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Congressional Testimony
August 2, 2001, Thursday
SECTION: CAPITOL HILL HEARING TESTIMONY
LENGTH: 4358 words
COMMITTEE:
SENATE AGRICULTURE, NUTRITION AND FORESTRY
HEADLINE: 2002
FARM BILL
TESTIMONY-BY: STEVE LANE, ON BEHALF OF THE
AFFILIATION: IOWA INDEPENDENT BANKERS
BODY: August 2nd, 2001
Statement of Steve
Lane On behalf of the Senate Agriculture Committee
Rural Development In
The New
Farm Bill Thank you Chairman Harkin and other
members for holding today's important hearing on rural development in the new
farm bill. I applaud you for the work you have done on this
issue. Your focus on rural economic development is essential given the
difficulties our farmers and ranchers face in these stressful times and the need
to diversify our rural economies so that so that farmers and ranchers have
economic opportunities off the farm as well as on the farm.
My name is
Steven Lane, and I serve as President of the Iowa Independent Bankers
Association. I'm also President and CEO of Security Savings Bank, an agriculture
bank located in the small community of Gowrie, Iowa. Security Savings Bank is a
$
48 million asset bank and most of our loans are agricultural
credits. Our town of 1028 people relies heavily on the agricultural economy. I'm
also representing the views of the Independent Community Bankers of America
(ICBA). ICBA is the only national trade association that exclusively represents
the interests of our nation's community banks. Over two-thirds of ICBA's member
banks are located in small communities of under 10,000 population. Over
three-fourths of our membership serves communities of under 20,000 people.
Eighty-six percent are in communities of less than 50,000 population. Clearly
community bankers across the nation have a long standing interest in ensuring
credit availability to our nation's farmers, small businessmen and women and
other consumers in our nation's rural communities. We also have a strong
interest in rural development initiatives that can underpin a strengthened farm
safety net and help diversify our rural communities.
Challenges Of A
Difficult Farm and Rural Economy
Let me say at the outset that we hope
the new
farm bill can have some significant new money for rural
development. The statistics and trends reveal that off-farm jobs are becoming
increasingly important to the health and viability of the farm sector. Census
numbers also reveal that counties dependent largely on agriculture have been
losing population. My point is that our farm programs and our rural development
programs need to both be on center stage in terms of enhancing the overall farm
safety net. We should put some real money into rural development.
We do
work hard in our small community to try an attract new businesses. It is a
difficult challenge. With the low prices we've seen in agriculture, farmers are
struggling to make their farm operations cash flow. The government farm aid
packages have allowed many farmers to hang on from one year to the next. The big
problems of course are profits and equity. Profits are often non-existent and
farmers' equity has eroded severely.
Farmers may be able to stay in good
standing with their lenders by paying their yearly operating loans, but they're
not able to upgrade their equipment as needed. The profits are not there and
unfortunately their net worth continues to drop. Most of our area farmers and
their spouses are working off the farm 40 hour a week to cover living expenses.
Others that are not working off-farm are incurring large amounts of debt. Each
year cash flows are harder to keep positive and financial statements are
slipping.
Many farmers have had to turn to off farm jobs to keep their
farms afloat. That is why diversifying the economic base of our rural
communities is so important and why rural development, which encompasses value
added agriculture, is such a crucial issue. But some farmers are just giving up
and selling out. Others continue to hope for better prices and continued
government support. I believe this year we will see more farmers quitting than
any other time since the 1980's in our area.
We are actively searching
for solutions to this difficult challenge. For example, our community offers new
businesses an arrangement where they pay no property taxes. Unfortunately, that
incentive - by itself - hasn't worked well, simply because it is hard to attract
new businesses to small rural towns. Rural communities do offer people a lot of
benefits, including a high quality of life, low-crime rates, a clean environment
and friendly neighbors. What we need to be successful is a much larger funding
commitment from Congress and some new legislative initiatives in this arena.
