SECTION: CAPITOL HILL HEARING TESTIMONY

LENGTH: 5169 words

COMMITTEE: SENATE AGRICULTURE, NUTRITION AND FORESTRY

HEADLINE: 2002 FARM BILL

TESTIMONY-BY: RONALD L. PHILLIPS,, PRESIDENT

AFFILIATION: COASTAL ENTERPRISES, INC.

BODY:
August 2, 2001

Testimony of

Ronald L. Phillips, President Coastal Enterprises, Inc.

Before the Agriculture, Nutrition and Forestry Committee of United States Senate

Hearing on Rural Development Issues and the Farm Bill

Introduction

Mr. Chairman and Ranking Member Lugar, thank you for inviting me to testify before you today as you debate and craft rural development policy for the 2002 Farm Bill reauthorization. My name is Ron Phillips and I am President and founder of Coastal Enterprises, Inc., based in Wiscasset, Maine.

I am here today on behalf of an informal coalition of rural non- profit organizations that are working together to promote federal rural development policies. Coordinated by the National Rural Housing Coalition, we are exploring ways to reinvigorate federal rural development policy and increased attention to the needs of our nation's farming communities and small towns. Coastal Enterprises, Inc. is a rural community development corporation and financial institution providing financial and technical assistance to support the development of small businesses, community facilities, and affordable housing, primarily in the State of Maine. Founded in 1977, Coastal Enterprises, Inc. has been serving communities in rural Maine for nearly three decades. Our mission is to help people and communities, especially those with low incomes, reach an equitable standard of living, working and learning, in harmony with the natural environment. Since our founding, we have created or sustained 10,000 jobs, invested over $200 million in economic development, and assisted over 8,000 small businesses. We understand how community development works, why it is important, and why it's important to rural communities.

Rural America warrants Congress's highest attention as it considers re-authorization of the Farm Bill. The Farm Bill not only is important to our nation's farmers, it is critical to the 54 million Americans who reside in our rural communities, 90% of whom rely on non-farm income to sustain themselves. In re- authorizing it, I urge you to seize the opportunity to provide rural America with a vision for the future and resources it needs to achieve it.

One new idea that I will discuss today with you is that of the Rural Endowment Act. The idea behind the Endowment is that rural community development works best when it is driven by local needs and considers not only the economic development needs of rural communities but also accounts for a communities' social and environmental needs. The Endowment is about creating permanent assets in a community that will continue beyond the initial federal investment.

The state of Rural America is in decline. Far too many rural counties are beset by problems of isolation, crumbling physical infrastructure, a declining or radically changing agricultural sector, and lack of social, economic and professional opportunities. As a result, there has been a surge of out- migration from communities in America's heartland, overwhelming growth in regions that offer natural amenities, and haphazard growth into rural areas juxtaposed to metropolitan centers.

Consider these facts:

-Of the 250 poorest counties in America, 244 are rural

-America's richest food producing region - California's Central Valley - has an unemployment as high as 15%, triple the national average

-1 million rural households in America lack indoor plumbing

-28% of the housing stock in rural America is considered physically deficient, lacking adequate plumbing, heating, and electricity

-22.7% of children living in rural America, live in poverty compared to 19.2% in urban areas

-During the 1990's one-third of rural counties captured three- quarters of all the economic gains in rural areas

The recent good economic times never made it to many rural areas. The downturn in many natural resource based economies has taken its toll on our small town and farming communities. Small, family farmers whose economic and social livelihoods are often tied to the communities in which they live have reaped far fewer benefits from reforms in federal agriculture support programs. Disinvestments in mining and logging and wholesale plant closings are now a regular part of the rural landscape. Persistently poor rural regions that provided incentive for America's "War on Poverty" continue to battle decline and poverty alone without a sense of national urgency or national leadership - and are close to giving up on ever turning things around.

As these trends have taken shape, there has been a stagnation or reduction in rural development programs that the Federal government provides to America's rural communities: programs that were once the bedrock of the Federal Government's commitment to rural America have seen diminishing financial and staff resources, such as USDA's housing, water and sewer, and electric utility programs. Over the last several years, federal support for rural development activities has been reduced by $500 million annually at the U.S. Department of Agriculture and other federal agencies have not picked up the slack..

In addition to dwindling federal resources, private capital investments over the last decade have predominantly flowed to a few urban/suburban areas. For example, about 50% of the venture capital invested during the fourth quarter of 1998 went to just two regions - California's Silicon Valley and New England's high- tech corridors. Another 16% went to the greater New York, Los Angeles/Orange County, and Washington, DC, metropolitan areas. Only 5.7% of all venture capital investments went to the South central, Southwest, and Northwest regions combined. 2 Notably, all three regions have significant lower-income, typically rural populations.

