[House Hearing, 105 Congress]
[From the U.S. Government Publishing Office]



 
                  AGRICULTURE, RURAL DEVELOPMENT, FOOD
                  AND DRUG ADMINISTRATION, AND RELATED
                    AGENCIES APPROPRIATIONS FOR 1999

========================================================================

                                HEARINGS

                                BEFORE A

                           SUBCOMMITTEE OF THE

                       COMMITTEE ON APPROPRIATIONS

                         HOUSE OF REPRESENTATIVES

                       ONE HUNDRED FIFTH CONGRESS

                             SECOND SESSION
                                ________

     SUBCOMMITTEE ON AGRICULTURE, RURAL DEVELOPMENT, FOOD AND DRUG 
                  ADMINISTRATION, AND RELATED AGENCIES

                     JOE SKEEN, New Mexico, Chairman

JAMES T. WALSH, New York               MARCY KAPTUR, Ohio
JAY DICKEY, Arkansas                   VIC FAZIO, California
JACK KINGSTON, Georgia                 JOSE E. SERRANO, New York
GEORGE R. NETHERCUTT, Jr., Washington  ROSA L. DeLAURO, Connecticut
HENRY BONILLA, Texas                   
TOM LATHAM, Iowa                       

NOTE: Under Committee Rules, Mr. Livingston, as Chairman of the Full 
Committee, and Mr. Obey, as Ranking Minority Member of the Full 
Committee, are authorized to sit as Members of all Subcommittees.

 Timothy K. Sanders, John J. Ziolkowski, Martin Delgado, and Joanne L. 
                       Orndorff, Staff Assistants
                                ________

                                 PART 6

Rural Economic and Community Development Programs and Food 
 Nutrition and Consumer Services:
                                                                   Page
     Rural Economic and Community Development.....................    1
 Rural Utilities Service, Rural Housing Service, and Rural 
Business Cooperative Service:
     Food Nutrition and Consumer Services.........................  377

                              

                                ________

         Printed for the use of the Committee on Appropriations
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                       COMMITTEE ON APPROPRIATIONS                      

                   BOB LIVINGSTON, Louisiana, Chairman                  

JOSEPH M. McDADE, Pennsylvania         DAVID R. OBEY, Wisconsin            
C. W. BILL YOUNG, Florida              SIDNEY R. YATES, Illinois           
RALPH REGULA, Ohio                     LOUIS STOKES, Ohio                  
JERRY LEWIS, California                JOHN P. MURTHA, Pennsylvania        
JOHN EDWARD PORTER, Illinois           NORMAN D. DICKS, Washington         
HAROLD ROGERS, Kentucky                MARTIN OLAV SABO, Minnesota         
JOE SKEEN, New Mexico                  JULIAN C. DIXON, California         
FRANK R. WOLF, Virginia                VIC FAZIO, California               
TOM DeLAY, Texas                       W. G. (BILL) HEFNER, North Carolina 
JIM KOLBE, Arizona                     STENY H. HOYER, Maryland            
RON PACKARD, California                ALAN B. MOLLOHAN, West Virginia     
SONNY CALLAHAN, Alabama                MARCY KAPTUR, Ohio                  
JAMES T. WALSH, New York               DAVID E. SKAGGS, Colorado           
CHARLES H. TAYLOR, North Carolina      NANCY PELOSI, California            
DAVID L. HOBSON, Ohio                  PETER J. VISCLOSKY, Indiana         
ERNEST J. ISTOOK, Jr., Oklahoma        ESTEBAN EDWARD TORRES, California   
HENRY BONILLA, Texas                   NITA M. LOWEY, New York             
JOE KNOLLENBERG, Michigan              JOSE E. SERRANO, New York           
DAN MILLER, Florida                    ROSA L. DeLAURO, Connecticut        
JAY DICKEY, Arkansas                   JAMES P. MORAN, Virginia            
JACK KINGSTON, Georgia                 JOHN W. OLVER, Massachusetts        
MIKE PARKER, Mississippi               ED PASTOR, Arizona                  
RODNEY P. FRELINGHUYSEN, New Jersey    CARRIE P. MEEK, Florida             
ROGER F. WICKER, Mississippi           DAVID E. PRICE, North Carolina      
MICHAEL P. FORBES, New York            CHET EDWARDS, Texas                 
GEORGE R. NETHERCUTT, Jr., Washington  ROBERT E. (BUD) CRAMER, Jr., Alabama
MARK W. NEUMANN, Wisconsin             
RANDY ``DUKE'' CUNNINGHAM, California  
TODD TIAHRT, Kansas                    
ZACH WAMP, Tennessee                   
TOM LATHAM, Iowa                       
ANNE M. NORTHUP, Kentucky              
ROBERT B. ADERHOLT, Alabama            

                 James W. Dyer, Clerk and Staff Director
















   AGRICULTURE, RURAL DEVELOPMENT, FOOD AND DRUG ADMINISTRATION, AND 
                RELATED AGENCIES APPROPRIATIONS FOR 1999

                              ----------                              

                                            Tuesday, March 3, 1998.

                           RURAL DEVELOPMENT

                               WITNESSES

JILL LONG THOMPSON, UNDER SECRETARY FOR RURAL DEVELOPMENT
WALLY BEYER, ADMINISTRATOR, RURAL UTILITIES SERVICE
JAN E. SHADBURN, ADMINISTRATOR, RURAL HOUSING SERVICE
DAYTON J. WATKINS, ADMINISTRATOR, RURAL BUSINESS COOPERATIVE SERVICE
ROBERT ARMSTRONG, EXECUTIVE DIRECTOR, ALTERNATIVE AGRICULTURAL RESEARCH 
    AND COMMERCIALIZATION CORPORATION
STEPHEN B. DEWHURST, BUDGET OFFICER, DEPARTMENT OF AGRICULTURE

                              Introduction

    Mr. Skeen [presiding]. Good afternoon. We are pleased to 
have with us today the Under Secretary for Rural Development, 
the Honorable Jill Long Thompson, she and her colleagues are 
responsible for bringing affordable housing, basic utilities, 
and economic development to rural America. We appreciate that 
very much. That's a tough call.
    The responsibility for this subcommittee and this chairman, 
we've always considered Rural Development to be the most 
important responsibility at the United States Department of 
Agriculture.
    Under Secretary, I understand that you appeared a few hours 
ago before the Senate, so I'm glad that you got the blessing 
over there from the Cardinals. This may all seem like instant 
replay for you today, but we appreciate your appearance. I hope 
we can come up with some new questions for you. We'll try to 
test you as best we can.
    Please introduce your colleagues, and make a statement for 
the record, and then we'll begin the questioning.
    Ms. Thompson. Thank you, Mr. Chairman.
    Mr. Skeen. But welcome most of all; you've been a great 
associate. We're delighted to see you're doing so well, and 
handle it with such great calm and poise.

                 Statement of Under Secretary Thompson

    Ms. Thompson. Well, thank you, you're very kind. And let me 
also thank you for the strong support that you have shown for 
these programs over the years, and continue to provide. And let 
me also say that, in my experience living in a rural community, 
and now in this position, traveling around to rural communities 
across the country, the leadership that you and your committee 
have given this country are truly making a difference in the 
lives of many, many individuals and families across the 
country.
    Mr. Skeen. Thank you. We hope so, and we hope we can 
measure up to that grand profile that you've just given us.
    Ms. Thompson. You do measure up to it.
    Mr. Skeen. Thank you.
    Ms. Thompson. With me today are Steve Dewhurst, who is with 
the Office of Budget and Program Analysis.
    Mr. Skeen. New boy on the team.
    Ms. Thompson. And Wally Beyer, who's the Administrator of 
the Rural Utilities Service; Dayton Watkins, who's the 
Administrator of the Rural Business Cooperative Service; Jan 
Shadburn, who is the Administrator of the Rural Housing 
Service; and Bob Armstrong, who is head of AARCC, Alternative 
Agriculture Research and Commercialization Corporation.
    Mr. Skeen. Welcome to all of you.
    Ms. Thompson. If it pleases the Chair, I will simply 
summarize my full testimony and submit the full testimony for 
the record.
    Mr. Chairman, I'm very pleased to be here today to present 
to the subcommittee the president's budget request for rural 
development for fiscal year 1999. This request reflects the 
president's strong commitment to the needs of rural areas, even 
when balancing the Federal budget has been his highest 
priority. And I think the president's commitment to balancing 
the budget, along with the commitment of the Congress, both the 
House and the Senate on both sides of the aisle, has 
established a setting for unprecedented economic growth, and it 
does present us with a very important lesson. The lower deficit 
has generated the lowest interest rates in decades, thereby 
lowering the cost of capital, which has generated new 
investment in plant and equipment and created millions of new 
jobs.
    In addition, the level of homeownership in this country has 
reached an all time high of 66 percent. Perhaps the best news 
is that the misery index, the combination of unemployment and 
inflation, is at its lowest level in 30 years. Almost all of 
the new jobs that have been created are in the private sector. 
The government has been a very important partner in this 
expansion, but its role has been to create an environment of 
investor confidence, and this is the way that our economy works 
best. It is also the role we think appropriate in rural areas 
to help create the environment that generates confidence and 
private investment.
    I wish that I could report to you that the full benefits of 
this economic expansion have reached rural areas. We are 
beginning to see some improvement in the net creation of new 
jobs and increase in rural salaries, but not as much as I would 
like to see.
    After a full decade of decreasing real income, rural wages 
are beginning to increase because of the tight labor market. 
However, income levels in rural areas continue to lag behind 
those in urban areas, and rural areas continue to experience 
very high poverty rates. The rural median household income is 
only about 77 percent of that in urban areas. Additionally, the 
median household income for African American and female heads 
of households are only about 50 percent of the overall rural 
median income.
    One disturbing fact is that employment still does not 
always lift a family out of poverty in rural areas. A typical 
rural wage is below the poverty line, and it is not sufficient 
to support a family of four.
    Poverty in rural areas is two percentage points higher than 
it is in urban areas; 15.6 percent relative to 13.4 percent. 
Poverty in the rural south is just under 20 percent. The 
unemployment rate is 16 percent higher in rural areas than in 
urban areas. And as I stated last year, the most devastating 
effect of rural economies is that 3.2 million rural children 
live in poverty, and 48 percent of the African American 
children in rural areas live in poverty. Itis very difficult 
for these children to attain the educational levels that are going to 
be necessary to compete for jobs in this information technology-
dominated economy.
    These are the reasons that the president is committed to 
continuing Federal investment in rural areas, yet he is 
cognizant that the Federal Government alone cannot solve the 
problem.
    An additional benefit of the economic expansion and lower 
interest rates is that it allows us to administer our rural 
development programs at 40 percent less cost than in 1993. We 
are in the enviable position of being able to deliver these 
programs to rural America at less cost.
    The budget request for the programs administered by the 
rural development agencies total $10.4 billion, requiring $2.2 
billion in budget authority. These are increases of about $450 
million and $110 million, respectively, over the levels enacted 
for fiscal year 1998.
    And I would like it, if it so pleases the chairman, to go 
through each of the agency areas and briefly outline the budget 
level requests.

                        rural utilities service

    In the Rural Utilities Service, each of the programs that 
are administered contribute significantly to the economic 
viability of rural communities, but perhaps none are more 
important than the programs that provide basic infrastructure 
investment. Economic growth and vitality cannot occur without 
the systems that provide water and sewer, electric and 
telecommunication services.
    The budget authority requested for the electrical and 
telecommunication loan program is $40.3 million, which will 
support lending levels totaling $1.7 billion, and when we 
factor in the private capital that accompanies this investment, 
the total investment in electric and telecommunications grows 
to $5.1 billion.
    Due to the growing demand for electric loans, we are also 
proposing a new Treasury rate direct loan program of $400 
million, which requires budget authority of only $840,000. We 
are proposing a new direct loan program, rather than proposing 
to simply increase the request for the Federal Financing Bank 
(FFB). The reason for this request is that, since the FFB 
financing has traditionally been used only for generation and 
transmission loans, distribution borrowers have expressed some 
reluctance to use the FFB authority, because of the additional 
time that is needed for us to process the loans.
    The budget authority requested for telecommunications 
loans, including the Rural Telephone Bank, totals $10.3 
million, and as you know very well, there are still many rural 
areas that cannot access the full benefits of modern 
telecommunications because the basic switching equipment has 
not been modernized. We are also proposing in this budget a 
phased-in privatization of the Rural Telephone Bank Board.
    For distance learning and telemedicine loans and grants, 
the budget requests a lending level of $150 million and a grant 
level of $15 million. The request for grants is an increase of 
$2.5 million. The loan request is the same as enacted for 1998, 
and as I think everybody is very aware, the demand for this 
program continues to grow.
    In the water and waste disposal, the budget requests $1.3 
billion in loans and grants for the program, which is a slight 
increase over the amount made available in fiscal year 1998. 
This level of funding would provide new water service to about 
500,000 rural residents, improved water service to an 
additional 400,000 rural residents, and provide new or improved 
waste disposal service to about 410,000 rural residents. And in 
the process, support about 30,000 jobs primarily in 
construction.

                         rural housing service

    In the Rural Housing Service, we feel very strongly that 
there's probably no single factor that contributes more to 
community stability than does homeownership. And since the 
early 1970s, USDA's rural housing programs have played a key 
role in improving the availability and quality of housing in 
rural America.
    The budget request for the rural housing and community 
facilities programs is $5.5 billion, which requires $895 
million in budget authority; 65 percent of this is for rental 
assistance payments. This represents an increase in the program 
level of $300 million over the 1998 level and an increase of 
$27 million in budget authority. The request for the 
homeownership program, which is the flagship program, is $4 
billion, of which $1 billion is for direct loans, the same 
amount that was enacted for 1998.
    The average income for families that are borrowing under 
this program is $17,000, which is barely above the poverty 
level, and for the guaranteed ownership program, we are 
requesting $3 billion. The two programs together will finance 
over 60,000 new and improved homes.
    For the Multi-family Housing Program we are requesting $250 
million, of which $100 million is for direct loans, and that 
requires $48 million in budget authority. This is a decrease 
from the level enacted in 1998. This level of funding would 
provide over 1,100 new units and provide for the rehabilitation 
of just under 5,000 units. The average annual income of tenants 
in this program is $7,300.
    We're also requesting $150 million for the Guaranteed 
Multi-Family Housing Program, which has operated as a pilot 
program for the past 2 years. This program serves tenants with 
much higher incomes, up to 115 percent of the area median 
income, than the direct program, and it's therefore less 
costly. This budget request would provide for the construction 
of about 4,100 units.
    For rental assistance, the budget requests $583 million, a 
$42 million increase over the 1998 level. Of this amount, $544 
million is needed for the expiring contracts, and then the 
remainder would be used for rehabilitation, new construction, 
and servicing, as well as for farm labor housing, which is 
consistent with the recommendations of the Civil Rights Action 
Team at USDA.
    For mutual and self-help housing, we're requesting $26 
million for the program, and that provides the technical 
assistance required for the families that are participating in 
the program.
    For the community facilities programs we are requesting a 
total of $418 million, and that's $200 million for direct 
loans, and $210 million for guaranteed loans, and $8 million 
for grants.

                   rural business-cooperative service

    The third agency that comprises the rural development area 
is the Rural Business-Cooperative Service. This agency plays a 
very important role, in that the key to improving economic 
conditions in rural areas is the creation of business 
opportunities and jobs. The role of the Federal Government is 
to assist in creating the environment that generates the 
private investment.
    We are requesting $1 billion for the business and industry 
loan guarantee program, and I intend to set aside about $200 
million exclusively for the use of cooperative businesses. 
These funds will be available only for cooperatives and if not 
used by a certain point in the year, then they could be made 
available for other loans.
    We also continue to work closely with AARCC and other 
organizations to ensure that no investment opportunity is 
missed, and we will continue to work with cooperative 
associations to develop other investment opportunities, both 
for the Rural Business Cooperative Service and for AARCC.
    The request for salaries and expenses for rural development 
is $527 million, which is an increase of $18 million over 1998, 
and there are several reasons for this increase. First, because 
of all the organizational changes that have occurred within 
rural development over the past few years, we have lost a 
disproportionate share of the lower level employees, even 
though we have used every means available to keep them, through 
buyouts and early retirement of our more senior employees. This 
has caused our average salary cost to increase. So even though 
we are requesting less than we would have without those 
reductions, it's still an increase over what we are spending in 
1998.
    If sufficient funding is not available for salaries and 
expenses, it will be necessary to execute a reduction in force 
(RIF) to remain within available funding. This action is only 
going to exacerbate the problem, because a RIF will in turn 
eliminate additional lower level employees, which drives the 
average salary cost even higher. The vast majority of these 
staff are in our field offices, and doing really good work out 
in the rural countryside.
    And let me also say that, toward the end of my testimony, 
it was a little disconnected. The reason for that is, we 
decided to shorten my remarks from what I said in the Senate, 
and my pages got turned around, and they're not numbered. So, 
if you have any questions, I'd be glad to go back over it, but 
you do have the full testimony in front of you. There was no 
attempt to slight anybody; my pages are just simply out of 
order.
    Mr. Skeen. We'll forgive you. That happens regularly around 
here, and a good thing too; it adds a little diversity, 
especially when you start off with one track, and have to go 
chase another----
    Ms. Thompson. Let me tell you, I found it much more 
interesting reading this time than earlier today.
    Mr. Skeen. Are you through?
    Ms. Thompson. Yes, I'm finished. Well, I hope I'm not 
finished, but I'm finished with my remarks.
    Clerk's note.--Ms. Thompson's written testimony appears on 
pages ______ through ______. Mr. Beyer's written testimony 
appears on pages ______ through ______. Mr. Shadburn's written 
testimony appears on pages ______ through ______. Mr. Watkins' 
written testimony appears on pages ______ through ______. Mr. 
Gain's written testimony appears on pages ______ through 
______. Biographical sketches appear on pages ______ through 
______. The Rural Development Mission Area's budget 
justification appears on pages ______ through ______. The Rural 
Utilities Services' budget justification appears on pages 
______ through ______. The Rural Housing Service's budget 
justification appears on pages ______ through ______. The Rural 
Business-Cooperative Service's budget justification appears on 
pages ______ through ______. The Alternative Agricultural 
Research and Commercialization Corporation's budget 
justification appears on pages ______ through ______.
    Mr. Skeen. We don't use absolute endpoint determinations 
down here. Life goes on, no matter what.

                             rural housing

    Madam Under Secretary, it looks like the rural housing 
request is basically the same level as last year. But before I 
leave there, you mentioned some figures about income that 
really shocked me, because--most agricultural enterprises as 
far as income, on a family basis, are way under what the 
national norm is. We're finding too that people are just not 
making a living in agriculture or strictly agricultural base. 
And there's no incentive for younger people to get in the 
business, and I don't know how a young person gets into the 
business of agriculture production these days, unless the base 
property--they inherit that, and then if we don't do 
something--half of that's gone by the time you get there. So 
your inheritance boils over.
    But those are fascinating figures that you've got there, 
and it reflects what's happening. Of course, the old argument 
always was, any business where you buy everything you buy 
retail, and you sell everything you sell wholesale, well, 
you're not in a profitable business. So we in agriculture do it 
for the love of it, rather than for the income, but you can't 
live on love forever. Some people try to.
    There are a few--speaking of this as a budget though, there 
are a few increases in some places, but Section 515 is down 
substantially. And I understand that HUD got an increase of 
about $1.8 billion. Are we shifting our priorities to the urban 
areas or is there just less demand in the rural area?
    Ms. Thompson. The demand continues to be very strong for 
multi-family housing units in rural communities.
    Mr. Skeen. Slow paced?
    Ms. Thompson. It's really just a matter of, in balancing 
the budget, there have to be tough choices made, and 
consequently, it's a challenge to stretch the dollars over the 
many programs that are administered in the rural development.

                         legislative proposals

    Mr. Skeen. It also appears that you have new legislative 
proposals to send to us here in Congress. Will those come up as 
a package, and when will the authorizing committees see them?
    Ms. Thompson. They will not all be included in the very 
same package, but all were referenced in my statement. Most of 
them are getting fairly close to be ready to send to the 
Congress.
    Mr. Skeen. Department by department?
    Ms. Thompson. Yes.

                            rural utilities

    Mr. Skeen. Let me go to Mr. Beyer, and let's talk about 
rural electric and the hardship telecommunication accounts that 
are down substantially in your proposed budget. Is it just 
because of the much higher subsidy calculation or has the 
demand fallen off?
    Mr. Beyer. Mr. Chairman, it's because of the subsidy. When 
we changed their subsidy calculation, for every budget 
authority dollar, you get about half of the loan dollars. 
That's the primary reason for it. There's been a change in the 
budget authority formula enacted in the Budget Act of 1997.
    Mr. Skeen. I see.
    Could I ask too, is there any special provision made for 
fiber optics extension in the telecommunication? Is this part 
of the mix, or not?
    Mr. Beyer. Well, Mr. Chairman, the fiber optics extension 
and actually new installations are ongoing.
    Mr. Skeen. With your telecommunications?
    Mr. Beyer. Yes. They're part of the--that's part of the 
system improvements in the regular loan program.
    Mr. Skeen. But it's not an exception thing, it's still part 
of the----
    Mr. Beyer. No, it's not an exception. It's still part of 
the ongoing technological improvements to the infrastructure.
    Mr. Skeen. I was astounded to find out the other day that 
we have a large community in New Mexico that doesn't have fiber 
optics, so they don't have the advantage--that's Farmington, 
New Mexico. Of course, if you live in the Four Corners area 
over there, you don't belong to anybody. But that's astounding. 
I had this assumption that all the schools had it, all the 
hospitals had it, and all the rest. But, they don't.
    Mr. Beyer. No, they do not. In particular, there's a large 
population down in New Mexico that does not have high quality--
telecommunications infrastructure.

                           rental assistance

    Mr. Skeen. Mr. Shadburn, the cost of rental assistance 
payments is one of the fastest rising items in our budget, and 
we're now almost $100 million over the level in fiscal year 
1994. And you're asking for more than a $40 million increase 
next year.
    Is there anything we can do to hold down the cost of this 
thing? Give us your impression of what's going on?
    Mr. Shadburn. Well, Mr. Chairman, thank you. This program, 
the 515 Program, we're very proud of the program. It serves 
individuals that have incomes of $7,300. 40 percent of the 
18,000 projects serve elderly.
    Mr. Skeen. This is elderly?
    Mr. Shadburn. Yes, sir, elderly. Forty percent of our 
18,000 projects have elderly in them.
    We are looking each year at the increased cost of the 
rental assistance. The increases we are beginning to see now 
are due to primarily 20-year rental assistance contract 
renewals. In the first few years of the program the contracts 
were written for 20 year periods. The term was reduced to 5 
years in the early 1980's for budgetary reasons.

                   rural business-cooperative service

    Mr. Skeen. Thank you, sir.
    Mr. Watkins, your testimony mentions the Cooperative Value-
Added Program. Can you give us some examples of how that 
program works, and what it does in a practical way to help the 
producer?