One concern we have, Mr. Chairman, is that recent statistics show that
communities relying largely on agriculture have declining populations. To be
successful in rural development, we need to both keep the people we currently
have in our rural communities and attract new ones as well. Because at some
point communities can fall below the "critical mass" of people needed to sustain
the town's infrastructure and services. That leads the town to an irreversible
decline because they lack the human resources needed to remain viable. The per
capita cost of providing services becomes too expensive. Ultimately, keeping
people, leaders, workers, and citizens in rural communities is essential to
keeping a healthy rural social infrastructure in place, which is the foundation
of a diverse economic base in our rural communities.
Maintaining the
social infrastructure in terms of human resources is key to maintaining a viable
physical infrastructure-- adequate roads, schools, health care services,
utilities, Main Street businesses and locally owned community banks focused on
meeting local financial needs.
This morning I first would like to offer
a few general principles to help guide rural development policy and then make
some specific legislative recommendations.
Key Principals To Drive Rural
Development Policies
I suggest four basic principals that should
underlie the federal government's approach to a sound and broad-based set of
rural development policy initiatives. These principals are:
1) Target
Resources to Rural Communities based on population;
2) Provide Tools To
Complement - Not Compete With -- the Private Sector;
3) Target Resources
to Various Sizes and Types of Businesses, Including Individuals; and
4)
Maintain the Population Base and Infrastructure of Rural Communities.
1)
Target Resources to Rural Communities -- We need to ensure that programs first
and foremost truly target rural areas and lead to the creation of new jobs and
to business start-ups and business expansions. This means there should be a
population- based criteria as the first component of deciding where federal
monies go, such as the Business and Industry (B&I) loan program's
requirement that loans go to communities of 50,000 or less.
This
population limit should apply to all types of rural businesses including
farmer-owned cooperatives, contrary to action by the House Agriculture committee
to provide an exemption, which would allow dollars intended for rural areas to
flow to large cities. The House bill did not provide any additional funding to
offset this loss for rural areas. When the decision is whether to finance a
business or processing facility in a rural setting versus an urban setting, the
rural community will almost always lose that decision due to factors such as a
smaller workforce and less access to technology. Rural development needs to have
a jobs component in order to truly revitalize and diversify the local rural
economic base.
There are many benefits of targeting rural areas based on
population. These include:
1) Providing off-farm jobs for farmers;
2) Maintaining the local tax base;
3) Maintaining the population
base which is necessary to keep experienced local leadership and a skilled
workforce in our rural communities; and
4) Maintaining the
infrastructure and services available to our rural communities.
2)
Recognize and Complement the Efforts of the Private Sector -- We should
compliment and add to the efforts of the private sector, especially private
sector financial institutions. Many residents in rural communities will tell you
that their community bankers are the leading catalyst to bringing together the
people and leveraging the resources necessary to attract new businesses to the
rural community.
Specifically from the standpoint of community banks
there should be a recognition that there are thousands of community banks in our
rural areas that can help stimulate our rural economy if they are given the
right tools. For example, there are approximately 3,000 "agricultural" banks
alone and several thousand non-ag banks all in rural areas. These banks are
keenly aware that the future of their institutions are directly tied to the
future of their rural communities. Rural development policies need to be
intricately tied into this vast network of private sector lenders if these
policies are to be successful.
3) Target Resources to Various Sizes and
Types of Businesses, Including Individuals - In addition to targeting rural
communities based on population, we need to ensure that credit is available to
individual entrepreneurs as well as larger corporate and cooperative ventures.
Obviously it may be easier to get financed if you are a multi-million dollar
business. But we need to also ensure that individual entrepreneurs can thrive in
a rural environment.
For example, a banking colleague of mine has a farm
customer who started a business that uses flax straw to make 20 foot long
erosion control logs that are shipped all over the country to minimize erosion
after flooding or forest fires. He is further expanding his business to make
hanging basket liners for horticultural use out of absorbent and environmentally
friendly flax blankets. He bought a closed-up schoolhouse for the manufacturing
site. This is value-added agriculture. He wasn't a large cooperative or a large
corporate business, just a single individual involved in value added
agriculture.