So, it is very difficult for most rural communities, to assemble capital and prepare the infrastructure necessary to promote economic growth and community improvements.

Rural Development Leadership at the USDA is Important

USDA is the only federal agency with a mandate to provide comprehensive assistance to America's rural communities. The programs operated by the Department provide invaluable assistance to small rural communities that do not have the tax base to raise these resources on their own. USDA has some very good programs serving rural America's housing, business, water and utility needs but they are perennially underfunded and over-subscribed.

One of the key USDA programs that we at Coastal Enterprises use is the Intermediary Re-lending Program, known as the IRP, which is one of the principal sources of federal funding available to assist rural small businesses. IRP funds can be used to finance a range of activities including community development projects, new business capitalization and expansion of existing businesses. Funds can be used to cover the cost of construction, conversions or expansion of a business facility, the purchase or development of land or facilities, start up operations or working capital. The flexibility of the program allows IRP intermediaries, such as Coastal Enterprises, Inc., to respond to the unique needs of businesses in their service area. One suggested improvement for the program is to institute a preferred lender program through which intermediaries with a proven track record in lending performance and demand for funds can access IRP funding through an expedited process.

The IRP is a very good example of how federal government can partner with private nonprofit community development organizations in a way that is efficient, flexible, and effective. Since USDA has administered the program in 1994, there have been no defaults of IRP loans to USDA. A recent survey of eight longstanding IRP intermediaries demonstrates the program's successful track record: Of the $30 million in IRP funds under management, $173 million in additional financing, primarily from private banks, was leveraged; the eight intermediaries originated 974 IRP loans totaling $52 million with an average loan of $107, 613; and, as a result of IRP financing, these intermediaries created and maintained 16,551 jobs at an average cost of $3,196 per job.

Over the last five years demand for IRP funds has consistently outweighed the availability of funds and the application process has become increasingly competitive. In FY 2000, USDA reviewed 144 applications for IRP funds totaling more than $96 million in demand but had only $38 million available. At the start of FY 2001, with $38 million available for the year, USDA already had 40 applications worth more than $25 million in demand. Clearly the need for more assistance exists.

Additional USDA programs designed to provide business investment resources to small rural businesses include the Rural Business Opportunity Grant Program and the Rural Business Enterprise Grant Program. Both these programs should be maintained and if anything, authorization amounts should be significantly increased. I would also urge this Committee to reauthorize and seek funding for the Rural Venture Capital Demonstration Program permitting the use of federal funds to guarantee a certain level of investment in venture capital pools. Equity capital is the hardest type of investment capital to pull together in rural communities but is often the most necessary for small entrepreneurs just starting out. The Rural Venture Capital pilot would enable USDA to select up to 10 community development venture capital organizations to establish a Rural Private Business Investment Pools. These pools would be designed to attract private sector investments and funds from the pools would be used to make investments in private business enterprises in rural areas. Although authorized in the last Farm Bill, this program was never funded.

Another critically important issue for rural communities is that of safe and clean water supplies. In this area, USDA's water and environment programs provide core funding support for small rural communities of less than 10,000. However, the need continues to far outweigh the resources Congress dedicates to the problem. In a recent inventory of our nations' water infrastructure needs, the Environmental Protection Agency (EPA) estimated that $33.3 billion is necessary to meet current drinking water needs of small community water systems serving rural communities of fewer than 10,000 and $14.5 billion is required to meet future needs over the next 20 years; EPA further estimated that $13.8 billion is required to meet clean water needs of small communities of 10,000 or fewer. In all, small communities will need to identify some $61 billion in order to meet their water and wastewater needs.

These numbers are daunting for communities of less than 10,000. The numbers become even more daunting when one considers the disproportional burden small communities carry compared to larger urban systems: households in small communities bare four times the costs of installing and maintaining water and wastewater systems than do households located in larger communities. Small rural communities simply do not have the taxpayer base to support the amount of resources needed.