                          value-added projects

    Mr. Watkins. Becoming involved in value-added projects is a 
strategy that's being employed at the Department to get small 
producers involved in increasing their own economic return on 
investment. Basically what we're trying to do is to, let's say, 
take a cabbage grower, or a group of cabbage growers, form them 
into a cooperative association, and then encourage them to 
create a processing plant that will allow them to process 
cabbage. That adds value to the product and it offers them an 
opportunity to increase their return on investment.
    We are looking to do that through several ways. One, in 
1997, we issued about 18 cooperative agreements to 
organizations, nonprofit cooperatives, that were looking into 
the opportunity to expand into value-added projects through the 
Fund for Rural America. We spent about $1.1 million in that 
program, and that's ongoing now.
    We also, through the--as the Under Secretary mentioned in 
her statement, we're setting aside $200,000 for Cooperative 
Stock Purchase Program. That will allow small farmers to become 
involved in cooperatives. Hopefully, those cooperatives are 
also going to be cooperatives that are going to be engaged in 
value-added production. Those are just some of the ways that we 
expect that through the value-added process we'll be able to 
bring increased economic returns to the small producer.
    Mr. Skeen. I hope it works.

                   north america free trade agreement

    Mr. Watkins, also would you elaborate on the Community 
Investment Program under the NAFTA that's mentioned in your 
testimony.
    Mr. Watkins. Yes, sir. Mr. Chairman, through the Department 
of Treasury, which really has the lead role, the U.S. 
Department of Agriculture has a memorandum of agreement, where 
the agency provides the underwriting for business transactions 
that may occur in communities that have been adversely impacted 
with businesses that may have closed down and jobs that were 
lost, because those companies found it more economical to move 
their process to Mexico.
    The funding for this program is actually coming from the 
North American Development Bank (NAD Bank) and we are merely 
administering that portion of the program that relates to rural 
America.
    Mr. Skeen. So it's not necessarily a budget item?
    Mr. Watkins. No, sir, for us it's not a budget item.
    Mr. Skeen. So it's neutral--you just require an amount of 
money to service those loans----
    Mr. Watkins. It's budget-neutral for us. It would show up I 
think in Treasury's budget, if there is a budget item for it.
    Mr. Skeen. Thank goodness, we found something that's 
neutral.

  alternative agricultural research and commercialization cooperation

    Mr. Armstrong, has the preference in Federal procurement 
produced any tangible results for the AARCC supported 
companies, and are there any Federal agencies that are buying 
these products now?
    Mr. Armstrong. Thank you, Mr. Chairman, and before I answer 
your question, Mr. Chairman and other members of the committee, 
I'd like to introduce Mr. Jeffrey Gain, who is the Chairman of 
the AARCC Board. As you know, AARCC is administered by a 
private sector Board of Directors, and Mr. Gain is not only the 
chairman of the Board, but he's my boss, so I thought I should 
introduce him.
    Mr. Skeen. Well, you did a good thing in introducing him.
    Mr. Armstrong. And I thought so too, sir.
    Mr. Skeen. I think there's a new shine on you already.
    Mr. Armstrong. To answer your question with respect to the 
procurement preference, that was a part of the 1996 Farm Bill, 
and we are now getting that translated from legislation to 
regulation. It is becoming a part of the USDA acquisition 
regulation, and from there it will then move to become a part 
of the FAR, the Federal Acquisition Regulation. And thus far, 
we have had some success in getting other government agencies 
to buy AARCC-funded material, certainly at USDA, and we've also 
made considerable inroads with the Department of Defense.
    I've just signed a contract with the Navy, where they're 
going to begin testing of a selection of AARCC-funded projects 
for use in the fleet.
    Mr. Skeen. Thank you. One last question. The Department's 
asking for a 3 percent set-aside in the RCAP for Indian tribes. 
About what percentage of your programs now go to tribes? Who 
handles that?
    Ms. Thompson. It's about 5 percent----
    Mr. Skeen. Five percent?
    Ms. Thompson [continuing]. Overall.
    Mr. Skeen. Ms. Kaptur.

                        cooperative development

    Ms. Kaptur. Thank you, Mr. Chairman. I want to welcome the 
Under Secretary, and all of your distinguished associates, 
including the representative from the private sector.
    I was very pleased in the testimony to see the emphasis on 
cooperative development. It's stronger under your leadership. I 
was very interested to see the additional funds for research 
and cooperatives. I'm curious as to why you feel that's 
necessary. I don't disagree with it, but I'm wondering what has 
motivated that particular request in the budget?
    Ms. Thompson. There are a couple of things that have been 
the motivation--but probably the biggest emphasis has been the 
1996 Farm Bill, with the phasing out of the commodity programs, 
which has created an opportunity for greater development and 
use of cooperatives in the private sector. We have not actually 
done much research over the last several years on the most 
effective uses and the most effective ways to structure 
cooperatives to generate the greatest payback for the 
opportunities that exist. And so, I believe, and we believe at 
the Department, that there needs to be more research done, so 
that we can explore new approaches of how cooperatives can be 
developed, and maintained, and now they can be made to grow. 
But also new uses in areas of cooperative development, where we 
haven't typically seen cooperatives in existence. So, that's 
what we are expecting to gain from the research, and hopefully 
we'll have the funding to do it.
    Ms. Kaptur. I recently had a chance to speak with the 
former CEO of Land O' Lakes, who's now working in Russia, of 
all places. He is working on one of the few successful 
privatization projects going. I would bet it's about the only 
one. What's interesting to me is he was able as a so-called 
``retired person'' to take this incredible experience from Land 
O' Lakes and root it in a place in the world that has to 
relearn how to feed itself.
    But what I wondered as I was talking to him, was you have 
so much to teach America about what you did. He said, our co-op 
always made butter and dairy, but really where we made our 
money was, and where the coop was able to survive, was on the 
input side. And I said, you know, I never knew that.
    And so even understanding our own history in cooperative 
development, sometimes maybe we've forgotten it, or if people 
weren't involved in it, they really don't know it. So, I'm very 
supportive of your efforts there.

                      business and industry loans

    I don't quite understand from the testimony on the Business 
Loan Guarantee Program, there's a $200 million setaside. How 
does that proposal compare to FY 1998? There was not a setaside 
before, and you obviously have said if it isn't used, it will 
revert back to other uses. But how many cooperative development 
loans, or what would that total have been in 1998 or 1997? Is 
this a significant change?
    Ms. Thompson. Well, it's a new use of the business and 
industry loan guarantee, where when a cooperative is formed for 
the purpose of adding value, the B&I loan guarantee can be used 
for purchase of stock in the new cooperative.
    But I don't know if Dayton has some numbers from 1997; 
obviously we're still working through FY 1998.
    Mr. Watkins. Congresswoman Kaptur, in 1997--well, the co-op 
stock purchase program came about in the 1996 Farm Bill, and it 
is to--as the Under Secretary has already mentioned, it is to 
be used to assist small farmers in stock in a newly formed 
value-added cooperative. This creates the equity needed to get 
the cooperative off the ground.
    In 1997 we had about four or five new cooperatives that 
showed interest in wanting to participate in the program, but 
for various reasons they didn't materialize. So we didn't do 
any in 1997. But they're still on the drawing board. We expect 
that as soon as the entities that are organizing these newly 
formed cooperatives, as soon as they can complete their 
organization, and raise their private sector capital, that 
we're going to begin to see significant participation in the 
Cooperative Stock Purchase Program. As we go around the country 
and begin to market and promote this program to the small 
producers who are interested in forming cooperatives, then we 
expect to see a tremendous uptake in the demand for the 
program.

                        value-added cooperatives

    Ms. Kaptur. One of the areas I have deep concern about is 
what's happening in poultry, and hogs, and a lot of our 
production areas with smaller farmers, who, because of 
integrators coming in, and just the structure of the industry 
are finding it difficult to survive.
    Do you have any demonstration projects or work underway 
that would try to see if a cooperative endeavor might give 
several farmers a place at the bargaining table when they have 
to sell product or become part of a production chain in any one 
of these sectors?
    Ms. Thompson. We have worked with several potential meat 
processors that are exploring the possibility of forming a 
cooperative, and it takes some time to actually work through 
the process of getting such a cooperative or such an operation 
actually put together. But like you, I think there is 
considerable potential for that. And I think in addition to the 
livestock industry, we can encourage the development of 
cooperatives that simply allow the producer to have more power 
in the food chain, more power by adding value, or even in a 
more basic sense, more power in the marketing process.
    Because with the concentration that we have seen in 
agriculture marketing and processing, it really does present 
quite a challenge for the individual producer, and it's next to 
impossible for an individual producer to set up a processing or 
value-added operation. But that individual producer can work 
with lots of other individual producers, and actually put 
together a significant business that will be competitive with 
some of the larger corporate entities that are operating in the 
food chain.
    Ms. Kaptur. I would very much like to suggest--I know that 
the National Farmers Union has a lot of sites they've 
identified around the country, where local producers are really 
being pressured greatly. I would like you to sit down with them 
and to identify a couple target areas for special attention, so 
that as you move forward, they at least can get their point of 
view heard, even if there's not an application involved.Just to 
know what you're doing, where you're attempting to go might help them 
meet the needs of some of the farmers that they come in contact with.
    Mr. Watkins. Congresswoman Kaptur, we do have one example 
of a cooperative that we provided financing, to the 
cooperative, not to the individual members. That was a turkey 
cooperative in Iowa last year.
    There was a major Fortune 500 company that owned a 
processing plant there. The plant was going to close down, and 
the producers, the turkey growers themselves, pooled their 
resources and bought this plant. And now they are continuing to 
operate the plant, and having a place to go sell and process 
their own turkeys.
    Unfortunately, the market for turkeys hasn't fared well 
because there's a glut of turkeys on the market. But they're 
pursuing other avenues, looking for other markets to 
distribute. They're looking to move into international markets 
for their products. So we expect that soon we're going to begin 
to see some turnaround in their operation, and we expect that 
in the long term they will become profitable.
    Ms. Kaptur. Now, one of the things--and I'm sure again this 
is being done, and I just don't know about it. But I was just 
thinking of our area of Ohio, the middle-half, and north. If 
your agency were to come in through whatever entity you have in 
Ohio or however you work that region, and you were to invite 10 
to 12 producers--I can think of this Fayette Pork Producers 
Task Force that I've come across in the western part of Ohio.
    Their problem is they can produce the hogs, but they're not 
formed as a cooperative. They can mutually produce the hogs. 
They don't have a processing plant to take it to; their problem 
is up the chain of production. They need to be able to talk 
about this, and to hear about new resources that might have 
resulted from the 1996 Farm Bill, market analysis that might be 
done to help them form their idea.
    I can think of several poultry producers further south, 
because of the entry into the market of a huge agribusiness 
that produces eggs, and these people just being wiped out 
across whole sections of Ohio.
    It seems to me, if you have this ability to convene, we 
would very much like to work with you on identifying a discrete 
number of regions of the state where we could bring some of the 
producers together, to talk with you, and to see if there's any 
meeting of the minds here on how they could think about shaping 
themselves to meet the future.
    I see it happening accidently. I don't see them coming to 
USDA, or automatically seeing it as resource. So I just express 
that to you. It isn't that you're not there; it's just that 
they're so busy they haven't had time to find you. But we would 
very much like to expedite that.
    Ms. Thompson. Might I offer that in any of your 
congressional districts, that if you see some potential for a 
cooperative development, in a particular or in a general kind 
of way. I would be very happy to come to the district, if we 
can find a mutually agreeable time, and if not myself, I know 
Dayton Watkins would or Randy Torgerson, who heads up our 
cooperative services. This has been a commitment of mine, since 
taking this position, actually a commitment of mine before 
taking this position. I think it is very opportune for us to 
engage in the kind of outreach that someone who holds a 
congressional seat can elevate to a level where it does get 
recognition throughout an entire region.
    So, if there's anything that we can do jointly to get the 
information to folks in your congressional districts, I would 
be delighted to work with you towards that end.

                         exhibit on agriculture

    Ms. Kaptur. I'm going to ask two brief questions, and then 
I'll finish and wait for the second round, but I mentioned this 
to the Secretary when he was before us and the people from ARS 
when they were here. If you're a young person in America and 
you come to Washington and you go to the Museum of History and 
Technology which a lot of kids do, you go through the computer 
exhibit and you get all excited, and you think about that as a 
career. If you go through the exhibit on agriculture, you would 
never go into agriculture. They have the original tractor, over 
there that was ever built. I have been encouraging--not knowing 
who's in the audience, and, you know, if you say something long 
enough sometimes something happens--that people who have 
influence should go there and think about the message being 
sent about this as a career for the future. We have these 
incredible scientists up before us, and, yet, no one in the 
country, really, unless those who are involved directly in that 
research know anything about it. There has to be a way for 
Secretary Glickman and yourself, Under Secretary, and others of 
good will and all the private companies that need people, 
whether they're an ice cream maker or whether they're a grain 
merchant--to have people in this country interested in 
agriculture--and we're not selling that message through the 
Smithsonian. In fact, we're doing just the opposite, and maybe 
there should be something on co-op development; maybe there 
should be a video that runs on ``This is Ralph Hofstad. This is 
a great American. He grew Land O' Lakes from this many billion 
to this many billion, and this is what he's doing now for 
America and building freedom in another part of the world. He 
understands co-ops,'' and maybe there should be all kinds of 
things there that inspire our youth to go into this field, but 
we don't do that here, so that's the first sell.

                            farmers' markets

    Second one is, on the farmers' markets--and I have spoken 
with the Under Secretary about this, but I've mentioned it to 
several others, and since Mr. Watkins is a victim here this 
morning--this afternoon----
    [Laughter.]
    Ms. Kaptur [continuing]. I just have to tell you that with 
over 1,500 farmers' markets and with more farmers now able to 
sell their products. There will be more as we continue to go 
through these markets around the country as a place for people 
to bring product. There's no reason that we couldn't have a 
marketing co-op that bridges them all and creates a mechanism 
to bring their product to the Nation and the world. In each of 
those markets, there's a product that can be sold through a 
catalog. When I met with Hickory Farms in my district they 
liked the idea so much they wanted the catalog, and I thought, 
no, this should belong to the farmers. This shouldn't move up 
the chain here. But what an interesting project now with the 
internet and with people's ability to advertise that you can 
help them not just get to their own market but you can help 
them get over to San Francisco and Raleigh and everyplace else, 
and one could look at this as a much better way of bringing 
product to market. So, I just pass that on because I think 
there's interest in the private sector in that. Yes?
    Ms. Thompson. May I respond? I know that you raised this 
issue with the Secretary when he was here testifying on the 
overall USDA budget, and as a result of that and also as a 
result of having had an opportunity to talk with you about this 
issue, we've actually begun the process of determining how we 
can communicate and begin the outreach. We're just at the very 
beginning stages, because this is a new idea, but I think we 
will probably be able to come up with something in this year 
where at least we make contact with the industry, the farmers' 
market industry, and, hopefully, they will find value in the 
cooperative approach and be able to do something significant as 
a result.
    Ms. Kaptur. Thank you, Under Secretary. You know, the thing 
is, Mr. Chairman, then I could get those certain green peppers 
that I eat down in your part of the country. I could figure out 
a way to get them into Ohio, because I haven't been able to get 
them since I was down there in your district. You know, the 
ones they--the way they put them in----
    Mr. Skeen. Well, you can smuggle them. [Laughter.]
    Ms. Kaptur. Thank you.
    Mr. Skeen. Mr. Walsh.
    Mr. Walsh. Thank you, Mr. Chairman. You never offered me 
any of those green peppers. [Laughter.]
    Mr. Skeen. They're in the mail. [Laughter.]
    Mr. Walsh. I understand they're strong enough to make it 
too. [Laughter.]
    Let me welcome Madame Under Secretary. It's good to see you 
again, Jill, and all of your team, welcome. Thank you for the 
fine work that you do.

                         single family housing

    I'd like to ask a couple of questions on direct and 
guaranteed loans primarily for housing, single-family housing. 
The budget for 1997--the budget authority was about $98 million 
for direct loans for single-family housing. The request is $128 
million. Last year it was $98 million; this year it's $128 
million. That gets us about $1 billion in construction, as I 
understand it, as opposed to about $700 million last year. On 
the guaranteed loan side, we got about $3 billion of 
construction or just over $7 million in budget authority, so it 
looks real good on paper that we're getting a lot bigger bang 
for the buck with guaranteed loans as opposed to direct, 
although I'm told the problem is that the banks who participate 
in the guaranteed loan program will not support those or will 
not qualify lenders based on income if their income is below a 
certain level. Can you comment just generally on what's 
happening as we transition from direct loans to guaranteed 
loans?
    Ms. Thompson. I would like to defer to Jan Shadburn to 
answer the specifics, and then if you have some general kind of 
questions on the subsidy rate difference, I would be glad to 
answer them.
    Mr. Walsh. Thank you.
    Mr. Shadburn. Well, thank you, sir. First of all, the 502 
Direct program is serving low and very low income families, and 
then the guaranteed program serves more moderate income 
families.
    Mr. Walsh. So, you're, basically, aimed at two different 
income groups.
    Mr. Shadburn. Yes. The low--the 502 Direct program really 
serves a income level of about $17,000, and the Guaranteed 
program reaches an income level of a more moderate income.
    Mr. Walsh. Where is the need?
    Mr. Shadburn. The need is all over rural America both for 
the direct and the guaranteed programs, and this year as we 
look at leveraging our 502 Direct program with other commercial 
lenders, they're taking a first mortgage, and we're taking a 
second mortgage. We are doing--leveraging and partnering with 
the local lenders and rural America with the 502 Direct 
program.
    Mr. Walsh. We're going to be hard pressed to fund a lot of 
the programs that we've been given; what's been requested v. 
the revenue stream that we have. User fees have been budgeted 
to pay for some of the programs that we'll be appropriating 
for, so it's safe to say that we're not going to have all the 
money that's been requested in this budget request. So, we're 
going to be put in a position where we're literally borrowing 
from Peter to pay Paul for these programs. If we can get $3 
billion worth of construction or $7 million under the 
guaranteed program, would it make sense to move more money from 
the direct loan program into the guaranteed?
    Ms. Thompson. I would like to answer that. The challenge is 
that in the direct lending program we are reaching individuals 
and families that have the greatest need and have the greatest 
challenge in finding affordable housing, and in the Congress, 
you all have to make decisions based on what you think the 
priorities ought to be, but I would have a hard time supporting 
moving additional funding out of the direct into the 
guaranteed.
    Mr. Walsh. I think we all would, but I wanted to ask the 
question and get your thoughts.
    Ms. Thompson. I think it's a very legitimate question, and 
I think that depending upon who you talk to, you would probably 
get some differences of positions, but having had an 
opportunity over the last two and a half years to travel around 
the country and to meet with families that are utilizing the 
Direct 502 Lending program, I just think that if we take away 
from that program, we are abandoning the families that have the 
hardest time getting ahead in our society. I am opposed to 
that.
    Mr. Walsh. I sit on VA HUD Subcommittee and ag; we do 
virtually all the housing. My own experience in city government 
was that the more home ownership you have as a proportion of a 
neighborhood, the stronger the neighborhood. I suspect that 
works as well in rural America too, and I don't think there's 
anything better we can do than to support home ownership. So, 
obviously, both of these programs are necessary to get to two 
different groups of people.

                            public utilities

    Let me ask another question, and this is regarding the 
utilities, public utilities. There have been--I'm told, there 
have been some sizable debt write-offs over the past twoyears 
in electric utilities. Could you give us an explanation of why that is? 
What's happening in that industry, and what do you expect this year?
    Ms. Thompson. If I could--and I want to defer to Wally 
Beyer to give you some of the details--but, in general, this 
has been a difficult process, because I feel very strongly that 
when you borrow money, you ought to repay the loan. The 
challenge for us has been that there were a number of large 
loans made for the purpose of nuclear power investment in the 
early 1980's, and they simply did not pan out as they appeared 
they would on paper, and those loans were not being repaid and 
were accruing interest and penalties over a number of years.
    Mr. Walsh. Which projects were these?
    Ms. Thompson. There are a number of them.
    Mr. Walsh. All nuclear?
    Ms. Thompson. A good portion of them have been, yes. And we 
can provide for you the specifics on each writedown and would 
be happy to do that, but in virtually every case where there 
has been a writedown, it's a writedown after a number of years 
of penalty and interest buildup and something--some decision 
had to be made that took into account the concerns and 
interests of the taxpayer and the public and, at the same time, 
the ultimate consumers who--for whom the program, itself, 
exists, and, so these have been tough decisions to make. I 
believe from a fiscal and managerial standpoint, they've been 
the right decisions, but I will let Wally follow up on some of 
this.
    Mr. Walsh. These are--primarily these are nuclear projects 
that didn't get permitted?
    Mr. Beyer. Well, actually, Mr. Chairman and Representative 
Walsh, we're dealing with a 15 to 20-year old debt. 
Principally, minority investments in large nuclear power 
plants. A couple of them I can think of were coal fired plants 
that were dedicated to specific aluminum companies, for 
example. Shale oil was one of them. Dedicated shale oil back in 
the late seventies, eighties, and you know what happened to 
that.
    Mr. Walsh. Good old shale oil.
    Mr. Beyer. And then the private sector walks away from this 
stuff, really.
    Mr. Walsh. So, when they walk away, the public utility that 
invested in it, they're still carrying some of the baggage for 
it.

                               Write-offs

    Mr. Beyer. Four years ago when I got here there was about 
15 troubled borrowers that had been kind of in a holding 
pattern for over 10 years, and a lot of them had interest rates 
accumulating as high as 14 percent. They were loans guaranteed 
by the agency, but made by the Federal Financing Bank, an 
agency of the Department of Treasury. The FFB would not allow 
them to refinance as the interest rates went down. So, there's 
a huge accumulation in interest.
    Mr. Walsh. Let's see if I got this straight. The private 
investors walked away; public utilities were minority 
shareowners in some of these projects.
    Mr. Beyer. Not the power plants. I'm talking about--when I 
say private, like the shale oil that went away; that's what I'm 
talking about. The nuclear investments didn't walk away. Those 
principals--basically, the investor owned utilities, and our 
borrowers had a minority interest participation in these 
nuclear projects.
    Mr. Walsh. So, we're talking about a number of different 
things.
    Mr. Beyer. Yes, we're talking about a number of different 
facilities across the country.
    Mr. Walsh. How much did we write off this year?
    Mr. Beyer. This year, we haven't written anything off. 
We've written off in the last two years $1.6 billion.
    Mr. Walsh. It's $1.6 billion, taxpayer dollars, that are 
lost, basically.
    Mr. Beyer. Yes, that's correct. Right, it's principal and 
accumulated interest. Some of these systems--one of them paid 
the highest--the consumers paid the highest rates in the 
country for eight years; and repaid about $700 million in 
interest. So, it isn't quite as bad as it sounds.
    Mr. Walsh. This taxpayer money guaranteed----
    Mr. Beyer. Yes.

