. The proposed grant authority will enable us to continue to seek ways to ensure that no one is left behind.

There are many challenges before us and even greater rewards if we succeed. And the investment IS needed. Much is depending upon a successful public/private partnership. Rural economies today are much more than the farm-based economies of a few years ago. And broadband service not only provides critically needed economic stimuli for rural communities through e-commerce initiatives and by enticing new businesses, it creates a new workforce of students educated through distance learning programs with the skills necessary to compete globally.

Distance Learning and Telemedicine Loans and Grants

The Distance Learning and Telemedicine program continues its charge to improve educational and health care delivery in rural America. The terms "distance learning" and "telemedicine" are becoming synonyms for "opportunity and hope."

Telemedicine projects are providing new and improved health care services beginning with patient diagnosis, through surgical procedures and post-operative treatment. New advancements are being made in the telepharmaceutical and telepsychiatry arenas and providing health care options never before available to many medically under-served, remote, rural areas.

Distance learning projects continue to provide funding for computers and Internet connection in schools and libraries. The vast array of study options available to rural students through distance learning technologies literally brings the world to their doorstep.

The value of these services to rural parents, teachers, doctors, and patients is immeasurable. Building on advanced telecommunications platforms, distance learning and telemedicine technologies are not only improving the quality of life in rural areas, but they are also making direct contributions to the economies in rural areas by introducing the skills needed for a high-tech workforce and promoting sound health care practices, including preventative care initiatives.

Over the past 10 years in which this program has operated, it is clear that the demand for loans in this program is very small. This is primarily due to the types of entities that are eligible to borrow - namely schools and health care providers serving rural areas. In most cases, schools are prohibited from entering into loan agreements and would not be able to generate revenues to repay the loan if they could. The high cost associated with the provision of rural health care limits the feasibility of telemedicine loans as well. Telemedicine offers a means to reach the most isolated and poorest residents of the country, but does not always provide a means for cost recovery. Therefore, in the FY 2004 budget, $50 million in loans is being requested. This amount is more than sufficient to cover loan demand based on past program experience and to meet any demand from larger, consortium-based entities with the necessary resources to collateralize a loan. The budget seeks $25 million in grants to continue the tremendously popular and successful grant program.

Local Television

As you are aware, in December 2000, the Local TV Act, "Launching Our Communities' Access to Local Television Act of 2000", P.L. 106-553 was enacted. The Local TV Act provides for the establishment of the Local Television Loan Guarantee Board (the Board) consisting of the Secretaries of Agriculture, Treasury, Commerce, and the Chairman of the Board of Governors of the Federal Reserve System, or their designees. The Board is authorized to approve loan guarantees of up to 80 percent of the total loan amount of no more than $1.25 billion to facilitate access, on a technologically neutral basis, to signals of local television stations for households located in nonserved and underserved areas. This program has been fully funded through FY 2002 appropriations and mandatory funding provided in the 2002 Farm Bill. Therefore, no additional funding is being requested in the FY 2004 budget.

Telecommunications Program Conclusion

Given the amount of investment capital necessary to deploy advanced telecommunications technologies -- not to mention the lack of available private capital -- it is unreasonable to believe that the private markets, particularly local banks, can generate the capital required.

Our goal should be to deploy a seamless, nation-wide broadband network, where the only thing distinguishing users is their zip code.

Since private capital for the deployment of broadband services in rural areas is not sufficient, incentives offered by the Rural Development program are more important than ever before. Providing rural residents and businesses with barrier-free access to the benefits of today's technology will bolster the economy and improve the quality of life for rural residents.

There is no one solution to the complicated issue of bringing advanced telecommunications services to every citizen. Government incentives; cost support mechanisms; changes in technologies; and private investment - each must play a role. Rural Development will continue to do its part.