USDA's water and environment programs receive high praise for their flexibility and for targeting of small rural communities in greatest need of support. However, federal budget cuts in the USDA's Rural Utilities budget has resulted in a FY 2000 funding level adjusted for inflation worth only 85% of FY 1995 levels. A recent evaluation of USDA's Water and Environmental Programs conducted by the consulting firm of Rapoza Associates found that most USDA State Rural Development Directors have 1.5 to 2 times the number of applications for water and sewer funds than funds available. The study also found that of those projects approved for funding, between 2 and 6 times the amount of funding actually available is required. 3

An improvement on the way resources are allocated to small communities water and wastewater systems would be to authorize a revolving loan fund for pre-development and repair costs that intermediaries would administer and that would prioritize small communities of populations of 2,500 or smaller. These small communities have greater difficulty pulling together financing for pre-development costs associated with installing water and wastewater systems as well as costs associated with repairs and maintenance. The consequence is that they either forego installing centralized systems or forego repairing systems already installed. A way to address this financing gap would be to establish a separate revolving loan fund that could support individual project loans not exceeding $300,000.

Quality, affordable housing is another major issue facing rural America. While much media attention has focused on the urban housing crisis, there is another housing crisis and that is in rural America. It is a crisis borne of a historic lack of resources to address the underlying problems of lack of decent housing and low incomes. However, the recent downturn in the natural resource based economies of rural areas when coupled with the dramatic reduction in federal rural housing assistance, have exacerbated an already serious situation. It is without exaggeration to say that most low-income rural families have virtually no option to improve their housing situation.

Rural areas have a disproportionate share of the nation's substandard housing.More than 1.6 million low income rural households live in moderately to severely inadequate housing. These are units without hot or cold piped water, and/or have leaking roofs, walls, rodent problems, inadequate heating systems, and peeling paint, often lead-based. Overall, more rural families live in inadequate housing than their urban counterparts, with 2.6 million rural residents living in inadequate homes compared to 2.4 million in cities and 1.3 million in the suburbs.

Some 28% of rural American households -- 10.4 million -- have housing problems. For rural renters, the rate of housing problems is higher. A third of all rural renter households are cost burdened, paying more than 30 percent of their income for housing costs, almost one million rural renter households suffer from multiple housing problems -- 90% are severely cost burdened, paying more than 50% of their income for rent; 60% pay more than 70% of their income for housing.

In short, rural families are the worst housed in the country.

There is a high incidence of poverty in rural America. In 1996 the poverty rate in rural America was 15.9%, compared to 13.2% in urban areas. Minorities in rural areas have much higher rates of poverty, with an average of 34.1% compared to urban minorities at 28.1%. Persistent poverty is also a major problem. Early data from the 2000 Census indicates that rural areas have made little progress in moving people from welfare to work.

There is also an inadequate supply of affordable housing. Many small, rural communities have only a limited number of available homes, and only a few that are affordable to lowand moderate- income households, with those often in need of extensive repair or improvements. While everyone agrees that there is a shortage of affordable housing in rural areas, there is less agreement on why the market does not produce the kind of housing to meet these demands.

Over the last decade, there was a substantial decline in federal support for federal housing programs. Spending for loans for low income single family home ownership was reduced by more than half and lending for rural rental housing is all but eliminated.

There is ample evidence that other federal agencies are not picking up the slack. FHA spending on rural areas is $24 per capita versus $240 per capita for big cities. Only about 10% of HUD section 8 resources get to rural areas.

There are a number of important steps that Congress can take to improve rural housing conditions. They include expanding funding for low income home ownership loans. The current lending is $1 billion and there is a backlog of some $5 billion.

Additional funding is also needed to preserve and maintain the existing portfolio of rural rental housing projects. There are over 450,000 units of rural rental housing, mostly occupied by low income and elderly households. Many of the developments need rehabilitation and Congress should provide funding for incentives for long term, lowincome use.

Finally, there is a desperate need for additional, new rental housing units in rural areas. Congress should consider the enacting S.652, the Rural Rental Housing Act of 2001. This legislation, sponsored by Sens.Edwards, Jeffords, Leahy and Wellstone, authorizes flexible funding to states and other intermediaries to finance rental housing in our small town and farming communities.

Community-based Non-profit Organizations: An Important Partner for Rural America

Community-based development organizations have proven to be innovative and entrepreneurial community leaders that can work with a broad array of community stakeholders to advance a community's economic development agenda. We have learned many lessons in what works and what doesn't in helping rural communities achieve vibrant communities: government alone is not the answer but federal commitments to an area can attract private investments; collaborative private/public partnerships do work; and, community-driven strategies are often the best strategies for sustaining results over time.

Community development corporations are quickly becoming key partners in a community's development efforts. We number over 1700 nation-wide, 53% of which serve rural communities solely and 47% serving a mix of rural and urban communities. A handful of mature community development organizations began in the late sixties and early seventies, however the median year of incorporation for organizations serving rural communities is 1989.