                               Refinance

    Mr. Walsh (continuing). And you're saying our Treasury 
Department would not allow those debt owers to refinance those 
loans?
    Mr. Beyer. That was a big issue in Congress during the 
eighties until, in fact, I think it was the Restructuring Act 
of 1993 that mandated some refinancing. Since then, we've 
refinanced--in the last four years, we've refinanced--right off 
the top of my head--$5 billion, $6 billion, and the rates are 
down now significantly compared to what they were.
    Mr. Walsh. What's our--if you could tell us, if you know--
what's our overall commitment to these sorts of projects? 
What's our total liability?
    Mr. Beyer. Well, the electric loan portfolio is right at 
$32 billion, and about $20 billion of that is power supply. We 
call them generation and transmission systems; powerplants, and 
transmission lines. The balance of it is the distribution 
systems.
    Mr. Walsh. What percent of that will be uncollectible?
    Mr. Beyer. Well, let me--I'm not exactly sure, because 
we're working with them. Right now, I can tell you that we're 
working with six now, so we've got the majority of it behind us 
in four years. We have four of them in bankruptcy; three of 
them have a court-approved plan, and only one of them are left 
in bankruptcy.
    Mr. Walsh. The ones in bankruptcy, are those the ones that 
you've forgiven this debt to?
    Mr. Beyer. No, no, not yet, because they're not completely 
closed out. The ones that we've forgiven debt was actually 
under the Department of Justice authority. We worked with the 
Justice folks in those, and, today, we're actively working with 
six financially stressed borrowers, and we're closing out three 
bankruptcies and working with the last bankruptcy.
    Mr. Walsh. Now, if we settled some more this year, in 
appropriations year 1999, how is that money accounted for?
    Mr. Beyer. Well, let me first say I'm the last to tell you 
that I understand Government financing or accounting, but----
    Mr. Walsh. Maybe not the last.
    Mr. Beyer. I'm the first one to admit it, I can tell you 
that. [Laughter.]
    The electric program has a liquidating fund, and the agency 
in the face of the loan guarantees is repaying those debts out 
of the liquidating accounts. The Credit Reform Act requires 
that we establish a loss reserve and those funds are deposited 
in the liquidating account along with all loan repayments.

                         Interest and Penalties

    Ms. Thompson. Congressman, could I share a number with you 
on the interest and penalties that accrued over the years and 
the number of years that it took for it to accrue? I think it 
would be of value to you, and we can make the data available.
    Mr. Walsh. Thank you. That would be helpful.
    [The information follows:]

                                                  [In Millions]                                                 
----------------------------------------------------------------------------------------------------------------
                                   (B) Date and    (C) Payments    (D) Date and                                 
                                    Debt as of      Rec'd After   Nom. Loan Loss  (D1) Principal   (D2) Accrued 
          (A) Borrower             Orig. Finan.    Date of Orig.    as of Debt       Write-Off    Interest Write-
                                     Problems      Fin. Problems    Settlement                          Off     
----------------------------------------------------------------------------------------------------------------
Soyland.........................       1986-$883            $750       1996-$982        \3\ $982              $0
Deseret.........................       1989-$526         \2\$430       1996-$502        \3\ $287            $215
Wolverine.......................       1986-$792            $300       1997-$165       \3\$ 162-              $3
Wabash\1\.......................       1984-$669              $0       1997-$202            $202              $0
----------------------------------------------------------------------------------------------------------------
\1\ Bankruptcy.                                                                                                 
\2\ This repayment figure does not reflect a 1985 sale/leaseback arrangement which resulted in the prepayment to
  RUS of $475 million originally lent to Deseret, or a 1988 refinancing which returned an additional $190       
  million to RUS. These special prepayments returned a total of $665 million to the RUS prior to 1989.          
\3\ Includes capitalized interest.                                                                              

    Mr. Walsh. One last question and that is do you anticipate 
any of these coming to closure in 1999?
    Mr. Beyer. I am hopeful that we'll--we are getting on top 
of this problem which was a huge problem. We're getting on top 
of this problem, and I'm hopeful that by 1999 we'll get through 
this. I'd hasten to say that the deregulation of the electric 
infrastructure is going to have--depending on what Congress and 
the States do--is going to affect, could affect, seriously, our 
loan security issues, because all of our loans are--all of our 
projects; all of our loans are in high-cost serve areas. 
They're not profit centers, per se. I'm mean, sure, there's 
here and there, but they're probably going to be gone----
    Mr. Walsh. Profitability v. the urban power plant.
    Mr. Beyer. Right, exactly. So, there's really major issues 
where we're working with in the telecommunications and the 
electric industry.
    Mr. Walsh. Thank you. Mr. Chairman, I have a couple of 
other questions, but I'll submit them for the record.
    Mr. Skeen. I thank the gentleman.
    Mr. Skeen. Mr. Fazio.

                       SELF HELP HOUSING PROGRAMS

    Mr. Fazio. Thank you, Mr. Chairman and Madame Secretary and 
gentlemen, welcome. Mr. Walsh has asked a question about rural 
housing that I was very interested in, but I'd like to 
specifically speak to the issue of migrant and seasonal farm 
worker housing which I think is a continuing problem. We have, 
apparently, a shortage of some 800,000 units of affordable 
housing for farm workers and a waiting list that's two or three 
times the level we can begin to appropriate for. I think we're 
talking abouta budget for $25 million and maybe 700 units this 
year. I wonder if you could give me some perspective as to 
whether we have any hope of working this down, and I'm 
particularly interested in the self help housing approach? I 
see the farm worker community in my district doing a lot of 
their own sweat equity and putting up housing that is really a 
fine product and adding to the permanent population of a lot of 
the small valley towns that I represent, and up and down the 
Sacramento and San Joaquin valleys this is a phenomena that's 
really working down part of the back log. Could you give us 
your sense of where we can go with this or is this inevitably a 
problem we simply have to adjust to?
    Ms. Thompson. Well, I think it's unquestionably a 
challenge, and, shortly after being sworn into this position I 
had an opportunity to actually visit a farm labor camp and was 
appalled at the living conditions of families who work very, 
very hard; very, very hard providing food to this country, and 
families that in spite of their living conditions were making 
sure that their children were in school everyday and that they 
were in church every Sunday as a family. I believe that this is 
a challenge and an opportunity that we have to take advantage 
of, and I would never give up and say that this is something 
that we just have to accept and believe that the solution lies 
in some creative approaches to not just housing but other 
services that are necessary for families and communities to 
survive.
    I do think that we've had very good success with self help, 
and it allows families to build equity over about a six-month 
time period that simply would not be affordable in other 
circumstances. We're also working in the Office of Community 
Development--that is headed by Victor Vasquez who also oversees 
our empowerment zone enterprise community initiative--ways that 
we connect families that are engaged in farm labor; connect 
them in the various parts of the country with regard to their 
children's education and health care, and I think it's going to 
take that kind of comprehensive approach to address the issue, 
and it's a matter of funding, but it's not only a matter of 
funding, and we continue to work for creative solutions as the 
Congress is doing, and I am very committed.
    I know that Jan Shadburn and others in the Rural Housing 
Service are very committed, and the Secretary has a very strong 
commitment, and we have other cabinet members heading up other 
departments that are working on this. So, I think we just need 
to continue to push ahead; be innovative, and I think we will, 
ultimately, resolve these issues. I think it will take years, 
but I think we've made progress, and we will continue to.
    Mr. Fazio. Mr. Shadburn?

                           farm labor housing

    Mr. Shadburn. Yes, sir. Thank you, sir. This, as you see in 
your Fiscal Year 1999 budget, there is an increase in the farm 
labor and migrant housing program which is very strong, as you 
say, in California. So, the $35 million is an increase over the 
previous years.
    We also have identified repair and rehabilitation needs, so 
we're looking at the overall conditions, not only new 
construction but repair and rehabilitation. We also realize in 
our self help program and that's why we've set aside an 
additional $40 million in the single family housing for the 
self help program this year out of the national reserve to 
boost it from $110 to $150 million this year, because we 
realize that there's an opportunity, for migrant farm workers 
as well as farm labor to go from rental to owning their own 
homes through the sweat equity. I've been out in California and 
seen that first hand where families of farm labor building 
their own homes.

                           rental assistance

    The commitment is there. I want to point out that, as we 
increase farm labor housing, that also increases the need for 
rental assistance. So, the commitment is there, and the thing 
that we're having to do right now with our self help technical 
assistance grantees is to balance with that $26 million that we 
have for technical assistance grantees. It is pushing us at the 
limit to expand, but we are now in 46 States with our self help 
program. The Under Secretary and the Secretary as well as the 
Rural Housing Service are committed to that and working with 
Mike Reyna in California.
    Mr. Fazio. I'm glad you mentioned Mike. He's doing an 
outstanding job out there. Mike is, I know, somebody you all 
work closely with and rely on. I can just say that we've had 
some problems. We ended up, as you all remember, debating 
problems in Galt, California last year in the appropriations 
process, I know that there are some difficulties, occasionally, 
with the planning and zoning authorities, and I'm sympathetic 
that, you know, communities don't always need to take, perhaps, 
the original plan that's submitted, but these things can be 
adjusted to; they can be worked through, and we have spent, my 
office, countless hours working with local cities and counties 
to see that these things can be resolved, and in 95 percent of 
the cases we go forward; build the housing, disperse it around 
the community if that's what's required, and end up with a win-
win for everybody, and I'd like to think we could continue to 
do that.
    I know that the incredibly great increase in citizenship 
applications and, frankly, completions of that process, while 
they take a while, has added an awful lot of people to the list 
of those in my part of the world who want to become homeowners 
and want to have a piece of the American dream. I think you're 
going to see even more demand for these programs as a result, 
and I hope we'll be able to keep up with that.
    I know there's a lot of interest in community organizing 
around these issues, but, as the chairman pointed out, earlier, 
when we look at that $1.8 billion in new spending over in HUD, 
they look to us to try to keep pace in rural communities, and 
we just don't have the wherewithal to proportionately match 
that demand, and many of the programs they're going after at 
HUD aren't really fashioned correctly for their needs, so 
they're sort of left in the lurch.
    Mr. Shadburn. Mr. Fazio, might I add, and, Mr. Walsh, Mr. 
Chairman, that out of the direct program that we're talking 
about, that's where the direct funding for the selfhelp program 
comes from, and we have not only taken steps in our regs to reduce the 
cost by 40 percent, we've also required our States to leverage at least 
30 percent of those funds with other partners so that we are trying to 
make sure that we do leverage and expand that direct program as far as 
it will go. So, we think it is a very good program, and the self help 
program will help home ownership that otherwise they wouldn't be able 
to have the American dream.

                        water and waste program

    Mr. Fazio. Let me ask Mr. Beyer, who I appreciated coming 
out and helping us make some loans to some of our rural water 
districts that are, frankly, in total disarray; in some cases, 
you know, company towns that went bust, and the people who 
remain there have no place to turn. There is no city 
government; no county that has the resources. What do you think 
the total demand is on, say, sewer and water for rural 
communities proportionate to what you can provide?
    Mr. Beyer. Well, Mr. Chairman, Representative Fazio, thank 
you very much. I enjoyed coming out and sharing that brief time 
with you. The water and waste water program--the Water 2000 
program that we're targeting lower income minority communities, 
poverty--there's a huge demand on it. The demand to date is 
about $3.5 billion coming from $4 billion, so, you know, we 
feel that we're making somewhat of a progress on it, but 
there's a huge demand for it, and it's really a health issue; 
it's a quality of life issue, and it's an issue of serving the 
unserved. We thank this committee for helping to provide those 
funds. It's a very, very valuable program in rural America.
    Mr. Fazio. If I could take--go ahead, Jill?
    Ms. Thompson. Mr. Chairman and Congressman, it's about $37 
billion. That's our estimate just to meet environmental 
standards.
    Mr. Fazio. And this year we're providing in this budget how 
much?
    Ms. Thompson. $1.3 billion.
    Mr. Fazio. So, that gives us some perspective. We've got a 
long way to go. I guess, like many other members of this 
subcommittee, I would just simply say as we struggle with the 
need to help low income families and communities that we've got 
to somehow get a bigger slice of this pie for rural 
communities, because they still are paying the price of 
neglect. You travel up and down any of our districts and you'll 
see rural communities having a hard time preserving the kind of 
semblance of family life that they've had historically. They've 
lost jobs, and they don't have the infrastructure that attracts 
jobs. It's a downward spiral. You can't bring new jobs when you 
don't offer the infrastructure that they require: sewage 
treatment, transportation, water systems, the basics that other 
communities have the opportunity to provide.
    Maybe some way can be found to galvanize public attention 
to this other than just to assume that they'll continue to lose 
population, and those problems will drift away and become urban 
problems. I think, actually, there's a desire to change that 
and to move back to these communities and try to improve them 
and enrich them with some new community elements.

                             welfare reform

    Let me just ask one last question about welfare reform 
given the fact that it is important to look at rural areas as 
they deal with welfare reform as well. Is anybody at the 
Department monitoring the effects of welfare reform in rural 
communities, rural counties? And how are we doing? We've been 
seeing some positive feedback and, obviously, some criticism, 
but in rural communities, how is welfare reform working?
    Ms. Thompson. We are, and it would be difficult for me to 
address the overall Department work on welfare reform issues, 
but in terms of filling vacancies from outside the Federal 
Government, we, in rural development, have been quite 
successful in hiring individuals going from welfare to work. In 
addition to that, we are now using our community facilities 
funds for financing day care centers which is a very, very 
important component of welfare reform.
    And, as you spoke very eloquently, there has to be the 
infrastructure in place in order for jobs to be created, and 
there has to be this sustainable economy in order for there to 
be employment opportunities, and through the empowerment zone 
enterprise community initiative we have made great strides in 
reducing the unemployment rates in the empowerment zones, and 
we've had very successful job creation, and we are also now 
working in a more regional way to help with infrastructure 
development; the coordination of service--providing of 
services, and in the southwest, in particular, I think we've 
had--and the Vice President has a real strong leader in this 
area--we have made great strides in tying together what happens 
in southwestern States so that we're not duplicating and being 
inefficient. We have a long way to go, but we are making 
progress.
    Mr. Fazio. Well, thank you, Jill and all of you gentlemen, 
and, Mr. Chairman, I yield back.
    Mr. Skeen. Thank you. Mr. Latham.

   alternative agricultural research & commercialization corporation

    Mr. Latham. Thank you, Mr. Chairman, Madame Secretary. The 
AARCC program was established as a revolving fund. When is the 
AARCC program going to start making, I guess you'd call it, a 
profit or returning money back to the fund? How much more money 
are we going to keep putting into it? I understand these are 
not economically viable projects to begin with, and it's going 
to very----
    Ms. Thompson. In AARCC?
    Mr. Latham. When?
    Ms. Thompson. Actually, we've had--and I will let Bob 
Armstrong who is the executive director give you some of the 
specific information on specific projects--but, in fact, we 
have had some very successful partnerships. Not only are the 
individual start-up companies--not only are they doing well in 
many cases in providing economic opportunity and job growth in 
their respective communities, but the technology that is 
getting developed in adding value to agriculture products is 
going to have, I believe, a long term, more macro-general 
impact so that we are going to be able to develop some 
industries here in the United States as a result of the 
program.
    One of the challenges is that the kinds of businesses and 
products that are being developed are not traditionally the 
kinds of businesses that rural lenders in the private sector 
deal with than venture capitalists have had experience dealing 
with, and so this is a program that allows us to work with them 
and actually help not just in the business but in the 
development of technology and development of new products, but 
I will let Bob Armstrong answer some of your specific concerns.
    Mr. Armstrong. Thank you, Mr. Congressman.
    Our board of directors--as you know, we're governed by a 
largely private sector board of directors, and the board 
ofdirectors has put together a 10-year business plan, running from 
1992, when AARCC was first authorized through 2002 with repayments 
being scheduled based on the investments that we were making and with 
additional appropriations scheduled through those years as well.
    The business plan calls for three scenarios: a low-, 
medium-, and high-return scenario. The first repayments were 
not expected in any of the scenarios until Fiscal Year 1998, 
and we, in the high case scenario, anticipate $300,000 
repayment in Fiscal Year 1998 based on investments made earlier 
in the fund. In fact we're at the first of March of 1998, and 
we've already got about, it's close to $250,000 in repayments 
for the Fiscal Year.

                      venture capital investments

    In out years, we begin to see this increase considerably: 
Fiscal Year 1999, $1.7; million Fiscal Year 2000, $3.8 million. 
The point is, the fund has been set up and the business plan 
written just as you would for any venture capital fund 
stretched out over a 10 year period of time so the more--the 
direct answer to your question about how much longer will 
appropriations be needed, we anticipated appropriations out 
through the entire 10 year period, but we're also beginning to 
see the repayments, as we programmed them, begin to come in 
right on target with Fiscal Year 1998.
    Mr. Latham. Where are the losses, or how many of the funds 
are nonperforming? Or you don't expect them to perform, how 
many dollars?
    Mr. Armstrong. At the moment, we have written off, out of 
the $33 million that we've invested, we have completely written 
off a little over $1 million. Now, are they all going to 
perform dollar for dollar? Absolutely not.
    And, again, these are not structured as loans, however, 
they're structured as venture capital investments so that the 
majority of them are pegged to an equity position within the 
company. The exit strategy being either an initial public 
offering or a merger with another company, so that when I 
structure the deals, we anticipate a 4 to 5 times return over a 
6-to-7-year period. That's the average, some are going to come 
in way under that, some we might just get back dollar for 
dollar, and if you discount back over time, even at the rate of 
inflation, you're still losing money. If we get some that are 
just a few percent, in fact our low-case scenario accounts for 
our getting an overall return of only 6 percent, but there's a 
core within the portfolio of about 5 or 6 investments that we 
think are just going to be spectacular, and that is very much 
how the private sector venture capital industry works. There'll 
be a portfolio, and there's just a core that carries the rest 
of the portfolio.
    So, to begin looking at dollars lost at this point, I 
think, we're only half way through the fund if we look at it as 
a 10 year fund, it's a little bit premature. But our numbers, 
our write-off numbers at this point, also are very much in line 
with the industry standards.
    Mr. Latham. Did the projection have a $1 million writeoff 
or nonperforming?
    Mr. Armstrong. Absolutely. We accounted for that, that 
there would not be a return, necessarily, on all of the 
investments. It's a risky business. And we have really 3 
objectives when we make an investment: return on investment, 
the ROI, is one of them, but the other 2 are job creation and 
then the use of agricultural land.
    And we balance that across the whole portfolio. Some might 
be weighted more toward our ROI, some might be weighted more 
toward job creation or use of agricultural land. But if we sum 
across the entire portfolio, there's a good balance of those 3 
things.
    Mr. Latham. You understand a revolving fund is supposed to 
have money coming back in?
    Mr. Armstrong. It's supposed to revolve, right, instead of 
rotate.
    Mr. Lee. Rather than just a one-way----
    Mr. Armstrong. Right. And that's what we anticipate. Our 
business plan really shows ----, and by that point we think 
that the cash flow will be such from the investments, it'll 
start generating enough money to come back in and just continue 
the----
    Mr. Latham. In 2002, we won't need new appropriations, 
then?
    Mr. Armstrong. That is what we have in our business plan, 
correct. But that's 2002, not 1999. I just want to make sure.

                  rural water and wash disposal grants

    Mr. Latham. The administration has stated that there's a 
log backlog for rural water and waste disposal grants. If this 
is the case, why is the administration rushing into this $7.2 
million decrease in grants?
    Mr. Beyer. Mr. Chairman, congressman, the decrease in grant 
funds is offset by the increase in loan funds----
    Mr. Latham. But you acknowledge that there's a $7.2 million 
decrease in the grants?
    Mr. Beyer. Yes.
    Ms. Thompson. But one of the things that we try to do in 
putting the budget together and making the request is trying to 
find ways to make the dollars go further.
    Mr. Latham. God bless you. [Laughter.]
    Ms. Thompson. The loans get repaid and then that allows you 
to make more loans.
    Mr. Latham. And these are the grants.
    Ms. Thompson. Right. But over the years, we have shifted 
more of the funding. Obviously, it takes considerably more 
authority for a grant program because that's dollar for dollar, 
than it does for a loan program because the loans get repaid. 
But we have shifted more of the emphasis of the water and waste 
program into loan making as opposed to grant making, because we 
can work with more communities that way. And also, it's 
important for the local community to have a commitment to a 
project that's funded because when there is that local 
commitment, and the local community is willing to put resources 
in, then there is a greater opportunity for sustainable 
development and growth in that community.
    Mr. Latham. I was pleased to see, I guess in the written 
testimony, that you cited to projects in Iowa. One was funded 
through the Rural Economic Development Loan Program, and the 
other through the Rural Economic Development Grant Program. 
Unfortunately, the budget anticipates a lower loan level for 
the loan program, and cuts the grant program by about $300,000, 
which is about the size of one of our grants.
    If these programs are successes, and worth noting and 
bringing out in your testimony, why is the Department cutting 
these programs?

                          balancing the budget

    Ms. Thompson. The challenge for us is, with the balancing 
of the budget being the highest priority, we simply have to 
make tough choices. And, as a consequence, some programs, we do 
request lower funding levels.
    Mr. Latham. Did you request that or is that from OMB?
    Ms. Thompson. We work with OMB.
    Mr. Latham. That wasn't the question. [Laughter.]
    Okay. Was that a Department request, to cut these?
    Ms. Thompson. Again, we work as an administration, and we, 
I think, speaking as a former Member of the House, when I was a 
Member of the House, I would have liked to request everything 
for my particular congressional district.
    Mr. Latham. And I'm sure you did, like we do. [Laughter.]
    Ms. Thompson. As an under secretary, I would like to 
request full funding for everything in the Rural Development 
area, but the reality is that unless we work as a team, and 
work not just as a team in the administration, but work as a 
team as Government employees with the United States Congress, 
we can't find solutions to the challenges. And so I can very 
honestly and very comfortably say that we worked with OMB. 
[Laughter.]
    Mr. Latham. Don't feel like I'm singling you out.
    Ms. Thompson. But you are. [Laughter.]
    Mr. Latham. I have asked this question to everyone that has 
testified from the different departments, and basically, the 
response is that a lot of the decisions were not at the request 
of the Department, that they were brought down from above and 
that's why they're there. If a department were to be making 
some of these judgments, there would be different priorities. 
Would that be accurate?
    Ms. Thompson. Again, I can say just as when I was a Member 
of the House of Representatives, if I could have had an entire 
full funding for my congressional district, but that would not 
have been realistic. And we do work together, and I am very 
pleased and very proud of the kind of working relationship that 
we have.
    Mr. Latham. Where would you change the priorities, then? If 
you were to not have----
    Ms. Thompson. I think this budget's perfect. [Laughter.]
    Mr. Latham. Well, what are we doing here, then?
    Ms. Thompson. You invited me. [Laughter.]
    Mr. Latham. Can we charge it to your district? I've got my 
request in for mine. Anyway, thank you very much.
    Ms. Thompson. Thank you.
    Mr. Latham. Thank you, Mr. Chairman.