4) Maintain the Population Base and Infrastructure of Rural
Communities - Diversifying rural economies is important because more and more
farm families appear to be relying on off-farm income to support the farming
enterprise. USDA statistics indicate that a significant part of the total income
of farm households comes from off-farm sources. Unfortunately, trends indicate
that counties which have relied largely upon agriculture as the main industry
lost significant population in the last decade. The recent 2000 census revealed
that while the general population grew 13 percent in the 1990's, 676 counties,
primarily rural counties, lost population. Those counties losing population are
largely dependent on agriculture. This shows the importance of diversifying
rural economies because doing so will help keep people in rural America and will
help farm families have additional sources of income thereby reducing the need
to rely solely on farm programs for survival in rural America.
From the
standpoint of the community banks in these rural areas, the loss of population,
with its subsequent result of fewer depositors and fewer deposits, is a critical
problem since fewer deposits mean fewer funds available to make loans to local
businesses and citizens and therefore less investment in the physical and social
infrastructure of rural communities.
Adopting Viable Solutions
Obviously an important goal for our rural areas should be to focus on
value-added agriculture. If we can process more of what we produce in the local
areas, rather than shipping our commodities across the country for processing
and packaging, then local farmers will reap the benefits in their local
communities. These benefits would include greater income from the local business
if they have an ownership stake in the business, but even more significant would
be the off-farm jobs created to keep local townspeople employed where they live.
We've seen a lot of farmer-owned cooperatives get involved in producing ethanol
and this is a future growth area that shows great potential because we can use
our surplus ag commodities to meet the growing demand for energy in our country.
Businesses other than cooperatives, such as individual proprietorships
and other small businesses are also important to building a stronger rural
economic foundation. But the key is locally oriented, value-added initiatives
that help create a better market for our area farmers and also create jobs for
those smaller farmers that need the off farm income.
This also
strengthens the small, locally owned community businesses on Main Street. I
learned a long time ago that when the farmer struggles it has a major effect on
every business in town. As more farmers disappear, so do our local businesses.
Equity Financing in Rural America
Rural Equity Fund - Mr.
Chairman, I want to applaud you for introducing legislation last year to
establish a rural equity fund. A broad coalition of organizations have joined
together in support of this legislation to spur business development in rural
communities. These organizations include the ICBA, the American Bankers
Association, the National Cooperative Business Association, the Farm Credit
Council, the National Rural Electric Cooperative Association, the National
Cooperative Bank, the Rural Telephone Finance Cooperative, the National Farmers
Union, CoBank, Agribank and others.
The "rural equity fund" would
encourage private investment in value-added agriculture enterprises and small
business start-ups and expansions. A healthy rural community obviously needs
many types of rural businesses. This includes both cooperatives and
non-cooperative businesses and both large and small businesses, and credit tools
that encourage individual entrepreneurship. Unfortunately, large venture capital
funds are not interested in focusing on rural America.
So this
legislation creates a public/private partnership designed to attract equity
investment into cooperative and other business ventures in rural America. The
fund would be capitalized by investments from private sector institutions and
the government would match these monies up to a specified level. From a banker
perspective, this fund could provide equity financing to help complement loan
packages put together by the private sector and would therefore complement the
debt financing offered by private- sector lenders. Projects could be brought to
the attention of this fund by a variety of sponsors including cooperatives,
banks and community development groups.
Investments made by this fund
will provide off-farm income, additional markets for agricultural products and
new business opportunities in rural communities. The intent of the fund is to
target rural business recipients in rural communities, defined as those with
50,000 people or less.
In addition, by investing in an equity fund,
rather than individual projects, private sector lending institutions would also
avoid the mixing of banking and commerce, which has traditionally been
prohibited by Federal law.