Although fairly young as an industry, community development corporations (CDCs) have had profound effect in the communities they serve. In the area of housing, CDCs have developed over 40,000 rural homes, made nearly 10,000 loans to rural home-owners amounting to over $100 million, and repaired nearly 50,000 rural housing units. In the area of essential facilities in rural communities, both industrial and non-industrial, CDCs have developed over 5 million square feet and have over $44 million in loan capital outstanding. And, in the area of business creation and jobs the track record continues to be strong: rural CDCs have assisted over 7,000 businesses, created over 34,000 jobs and have made business investments totaling over $160 million.

Aside from housing and business development, community-based non- profit development organizations provide a number of different services depending on the need of the particular community served. Our services often include childcare, education and job- training, healthcare, nutrition and hunger reduction, eldercare, and arts and cultural services. The services we provide is really driven by what a community needs.

One of the reasons for CDCs success is the financing package they are able to pull together. A recent survey of community development corporations by a national trade association serving the industry found that rural CDCs attract income from the private sector, generate income through fees on services performed, and receive funding from public sector programs. From the private sector alone, CDCs receive financing from banks, corporations, foundations, national intermediaries, religious institutions and the United Way.

CDCs often provide financing of last resort to businesses and individuals who do not have the credit history or the capital needs to receive conventional financing for their businesses or homes. Because CDC's mission is the double bottom line, to achieve a social as well as a financial return, we are often the only community institution that low income populations can turn to.

One program designed to increase the capacity of community development corporations is the Rural Community Development Initiative that was first passed last year and is administered by the USDA. The program provides matching grant resources to help local organizations establish and develop community-based organizations where none exist. CDCs work particularly well in rural settings because they are able to fill a void that is created by lack of taxpayer resources to support a large government structure. Rural communities typically have only one or two full-time clerks who handle everything from marriage licenses to building permits. Community non-profit development organizations help these communities meet development needs they otherwise could not meet themselves.

The Maine Story:

The state of Maine is famously beautiful, but it poses contrasts as sharp as the ledges along its rugged coast. With a population of 1.2 million, Maine is the 3rd most rural state in the nation and the only state to become more rural in recent years. Fully 35% of Maine's households are within 200 percent of the poverty level and face the lack of opportunities and community disintegration that have become the hallmarks of rural poverty. Changes in the structure of the Maine economy, most notably the decline in the manufacturing and natural resource sectors, have had a dramatic impact on Maine workers.

Between 1989 and 1999, Maine's manufacturing sector had a net loss of about 21,000 jobs, many of them defense-related. Many of these lost jobs have been replaced by lowwage, part-time jobs, leading to an erosion of Maine's middle class. In Maine during 1998 alone, 35,079 jobs were created in industries paying an average annual wage of less than $20,000, while only 12,645 jobs were originated in industries paying $30,000 or more in average annual wages. As a result, an increasing number of Maine households find themselves in higher debt, without health benefits, and low or no retirement savings.

Agriculture and natural resource-based sectors have fueled much of rural Maine's economy, however these industries are under severe pressure and are in decline. The lumber industry is experiencing the pangs associated with declining prices. Mills in northern Maine have been shut down recently, if only temporarily. The lumber industry is facing an even more uncertain future with the recent expiration of the Softwood Lumber Agreement with Canada. U.S. lumber prices are at a nine-year low and sales of softwood lumber have fallen precipitously. Depending on the outcome of trade negotiations, Maine sawmills may be faced with intense competition from their counterparts in Canada.

Farming has been a way of life for Maine families for hundreds of years and employs over 60,000 Maine people. However, increasing land development pressures and global competition from larger farming enterprises in recent years have made small farm ownership uneconomical, forcing many Maine farms out of business. In 1950 there were about 35,000 farms in operation throughout the state; today there are just 7,400. Maine farms generate about $500 million in sales each year, with another $800 million in associated food processing. Those farms occupy 600,000 acres of cropland and about 600,000 more acres of forests and other land. However, in the last 20 years, the amount of Maine land used for farming declined by over 350,000 acres.

When the land is no longer used for agricultural production, farm- based jobs and lifestyles disappear, and the rural landscape becomes fragmented by development. Coastal Enterprises, Inc. works with communities and businesses to find ways to sustain these sectors that Mainers have relied on for years. Our investments are guided by our commitment to serve low-income people who require not just a paycheck but a livable wage with benefits.

Coastal Enterprise investments include:

-Maine Coast Organic Products that recycles salmon, blueberry and mussel waste into high-end, value added garden compost;

-Cuddledown of Maine, a manufacturer of premium-quality bed-and- bath merchandise;

-Misty River Trucking, a woman-owned and operated long-haul trucking brokerage firm;

-Maine Farms Projects that supports local Maine Farmers and raises awareness of the importance of agriculture and food systems in our lives; and,

-Ward Brook, a nine unit affordable housing complex for single mothers in transition from welfare to work.