                        administrative expenses

    Mr. Skeen. Let's go to the last round here, and I'll ask 
one question, Madame Secretary. We had a substantial reduction 
in administrative expenses last year, and mainly in the rural 
housing area, and the Fiscal Year 1999 budget puts that money 
back in and adds some more.
    In the reorganization, why did we lose a disproportionate 
number of lower level employees and retain so many of the high-
paid employees?
    Ms. Thompson. We tried to do what we could to retain 
employees at the lower----
    Mr. Skeen. On an experience basis?
    Ms. Thompson. It has to do with service in the Government, 
and the buyouts that were offered, and individuals made the 
decisions that they made. The salaries and expenses budget 
request is lower than it would have been had we not gone 
through the reorganization, but it's still higher than we 
requested last year. But let me also say that some of the 
savings that we are now experiencing don't show up because of 
the way the budget is actually calculated or counted or 
presented.
    For example, in the Centralized Servicing Center of our 
single family housing direct loans in St. Louis, we did, in 
fact, we are saving about $100 million in 1999, but that 
doesn't show because the baseline was changed in 1998 as a 
result of the reduction in number of FTEs. So we are saving 
considerably beyond what we would be spending had we not made 
the changes but they don't always show up in the budget itself.
    Mr. Skeen. Were these not requested leaves, those who were 
ready to leave the service by their own request when you had 
the draw-down in personnel?

                           reduction in force

    Ms. Thompson. We actually had in the Rural Development 
area, we did have a reduction in force, but we also had a 
number of----
    Mr. Skeen. Regular retirement----
    Ms. Thompson. There were some who retired and some who took 
advantage of buyouts.
    Mr. Skeen. We're going through that now with the Department 
of Defense.
    Ms. Thompson. Let me also say that even though we lost some 
employees who were at some of the lower Government levels, 
personnel levels, they were still very valued employees and 
very good employees who were doing extremely good work out in 
the field.
    Mr. Skeen. I can understand that. It was a reduction in 
force, it had to go one way or another.
    Ms. Thompson. And it has put quite a burden on many of the 
employees who have stayed in the Department of Agriculture.
    Mr. Skeen. But if your request is granted from this year's 
base, would you hire more in, more personnel?
    Ms. Thompson. We would be able to, for this year, wewould 
not have to let anyone go, but we would not have the availability to 
hire new employees.
    Mr. Skeen. So you're pretty much at status quo.
    Ms. Thompson. Right.
    Mr. Skeen. Thank you very much. Ms. Kaptur.

                               nutrition

    Ms. Kaptur. Thank you, Mr. Chairman. Madame Secretary, last 
year during your appearance before the subcommittee, we talked 
a little bit about the size of USDA's total budget and the fact 
that two-thirds of it goes into nutrition programs and one-
third goes to production agriculture. And at that time, I asked 
some questions about, does the nutrition side of USDA ever talk 
to the production side.
    In looking at your efforts to try to spur rural business 
development, I guess I'm curious as to, over the last year, if 
anything has been done between, what I call, the agriculture 
side of USDA and the nutrition side of USDA to get more of 
those purchases directly from farmers?
    Ms. Thompson. I can address that from the Rural Development 
stand, from the perspective of Rural Development, and it has 
been primarily in Dayton's area, in the Rural Business 
Cooperative Services, where we have worked some through the 
Empowerment Zone Enterprise Community Initiative and some 
through the specific program administration, where we have 
worked to provide technical assistance and information to 
producers so that they would be able to potentially take 
advantage of opportunities in the school lunch program or 
otherwise. There are some challenges to making that happen, but 
we have, in fact, worked on that. And Wilbur Peer in Dayton's 
shop has been quite a leader in that whole area, particularly 
with smaller producers, some of the smaller farming operations.
    Ms. Kaptur. Do you find resistance from the state levels to 
doing this, so many of these nutrition programs are managed at 
the state level?
    Mr. Watkins. Congresswoman Kaptur, I'm going to have to do 
some follow up and get back to you. I know that we have made 
some inroads in dealing with the other agencies in the 
Department that are, in fact, responsible for those areas. 
There are a couple of pilots that are going on right now in a 
couple of states for the School Lunch Program, but at this 
moment, I'm not exactly sure what the status in terms of 
progress, has been. I can tell you, yes, there has been a 
little resistance in terms of getting into the other agencies 
and establishing those kinds of relationships, but at the same 
time, there has been a willingness to begin the dialogue and 
begin working for the benefit of rural America. So what I would 
like to do is go back and to get the information that speaks 
specifically to progress that has been made of actual 
involvements that we've had with the other agencies and within 
each of the states, and see if my suspicions bear out.
    Ms. Kaptur. I'll appreciate that very much.
    Ms. Thompson. I think that, and I'm not aware of any 
resistance at the state level, what I'm aware of is resistance 
to purchasing from small producers who can provide only a 
limited supply of a particular commodity. And one of the things 
that we are exploring is how the cooperative model, then, can 
be used to bring the small producers together so that they have 
a larger supply, and well as the more standardized supply, may 
be add value to the food product and then have an opportunity 
to supply a school system or whatever.
    Ms. Kaptur. I appreciate your efforts in that regard, and 
I'll ask the same question again next year, but I will 
appreciate any information you can provide so that we can be 
helpful to our own rural communities in trying to help them 
move product.

                           AARCC Investments

    My final question, really, but I did want to ask about 
AARC. If you, Mr. Armstrong, might give me, of the investments 
that have been made, what would have been the largest. Not 
necessarily the company, but the amount, and what would be the 
smallest, on average, in dollars.
    Mr. Armstrong. Yes, what we have begun doing is, in the 
last 2 or 3 years, deliberately going back to some of our 
initial investments and reinvesting. So, in answer to your 
question, some of our smallest investments: $50,000. Our 
largest investment at any one time has been $1 million. Now, 
since we've been going back and reinvesting in companies, we 
have about 3 or 4 companies where we're between $2, $2.5, $3 
million in the company.
    Gridcore is a good example in California. Gridcore was a 
product that was developed at the Forest Products Lab in 
Madison. With our $50,000 investment, Gridcore licensed the 
technology from the Forest Products Lav. We now have almost $2 
million in Gridcore. Gridcore also has a syndicate of other 
investors with between $15 and 20 million additional dollars. 
It all started, though, with a $50,000 investment on the part 
of AARCC, which we have now grown to about a $2 million 
investment, and now we're a minority in this much larger 
syndicate of approximately $20 million in the entire company. 
So, across the portfolio, you really have to look at each and 
every one of the companies. We have gone back again in this 
core that we're looking at as carrying the entire portfolio 
forward economically, and return on investment being only one 
of our considerations. The job creation and the use of ag. land 
being the other two. But on the economic side we have, in 
effect, become our own second, third, and fourth round of 
financing.

                         cooperative businesses

    Ms. Kaptur. Are any of your businesses cooperatives?
    Mr. Armstrong. There is a cooperative involved with one of 
our businesses. There's a marketing group that we have actually 
invested in, in Chicago. We have a million dollars in a project 
to commercialize medifoam. It's a plant and they derive the oil 
from medifoam. It's got a lot of uses in lubricants and in the 
cosmetic area. They are working with a co-operative which we 
worked with, to help put the growers together in a co-operative 
so they then can work with the company that we've put the 
million dollars in. So we've not directed directly in a co-op, 
but we are working with the co-op.
    Phoenix Bio-composites also is. It did not start as a co-
operative investment, though. That's a company that's making 
building material out of soybeans, and they are now getting 
their soybeans from a co-operative, but our initial investment 
was not in them as a co-op.
    Ms. Kaptur. Was the little starch plate that we received in 
our agricultural research bags, is that your company, one of 
your venture companies?
    Mr. Armstrong. I wish I could say yes, Congresswoman, but I 
don't think that one is. Biodegradable starch has been sort of 
the elusive goal that everybody has been chasing. We don't have 
money in a biodegradable starch at this point, for tableware.

                    Army Corps of Engineers Research

    Ms. Kaptur. I would like to bring to your attention 
research that is being done under USDA's auspices, along with 
the U.S. Army Corps of Engineers. I noticed that one of 
yourmajor interests is in the re-use of agricultural waste. I don't 
know if you can call this a waste, but in the Great Lakes area, we 
dredge a lot, millions and millions of tons a year, and for many years 
this has been put in confined disposal facilities, which cost millions 
of dollars, and largely it's runoff from the land. One of the problems 
is that it goes into the rivers and then ultimately, sometimes it picks 
up some other stuff along the way. And the question always was, could 
you use it back on the field again, as a complement.
    Well, it took us a decade, if you can believe this, to get 
the Army Corps of Engineers to actually have it tested, and we 
did that through the Vicksburg facility. It has now been 
tested, at least the material from our area, and they've done 
testing in New York. There's one other place, I don't remember 
where it is. But the material in our area is very reusable, and 
they are now working to try to get companies like Scotts. I 
guess they've been up there and they're very interested. But I 
think that this is a business that USDA really has helped to 
spawn with the Army Corps. And in looking at ventures, I would 
just encourage you to look at this because it's going to be an 
additive to something, and there's a lot of it. It's being 
produced every year, and we've got all these CDFs that we have 
to mine and get the stuff out of, and so I wanted to mention 
that. And I believe there's an interim reporting period coming 
up with USDA and the Corps. I don't have the exact date, but I 
know the research itself is being done down there in Vicksburg, 
and I know you have your connections there. But looking at the 
whole band of the Great Lakes, all the way from Duluth all the 
way out to the St. Lawrence Seaway. I mean you have just a 
tremendous volume of material there that has plenty of 
applications. So, I just throw that out for what it's worth.

                      Agricultural Waste Materials

    And, also, in the area of agricultural waste materials, we 
have had a discussion about poultry waste and livestock waste, 
the last farm bill. To what extent are any of your--I saw the 
composting project, which I know we've been very interested in. 
But to what extent are you really getting into this reuse of 
animal waste materials, without totally destroying the organic 
in them. Removing the heavy metals, removing other stuff that 
might be in there. Do any of your projects deal with that?
    Mr. Armstrong. We have a project in California, Bio 
Recycling Technologies, Inc. We have over a million dollars in 
BTI, and we have also helped attract about $6 to 7 million from 
private investors. We've actually been part of their due 
diligence. BTI takes dairy manure and processes it through a 
patented process and they produce 3 things. They produce a 
liquid fertilizer for use back in the fields for high-value 
crops, vegetables and fruits. They produce a growing medium 
that they sell to wholesale growers. And then they also produce 
enough methane to generate electricity to run their plant, plus 
sell to the grid. BTI is now being looked at by some larger 
companies, possibly for purchase and taking the technology to 
North Carolina and to Iowa to help address the swine problems 
there.
    And on the plant side, straw is really the biggest ag. 
waste product we've got, and a lot of states are beginning to 
prohibit the burning of that straw, and we have quite a few 
strawboard-based projects. There's one in Texas, in particular, 
AgriCorp, that we're very keen on that we see as part of our 
core investments, where they're manufacturing walls for 
interior construction. The inside of those walls is nothing 
more than straw. And, in fact, during the processing, you would 
think that maybe there would be a fire problem with this, but 
it is so tightly compressed, it drives out the oxygen. This 
actually has a better fire rating than a normal wall does. So, 
the ag. waste side, and probably, without going through all of 
my portfolio, but off the top of my head, that's probably a 
third of our portfolio, as opposed to new fiber crops or new 
seed oil crops, or something of that sort.

                   North America Free Trade Agreement

    Ms. Kaptur. And, finally, Madame Secretary, on NAFTA, we 
know that the majority of job loss has been in the rural 
countryside across our nation, and it has been significant. We 
just came back from a trip to Georgia, in fact, going through a 
lot of the towns there. I'm wondering if you could highlight 
some of the Rural Development activities to try to address the 
job loss that is occurring in the rural areas that are related 
to NAFTA. I know that we always hear about the job creation 
with the exports, but even on the agricultural side, there is 
significant fallout.
    Do you, for instance, if a textile plant closes in south 
Georgia, or an apparel plant and it's in a rural area, do you 
consider that within your jurisdiction, or is that the 
Department of Commerce?

                           EZ/EC Communities

    Ms. Thompson. Oh, no, if it's in a rural community it's 
certainly within our jurisdiction and we have an Office of 
Community Development that administers the EZ/EC, Empowerment 
Zone/Enterprise Community, initiate, as well as other community 
development initiatives, and the Office of Community 
Development works with all of the agencies, but in particular 
has worked with the Rural Business Cooperative Service and 
Dayton can actually relate to you the specific areas where we 
have become involved and been able to bring to the table a 
resource to partner with a resource in the local community to 
help when there has been job loss, whether it's due to a 
factory closing and moving across the border into Mexico or for 
some other reason. And we've actually been quite successful, 
but Dayton may want to----
    Ms. Kaptur. May I ask, before he begins, Madame Secretary, 
could you----
    Ms. Thompson. I've just had--It just came to me. Four towns 
in Georgia, in fact, have had special assistance as a result of 
job loss that we believe is due to the North American Free----
    Ms. Kaptur. Is it incumbent that the community contact 
USDA, or does USDA through it's regional offices pay attention 
to where the closures are occurring and contact the community?
    Ms. Thompson. It comes about in a number of ways, but our 
field offices are a, we have a wonderful system where a county 
office or a state office, because of all of the interaction 
with the private sector community in the respective states, 
they get the information as soon as something happens, and they 
call us and let us know. And they being working at the state 
level, but we also work out of the national office as well.

                  Community Adjustment and Investment

    Mr. Watkins. Mr. Chairman and Congresswoman Kaptur, this 
gives me an opportunity. Thank you for the questions because it 
was a question that the chairman asked me earlier. It gives me 
an opportunity to get a second bite at this apple. Rural 
Business through the Department, through Rural Development and 
the Department of Agriculture, is in, we have a memorandum of 
agreement with the Department of Treasury to administer the 
Community Adjustment and Investment Loan Program, which targets 
communities that have lost jobs because of NAFTA or that the 
plants that were formally there just closed because they 
couldn't compete or the owners felt that there was greater 
economic return for them by relocating somewhere else. Through 
this program, year to date for Fiscal Year 1998, we have 
already processed approximately 11 loans at $8.5 million to new 
businesses that are either locating communities that have been 
adversely impacted where they're bringing jobs back, or 
businesses that are still located there that are expanding.
    Also part of that memorandum of agreement is the U.S. Small 
Business Administration that focuses on the urban side. Our 
responsibility is to focus exclusively on the rural side. Also 
through the Empowerment Zone/Enterprise Community Program, 
there are set-asides in our program for the business and 
industry and loan, the housing, the intermediary relenting, the 
RBEG, where business people and entrepreneurs who are locating 
in the designated communities, or what we consider to be 
champion communities, get access to a pool of funds that are 
set aside exclusively for them as they expand and develop their 
business opportunities. Some of the communities that are 
impacted, let's say by NAFTA, may in fact be the Empowerment 
Zone/Enterprise Community as well.
    Ms. Kaptur. Thank you. Thank you, Mr. Chairman.
    Mr. Skeen. Mr. Walsh.

                           telecommunications

    Mr. Walsh. Thank you, Mr. Chairman. I'd like to ask a 
couple more questions on the utility side, this time on 
telecom, if I may. Looking through your notes, obviously, and 
when I first came onto this committee, I asked a lot of 
questions about rural utilities in the Rural Electrification 
title. Obviously that's not the focus that it once was. The 
focus now seems to be, at least one would think it would be on 
telecommunication because of the changes in technology and the 
emphasis on some of the new technologies like distance 
learning, telemedicine, and internet access. Those are the 
sexy, exciting things that happening in telecommunications 
today. What I'm wondering about is, as I see it, on page 3 and 
4, you've said, we've got about $10 million in budget authority 
in telecommunications budget for direct loans, treasury rate 
loans and rural telephone bank loans, and another $15 million 
for distance learning and telemedicine. So about $25 million in 
budget authority, is that right? Obviously, that's just a drop 
in the bucket. Is there anything else in telecom that I'm not 
seeing in terms of subsidy for telecommunications, public 
utilities or co-operatives or whatever they are? That's it.
    Ms. Thompson. Well, first of all, I do want to make the 
distinction between the request for the telecommunication loans 
and the distance learning/telemedicine grants because the 
budget authority for the loans results in a much higher level 
of program.
    Mr. Walsh. Certainly, just as it was with the other loans 
we talked about. I'm talking about our commitment, Federal 
dollars, budget authority, for this year is about $25 million.
    Ms. Thompson. That is correct. We have in the past 
supplemented with Fund for Rural America funds to the tune of 
about $6 million, I think.
    Mr. Walsh. Okay.
    Ms. Thompson. But obviously that's not a request in this 
budget.
    Mr. Walsh. Okay, did you want to add something to that, Mr. 
Beyer.