ELECTRIC PROGRAM

The Rural Development Electric Program budget proposes a program of $2.6 billion. This amount includes: a hardship program level of $240 million; a municipal rate program level of $100 million; a $700 million funding level for Treasury rate loans; and a $1.5 billion funding level for guaranteed loans through the Federal Financing Bank, which does not require any budget authority; and $60,000 in budget authority for a $100 million loan guarantee program for private sector loan guarantees.

In the last four fiscal years (1999-2002) Utilities Programs had lent over $6.2 billion for distribution facilities. In addition, it is anticipated that another $2 billion will be lent for distribution purposes in fiscal year 2003, which will bring the total over $8.2 billion. In the past three years (2000-2002) Utilities Programs had lent over $3.8 billion for generation and transmission facilities. In addition, it is anticipate that another $1.7 billion will be lent in FY 2003, which will bring the total to over $5.5 billion. When consideration is given to the amount we have lent in the last five years and the fact that the backlog will have been reduced to less than 6 months, there is no demonstrated need for a $4 billion loan program in FY 2004.

An example of how our rural electric borrowers can improve the economic potential and quality of life in rural communities is the United Cooperative Service (United) in Cleburne, Texas. United was created in April 2000, from the consolidation of Erath County Electric Cooperative Association and Johnson County Electric Cooperative Association. United provides service to 77,916 consumers, using 8,819 miles of distribution line. In January 2002, Rural Development awarded a loan to United for $32 million to serve 10,823 new consumers, build 743 miles of new distribution lines, and make other system improvements.

WATER AND ENVIRONMENTAL PROGRAMS

This budget seeks $346 million in budget authority for Water and Waste Disposal (WWD) grants; $3.5 million in budget authority for solid waste management grants; and $35 million in budget authority to support over $1.1 billion in WWD direct loans and $75 million in guaranteed loans.

The budget request earmarks $11.8 million for Colonias along the U.S.-Mexico border, $16.2 million for technical assistance and training grants, $9.5 million for the circuit rider technical assistance program, $11.8 million for rural Alaskan villages, $13 million for Federally Recognized Native American Tribes; and $12.6 million in budget authority for loans and grants Federally designated Empowerment Zones and Enterprise Communities. Our budget request will also allow third-party service providers, such as rural water circuit riders, to make over 56,000 water and wastewater system contacts to communities needing technical assistance, and through a clearinghouse effort, take more than 20,000 telephone calls and an estimated 11,000 electronic bulletin board and web site contacts.

As a result of Rural Development's strong technical assistance efforts, both from staff and third-party service providers/contractors, loan delinquency and loan losses will remain low. Currently, only 1 percent of approximately 8,000 borrowers is delinquent. Since the inception of the water and waste disposal program, less than 0.1 percent of the amount loaned has been written off.

Rural Development programs improve the quality of life and health of an estimated 1.4 million Americans in needy communities each year by providing access to clean, safe drinking water. In addition, new or improved waste disposal facilities are provided to an estimated 500,000 people living in rural areas. A field network of Rural Development employees deliver the program through "hands-on" technical and financial assistance under the Rural Community Advancement Program.

The Water and Waste Disposal program has been very successful since its inception over 60 years ago. A total of over $25 billion in financial assistance has been provided, about 70 percent of that in the form of loans; approximately 45 percent of the total has been provided during the past 10 years. Indications suggest, however, that needs for water and waste disposal systems are still significant and are likely to grow as a result of expanding population in rural areas, changes to water quality standards, drought conditions, and similar factors. The additional funding provided by the Farm Bill helped reduce the backlog for assistance. However, the backlog still persists and totals approximately $2.3 billion. Over the last three years, Rural Development has assisted 1,124 borrowers in moving up to commercial credit in accordance with its graduation requirement. The loans paid off as a result of this effort totaled nearly $680 million.

Mr. Chairman, this concludes my testimony for the Rural Development FY 2004 budget for rural utility programs. I look forward to working with you and other Committee members to administer our programs. I will be happy to answer any questions the Committee might have.

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