The issue of bringing more equity financing
to rural America has had increasing attention in recent years. A couple years
ago the Center for the Study of Rural America, headquartered in the Federal
Reserve Bank of Kansas City, and a national rural outreach committed to
illuminating the issues and challenges facing rural America, conducted a
national conference on this issue. The Center's 1999 report, Equity for Rural
America - from Wall Street to Main Street", offered a number of important
observations. These included:
n Few companies with high growth potential
are located in rural areas;
n Some initial public funding for rural
equity projects is necessary because returns are too low to attract venture
capital investments to small rural companies;
n A greater degree of
management assistance is likely needed for rural firms;
n Urban areas
can attract equity capital much more efficiently than rural areas;
n
Investors naturally migrate to larger deals;
n The key question is what
degree of emphasis will be placed on economic development in rural areas versus
earning a high rate of return?;
n An equity capital fund's goals and its
institutional structure have a big impact on which deals are funded and how the
fund exits from those investments;
n Creating local wealth that is
locally controlled should be an essential goal;
n A double-bottom line
is needed - both a good rate of return but also providing the rural communities
with a major economic boost (jobs, etc);
n Community banks can play a
vital role in leveraging the capital resources of local businesses; and
n Any serious attempt to boost the supply of equity capital in rural
America has to include banks in the plan.
Mr. Chairman, we look forward
to working with you on this important initiative. We hope this measure, as
outlined above can be made a part of the
farm bill in an effort
to help rural America.
Other Rural Development Recommendations for the
Farm Bill In the context of what this committee can do
in the
farm bill to promote rural development, I would like to
also offer these suggestions.
1) Pass legislation to prohibit USDA from
raising fees on the Business & Industry (B&I) loan program unless
Congress specifically authorizes the increase. The FY-2002 budget states USDA
intends to raise fees from the current 2 percent level up to 3.25 percent
through administrative action.
2) Establish a pilot program where fees
are eliminated for all users of the B&I program in rural areas. (An expanded
program could also apply to SBA loans.)
3) Include targeted funding and
authorities for a program in the B&I authorities specifically targeted at
smaller-sized small business loans, perhaps with a cap of
$
250,000 to $
500,000. USDA currently targets a
portion of FSA guaranteed loans to small and beginning farmers; this would be
the same concept.
4) Include a "Low-Doc" loan program for loans of
$
150,000 in the B&I program to speed up loan approval and
reduce paperwork on small rural development loans.
5) Provide special
incentives for community banks that help promote and develop value-added
agricultural investments in their rural areas, thus tapping the vast rural
community bank network. Any incentives to promote value-added agriculture should
ensure that rural community banks are part of the financing equation through
loan guarantees, loan participations and combinations of any other programs
including tax incentives and grants.
6) Enhance the Aggie Bond program
to help young farmers by passing two changes: exempt Aggie Bonds from state
volume cap formulas on industrial revenue bonds and allow aggie bonds to be used
with FSA loan guarantees.
Let me address a few of these issues.
Increase funding for USDA's Business & Industry Guarantee Loan
program -- We were pleased that Congress last year provided the USDA Business
and Industry (B&I) program with a significant funding increase of 50
percent, bringing the budget to $
1.5 billion for the current
fiscal year. This program lends money to any rural business that provides
economic opportunity to people living in towns with populations of less than
50,000 people, including gas stations, factories, and other local businesses.
USDA reports that B&I loans reportedly saved or created more than 29,000
jobs last year.
This is good news for banks in their efforts to help
stimulate slow-growing rural markets. However, we are told that only about 400
banks are able to use the program and more are trying to get in. The main
problem has traditionally been that the B&I program is under-funded. Last
year almost $
1 billion in guaranteed loans, for nearly 400
projects, could not be approved due to lack of funding. Remember that the
lenders are the ones providing the funding, the government's expense comes only
in cases of a loan default.
Limit/Eliminate Fees on Guaranteed Loan
Programs in Rural Areas - - USDA's FY 2002 Budget included an increase in the
loan origination fees on B&I guaranteed loans to 3.25 percent, well above
the current 2% level. USDA stated they would implement this through a regulatory
change since legislation was not necessary to accomplish the higher fee. This
increase to the guarantee fee will have an adverse impact on access to credit
for many rural businesses as it will make the costs of credit greater. Bankers
won't be able to absorb these costs and they will be passed on to borrowers in
the form of higher interest rates. The increased fees being proposed would
jeopardize needed credit to small business at the worst possible time as our
economy has slowed dramatically and small business lending has become more
difficult.