                               leveraging

    Mr. Beyer. Well, the other thing, congressman, I would add 
is that the telecommunications, the Telecom Program, we have 
about a 4 to 1 leveraging in that program.
    Mr. Walsh. Right.
    Mr. Beyer. So, for every Federal loan dollar, an additional 
$4 loan dollars are going out.
    Mr. Walsh. I understand. So it's leveraging substantial 
dollars.
    Mr. Beyer. Leveraging substantial dollars.
    Mr. Walsh. Even if you leverage 4 to 1, at $25 million 
you're $100 million. That's a lot of money----
    Mr. Beyer. Well, $25 million is the budget authority. The 
loan levels are $50, $300.
    Mr. Walsh. No, okay, you're right. You're right. Even, even 
at that, you're talking $50 and $300, $350, $450, $525, and 
another $150 on telemedicine, you're still talking less than $1 
billion in physical plant construction.
    Mr. Beyer. Right.
    Mr. Walsh. The Vice President----
    Ms. Thompson. Being financed through us.
    Mr. Walsh. Right.
    Ms. Thompson. There's certainly private----
    Mr. Walsh. There's certainly private--okay, right. The 
point that I'm getting at, and I'm slowly getting there, is the 
Vice President said, this country cannot afford a digital 
divide between those who have access to the benefits of the 
information superhighway and those who do not.
    No one is going to argue with that. But the facts are that 
investing large sums of money in new technologies in rural 
areas for telecommunications is not profitable, unless you can 
tell me otherwise, and I hope you can.
    Mr. Beyer. Well, if you wouldn't mind, let me back up a 
little bit. We have about 1,000 borrowers, 70% of those are 
private mom and pop-level of corporations, because they serve 
in rural areas, 30 percent are co-operatives. Okay?
    Mr. Walsh. What percent of the public telecommunications 
network would they represent?
    Mr. Beyer. Well the network is about $200 billion network, 
and they're like 10 percent, something like that.
    Mr. Walsh. Ten percent.
    Mr. Beyer. Yes. It's a small part. It's like, you know, 80 
percent of the land mass and 25 million people, is about what 
it is.
    Mr. Walsh. You're saying $200 billion physical plant?
    Mr. Beyer. No, annual.
    Mr. Walsh. The physical plant is obviously bigger.
    Mr. Beyer. Oh, yes, bigger. I don't know what the physical 
plant is, but it's bigger.
    The point is, over the years, the rural borrowers have been 
investing at a greater rate in high tech fiber optics digital 
equipment than some of the RBOC, for example, in Mr. Chairman's 
area. They have----
    Mr. Walsh. In his rural area?
    Mr. Beyer. Yes, yes, sir.
    Mr. Skeen. That's the whole state. [Laughter.]
    Mr. Beyer. That's the whole state. It's kind of off to the 
right of the Great Plains looking south, right.
    Mr. Walsh. It's safe to say that whoever has telecom is 
investing in urban areas where the traffic is high, the profit 
is high, and so on, and whoever has rural areas is finding it 
not be as profitable.
    Mr. Beyer. Right.
    Mr. Walsh. Publicly owned or privately owned.
    Mr. Beyer. As the industry changes to a profit center 
industry, the big guys in the business are not going to be 
there. In fact, they've sold. There are about 400 rural 
telephone exchanges that have been sold in the last 3 years, 
and these rural borrowers are picking it up. That's going to be 
part of the dilemma. The other thing that's happening----
    Mr. Walsh. Let me just tell you where I'm trying go here. 
We made some calls, the organization made some calls on 
technologies in public utilities. Obviously, there's a $1.6 
billion in uncollectible. Recently, there's more than that out 
there. And you're going to be asked, I'd suspect, to make some 
calls on investing in these telecommunications physical plants. 
Now who is to say that they shouldn't scrap the land line 
system and put in wireless? Who's to say they shouldn't go 
broadband cable? Who's to say they shouldn't invest in the new 
satellite technologies that'll be up there in 15 or 20 years? 
Who's going to make those calls, and who's going to pay for the 
bad guesses?
    Mr. Beyer. Well, as the technologies advances, the market 
is going to drive a lot of this stuff. When we go into a 
market----
    Mr. Walsh. But the Government is different from the market.
    Mr. Beyer. Right. The Government is focused more on the 
value rather than the price and the cost things, really, value 
of quality infrastructure in middle America. And it is just 
going to be an evolution. Let me tell you, 2 of the things that 
we're concerned about in our loan security issues now, in 
making loans. In fact, our loans down because the borrowers are 
being cautious because FCC is make some major, major rules 
that's going to impact revenue and impact competition. Two of 
the issues we have are secured areas, certified areas. Public 
Service Commissions are going to issue more than one 
certification for certified areas.
    Mr. Walsh. What's a certified area?
    Mr. Beyer. A certified area is an area where only you can 
serve. They certify you to serve and no one else.
    Mr. Walsh. A regulated monopoly.
    Mr. Beyer. Yes, it's regulated. And that's all breaking 
down. Now public service commission can go in and issue more 
than one certification, that's one issue. Another issue is this 
huge $20 billion universal service pool mechanism that's in the 
telecom industry. The majority of that is toll separation where 
the long distance guys use the infrastructure of the small guys 
down to the consumer, to the subscriber, and they pay for that, 
and it's a big toll separation, a lot of revenue.
    Mr. Walsh. User fees.
    Mr. Beyer. Something like that. The other part of that is a 
high cost to serve piece that NEPA administers. That's about 
$700, $800 million, I guess. The point is, on the average of 
our 1,000 borrowers, 65 percent of their revenue comes from 
that mechanism.
    Mr. Walsh. It doesn't come from the subscribers?
    Mr. Beyer. No. The subscribers have a relatively low 
service charge and the rest of it's supported by that 
particular mechanism.
    Mr. Walsh. If and when AT&T and the Bell operating 
companies duke it out, and AT&T gets into the local end, if 
they do, and the others get into the long distance end, which 
they will, some of that is going to go away, is it not?
    Mr. Beyer. Well, the FCC is re-juggling that pot, number 
one. And the bug guys are saying, we don't want to send that 
much money back to the little guys anymore. And the RBOCs say, 
you know, they want to get into long distance. This is a huge 
rhubarb going on right at FCC right now, and it's a volatile, 
volatile time in the infrastructure.
    And to get to your question: When are we going to go to 
wireless? That's the other issue looming out there. When are we 
going to go to wireless and really jeopardize those rural 
areas.
    Mr. Walsh. You've got a lot invested in that physical plant 
out there, and if you just abandon it, that becomes 
uncollectible.
    Mr. Beyer. Exactly. Now one of the pluses is the 
telecommunication borrowers have a lot of equity. They have had 
a lot of that $20 billion revenue going back into their 
systems, and right now they're in not-too-bad shape, with the 
exception of some of them that are really, really poor.
    Mr. Walsh. These are your----
    Mr. Beyer. These are our borrowers.
    Mr. Walsh. Borrowers?
    Mr. Beyer. Correct. They're in much better shape than the 
electric portfolio, no question about it.
    These are some of the real issues that we struggle with as 
an agency in our loan--we're reforming our loan processes right 
now. And, you know, we wait for the FCC to do something, and 
then somebody sues them, and it's a very volatile time. We're 
working daily on this issue.
    Mr. Walsh. I guess at the end of this line of questions is, 
if it's not profitable for local telephone companies, either 
mom-and-pop operations or cooperatives or public utilities, is 
that profitable for them to invest in these new technologies? 
We're only going to spend $25 million a year to support that 
activity. You're never going to get to where Vice President 
Gore and everybody else wants us to be.
    Mr. Beyer. Well, there's another mechanism now that's 
coming out of FCC, and it's called the education credit.
    Mr. Walsh. But those totals are libraries, right?
    Mr. Beyer. That's schools, libraries, and rural medicine. 
It complements our distance learning telemedicine program 
really, because with this program now, they're going to be able 
to get some credits, some refunds, on the difference between 
what it cost to serve in urban areas versus what it cost in 
rural areas. So there are some other financial assistance here 
that's generated from within infrastructure that's going to 
help.
    Ms. Thompson. And, Congressman, regarding telemedicine and 
distance learning programs, specific programs, there are 
programs in other departments as well: the Department of 
Education, and EDA has some.
    Mr. Walsh. I understand that, and we've actually worked 
with some of those other departments in my district on 
precisely these things, but the problem is that, as big and as 
powerful and as strong and as rich as this country is, and the 
Government is, you're talking about 80 percent of physical 
plant without any major investment in new technology to get us 
to that point, and if it's not profitable to those industries, 
then it isn't going to happen nearly as fast as it needs to 
happen. I don't know what the answer is.
    Mr. Beyer. Well, that's very true. You've got your finger 
on a real major, major problem, because if there's no profit 
center, it's not profitable, obviously, nobody's going to 
invest in it. So then there needs to be a Federal policy that 
is going to provide some assistance to ensure that we don't end 
up with a digital haves and digital have-nots in this country 
going into the future.
    Mr. Walsh. The Communications Act of 1934, which made 
telecom ubiquitous----
    Mr. Beyer. Exactly.
    Mr. Walsh. [continuing]. But it provides for regulated 
monopolies throughout the country----
    Mr. Beyer. Correct.
    Mr. Walsh. [continuing]. And we're going the other way on 
that.
    Mr. Beyer. Exactly right. This is a huge--this is a very 
exciting time really. We're going through some major revolution 
in both of these infrastructures, and the telecom is on a 
little leading edge because Congress passed the law a few years 
ago.
    Mr. Walsh. Yes. The utilities are now going through the 
deregulation that telecom went through for----
    Mr. Beyer. Just beginning, yes, sir.
    The other thing that I would offer you is the rural systems 
as a whole are not in bad shape. They're not starting from 
ground zero, where they have party lines. Most of the system 
has capabilities of serving some of this stuff. So we're not 
starting from ground zero.
    Mr. Walsh. Okay, thank you very much. Thank you, Mr. 
Chairman.
    Mr. Skeen. We appreciate all of you. This discussion brings 
back to mind what happened to me when I first came up. I come 
from a very rural area, and I'm the last person in the Congress 
of the United States to get a phone. We got our electricity, 
but those systems really work.
    But I had a seat partner on Science and Tech, a committee I 
was on, who's now a U.S. Senator, and I'll not mention his 
name----[Laughter.]
    So it was a northeastern State, and he's a good skier. I 
told him I've got one of the southernmost ski areas in the 
United States, Sierra Blanca, and so he says, ``Well, where do 
you live?''
    I said, ``Well, I live on a ranch seven miles south of the 
interstate highway.''
    He said, ``There's no place in the United States that's 
seven miles off of an interstate highway.''
    And ours is an unpaved road. I said, ``It's off of paved 
road.''
    And he says, ``There's no place on Earth or in the United 
States that's seven miles away from a paved road.'' [Laughter.]
    I said, ``Come on down, friend, and bring your skis and 
we'll let you mud-ski part of the way.'' [Laughter.]
    Right now, subject to the questions that you were asking, 
they're going through a terrible situation on electrical 
generating areas.
    Mr. Beyer. Yes, sir.
    Mr. Skeen. There's a total realignment throughout the 
United States because it has not been entirely profitable, and 
the technology is changing. You put your finger on it; it's a 
very good question: What does the technology do?
    Now who's running around here with a telephone? There's one 
in every pocket. [Laughter.]
    There's the greatest new technology in the whole world. 
Mother now can find you anywhere. [Laughter.]
    Mr. Beyer. And, Mr. Chairman, we're only beginning really. 
This thing is really going to explode.
    Mr. Skeen. That's right. We've just barely touched the 
surface of this thing.
    Thank you for your testimony, and thank you for the work 
that you do, and thank you for being the kind of people that 
are responsible for a tremendous amount of the effort that goes 
into this country and makes it work.
    Ms. Thompson. Thank you. Thank you very much, Mr. Chairman.
    Mr. Skeen. We appreciate it. Thank you all very much.
    We're adjourned.
    [Clerk's note.--The following questions were submitted to 
be answered for the record.]

                           Rural Development

                Empowerment Zones/Enterprise Communities

    Mr. Skeen. Please list all the specifically targeted areas 
such as Empowerment Zones/Enterprise Communities and Colonias 
which your programs serve and the states where they are 
located.
    Respondent. A total of 24 states have either an Empowerment 
Zone or Enterprise Community. In Round I of the program, 3 
Empowerment Zones and 30 Enterprise Communities were 
designated. The Rio Grande Valley Empowerment Zone in Texas 
does represent Colonias areas, but the Office of Community 
Development does not have a specific initiative for colonias 
communities. During the past year however, we have also created 
a number of Regional Initiatives--The Southwest Border Regional 
Initiative, the Mississippi Delta Regional Initiative and for 
Round II of EZ/EC we plan to accelerate our work on the Rural 
Economic Area Partnership Initiative which concentrates on out-
migration problems. A map is submitted for the record which 
pinpoints location of all Rural EZ/EC's.

    [The information follows:]

[Page 38--The official Committee record contains additional material here.]


                carryover for rural development programs
    Mr. Skeen. Please provide a chart showing the carryover for each 
program in RDS at the end of fiscal year 1997. Please also show 
programs for which funding authority expired at the end of the year.
    Respondent. The General provision--section 706 of the FY 1997 
Appropriations Act, provides that ``no part of any appropriation 
contained in this Act shall remain available for obligation beyond the 
current fiscal year unless expressly so provided herein''. Essentially, 
every program other than the ones I will detail for the record will 
have expired funding authority.
    [The information follows:]

Fiscal year 1997 carryonver for rural development programs

                                       Budget authority carryover amount
Loan Programs:
    Sec. 502 Single family housing loans, natural 
      disaster..........................................      $3,306,046
    Sec. 504 Direct housing repair loans, natural 
      disaster..........................................       1,203,143
    Sec. 515 Direct new construction loans..............         751,240
    Rural water and waste disposal loans................         256,354
    Rural water and waste disposal loans, natural 
      disaster..........................................          46,940
    Rural community facility guaranteed loans...........           9,352
    Distance learning and medical link loans............       1,530,000
    Business and industry guaranteed loans..............             431
    Business and industry NADBank guaranteed loans......          10,144
Grant Programs:
    Sec. 504 Very low-income housing repair grants......          53,403
    Sec. 504 Very low-income housing repair grants, 
      natural disaster..................................             402
    Sec. 523 Mutual and self-held housing grants........         113,594
    Sec. 516 Rural housing for domestic farm labor grant          19,966
    Sec. 509 Compensation for construction defects grant       1,587,082
    Sec. 525/509 Supervisory and technical assistance 
      grants............................................         809,334
    Sec. 533 Rural housing preservation grant...........               1
    Sec. 521 Rental assistance program new construction.       3,835,440
    Rural community fire protection grant...............          10,290
    Rural water and waste disposal grants...............       3,931,688
    Rural water and waste disposal grants, natural 
      disaster (No year.)...............................          91,700
    Rural water and waste disposal grants, FY 97/98 
      natural disaster..................................         586,700
    Solid waste management grants.......................          44,720
    Emergency community water assistance grants, natural 
      disaster..........................................          33,960
    Distance learning and medical link grants...........       7,479,260
    Rural economic development grants...................      19,844,388

    Note.--The FY 1997 amount available for distance learning and 
medical link loans and grants was used in early FY 1998 for 
applications received under the FY 1997 window.
           definition of rural for rural development programs
    Mr. Skeen.  Please provide the definition of ``rural'' in terms of 
eligibility for your programs.
    Respondent. The requested information is as follows:
    Rural is generally defined in the 1996 Farm Bill as a city, town, 
or unincorporated areas that has a population of 50,000 inhabitants or 
less, other than an urbanized area immediately adjacent to acity, town 
or unincorporated are that has a population in excess of 50,000 
inhabitants. The 1996 Farm Bill also provides that the highest priority 
will be given to communities with the lowest populations and lowest per 
capita incomes. However, the Act provided for other definitions for 
specific programs, such as: Water and Waste Disposal loan and grants--
the terms rural and rural areas mean a city, town or unincorporated 
area that has a population of no more than 10,000 inhabitants.
    For the Housing loan and grant programs the definition for rural 
for the housing programs is found in section 520 of the Housing Act of 
1949, as amended, 42 U.S.C. 1490, which states that the terms rural and 
rural area mean any open country, or any place, town, village, or city 
which is not part of or associated with an urban area and which (1) has 
a population not in excess of 2,500 inhabitants, or (2) has a 
population not in excess of 2,500 but not in excess of 10,000 if it is 
rural in character or (3) has a population in excess of 10,000 but not 
in excess of 20,000, and (A) is not contained within a standard 
metropolitan statistical area, and (B) has a serious lack of mortgage 
credit of lower and moderate income families.
    For the intermediary relending program the definition of rural area 
is a city or town with a population not in excess of 25,000.
                       rural development councils
    Mr. Skeen. What are the Rural Development Councils? What do they do 
and what is their budget for fiscal years 1998 and 1999?
    Respondent. Mr. Chairman, the Rural Development Councils are 
informal organizations within 39 States composed of representatives 
from Federal agencies within the State, State Government, local 
government, tribal organizations and others, including the private 
sector, with an interest in rural development issues with their state. 
The Councils were formed to provide a forum to discuss rural 
development problems and issues within the state and, where possible, 
develop a solution to the problems or issues. The Councils began as a 
pilot project with five states during the Bush Administration and 
presently there are Councils within 39 states. Other states have 
expressed interest in forming Councils.
    There is no set budget for the Councils. Generally the Federal 
government has contributed 75% of the cost of the Councils with the 
States contributing 25% either in cash, in-kind match or a combination 
of the two, In 1998 USDA is committing $1.8 million to Council support 
and expects to receive contributions from other Federal Departments and 
Agencies as well. USDA also provides staff and administration support 
for the Councils at headquarters. No decision has been made for FY 
1999.
    Mr. Skeen. From what part of your budget does funding for Rural 
Development Councils come?
    Respondent. The Council support comes from the Salaries and Expense 
budget.
                         write-offs and losses
    Mr. Skeen. Please update the table on pp. 45-47 of last year's 
hearing record showing the latest information on defaults for all loan 
programs from fiscal year 1998.
    [The information follows;]

[Pages 41 - 44--The official Committee record contains additional material here.]


                             staffing ratio
    Mr. Skeen. Please provide a staffing ratio showing the number of 
supervisors to employees in Rural Development
    Respondent. Mr. Chairman, there is one supervisor for every 8.5 
employees in RD.
                 rural utilities service loan programs
    Mr. Skeen. What is the status of your efforts to prevent RUS loans 
from competing with the private sector as reported by the Inspector 
General last year?
    Respondent. The field task force RUS established in response to the 
Office of Inspector General's (OIG) report has completed its work. The 
task force reviewed the audit findings and RUS' requirements governing 
credit available through the private sector. The task force met with 
three lenders, including two of those OIG consulted when conducting the 
audit. Based upon its review of the audit findings, discussions with 
the lenders, and its review of current procedures, task force members 
concluded that basic RUS requirements are adequate. However, we believe 
that increasing the focus on consistent and thorough implementation of 
those requirements will help ensure that private sector sources of 
credit are given the maximum possible opportunity to finance projects 
for which RUS receives applications.
    A Staff Instruction relating to other credit was developed by the 
task force and sent to the field staff in December of this past year. 
The Staff Instruction emphasizes increased efforts to identify all 
possible sources of commercial credit and improved documentation on 
other credit sources in State Office files. It requires the referral of 
applicants to other lenders unless they clearly would not meet the 
minimum requirements of the other lenders that have provided 
information on their lending policies to RUS. Applicants who are 
referred will have to submit meaningful documentation of their attempts 
to obtain financing. We believe this will result in lenders being 
contacted only by applicants for loans that they would seriously 
consider, and insure that interested private lenders have an 
opportunity to participate.
    The Water and Waste Program is committed to avoiding competition 
with private sector sources of credit. We recognize that it is 
particularly important that RUS refer applicants to private sector 
sources whenever they appear to qualify for financing from such sources 
so that we may continue to focus our resources on those groups who are 
unable to obtain water and waste financing from any other sources at 
reasonable rates and terms.
    Mr. Skeen. What is the status of the $44,500 mentioned in the IG 
report last year? Was the management company involved in the rental 
housing projects debarred
    Respondent. The owner and identity of interest management company 
appealed RHS's actions to collect the funds and seek debarment. RHS's 
actions were upheld, however, the amount of $44,500 was reduced to 
$35,422 through negotiations. The owner has since filed a civil suit 
against RHS to stop these actions from taking place. The collection and 
debarment are on hold pending the outcome of the suit.
                      voluntary separation program
    Mr. Skeen. How many people have taken advantage of the voluntary 
separation program and what has been the cost so far?
    Respondent. The information for FY 1998 and FY 1999 follows.

[Pages 46 - 47--The official Committee record contains additional material here.]


                     non-agricultural cooperatives

    Mr. Skeen. What happened to the proposed legislation to 
allow the delivery of assistance to non-agricultural 
cooperatives?
    Respondent. The Department forwarded the legislation to the 
leadership of the House and Senate Agriculture Committee for 
consideration and possible introduction. While the proposed 
legislation has not yet been introduced in the House, the 
Ranking Member of the Senate Agriculture Committee introduced a 
modified version of the legislation last year. A copy of the 
letter transmitting the proposal to the Speaker of the House is 
provided for the record.
    [The information follows.]

[Pages 49 - 51--The official Committee record contains additional material here.]


    Mr. Skeen. In your home state of Indiana and in most of the 
districts represented on this Subcommittee, there are small towns of a 
few hundred people or less. They may not have a mayor or town council. 
They probably aren't connected to any network of government assistance. 
They may have urgent need for assistance in housing or utilities or 
economic development. How can these communities learn about and benefit 
from your programs?
    Respondent. Each of our State Offices has compiled a directory of 
the programs and services offered by USDA Rural Development. 
Communities can obtain a copy by calling the State office. We also 
offer an extensive site on the World Wide Web, which provides 
information about our programs. The address is http://
www.rurdev.usda.gov. Each State Rural Development office has a 
Community Development staff available to conduct program outreach and 
provide technical assistance to communities such as the ones you are 
referring to. This assistance can be scheduled by contacting the State 
Director.
                   rural community assistance program
    Mr. Skeen. Why does USDA propose to eliminate the earmark in the 
RCAP for technical assistance for rural transportation?
    Respondent. The policy of the Administration is to eliminate all 
earmarks that do not have specific statute requiring an earmark in the 
appropriation language or those that are not included in specific 
policy initiatives.
                environmental resources fund for america
    Mr. Skeen. What is the Environmental Resources Fund for America? 
Which government organizations participate? How is it funded? What is 
USDA's role?
    Respondent. The Environmental Resources Fund for America is simply 
a budget presentation of the key environmental programs in the Federal 
government. The presentation makes it easier for the public to view all 
of the key programs in one section of the budget rather than scattered 
throughout the budget as has been done in the past. Departments and 
agencies listed include the Environmental Protection Agency, USDA, 
Department of Interior, Department of Defense, Department of Commerce 
and the Department of Transportation. I understand that some of the 
initiatives are to be funded through the renewal of the taxes that 
support the Superfund program. USDA has several programs that are 
listed under the Fund, including the Rural Development water and waste 
disposal loan and grant programs, the Forest Service Operating Program, 
the Natural Resource Conservation Service Operating Program, the 
Environmental Quality Incentives Program, the Wetlands Reserve Program 
and the Conservation Reserve Program.
                             subsidy rates
    Mr. Skeen. Why are the subsidy rates higher for the next fiscal 
year?
    Respondent. The reason for the increase in subsidy rates is 
attributable to a change in the methodology used in calculating the 
rates enacted in the Balanced Budget Act of 1997. The Act requires the 
Treasury discount rate be the same for all cash flows regardless of 
whether the loan is disbursed in the budget year or in subsequent 
years. Prior to this change the subsidy rate could be different, 
reflecting OMB economic assumptions for the out years, for each loan 
disbursement year. This change is an attempt to correct the problem of 
widely fluctuating rates we have experienced in the past, with the 
decrease in the single family direct loan level from $10 billion to 
$570 million being the most notable example.
    Most of Rural Development's loan programs have very low 
disbursement rates in the initial year and increase each year through 
year three and then tapers off. For example, in the FY 1998 assumptions 
the Treasury discount rate declined from 6.16% in the initial year to 
5.76%, 5.48%, 5.29%, and 5.24%. The assumption for FY 1999 is 6.11% 
regardless of the year of disbursement. The effect is to increase the 
subsidy rates.
    Mr. Skeen. Subsidy rates for the rural utility programs have more 
than doubled from fiscal year 1998 while subsidy rates for the housing 
loans are estimated to change much less. Why is this?
    Respondent. The difference is due to the rate at which the loan 
funds are disbursed. Most of the housing programs disburse the majority 
of the funds in the budget year which means they benefit from the 
estimated decrease in interest rates from 1998 to 1999. However, most 
of the loan funds in the utility programs are disbursed in the second 
and third years which means that interest rates assumed for those years 
in fixed at the same rate assumed for the budget year. Even though the 
interest rate for the budget year is less than it was a year ago and 
the subsidy rate for the initial year is less, the composite subsidy 
rate over the period of loan disbursement is higher because the 
interest rate is now fixed over that period.
                          technical assistance
    Mr. Skeen. Please describe the kind of technical assistance and 
training for targeted communities as proposed on page 22-17 of the 
budget justification.
    Respondent. The technical assistance and training provided to 
communities involves on-site work and one-on-one work with community 
leaders, system owners and operators, and rural residents to solve 
particular problems or needs at each project site. The training brings 
together operators, owners, boards of directors, and community leaders 
for on-site training to address shared needs.
                   cooperative stock purchase program
    Mr. Skeen. How does the Cooperative Stock Purchase Program work and 
what is the level of activity so far?
    Respondent. This program is based upon Business and Industry 
Guaranteed Loans made for the purchase of startup cooperative stock for 
family-sized farms where commodities are produced to be processed by 
the cooperative.
    There have been several requests for information and some actual 
application activity. The following are examples:
    Northern Plains Premium Beef was a proposed beef processing and 
marketing cooperative whose members were beef ranchers in seven north 
central states surrounding the Dakotas. The Agency had approved a 
$100,000 loan to one of the cooperative's members; however, the 
cooperative withdrew its proposal when the stock drive fell short of 
the minimum level of projected stock participation. We have heard that 
the cooperative is considering a smaller proposal in perhaps just one 
or two States.
    U.S. Premium Beef was also a proposed beef processing and marketing 
cooperative whose members were both beef ranchers and feedlot 
operators. The cooperative depended heavily on the participation of its 
feedlot operators which do not qualify as family-sized farm. The Agency 
definition of family sized is based upon the borrower providing the 
management and labor necessary to operate the business as well as 
producing agricultural commodities with sufficient income to be 
sustainable and is further limited to a B&I Guaranteed Loan of not more 
than $400,000. Once this determination was given to the cooperative no 
further activity has been noticed.
    There are several other general inquiries or preapplications in 
Minnesota, Georgia, and Iowa which have not yet materialized into full 
applications. These include proposals involving ethanol production, 
pork, poultry, and grain.
                  rural development program monitoring
    Mr. Skeen. How does Rural Development monitor its programs for 
waste, fraud and abuse?
    Respondent. In response to how Rural Development monitors its 
programs for waste, fraud and abuse, the Senior Management Control 
Council (MCC) has established a five year management control review 
(MCR) plan beginning in FY 1998. The plan contains the assessable units 
(program and administrative) within Rural Development with assigned 
risk levels and proposed schedule for review. Each assessable unit will 
have management control reviews conducted from the highest operational 
level to the lowest level to provide a comprehensive report of the 
assessable unit being reviewed.
    Prior to FY 1998, Coordinated Assessment Reviews (CARs) and 
National Internal Reviews (NIRs) were conducted by National Office. The 
CARs and NIRs were reviews of field office operations (program and 
administrative) at the State Office and below. The CARs were conducted 
in all states on a three year cycle from FY 1987 through Fy 1994, and 
the NIRs were conducted on a five year cycle from FY 1995 through FY 
1996. Weaknesses identified during these reviews were tracked and 
follow-up actions monitored until all corrective actions were taken to 
close the reports.
    At the State Office level, the states are required to conduct State 
Internal Reviews (SIRs) which are comprehensive reviews of all field 
office operations below the State Office, and centralized program 
functions. The SIRs are conducted by the State Office on a five year 
schedule.
    In addition, various program evaluations are conducted by National 
Office staff independent of the formal Rural Development five year MCR 
plan. The Financial Management Division (FMD) conducts reviews in State 
Offices of their management control program and audit activity. Several 
other program areas conduct their own program evaluations, such as 
Business Programs, Multi-Family Housing, Single Family Housing, 
Community Programs, etc.
              supervisory and technical assistance program
    Mr. Skeen. USDA is not requesting funding for Supervisory and 
Technical Assistance. Is there money in this account and how is it 
being used?
    Respondent. Supervisory and Technical Assistance Grants are funded 
from a carryover appropriation. This appropriation has now been 
combined with Section 509 Housing Application Packaging Grants. The 
carryover balance for fiscal year 1998 was $809,333.99 and is split for 
the two programs, $507,500 for Housing Application Packaging Grants and 
$301,833.99 for 525 Supervisory and Technical Assistance Grants.
                rural housing preservation grant program
    Mr. Skeen. On page 24-35 of the budget justification USDA states 
that demand for rural housing preservation grants ``far outstrips the 
existing funds.'' If that is the case, then why is there a decrease in 
the request?
    Respondent. The Administration had to make the necessary decisions 
to submit a balanced budget request while distributing our funding 
request in an equitable fashion. Because there is a large backlog and 
demand for the housing programs, we believe this request balances the 
need with the appropriate levels.
                 compensation for construction defects
    Mr. Skeen. Is the $495,000 available for compensation for 
construction defects shown on page 24-38 of the budget justification 
available for other uses in fiscal year 1999?
    Respondent. The $495,000 is available for all programs in the Rural 
Housing Assistance Grant account.
                             fte reduction
    Mr. Skeen. What FTE reductions in the Rural Housing Service are 
projected for fiscal year 1999 from the previous fiscal year?
    Respondent. All of the FTE reductions for Rural Development 
reflected in the FY 1999 budget are a result of the Department's 
Streamlining Plan originally released in 1994.
                    rural development appropriation
    Mr. Skeen. Are any funds appropriated to rural development programs 
being used to support the Assistant to the Secretary for Western 
Affairs in fiscal year 1998? Are any funds in the fiscal year 1999 
request budgeted for this office?
    Respondent. None of the funds appropriated for rural development 
programs or the salaries and expenses for fiscal year 1998 are being 
used to support the Assistant to the Secretary for Western Affairs, nor 
are there any plans to use any funds appropriated to rural development 
for fiscal year 1999 for that position.