One of the main reasons we have been so successful is that we have aggressively found ways to provide affordable financing for deals that larger financial institutions would not serve. As such, we understand the critical need for flexible capital that can provide alternative ways for entrepreneurs and rural communities to finance projects they would otherwise be unable to afford. I would especially like to emphasize the need for rural equity capital that I spoke of earlier in my testimony. This type of financing is critical to small entrepreneurs who cannot leverage debt financing.

The Rural Endowment Initiative: Building Permanent Assets in Communities

Recent federal policy has moved away from giving rural communities the resources needed to improve housing, infrastructure, economic opportunity and environmental quality. In particular, the demise of federal rural development programs, when coupled with the downturn in many natural resourced based economies has made life in rural America increasing difficult.

We have developed a Rural Endowment program that is designed to make a permanent resource available to our nation's small town and farming communities. The Rural Endowment combines lessons learned from decades of government programs with lessons learned from decades of work with community-based development strategies. It is designed to spur the creation of long-term assets in a community, grow capacity among community leaders to conduct on- going community development efforts beyond the initial federal commitment, and create real opportunities for improving the quality of life outlook for residents of rural America.

In particular, the Endowment is designed to take advantage of the skill and expertise of the network of rural community based organizations that are increasingly at the center of community development activities in rural America. The success we have had in Maine is replicated in many other communities across the country by other important local organizations. For example, in the San Joaquin Valley of California, Self Help Enterprises has constructed more than 4,000 homes for low income and farmworker families using the self help housing method of construction. In Eastern Kentucky, Kentucky Highlands Community Development Corporation administers the enterprise zone in three extremely poor counties. The most recent statistics indicate that one in three households in those counties have someone employed by a private business enterprise that has received financing from Kentucky Highlands.

The Rural Endowment Initiative has the following features: a flexible source of funding that would support various development projects including business investments and job creation, real estate projects, community facilities programs, and conservation measures; enables communities to create of a permanent fund to remain after the initial government investment period concludes thus creating a long-term local financial asset; it requires an inclusive, community-driven investment strategy that incorporates economic, social, cultural and environmental matters is required; it promotes accountability by requiring clear, performance-based outcomes for continued federal investment; and, it would provide capacity-building assistance for a community to establish a non- profit community development entity.

The Endowment would be targeted to communities that make balanced community development investments according to their unique situations. Communities that are able to sustain themselves over time will be those communities that successfully incorporate environmental health and cultural and social well-being measures to meet quality of life goals for its residents. Far too many rural communities lack the resources to address the range of social and economic needs they confront. Far too many rural communities are unable to get such flexible resources from other federal or state agencies.

We urge this Committee to adopt this initiative as a centerpiece for the Rural Development Title of the Farm Bill.

Conclusion:

In this next Farm Bill, Congress has an opportunity to lay-out a vision of rural America that captures our ideals of what rural American can be: a place where we live, a place where we work and a place where we recreate. This involves expanding our way of thinking about resources we spend and the priority we place on thinking about how policies affect rural communities.

Our first recommendation is to urge this Committee to take a serious look at the Rural Endowment program and adopt it as the centerpiece of rural development policy in the reauthorized Farm Bill. Communities that are able to sustain themselves over time will be those communities that successfully incorporate environmental health and cultural and social well-being measures to meet quality of life goals for its residents. The Endowment is about helping rural communities build permanent assets in a way that is both comprehensive and community-based. It also recognizes that rural areas differ from region to region and face a variety of challenges including economic development, social well-being and environmental health. The Rural Endowment initiative would provide rural communities with flexible resources to achieve their development goals.

Second, the current housing, infrastructure and business development programs at the USDA are working and should continue as they are. The USDA has developed the skills and experience to administer these programs well. Some improvements to these programs are warranted and are discussed in our testimony. I would be happy to provide more information on ways to improve these programs' efficiency and effectiveness. One common denominator among all of them is that more resources are needed and we would urge the committee to increase authorizations for them and work with appropriators to meet the targets.

Finally, rural America's issues, policies and programs are far too often relegated to the back burner in Washington. We urge the Committee to mandate the establishment of an assistant secretaries working group on rural development. The purpose of such a group would be address over-arching policy issues, improve coordination between federal agencies and ensure that rural issues do not get lost in federal policy deliberations.



LOAD-DATE: August 8, 2001