Obviously, in the next budget cycle, new and higher fees
could again be proposed. To deal with these issues, for USDA (and SBA) loans on
a more permanent basis, we suggest:
1) Congress should pass legislation
prohibiting USDA (and SBA) from raising loan fees without approval from
Congress;
2) Establish a pilot program that would eliminate fees on
small business loans in rural areas;
3) Increase funding for B&I
(and SBA) loan programs;
4) Make SBA loan programs and related
information available through USDA loan offices since USDA has a physical
infrastructure in rural areas that SBA does not.
We point out that some
of the demand for small business loans in rural areas is limited due to high
fees. Eliminating these fees for all borrowers would attract greater
participation and enhance the strength of the portfolio and the viability of the
program as a whole. If the fees are too high, only high-risk ventures will seek
financing, thus weakening the loan portfolio.
Other Rural Development
Issues Outside the Committee's Jurisdiction
Greater Broadband Capacity
in Rural Areas -- We also need to find the right mix of policies that will spur
greater investment in telecommunications technologies in rural America to help
us bridge the "digital divide" between our rural and urban areas. Not only do we
need to create more jobs in rural areas, we need to ensure that rural areas have
access to the latest technology to make them less isolated from larger
metropolitan areas and to attract people with the kind of leadership and job
skills necessary to help our rural areas survive and thrive. Rural America's
future rests with our ability to compete in the new economy. We need the
technological infrastructure to line up at the starting gate.
Increase
Deposit Insurance & Index it to Inflation -- Another key ingredient to
providing more funds for investing in our rural communities would be to
significantly increase deposit insurance and index it to inflation. Many rural
banks are having difficulty growing their core deposit base which forces them to
seek other sources of funding to meet the lending needs of their rural
communities.
While American agriculture is undergoing dramatic changes
resulting in fewer and larger farms as well as larger corporate and agribusiness
interests, deposit insurance hasn't been raised since 1980 and its value has
been eroded in half, to approximately $
50,000 based on 1980
dollars. Increasing the deposit insurance level and indexing it to inflation
would be a quick and efficient way to immediately help infuse more funds into
our rural areas and ultimately benefit rural citizens, including farm families
that depend on off-farm income to survive.
Subchapter S Reform -- ICBA
supports the Small Business and Financial Institutions Tax Relief Act of 2001
introduced in both the House and Senate (H.R.1263) and (S. 936). This
legislation would help ease the tax burden on thousands of small businesses and
community banks and free up capital to reinvest into the local communities they
serve.
This legislation would afford many small businesses, including
community banks, needed relief from punitive double taxation and would improve
the viability of our nation's small banks and the communities they serve. When
Congress passed the Small Business Job Protection Act of 1996, it made community
banks eligible to elect S Corporation status for the first time in tax year
1997. Unfortunately, many community banks and small businesses are having
trouble qualifying under the current rules and cannot benefit from Congress
intended tax relief. The key focus is on expanding the number of eligible
shareholders for Subchapter S tax status from 75 to 150.
Conclusion
Mr. Chairman, we appreciate the Committee's efforts. Strengthening the
agricultural economy and creating business investment opportunities in our rural
communities is key to a viable future for many family farmers and local area
businesses.
Again, I want to emphasize that rural development should be
an integral part of the new
farm bill and should be considered
a working partner, not an outsider, to a broad based farm safety net. Off-farm
jobs go hand in hand with a new and improved
farm bill in
accomplishing the goal of keeping farmers on the land, keeping Main Street
vibrant and keeping our rural communities healthy.
Obviously, there are
a number of issues that are important to rural America that may go beyond the
scope of this committee. Issues that include tax incentives for greater ethanol
production, subchapter S reforms, and increasing the deposit insurance coverage
levels and indexing them to inflation. We will be working within other
congressional committees to achieve these needed changes. These are all very
important issues to rural America and although outside of this committee's
jurisdiction, I hope each committee member will support community bank positions
on these issues.
ICBA and its Agriculture-Rural America Committee will
be discussing farm policy and rural development issues in more detail during
their two days of committee meetings next week. I'm sure they will be happy to
pass along additional recommendations from those meetings. Community bankers
look forward to working with the committee and others in Congress to ensure
enactment of a new
farm bill that has a stronger farm safety
net -- one in which rural development plays a major role.
Thank you.
LOAD-DATE: August 8, 2001