                        Rural Utilities Service

                           water 2000 program
    Mr. Skeen. Please explain the Water 2000 program and how it fits in 
with other programs in the rural utilities area.
    Respondent. Water 2000 is the Clinton Administration's initiative 
to improve the availability of quality drinking water in rural America. 
Its goal is to emphasize the use of Federal investment in lower-income 
rural communities with the most serious drinking water quality, 
quantity, and dependability problems. Water 2000 projects consist 
primarily of poverty rate loans that the Rural Utilities Service (RUS) 
makes for water projects and the grants made in conjunction with those 
loans. The initiative is an outgrowth of the recognition that safe, 
affordable water is crucial to the health and well-being of rural 
areas. The emphasis on providing safe and affordable drinking water 
complements the wastewater, electric, and other rural utility programs 
available through RUS.
                        rural utilities programs
    Mr. Skeen. Please describe the differences in municipal rate, 
Treasury rate, five percent and Federal Finance Bank loans. Why are the 
different programs necessary? How do these loan programs compare in 
terms or risk and cost to the taxpayer?
    Respondent. Currently, RUS electric borrowers have three sources of 
financing assistance available to them from RUS. The primary difference 
between the programs is the qualifying criteria and the interest rate 
for each type of financing.
    The five percent (hardship) program is limited legislatively to 
borrowers that meet certain rate disparity thresholds and whose 
consumers fall below certain average per capita and household income 
thresholds. These borrowers may borrow 100 percent of their capital 
requirements from RUS at a fixed interest rate of five percent.
    The municipal interest rate program is available to all electric 
distribution borrowers and to power supply borrowers only to finance 
certain power supply facilities. The interest rate is pegged to 
interest rates available in the municipal bond market for similar 
maturities. Borrowers are required to seek supplemental financing for 
30 percent of their capital requirements under this program. The 
interest rate changes quarterly and borrowers may choose from several 
maturities that will determine the interest rate.
    Federal Financing Bank (FFB) loans are available to all electric 
borrowers. Historically, power supply borrowers with larger capital 
requirements have used this program. The interest rate is the 
prevailing cost of money to Treasury plus one-eighth of 1 percent. 
Under this program, the loan is made by FFB and is guaranteed by RUS. 
The one characteristic of this program that differs from the other two 
is the fact that borrowers must work with both RUS and FFB.
    The Treasury rate program that is being proposed would be available 
to all borrowers and the interest rate would be pegged to prevailing 
Treasury rates for debt instruments of similar maturity. Generally 
speaking, the risk associated with each of these programs would be 
similar; however, the cost for each would be considerably different. 
The 5 percent hardship program would carry the highest cost and the 
proposed Treasury rate and FFB programs would be the least costly.
    In the Telecommunications Loan Program, the Cost of Money loans 
bear interest at a rate equal to the current cost of money to the 
Federal Government--the Treasury rate. Hardship loans bear interest at 
the rate of 5 percent per annum for the duration of the loan. Federal 
Financing Bank loans bear interest at the current cost to the Federal 
Government plus one-eighth of 1 percent. All of the above programs are 
used to make loans to furnish and improve telecommunications service in 
rural areas. Hardship loans, at an interest rate of 5 percent, carry a 
subsidy cost to the Government. Hardship loans are intended for those 
borrowers with high investments in telecommunications plant per 
subscriber per route mile of cable (subscriber density) and for those 
borrowers that cannot afford cost of money or Treasury rate loans.
                         federal financing bank
    Mr. Skeen. What is the Federal Financing Bank and how does it 
operate?
    Respondent. The Federal Financing Bank (FFB) is an instrument of 
the Treasury Department that provides funding in the form of loans for 
various Government lending programs, including the RUS guaranteed 
program. The FFB is subject to the general supervision and direction of 
the Secretary of the Treasury and its functions include the purchase 
and sale of obligations issued, sold, or guaranteed by Federal 
agencies.
    Loans made by FFB and guaranteed by RUS are made under terms and 
conditions that yield a rate of return not less than a rate determined 
by the Secretary of the Treasury--a rate that takes into consideration 
the current average yield on outstanding U.S. marketable obligations 
having a comparable maturity rate (the cost of money to Treasury plus 
one-eighth of 1 percent). While FFB makes the loan, all of the loan 
origination and servicing is done by RUS. RUS guarantees the loan; that 
is, if the borrower is late or does not make a payment, RUS makes the 
payment to Treasury. Because RUS' guarantee is Treasury's security on 
the loan, RUS generally has the benefit of the pledge of all, or 
substantially all, of the borrower's assets.
                 distance learning/medical link program
    . Mr. Skeen. What are the basic criteria for qualifying for 
distance learning/medical link grants and loans?
    Respondents. To be eligible to receive a loan and/or grant under 
the Distance Learning and Telemedicine Program, the applicant must meet 
the following criteria:
    1. Be organized in one of the following corporate structures:
    (a) An incorporated organization, partnership, Indian tribe and 
tribal organization as defined in 25 U.S.C. 450b (b) and (c) or other 
legal entity that operates or will operate a school, college, 
university, learning center, training facility, or other educational 
institution, including a regional educational laboratory, library, 
hospital, medical center, medical clinic or any rural community 
facility.
    (b) A consortium; i.e., a combination or group of eligible entities 
formed to undertake the purposes for which the distance learning and 
telemedicine funding is provided.
    (c) An incorporated organization, partnership, Indian tribe and 
tribal organization as defined in 25 U.S.C. 450 (b) and (c) or other 
legal entity that is providing or proposes to provide telemedicine 
services or distance learning service to other legal entities or 
consortia at rates calculated to ensure that the economic value and 
other benefits of the distance learning or telemedicine grant is passed 
through to such other legal entities or consortia.
    2. At least one of the entities in a partnership or consortium must 
be eligible individually, and the partnership or consortium must 
provide written evidence of its legal capacity to contract with RUS.
    3. A borrower of an electric or telecommunications loan under the 
Rural Electrification Act of 1936 (U.S.C. 901 et seq.) is eligible for 
a cost of money loan only.
    To be an eligible project, an application must be submitted by an 
eligible organization, and must meet these basic criteria:
    1. The project must enhance learning or health care opportunities 
for rural residents.
    2. The applicant must provide at least 30% of the project cost for 
grants, and 10% of the project costs for loans, in cash or other in-
kind matching.
    3. The project must be described in an application, which is 
prepared according to 7 CFR 1703, Subpart D.
    All eligible applications are scored under a process that is 
described in Part 1703, and compete, based on those scores, for 
available funding.
                     cost to rural vs. urban users
    Mr. Skeen. Please update for us the information provided last year 
which describes the differences in cost to the rural users for 
telephone and electric service and the rates urban users have.
    Respondent. The cost of service for rural telecommunications 
providers and subscribers is very different from the cost of service 
for urban telecommunications providers and subscribers. Investment per 
subscriber is significantly higher for rural local exchange carriers 
(LECs) compared to large, urban oriented LECs. As would be expected, 
the number of subscribers per square mile and per route mile of line 
are substantially less for rural LECs. In addition, local service 
revenues--or revenues for basic service--account for only half as much 
of the total revenues for small LECs compared to larger LECs, and are 
only one-quarter of the small LECs total revenue. This requires the 
small LEC to rely heavily on long-distance revenues and the toll 
settlements process, if local service rates are to remain affordable. 
Because of these and other factors, the cost of delivering service and 
the cost paid for the service is very different for rural versus urban 
telecommunications providers. While the average ``basic rate'' for 
telephone service for rural residents may be lower in some states than 
the rate paid by urban subscribers, that average basic rate for rural 
residents does not include other typical rural-oriented costs 
associated with providing service nor reflect the value of service. For 
example, urban subscribers can call tens of thousands of other urban 
subscribers without paying toll charges whereas rural subscribers can 
call an average of only 1,100 local subscribers.
    Studies done over the years indicate that rural electric systems do 
have rate disparity with their urban counterparts. Approximately two-
thirds of the rural electric systems today have higher rates than 
neighboring utilities. The actual disparity varies greatly from case to 
case. The average rural electric system serves approximately six 
consumers per mile while urban systems average about 35 consumers per 
mile. In general, the higher investment per consumer inherent in rural 
systems results in higher rates to the end user.
                              subsidy rate
    Mr. Skeen. Please provide a table showing each of the RUS programs 
and what the OMB subsidy rate is calculated to be for the fiscal year 
1999 budget?
    [The information follows:]

                  RURAL UTILITIES SERVICE SUBSIDY RATES                 
------------------------------------------------------------------------
                                  Rural               Fiscal year       
                                Utilities  --------------------------------
                                   Loan                                 
                                 Programs       1997         1998     1999
-------------------------------------------------------------------- ------
Rural electric loans:                                                   
    Direct...................         5.27         7.46        13.04    
    Treasury.................  ...........  ...........         0.21    
    Municipal................         6.20         4.22         8.76    
    FFB......................         0.93         0.92        -0.38    
Telephone loans:                                                        
    Direct...................         1.59         3.92         9.79    
    Treasury.................         0.02         0.02         0.27    
    FFB......................        -0.07        -0.07        -0.81    
Rural telephone bank loans...         1.32         2.12         2.65    
Distance learning:                                                      
    Treasury.................         1.02         0.02         0.12    
Direct water and waste disp.                                            
 loans.......................         9.02         9.76        16.52    
Guar. water and waste disp.                                             
 loans.......................        -1.09        -1.90        -1.08    
------------------------------------------------------------------------

        eligibility requirement for electric and telephone loans
    Mr. Skeen. The Rural Electrification Loan Restructuring Act of 1993 
established the criteria which determine borrower's eligibility for 
hardship, municipal, and Treasury rate loans. Please provide the 
criteria for each loan type and provide a table showing the number of 
applications and total loan requests currently on hand for each 
category.
    Respondent. In the Electric Program, direct loans are generally 
used to finance distribution and subtransmission facilities. Direct 
loans may be either hardship rate loans or municipal rate loans, with 
or without an interest rate cap. Qualifications for each are as 
follows:
    The borrower is eligible for a hardship rate loan if:
    (a) both average total revenue and average revenue per kWh for 
residential consumers are at least 120 percent of the state average, 
and either average per capita income or median household income of the 
consumers served is lower than for the state; or
    (b) residential revenue exceeds 15.0 cents per kWh; or
    (c) the Administrator determines that the borrower has suffered a 
severe hardship.
    The borrower is eligible for a municipal rate loan, with the rate 
capped at 7 percent if:
    (a) the system serves, on average, fewer than 5.50 consumers per 
mile; or
    (b) average total revenue per kWh is more than the state average, 
and either the average per capita income or the median household income 
of the consumers served is lower than for the state.
    Borrowers that do not qualify for hardship rate loans or for capped 
municipal rate loans, may qualify for uncapped municipal rate loans.
    Electric borrowers are eligible for loan guarantees at a Treasury 
rate to finance generation, transmission, or distribution facilities.
    The following is a listing of the applications on hand, by 
category, as of February 28, 1998:

                          [Dollars in millions]                         
------------------------------------------------------------------------
                                                  No. of        Total   
                  Loan type                    applications     amount  
------------------------------------------------------------------------
Hardship.....................................            32        $74.5
Municipal rate...............................           181        840.0
Guaranteed FFB...............................             5         30.1
------------------------------------------------------------------------

    In the Telecommunications Program, the criteria are as follows:
    The borrower is eligible for a hardship loan if its density 
(subscribers per route mile of line) is not more than 4.0 subscribers 
per mile and its TIER is not less than 1.0 nor more than 3.0. (State 
Telecommunications Modernization Plan.)
    The borrower is eligible for a concurrent loan (Cost-of-Money and 
RTB) if its density is not more than 15.0 subscribers per mile or its 
TIER is not less than 1.0 nor more than 5.0. (State Telecommunications 
Modernization Plan.)
    The borrower is eligible for a guaranteed loan if its TIER is at 
least 1.5. Its density factor is not a criterion; however, a borrower 
must elect to take a guaranteed loan.
    Applications on hand as of March 1, 1998 are as follows:

------------------------------------------------------------------------
                                              No. of                    
              Type of loan                 applications       Amount    
------------------------------------------------------------------------
Hardship...............................              11      $61,544,000
Treasury rate (cost-of-money)..........              20      129,807,000
Rural telephone bank...................              20       75,742,800
Guaranteed (FFB).......................               4       20,072,000
------------------------------------------------------------------------

               distance learning and medical link program
    Mr. Skeen. Please provide a list, by fiscal year, of all approved 
projects for the Distance Learning and Medical Link Program?
    [The information follows:]

[Pages 59 - 63--The official Committee record contains additional material here.]


                               deferment
    Mr. Skeen. Please update the information provided last year on 
deferment of REA-scheduled debt service payments.
    Respondent. We have received no request for loan deferments for 
Rural Development projects since last year.
    Mr. Skeen. Please provide a list of the recipients of those 
deferments for last year and so far for this year.
    Respondent. We have received no requests for loan deferments for 
Rural Development projects since last year.
                  electric and telephone loan programs
    Mr. Skeen. Please provide a table showing, by state, the pending 
loan applications on hand for the electric loan programs.

[Pages 65 - 66--The official Committee record contains additional material here.]


    Mr. Skeen. What is the number and dollar amount of electric loans 
that have been approved for fiscal years 1997 and 1998. Please indicate 
the amounts for direct, FFB, and bank guaranteed loans.
    Respondent. In the last two fiscal years we have approved the 
following electric loans:

                            Fiscal Year 1997                            
                          [Dollars in millions]                         
------------------------------------------------------------------------
                                                           Total amount 
              Type of loan                 No. of loans      of loans   
------------------------------------------------------------------------
Hardship...............................              24            $68.6
Municipal rate.........................              90            455.4
Guaranteed FFB.........................              22              524
------------------------------------------------------------------------


                   Fiscal Year 1998 as of February 28                   
                          [Dollars in millions]                         
------------------------------------------------------------------------
                                                           Total amount 
              Type of loan                 No. of loans      of loans   
------------------------------------------------------------------------
Hardship...............................              14            $43.7
Municipal rate.........................              65            331.8
Guaranteed FFB.........................              12            132.2
------------------------------------------------------------------------

    There were no bank guaranteed loans.
    Mr. Skeen. Please provide a table listing, by state, the pending 
telephone loan applications.
    Respondent. Following are the Telecommunications Applications on 
Hand.

----------------------------------------------------------------------------------------------------------------
                                                                                        No.           Amount    
                              State                                No. Borrowers   Applications     (millions)  
----------------------------------------------------------------------------------------------------------------
Alabama.........................................................               2               3            $5.2
California......................................................               1               3            34.0
Georgia.........................................................               2               4            15.5
Illinois........................................................               1               2            10.6
Iowa............................................................               2               3            17.2
Kansas..........................................................               2               4            37.2
Minnesota.......................................................               4              10            55.0
Missouri........................................................               2               5            39.3
New Mexico......................................................               1               2             8.4
New York........................................................               1               2             1.9
North Dakota....................................................               1               3             6.6
South Carolina..................................................               1               2            19.8
South Dakota....................................................               3               7            24.6
Texas...........................................................               1               2             9.3
Wisconsin.......................................................               1               3             2.3
----------------------------------------------------------------------------------------------------------------

    Mr. Skeen. What is the number and dollar value of telephone loans 
approved so far in fiscal year 1998? Please indicate the amount for 
direct, FFB, and bank guarantees.
    Respondent. During the current fiscal year, we have approved the 
following Telecommunications loans:

                     FISCAL YEAR 1998 AS OF MARCH 4                     
                          [Dollars in millions]                         
------------------------------------------------------------------------
                                                           Total amount 
              Type of loan                 No. of loans      of loans   
------------------------------------------------------------------------
Hardship...............................              12          $65.122
Treasury rate..........................              11           44.025
Rural telephone bank...................              11           25.681
Guaranteed FFB.........................               0                0
------------------------------------------------------------------------

                             foreign travel
    Mr. Skeen. Did any RUS employees travel outside the United States 
to provide technical assistance to foreign countries? If so, please 
provide the details of such travel.
    Respondent. With the exception of limited travel to the former 
Pacific Trust Territories for program financing activities, no RUS 
employees traveled on behalf of the Agency outside the United States. 
These former Trust Territories have entered into a Compact of Free 
Association with the United States and under the terms of the compact, 
are eligible for RUS financing programs on the same basis as rural 
areas within the country.
                water and waste loan and grant programs
    Mr. Skeen. Please provide a table that shows the budget request and 
appropriations for the past ten fiscal years for the water and waste 
disposal loan program. Also, provide the number of loans for each 
fiscal year.
    [The information follows:]

                            DIRECT WATER AND WASTE DISPOSAL LOANS FISCAL YEAR 1988-97                           
                                             [Dollars in thousands]                                             
----------------------------------------------------------------------------------------------------------------
                           Fiscal year                               Requested     Appropriated    No. of loans 
----------------------------------------------------------------------------------------------------------------
1988............................................................  ..............        $330,380             662
1989............................................................         250,000         332,880             679
1990............................................................         200,000         350,293             686
1991............................................................         300,000         500,000             862
1992............................................................         425,000         600,000             859
1992/1993 supplemental..........................................  ..............          35,500  ..............
1993............................................................         600,000         850,000             927
1994............................................................         876,390         834,193             993
1995............................................................         976,853         905,523           1,057
1996............................................................         800,000           (\1\)             902
1997............................................................         800,000           (\2\)           1,003
----------------------------------------------------------------------------------------------------------------
\1\ $487,868,000 in budget authority appropriated for the Rural Utilities Assistance Program which includes:    
  direct rural water and waste disposal loans, rural water and waste disposal grants and the solid waste        
  management grant program.                                                                                     
\2\ $566,935,000 in budget authority appropriated for the Rural Utilities Assistance Program which includes:    
  direct rural water and waste disposal loans, rural water and waste disposal grants and the solid waste        
  management grant program.                                                                                     


                          GUARANTEED WATER AND WASTE DISPOSAL LOANS FISCAL YEAR 1990-97                         
                                             [Dollars in thousands]                                             
----------------------------------------------------------------------------------------------------------------
                           Fiscal year                               Requested     Appropriated    No. of loans 
----------------------------------------------------------------------------------------------------------------
1990............................................................         $50,000          $7,500  ..............
1991............................................................          50,000          35,000               8
1992............................................................  ..............          35,000              12
1993............................................................  ..............          35,000               5
1994............................................................          35,945          35,250               8
1995............................................................  ..............  ..............  ..............
1996............................................................  ..............          50,000              13
1997............................................................  ..............          75,000               9
----------------------------------------------------------------------------------------------------------------

    Mr. Skeen. How many applications are currently on hand for water 
and waste loans? What is the total amount pending?
    Respondent. As of October 1, 1997, the total number of pending 
applications on hand for water and waste loans was 1,723 for $2.6 
billion.
    Mr. Skeen. In fiscal year 1997, what percent of water and waste 
disposal loans were used for expansion of existing systems?
    Respondent. In fiscal year 1997, 62 percent of the water and waste 
disposal loan funds were used for expansion, replacement, and 
renovation.
    Mr. Skeen. Please provide a ten-year table showing the 
Administration's request, the amount appropriated, and the number and 
dollar amounts of water and sewer grants made.
    [The information follows:]

                            RURAL WATER AND WASTE DISPOSAL GRANTS FISCAL YEAR 1988-97                           
                                             [Dollars in thousands]                                             
----------------------------------------------------------------------------------------------------------------
                                                                                         No. of                 
                       Fiscal year                          Requested   Appropriated     grants        Amount   
                                                                                       obligated   obligated \2\
----------------------------------------------------------------------------------------------------------------
1988.....................................................  ...........      $109,395          328      $119,359 
1989.....................................................       75,000       109,385          344       122,699 
1990.....................................................       75,000       207,000          467       212,036 
1991.....................................................      100,000       300,000          612       307,788 
1992.....................................................      225,000       350,000          627       354,306 
1992/1993 supplemental...................................  ...........         5,600  ...........  .............
1993.....................................................      300,000       425,000        1,325       423,865 
1994.....................................................      540,530       487,500        1,676       499,647 
1995.....................................................      525,000       500,000        1,421       507,611 
1996.....................................................      590,000         (\1\)        1,192       394,429 
1997.....................................................      590,000         (\3\)        1,221       518,599 
----------------------------------------------------------------------------------------------------------------
\1\ $487,868,000 in budget authority (BA) appropriated for the Rural Utilities Assistance Program which         
  includes: direct rural water and waste disposal loans, rural water and waste disposal grants and the solid    
  waste management programs.                                                                                    
\2\ Amounts obligated exceeds the appropriated amounts due to carryover from previous years.                    
\3\ $566,935,000 in BA appropriated for the Rural Utilities Assistance Program which includes: direct water and 
  waste disposal loans and grants and the solid waste management programs.                                      

    Mr. Skeen. How many applicants do you presently have on hand, both 
in terms of numbers of applications and dollar amounts?
    Respondent. As of October 1, 1997, the total number of pending 
applications on hand for water and waste grants was 1,123 for $1.1 
billion.
    Mr. Skeen. Please provide a table listing these applications, by 
state.
    Respondent. [The information follows:]

[Page 70--The official Committee record contains additional material here.]


                         circuit rider program

    Mr. Skeen. What is the reason for the requested increase 
for the circuit rider program? What does this program do? In 
which states does it work?
    Respondent. The proposal for the FY 1999 Circuit Rider 
Program is $6 million which will provide 55 circuit riders. 
This will allow for an increase of at least three circuit 
riders under the terms of the FY 1999 option in the contact 
executed last year.
    Since 1980, we have contracted with the National Rural 
Water Association, NRWA, to provide circuit riders. Circuit 
riders are available to rural water systems to assist them with 
day-to-day operational, financial, compliance, and management 
problems. Currently, there are 52 circuit riders over the 48 
continental states. Most states have one circuit rider, a few 
states have two, and some states share a circuit rider. Circuit 
riders must average 35 technical assistance visits per month. 
The assistance may be requested by rural water systems or our 
field staff, and when they are not working on specific 
requests, they call on rural water systems to offer their 
assistance. Circuit riders report their accomplishments monthly 
to our State Rural Development offices. Helping rural water 
systems to locate and correct leaks, to comply with the Safe 
Drinking Water Act requirements, and to improve record keeping 
procedures are just some example of circuit rider work. This 
assistance helps to keep small rural water systems operating 
efficiently. Systems that are properly operated and maintained 
are more likely to meet all the Federal and state health 
requirements as well as make their loan payments on time. This 
program compliments our loan ``supervision'' responsibilities.
    During FY 1996, over 24,500 contacts were made on systems providing 
service to several million rural people, including 9 million people 
directly concerned with public health issues. We continue to get 
positive feedback on how valuable the program is to water systems 
throughout the nation. The circuit rider program is valuable to the 
Government as well as to rural water systems. The benefits of the 
program would cease if contract funds are not available.
                   technical assistance grant program
    Mr. Skeen. Please provide a list of all technical assistance grants 
that were made in 1997 and so far in fiscal year 1998.
    Respondent. The following is a listing of technical assistance 
grants made in fiscal year 1997. No grants have been made thus far in 
fiscal year 1998.
Grantee/location:                                           Grant amount
    Mississippi Municipal Assn., Jackson, MS............        $300,000
    Missouri Rural Water Assn., Columbia, MO............          85,850
    New Mexico Rural Water Assn., Albuquerque, NM.......          88,000
    National Rural Water Association, Duncan, OK........       5,378,040
    National Rural Water Association, Duncan, OK........         800,000
    Rural Community Assistance Program, Leesburg, VA....       3,441,830
    Rural Community Assistance Program, Leesburg, VA....         800,000
    West Virginia University Research Corporation, 
      Morgantown, WV....................................         989,280
                    --------------------------------------------------------
                    ____________________________________________________
      Total.............................................      11,883,000
                                colonias
    Mr. Skeen. Please describe how the funds have been used in fiscal 
year 1997 and, so far, in fiscal year 1998 in the Colonias.
    Respondent. In fiscal year 1997, we allocated $17.2 million of the 
$18.7 million available to the four states bordering Mexico to finance 
the construction of community water and sewer facilities. In addition, 
we set aside $1.5 million in individual grants for connecting to a 
community water or sewer system and constructing bathroom facilities. 
These funds are administered by the Rural Housing Service. Grants were 
made to 37 rural community water and sewer systems and 385 individual 
families. In fiscal year 1998, we have made 12 grants to rural water 
and sewer systems and 151 individual families totaling $8,028,865. We 
anticipate that the balance of available funds will be obligated over 
the next several months.
    Mr. Skeen. How many grant applications and what dollar amount is 
currently pending for requests related strictly to Colonias?
    Respondent. We currently have, on hand, 42 unfunded application 
from rural communities for water and sewer improvements in Colonias 
totaling $38.7 million.
              emergency community water assistance grants
    Mr. Skeen. Please provide a table showing Emergency Community Water 
Assistance Grants made in fiscal year 1997 and the distribution, by 
state.
    Respondent. The information follows:

----------------------------------------------------------------------------------------------------------------
         State                      Project               Amount       Date                 Situation           
----------------------------------------------------------------------------------------------------------------
CO.....................  Buffalo Creek................     $60,000    08/29/96  Flash flood.                    
FL.....................  Caryville....................      75,000    01/13/97  Underground pressure damage.    
FL.....................  Brooker......................      58,850    02/07/97  Terra-shift contamination.      
                                                       ---------------------------------------------------------
                         Florida total................     133,850  ..........  ................................
                                                       =========================================================
ID.....................  Juliaetta....................      17,500    10/11/96  Flood damage.                   
ID.....................  Elk City.....................      10,000    10/11/96  Flood damage.                   
                                                       ---------------------------------------------------------
                         Idaho total..................      27,500  ..........  ................................
                                                       =========================================================
MD.....................  Lonaconing...................     130,000    10/17/96  Hurricane Fran damage.          
MD.....................  Garrett County...............     131,250    11/26/96  Hurricane Fran damage.          
MD.....................  Frostburg....................      25,000    11/26/96  Hurricane Fran damage.          
                                                       ---------------------------------------------------------
                         Maryland total...............     286,250  ..........  ................................
                                                       =========================================================
MN.....................  Winton.......................      20,000    10/17/96  Flood damage.                   
MT.....................  Browning.....................       6,500    01/23/97  Drought.                        
----------------------------------------------------------------------------------------------------------------

    Mr. Skeen. Are there communities which are too small to make it 
through the RUS application process and, if so, what can the Department 
do to help them?
    Respondent. We believe that there are options for improved water 
and sewer systems available for all rural communities regardless of 
size. In small, sparsely settled communities, individual wells and 
septic tanks are often the best solution. We have a Rural Development 
field staff with trained individuals who will work with the smallest 
communities to help them apply for assistance. We also have a network 
of technical assistance providers from the Rural Community Assistance 
Program who work at the grass roots level. The National Rural Water 
Association Circuit Riders also assist small communities with their 
applications. There are no communities too small to apply to RUS.
                         telecommunications act
    Mr. Skeen. What is the affect of the Telecommunications Act on the 
need for capital by rural telecommunications providers.
    Respondent. Since the passage of the Telecommunications Act of 
1996, which provides for a competitive, deregulated national 
telecommunications policy framework, the Federal Communications 
Commission has been working to implement the provisions of the 
communications act re-write. As those provisions begin to be fleshed 
out through the FCC's rulemaking process, the FCC is focusing on the 
types of telecommunications available to all--``Universal Service''--
and the benefits to all Americans from advanced services for schools, 
libraries, and rural health care providers and businesses. On May 8, 
1997, the FCC released its Report and Order of the Federal-State Joint 
Board on Universal Service. The May 8 Order made clear that the need 
for continued and increased infrastructure investment in rural areas is 
greater today than ever before. The Order mandated a level of service, 
or core service levels, that will require increased investment--
investment that is needed to prepare students for the future, provide 
quality health care to our citizens, and improve economic conditions in 
rural America. Already, due to the changing environment of the 
telecommunications industry, large or predominately non-rural 
telecommunications companies are selling off their more rural exchanges 
in an effort to brace themselves for competition by concentrating on 
their more lucrative service areas. This ``sell-off'' provides an 
opportunity for rural telecommunications providers to expand their 
service territories. However, typically these acquired exchanges will 
need substantial infrastructure improvements resulting in increased 
investment. Lending activity from the RUS Telecommunications loan 
programs is beginning to pick up compared to the past year. However, 
uncertainties regarding future revenue streams and the availability of 
funds from universal service support mechanisms, in light of new 
rulemaking at the FCC, have hampered some investment decisions.
    Mr. Skeen. Will there be an increase in demand for 
telecommunications loans?
    Respondent. Demand is increasing. For fiscal year 1998, demand for 
the Hardship program has already exceeded available funding. Concurrent 
loans (Cost-of-Money and Rural Telephone Bank) approved to date are up 
160 percent above last year's levels for the same period. We see a 
steady demand for loans as rural telecommunications providers implement 
the requirements of the Telecommunications Act. The Telecommunications 
Act envisions new service demands that will require modern and expanded 
telecommunications infrastructure in rural America. The infrastructure 
needed to meet the expected service demands will require steady capital 
expenditures by rural telecommunications providers. As discussed 
earlier, some telecommunications providers are taking a very 
conservative approach to new borrowing in light of uncertainties 
regarding rulemaking and changes to the current method of accounting 
for revenues.
                   deregulation of electric utilities
    Mr. Skeen. What role is the Department playing in the development 
of legislation for the deregulation of utilities?
    Respondent. The Department's primary role in the development of 
electric deregulation policy is to serve as an advocate for rural 
America, and to ensure RUS electric borrowers' ability to repay RUS 
loans. In May 1997, the National Economic Council (NEC) established an 
interagency working group on restructuring the electric industry. This 
group was charged with the responsibility of reviewing policy issues 
and beginning the process of making recommendations to the President. 
RUS represented the Department of Agriculture (USDA) as a member of the 
interagency working group. The working group developed recommendations 
and identified policy issues that are now under consideration by the 
NEC.
    The newly competitive environment will also undoubtedly effect the 
rural telecommunications marketplace. For many markets--urban and 
rural--competition will offer the means for delivering the service, but 
the universal service support envisioned by the Telecommunications Act 
of 1996 will be needed to provide affordable service in many rural 
areas. In the competitive marketplace of the future, investment in 
infrastructure will be lucrative in markets where local exchange 
carriers seek to attract high-usage, low-cost subscribers. Competition 
will be fierce and customers will be the winners as their demands for 
new and improved service at affordable rates will be met and, in some 
cases, exceeded. Yet in rural and high-cost areas, where quality of 
service and advanced service offerings are just as important, less 
investment potential based on competition exists. This financial 
resource void will need to be filled in the form of incentives through 
the universal support mechanisms and the lending programs of RUS. Since 
the passage of the Telecommunications Act, RUS has been busy in the 
role of advocate for rural America before the FCC and state regulatory 
bodies on issues affecting the rural telecommunications 
infrastructure--making some 20 filings on behalf of rural America to 
the FCC. RUS stands ready to continue its partnership with rural 
America to ensure that providers will have the means to modernize their 
networks.
    Mr. Skeen. What are the major concerns of rural America in electric 
utility deregulation?
    Respondent. One of the greatest challenges in restructuring of the 
electric industry is ensuring access to reliable and affordable 
electric service in rural areas. RUS believes that rural areas can 
share the benefits of a competitive retail electric market, if 
competition is conditioned and reliability of service is ensured.
    Concerning affordability, electric service in rural areas requires 
more capital investment, has higher costs of operation and maintenance, 
and results in lower revenue per mile of line than urban and suburban 
areas. To maintain affordability within a distribution system, many 
utilities use the common practice of `cost-averaging' across customer 
classes. `Cost averaging' has been historically supported by state 
public utility commissions. It most often occurs when utilities use 
revenues from industrial and large commercial consumers to offset other 
fixed costs within the system.
    In a competitive retail environment, such cost-averaging will be 
disrupted as larger consumers purchase power directly from power 
marketers (cherry-picking). Although distribution companies may be able 
to institute `wires charges' to cover delivery cost of another 
company's power, these charges may not be sufficient to maintain 
reasonably affordable rates for smaller customers, especially in high 
cost to serve rural areas. Furthermore, additional complications will 
result as market pressures encourage by-passing of some distribution 
systems to reach large customers or customer blocks.
    The loss of an electric system's ability to average cost among 
customer classes can place upward pressure on rates in rural areas, 
which are already comparatively higher than urban areas on a state-by-
state basis.
    USDA is concerned that the future availability of investment 
capital for rural electric infrastructure can be jeopardized if current 
and future investments are allowed to become stranded. One of USDA's 
major concerns in a deregulated electric market is the ability of RUS 
borrowers to repay outstanding loans if competition creates stranded 
investment in high-cost rural areas. Currently, USDA-RUS has 
approximately $31 billion in outstanding electric loans. Typically RUS 
loans are used to leverage two-thirds of investment capital from 
private sources. These loans are the life blood in maintaining and 
improving rural infrastructure. If these loans become stranded, the 
investment resources from federal programs as well as private sources 
could easily diminish.
                        electric loan writedowns
    Mr. Skeen. Please provide a description of electric utility loan 
writedowns or forgiveness in 1997 and what is expected in 1998 and 
1999?
    Respondent. In October 1996, a debt writedown of $501.7 million was 
approved for Deseret Generation & Transmission Cooperative, Inc. 
(Deseret), Sandy, Utah. Legal authority for the Deseret debt compromise 
was exercised by the Department of Justice (DOJ), with RUS concurrence. 
Deseret's contingent note, established as part of its 1989 debt 
restructure, was already recognized as having a low likelihood of 
repayment. Approximately 20 percent of Deseret's debt in October 1996 
was contingent debt. Including the final Deseret payment on October 16, 
1996, Deseret paid nearly $432 million (nominally) following the 1989 
restructure. Background on Deseret 1989 Restructure: Deseret 
constructed a generation plant intended to meet demands expected with 
the onset of shale oil development. The failure of that industry made 
it impossible for Deseret to repay its full debt. This restructure 
required payments to be made on a noncontingent note (with reduced 
payments until 1996) and a contingent note (with payments only made in 
the event of excess cash levels and increased load growth). No debt 
write-off was provided. Deseret's debt increased from $525.7 million in 
March 1989 to $740.2 million in October 1996. The 1989 debt does not 
reflect a 1985 sale/leaseback which resulted in the prepayment of $475 
million originally lent to Deseret by RUS or a 1998 refinancing which 
returned an additional prepayment of $189 million to RUS.
    In June 1997, a debt writedown of $165 million was approved for 
Wolverine Power Supply Cooperative (Wolverine), Cadillac, Michigan. 
Legal authority for the Wolverine debt compromise was exercised by the 
DOJ with RUS concurrence. While Wolverine was making modest payments 
under its contingent note, established as part of its 1986 debt 
restructure, it was clear that the majority of this contingent debt 
would not be repaid. In addition, payments under the noncontingent note 
were being threatened by incipient retail competition activities in 
Michigan. The remaining payments and obligations of Detroit Edison to 
RUS on the $537 million in Fermi Nuclear Plant (Fermi) debt it assumed 
were not affected by this action. Including the final Wolverine payment 
on June 27, 1997, Wolverine paid nearly $450 million (nominal) 
following the 1987 restructure. Background on Wolverine 1987 
Restructure: The restructure resulted in (a) the sell-back of 
Wolverine's Fermi Nuclear Plant interest to Detroit Edison and 
assumption of $537 million of Wolverine's $737 million in Fermi debt to 
Detroit Edison, (b) a restructuring of Wolverine's remaining $200 
million in Fermi debt into a $100 million noncontingent note and a $100 
million contingent note, and (c) Wolverine's non-Fermi debt remaining 
unrestructured and payable as due. No debt write-off was provided. 
Wolverine's Fermi debt increased from $200 million in 1987 to $260 
million in June 1997 because of the accrual of interest on the 
contingent note.
    The following borrowers are involved in bankruptcy proceedings. We 
anticipate debt writedowns in Fiscal Years 1998 and 1999 as part of the 
overall outcome of these borrower cases. Legal authority for these 
writedowns will be exercised by the DOJ with RUS concurrence. However, 
the make up of a bankrupt borrower's plan of reorganization, including 
the dollar amount to be written off by creditors, is subject to 
bankruptcy court decision and is largely outside the Government's 
control.

------------------------------------------------------------------------
                                                        Projected amount
             Borrower                  Fiscal year       (in millions)  
------------------------------------------------------------------------
Wabash Valley Power Association...               1998               $202
Vermont Electric Generation &                                           
 Transmission Cooperative.........               1999                 85
Cajun Electric Power Cooperative..               1999              3,100
------------------------------------------------------------------------

    Mr. Skeen. How have the loan writedowns affected the subsidy rate 
for appropriated funds?
    Respondent. The losses on loans to power supply borrowers stem from 
loans and loan guarantees made in the 1970's and 1980's to finance 
nuclear power plants and large fossil fuel plants. RUS was, by no 
means, the only lender to finance such facilities. The agency has not 
made a loan or loan guarantee for base load power plants since the mid 
1980's. RUS does not anticipate new requests for such facilities.
    New loans and loan guarantees to power supply borrowers are 
generally made for transmission facilities, necessary improvements to 
existing facilities, and combined cycle generating facilities that are 
relatively inexpensive to operate. Such loans bear a low risk. For 
these reasons, OMB, in 1995, reduced the subsidy rate for new electric 
loans to reflect the general change in agency lending practices away 
from loans for large-scale new generation facilities. Consequently, 
loan writedowns have not adversely affected the subsidy rate for new 
loans.
                    rural utilities service programs
    Mr. Skeen. How much on average does RUS provide for loans and how 
much is provided by the private sector?
    Respondent. In the Electric Program, RUS may provide about 70 
percent of the debt financing request of a borrower who receives a 
municipal rate loan. RUS may provide up to 100 percent of the debt 
financing request of a borrower eligible for a hardship rate loan, and 
up to 100 percent of the debt financing request of a borrower who 
receives a loan guarantee.
    RUS studies have shown that, for each dollar of RUS loan funds, 
borrowers add almost three dollars in plant. This indicates that each 
RUS loan, on average, leverages three dollars from private sources. RUS 
participation and the availability of RUS loan funds make it easier for 
borrowers to obtain private sector financing.
    The following chart illustrates leveraging of Federal dollars:

                                              [Dollars in Millions]                                             
----------------------------------------------------------------------------------------------------------------
                                                                                                     Private &  
                                                       Gross                      Funds advanced      general   
                      Year                         additions to         RUS             FFB           capital   
                                                       plant                                         expended   
----------------------------------------------------------------------------------------------------------------
1996............................................          $3,212            $682             $93          $2,437
1995............................................           3,269             809             211           2,249
1994............................................           3,344             618             242           2,484
1993............................................           2,833             388             169           2,276
1992............................................           3,104             401             208           2,495
1991............................................           2,931             592              98           2,241
----------------------------------------------------------------------------------------------------------------

    In the Telecommunications Program, the Federal dollars loaned by 
RUS are used to leverage substantial private capital. For FY 1998, a 
subsidy appropriation of only $6.7 million will be used to support a 
lending program totaling $670 million for rural infrastructure 
telecommunications loans. During 1997, RUS' telecommunications 
borrowers invested nearly five dollars of non-Federal funding for every 
RUS dollar expended in building telecommunications plant. For the 
Distance Learning and Telemedicine Program, a subsidy of only $30 
thousand will be used to support a $150 million in loans for distance 
learning and telemedicine initiatives. In addition, applicants for DLT 
funding must provide at least 30 percent of the project costs for 
grants and 10 percent of the project costs for loans using non-Federal 
funding. For a modest investment, the Government is encouraging 
tremendous amounts of private investment in rural telecommunications 
infrastructure.
    Over the past five years, RUS has provided an average of $725 
million a year for Water and Waste loans. These loans are made at one 
of three interest rates: poverty, intermediate, or market. Since RUS 
programs are to be carried out so as not to compete with private sector 
sources of credit, the vast majority of the loans made by the Agency 
are at the poverty or intermediate interest rate. In FY 1997, only 5.7 
percent of the loans made were at the market interest rate. Given the 
variety of sources of private sector funds, RUS does not have data on 
the total amount of loans made for similar purposes.
                         circuit rider program
    Mr. Skeen. What is the total amount of funds budgeted in your 
fiscal year 1999 request for the Circuit Rider program, including the 
earmark under the RCAP?
    Respondent. The total amount of funds budgeted in the fiscal year 
1999 request for the Circuit Rider program is $6 million.
              distance learning and telemedicine programs
    Mr. Skeen. Distance Learning and Telemedicine systems can be 
expensive to operate and maintain. Does USDA provide operation and 
maintenance funding after its initial grants? Is money available from 
other federal programs for this purpose?
    Respondent. All distance learning and telemedicine funding provided 
to applicants is generally for end-user equipment. Financing is not 
provided for recurring or monthly costs associated with administering 
the project, such as salaries, travel expenses, or overhead. Applicants 
must demonstrate project sustainability in order to receive funding. If 
funding for operations is to be provided through a third party, that 
is, the project does not have the capability of self-sustainability, 
those funding sources must be committed and available before RUS 
funding can be provided.
    Mr. Skeen. What is done government-wide to assure that distance 
learning and telemedicine programs operated by federal agencies and 
states do not duplicate each other?
    Respondent. First, all applicants for financing must contact the 
State Single Point of Contact when applying for assistance in 
accordance with Executive Order 12372, ``Intergovernmental review of 
Federal Program.'' Second, all applicants must consult with the USDA 
State Director concerning the availability of funding at the local and 
state levels and conformance of the proposed project to the State 
Strategic Plan, if one exists. And third, RUS personnel attend 
government-wide meetings on issues of rural education and health care 
and are active participants at Federal meetings that have participants 
administering related programs.
                           year 2000 project
    Mr. Skeen. Are all RUS computer operations, including hardware and 
software, compliant with Year 2000 requirements?
    Respondent. The Chief Information Officer (CIO) is in the process 
of making computer operations, hardware and software year 2000 (Y2K) 
compliant. The RUS modernization will ensure that the loan servicing 
for the Electric and Telecommunications programs will be Y2K compliant 
by September 1999. The Water and Waste Water program loan servicing is 
being made Y2K compliant by the Rural Development CIO's staff.
                   rural communities water resources
    Mr. Skeen. What steps is the Rural Utilities Service taking to 
publicize private well drilling as an option for water resources in 
rural communities?
    Respondent. RUS has long recognized that there are pockets of rural 
residents where the best solution to providing drinking water is 
through individual wells. RUS will continue to work with rural 
communities to provide safe drinking water through the best means 
available. If individual or cluster wells are the answer to solving a 
community's water problems, RUS will work with the community to develop 
such a system. We have provided guidance to the Rural Development State 
Directors advising them to consider whether individual or cluster wells 
could solve the water problems of the proposed service area prior to 
processing a loan/grant for a central system.
                          liquidating accounts
    Mr. Skeen. USDA proposes to use unobligated balances in the Rural 
Telephone Bank Liquidating Account to pay for the cost of direct loans 
and for administrative expenses. Does USDA have existing authority for 
this or is new authorization required?
    Respondent. No. Under the Federal Credit Reform Act of 1990, RUS is 
prohibited from using funds in the liquidating account except for those 
purposes allowed under Credit Reform accounting procedures (i.e., 
administer loans approved prior to FY 1992 and expenses associated with 
those loans). It would appear that new authorization would be required 
to exempt the RTB from Credit Reform or certain provisions of Credit 
Reform.
    Mr. Skeen. What is the current balance in the Liquidating Account?
    Respondent. As of December 31, 1997, cash in the liquidating 
account totaled $493 million.
    Mr. Skeen. For what other purposes may the liquidating account be 
used?
    Respondent. Under the Federal Credit Reform Act of 1990, funds in 
the liquidating account may be used to meet advances on loans obligated 
prior to FY 1992 and pay expenses associated with those loans, i.e., 
debt service to Treasury, dividends to shareholders, and retirement of 
government stock.
                      rus electric troubled loans
    Mr. Skeen. Several RUS troubled electric borrowers are currently in 
bankruptcy negotiations. How much is at stake? How much is owed by the 
largest borrower in bankruptcy? How much is principal and how much is 
accrued interest?
    Respondent. RUS currently has 2 borrowers in bankruptcy 
negotiations. The Department of Justice has the authority to compromise 
debt in bankruptcy cases. The aggregate debt owed to the RUS by these 
borrowers is $5.2 billion. Cajun Electric Power Cooperative, the 
largest from an outstanding debt standpoint, owes $4.1 billion to the 
RUS of which $2.7 billion is principal and the remaining is accrued 
interest.
    Mr. Skeen. Last year RUS wrote-off $1 billion of an electric 
borrower's debt as a result of bankruptcy proceedings. There were 
concerns raised with the bankruptcy court's interpretation of equity 
held by the cooperative members. Could you explain briefly what this 
problem was and has it been corrected?
    Respondent. The Wabash Valley Power Association, Inc. case bests 
illustrates the issues associated with the bankruptcy court's 
interpretation of equity. The Supreme Court refused to review the 
decision of the Seventh Circuit Court of Appeals approving the 
bankruptcy Plan of Reorganization proposed by Wabash. Under the Plan, 
margins contributed by the members of Wabash were treated as debts owed 
to the members rather than as equity and, therefore, could be included 
in the same creditor class as other unsecured debt. Moreover, the 
members were held not to be owners of Wabash for purposes of the 
``absolute priority rule'' and, therefore, were allowed to control 
Wabash and operate it for their own benefit even though RUS is forced 
to write-off most of Wabash's debt. RUS intends to seek legislation to 
correct the considerable risk to its loan security caused by this 
decision.
                       commercial credit sources
    Mr. Skeen. RUS' programs are intended to assist sparsely populated 
rural areas with infrastructure development. Yet RUS appears to have 
little or no policy regarding moving borrowers, who no longer meet the 
basic eligibility criteria, from federal assistance to commercial 
credit. With respect to the electric program, in particular, please 
explain why financially healthy borrowers in largely metropolitan areas 
are not encouraged to move to commercial credit?
    Respondent. The RE Act of 1936, as amended, specifically sets forth 
the qualifying criteria for the loan programs administered by RUS. The 
Act does not provide the latitude for RUS to require borrowers to 
graduate from one program to another or to exclude borrowers from 
eligibility. Some hardship qualified borrowers do move into the 
municipal rate program as they improve in the areas of retail rate 
disparity and consumer per capita and house hold incomes. Also, over 
the last 4 years, approximately 130 electric borrowers have bought out 
of the program. The majority of these borrowers were financially 
healthy and many serve large urban type areas.
    Mr. Skeen. Given the tight budget situation, would not a policy 
that encourages such borrowers to move to commercial credit allow 
additional funds to be made available for the more needy systems?
    Respondent. Without a legislative change in the RE Act of 1936, RUS 
does not have the flexibility to adopt a policy requiring borrowers to 
move to commercial credit sources. As noted in our response to the 
previous question, over 130 borrowers have left the RUS program. These 
borrowers have tended to be the financially healthy borrowers. In order 
to reduce the cost of the RUS lending programs, the budget also 
proposes a new treasury rate program. Recent activity has also shown 
that a number of telecommunications borrowers are seeking financing 
with CoBank or RTFC (two alternative non-Federal sources of capital). 
But again, RUS cannot force a borrower to seek financing elsewhere 
based on financial or any other condition, if they meet the eligibility 
qualifications to borrow from RUS.
                          rus computer system
    Mr. Skeen. RUS has been utilizing an antiquated computer system to 
track its electric and telecommunications loans. The existing system 
has been said to be in such poor condition that it is in danger of 
complete failure, threatening the ability of RUS to track its $5 
billion electric and telecommunications loan portfolio, to send out 
billing statements on a timely basis, or even to process payments as 
they come in. In short, if this system collapses, so do the RUS 
programs. Since 1996, Congress has provided about $8.8 million, of a 
projected $12 million, to replace and upgrade this system. It has been 
suggested that RUS has delayed bringing the new system on-line in order 
to facilitate implementation of other Rural Development accounting 
systems which are unrelated to the system in danger of collapse. Please 
comment on this.
    Respondent. The assessment that documented the problems with the 
RUS legacy systems outlined a 4- to 5-year plan at an estimated cost of 
$12.7 million. RUS is not delaying any of the modernization effort. RUS 
is implementing the modernization effort within the time frame outlined 
in the assessment document and as fast as funds are made available to 
RUS by the Rural Development mission area. RUS has not delayed 
development of the new system to facilitate the implementation of other 
Rural Development accounting systems.
                          proposed legislation
    Mr. Skeen. The budget request for RUS' electric program includes 
proposed legislation to initiate a direct Treasury rate loan program. 
Can you give us a date certain when we can expect this legislation to 
be transmitted to Congress?
    Respondent. Legislation to initiate a direct Treasury rate loan 
program is in the clearance process at USDA. As soon as it clears, it 
will be transmitted to the House and Senate.
    Mr. Skeen. Assuming that the proposed legislation is enacted, how 
would the direct Treasury rate loans compare to the FFB insured loans? 
Do you need both authorities?
    Respondent. Assuming that the proposed Treasury rate program is 
enacted, its administration would differ in a couple of respects from 
the FFB program. First, the Treasury program would not require the 
borrower to work with FFB. RUS would administer all phases of the 
program as we do with the hardship and municipal rate programs. From 
that prospective, it would be more customer friendly to the borrower 
since they would only be working with one Federal agency. The Treasury 
program would not impose the one-eighth of 1 percent adder that is 
required by the FFB program. As mentioned in a response to an earlier 
question, FFB has generally been used by the power supply borrowers for 
their larger, capital-intensive projects. The new Treasury rate program 
would have, as its targeted audience, the electric distribution 
cooperatives that are experiencing significant delays in obtaining 
other RUS loan funds because of the heavy demand for such financing. It 
is also important to maintain the guarantee program since it has been 
and can continue to be used to guarantee private sector lenders as well 
as FFB loans.
    Mr. Skeen. The budget request indicates that you will be offering 
proposed legislation to convert the Rural Telephone Bank (RTB) to a 
Performance Based Organization (PBO). Please explain what a PBO is?
    Respondent.  PBO is a discrete unit of a department that commits to 
clear management objectives, measurable goals, customer service 
standards and specific targets for improved performance. This unit 
remains within the department under the policy guidance and direction 
of the Secretary. It remains subject to government regulations, rules, 
policies, and procedures, unless specific waivers are granted. A PBO 
focuses on programmatic operations, not policy-making functions. A PBO 
will have a Chief Operating Officer (COO) and greater managerial 
flexibilities in personnel, procurement and other specified areas that 
will enable the PBO to improve organizational performance. The COO will 
be selected for managerial experience, for a fixed term, and will sign 
an annual performance agreement with the Secretary and be accountable 
for meeting the organization's performance improvement goals.
    Mr. Skeen. Last year, you indicated that legislation was being 
prepared to accelerate the privatization of the RTB. However, the 
proposed legislation never made it to Congress, in part, because you 
were unable to get OMB and Treasury approval of the plan. How would you 
assess your chances of actually getting this legislation up here for 
consideration?
    Respondent. Establishing the Bank as a PBO will require 
legislation. RUS would craft legislation to fit the Bank's needs. Once 
established, the Bank could pursue privatization efforts while still 
under the USDA umbrella. As a PBO, the Bank would ``enjoy'' a less 
restrictive operating environment than its current organizational 
structure provides. A primary reason for establishing a PBO is to 
foster the more efficient operation of a government agency performing a 
public purpose. One of the key qualifications to becoming a PBO is the 
ability to generate cash flow. The PBO status is a way for the 
government to increase operating efficiency by allowing certain 
exemptions from government rules; yet, at the same time, maintain 
control over the function the agency is performing. For most government 
agencies, becoming a PBO is a permanent status; however, for the Bank, 
it is a stepping stone to privatization. At the direction of the COO, 
the Bank would focus its efforts on becoming a fully private entity 
within ten years while fulfilling its mission of providing financing 
for rural telecommunications infrastructure.
    During its status as a PBO, all of the ``routine'' operating 
functions (i.e., writing and servicing loans) could be performed by RUS 
employees. PBO status will heighten the goal of privatization and 
provide a platform for the Bank to structure itself for complete 
privatization.
    Many issues would need to be addressed as the Bank moves from a PBO 
to a fully private entity, including the process of developing 
legislation to accommodate a transition to a PBO then to a fully 
privatized Bank. RUS will be diligent in its efforts to move forward 
with the process of establishing the Bank as a PBO.
               distance learning and telemedicine program
    Mr. Skeen. Your budget submission indicates that you carried over 
$9 million in budget authority from 1997 to 1998 under the distance 
learning and medical link program. That is the entire amount 
appropriated for that program in 1997. Why have you requested two 
consecutive annual increases in this program?
    Respondent. All of the funds appropriated in FY 1997 for the 
Distance Learning and Telemedicine program were used. Due to a very 
short application window and the time needed to process all of the 
applications, the Agency was allowed to carryover the FY 1997 funding. 
All funding was approved in early October 1997 and was used for 
projects submitted under the FY 1997 application window. In fact, since 
its inception in 1993, demand for DLT financing has been enormous. With 
nearly 1,000 applications received, the demand for grant funding has 
exceeded available grant funds by over 500 percent.
                    mandatory connection requirement
    Mr. Skeen. Regarding mandatory connection requirements for drinking 
water systems, could you please outline the Department's requirements? 
Are mandatory connection requirements included as a stipulation for 
departmental approval for a public water system under the Rural 
Utilities Services?
    Respondent. Mandatory connection for a public water system is not a 
condition for RUS financing. However, if mandatory connection to a 
water system is permitted by either local ordinances or state statutes, 
RUS may make mandatory connections a loan condition. Some water and 
sewer systems choose to implement mandatory connections as a way to 
stabilize revenues. For systems dependent on user fees to pay the RUS 
debt and to properly operate and maintain the system, we are concerned 
about the number of users that a system has. Therefore, although we do 
not require mandatory connection, a system must have enough users to 
pay all expenses associated with constructing and operating the system.
                    Question Submitted by Mr. Walsh
                             RUS Write-offs
    Mr. Walsh. Please describe the process by which rural utility debts 
are written off. Does the Department require a formal application? Who 
participates in the process from the U.S. Government side, by agency 
and Department? Does the government use outside consultants or advisors 
and, if so, who are they? What criteria are used to make the decision. 
What restrictions are put on the borrowers in terms of future use of 
government programs? At what level in the government is the decision 
made?
    Respondent. A recently enacted RUS regulation, 7 CFR Part 1717, 
Subpart Y, Settlement of Debt Owed by Electric Borrowers, establishes 
policies, criteria and standards, and describes the process for 
settling requests from RUS electric borrowers for debt restructure or 
writedown. A copy of the regulation is provided for the record. A 
formal application is required to be submitted by all electric 
borrowers requesting debt restructuring or writedown. RUS and the 
Office of General Counsel, USDA, participate in the process outlined in 
the regulation. The Department of Justice participates in all 
bankruptcy cases. In cases of borrowers whose debt has been settled in 
the past under the authority of the Department of Justice, RUS notifies 
the Department of Justice before proceeding to consider the 
application. The Department of Justice has the discretion to 
participate in settling such claims under its authority.
    RUS utilizes an outside consultant, OnLocation, Inc., to provide 
analytical support, economic and financial expertise, and counsel in 
support of ongoing litigation and complex negotiations for troubled and 
bankrupt electric borrowers. Under the new regulation, RUS also has the 
ability to contract with an independent consultant to provide an 
analysis of the efficiency and effectiveness of an electric borrower's 
organization and operations, and those of its member systems (in the 
case of power supply borrowers). The borrower requesting debt 
restructuring assistance may fund such services, either in whole or in 
part.
    A formerly troubled or bankrupt borrower's ability to future access 
to RUS lending programs is not unilaterally restricted under RUS 
regulations. The RUS debt settlement regulation provides:
    ``In considering any future loan requests from a borrower whose 
debt has been settled in whole or in part (including the surviving 
entity of merged or consolidated borrowers, where at least one of said 
borrowers had its debt settled), it will be presumed that credit 
support for the full amount of the requested loan will be required. 
Such support may be in a number of forms, provided that they are 
acceptable to the Administrator on a case by case basis. They may 
include, but need not be limited to, equity infusions and guarantees of 
debt repayment, either from the applicant's members (in the case of a 
power supply borrower), or from a third party.'' (7 CFR 1717.1206) New 
RUS loans to formerly troubled or bankrupt borrowers are subject to 
review and approval procedures which include personal approval by the 
RUS Administrator. RUS regulations published in 1992 provide that:
    ``RUS will make a loan only if there is reasonable assurance that 
the loan, together with all outstanding loans and other obligations of 
the borrower, will be repaid in full as scheduled, in accordance with 
the mortgage, notes and loan contracts. The borrower must provide 
evidence satisfactory to the Administrator that the loan will be repaid 
in full as scheduled, and that all other obligations of the borrower 
will be met.'' (7 CFR 1710.112(a)) and
    ``RUS makes loans only if, in the judgment of the Administrator, 
the security therefore is reasonably adequate and the loan will be 
repaid in full according to its terms within the time agreed.'' (7 CFR 
1710.113(a))
    To help enforce these requirements, RUS has two agency loan 
underwriting committees. All new loans and loan guarantees are 
thoroughly reviewed by at least one committee. Larger loans and loan 
guarantees are reviewed by both committees before being submitted for 
approval to the Administrator. The committees are made up of high-level 
RUS staff representing the electric program and other agency offices.
    To support the required findings that a proposed loan is feasible 
and secure, RUS requires that all applications for loans and loan 
guarantees be supported by a range of financial and engineering studies 
showing, among other things, that: the facilities to be financed are 
needed to meet RE Act purposes; the borrower will have the revenues to 
meet its obligations in full; the collateral for the debt will be 
adequate; there is a reasonable expectation that any state regulatory 
authorities with jurisdiction will allow the facilities to be included 
in rate base; the performance of the borrower's management is adequate; 
and there are no undue or extraordinary risk factors. These 
requirements are codified in RUS regulations. RUS will not approve 
financing for generating plants unless the borrower demonstrates that 
the facilities to be financed are the best, most cost-effective 
alternative for obtaining the electricity needed to meet the borrower's 
projected load.
    In short, in the event that loans are made to formerly troubled or 
bankrupt borrowers, all steps are taken to ensure that the loan will be 
feasible and the Government's security adequate.
    Final decisions on debt restructuring or writedown of interest are 
made by the RUS Administrator. Final decisions on the writedown of 
principal are made by the Under Secretary for Rural Development, USDA. 
The Attorney General has the authority to compromise debt in bankruptcy 
cases. For borrowers whose debt has been settled in the past under the 
authority of the Department of Justice, RUS is responsible for 
notifying the Department of Justice before proceeding to consider new 
applications from such borrowers for restructuring assistance. The 
Department of Justice has the discretion to make the final decision on 
the settlement of such claims under its authority.
    [The information follows:]

[Pages 81 - 90--The official Committee record contains additional material here.]


                   Question Submitted by Mr. Serrano

                   Water and Waste Disposal Programs

    Proposals to solve problems relating to water and waste disposal 
programs are vague.
    Through the Water 2000 initiative, the Department of Agriculture 
targets resources to the estimated 2.5 million rural Americans that 
have some of the nation's most serious drinking water quality and 
availability problems. According to the 1990 Census, over 400,000 rural 
households lack complete plumbing.
    What answers will the Department's Water 2000 program provide for 
these shocking public health concerns? Please provide this panel with 
specific examples of approaches to solving these problems.
    Respondent. Based on needs assessments conducted by our State 
Offices, the funds needed by rural communities to overcome inadequate 
drinking water and/or wastewater disposal exceeds $10 billion. The 
Department's Water 2000 initiative seeks to target the most severe of 
those cases by focusing our loans and grants with leveraged funds from 
outside sources, both Federal and State. The initiative does not have 
earmarked or line-item funding, but uses our regular appropriated water 
and waste disposal loan and grant funds.
    In the three years of the Water 2000 initiative, we have provided 
over $1.3 billion in RUS loans and grants to fund over 1,000 water 
projects in all but one of the 50 states and Puerto Rico. We estimate 
that over 2 million people are receiving safe drinking water at 
affordable rates as a result of this initiative.
    The Water 2000 rollout event in 1997 included over $115 million in 
RUS loans and grants, plus over $35 million from other sources. Forty-
three states and Puerto Rico participated in serving over 11,400 new 
rural households and improving service to about 84,000 others.
    Many rural communities need a central water system to provide safe 
water to their residents. In some cases it's best to develop their own 
system, while in other cases, purchasing water from another system or 
extending service from another system may be the best alternative. Some 
communities may not want or cannot afford a central water system. Where 
good quality water is available, individual or cluster wells may be the 
best solution.
                         Rural Housing Service
                             subsidy rates
    Mr. Skeen. Please provide a table showing the OMB subsidy rate for 
housing loan programs for FY 1998 and FY 1999.
    Respondent: [The information follows:]

------------------------------------------------------------------------
   RURAL HOUSING LOAN PROGRAMS       FY 1997      FY 1998      FY 1999  
------------------------------------------------------------------------
Sec 502 Direct Single Family                                            
 Housing.........................        14.18        12.81        11.82
Sec 502 Direct Single Family Em.                                        
 Supp............................        14.18        12.81  ...........
Sec 502 Guar Single Family                                              
 Housing.........................        0.23*         0.23         0.09
Sec 502 Guar SF Unsub Refinancing  ...........  ...........        -0.13
Sec 515 Direct Multi-Family                                             
 Housing.........................        51.24        53.44        48.25
Sec 538 Guar Multi-Family Housing         3.09         6.09         2.32
Sec 504 Housing Repair Loans.....        36.63        34.36        35.23
Sec 504 Housing Repair Loans Em.                                        
 Supp............................        36.63  ...........  ...........
Sec 514 Farm Labor Housing Loans.        47.77        49.25        52.03
Sec 524 Housing Site Dev. Loans..        -1.02        -1.19         0.33
Sec 523 Self-Help Housing Loans..         2.87         3.41         5.64
Single-Family Credit Sales.......         8.86        13.97         9.02
Multi-Family Credit Sales........        50.55        13.97        48.31
Direct Community Facility Loans..         8.73         8.38        13.74
Guar. Community Facility Loans...         0.41         0.40        -0.54
------------------------------------------------------------------------

                     rural housing service programs
    Mr. Skeen. What is the difference between the Section 533 housing 
preservations grant program and Section 504 very low-income housing 
repair grants?
    Respondent. The Section 533 housing preservation grant program 
provides grant funding on a competitive basis to local nonprofit 
organizations and governmental bodies. These funds enable the grantees 
to provide grants and loans, including interest reduction on loans, to 
low and very low-income homeowners and rental property owners to repair 
existing property and bring these properties up to local codes. The 
Section 504 grant program is designed to directly assist homeowners 62 
years of age or older to remove health and safety hazards. The 504 
grant program does not require that the property meet local codes upon 
completion of the work. This grant program can also be combined with 
the 504 loan program if the borrower displays repayment ability. 
Eligibility for the 504 loan program is not limited by age.
    Mr. Skeen. What was the current backlog, in dollar volume and 
number of approved pre-applications and final applications, for section 
515 loans in fiscal year 1997 and what are the figures for 1998 to 
date?
    Respondent. In FY 97, based on our most recent survey, we had 
approximately $423.5 million in pre-applications on hand which equated 
to approximately 398 loan requests for new construction. We had 
approximately $168.5 million in applications on hand which equated to 
approximately 173 loan requests for new construction. In repair/
rehabilitation and inventory properties, we had approximately $150.8 
million combined.
    The Agriculture, Rural Development, Food and Drug Administration, 
and Related Agencies Appropriations Act, 1997, Pub. L. 104-180 included 
six reforms to the multi-family housing (MFH) program. These reforms 
made substantive changes in the manner in which MFH loan requests are 
processed. The Agency was mandated to prioritize its assistance which 
meant ranking rural places based on greatest need for Section 515 
housing.
    The Agency implemented a Notice of Funding Availability (NOFA) 
system. This system imposes certain time restrictions for developers to 
submit applications to the Agency (60-90 days.) The Agency established 
a list of ``designated places'' for which Section 515 applications 
would be invited. Therefore, many of the pre-applications and 
applications in the pipeline at that time were returned to the 
applicant, because the proposed housing was not to be located in a 
``designated place''. In the future, pre-applications and applications 
will not be retained by the Agency; they will be returned to the 
applicant. Each year, applicants must submit a new application. 
Additionally, the NOFA period has not expired in all States. Therefore, 
for FY 1998, we are unable to provide pre-application/application 
numbers at this time.
                       rental assistance program
    Mr. Skeen. Please update the table on the rental assistance program 
status of funds from page 86 of last year's hearing.
    Respondent. [The information follows:]

----------------------------------------------------------------------------------------------------------------
                                                          Existing demand    No requested in      Total funds   
                      Type of unit                            in units            units            requested    
----------------------------------------------------------------------------------------------------------------
Renewals...............................................             37,516             37,516        551,898,000
New Construction--515..................................              1,667              1,003         12,868,000
New Construction--Farm Labor...........................                658                658          8,442,000
Servicing..............................................            100,000                  0                  0
Rehab..................................................                326                292          4,289,000
Debt Forgiveness.......................................                401                401          5,900,000
    Totals.............................................            140,568             39,870        583,397,000
----------------------------------------------------------------------------------------------------------------
Note.--This chart assumes that all renewals and Farm Labor new construction will be funded. At this time, we    
  estimate that the $17 million available for Section 515 new construction and rehabilitation units will be     
  split 75% towards new construction and 25% towards rehabilitation needs.                                      

    Mr. Skeen. One of the problems with the rental assistance program 
has been participants under-reporting wages. How many states now allow 
wage matching by USDA for the rental assistance program?
    Respondent. USDA is currently conducting wage matching in 26 states 
for the rental assistance program.
    Mr. Skeen. Please provide a five-year table that shows expiring 
rental assistance contracts for each year.
    Respondent. [The information follows:]

Number of expiring rental assistance contracts

Year:
    1999......................................................    37,516
    2000......................................................    44,260
    2001......................................................    42,750
    2002......................................................    42,050
    2003......................................................    40,895
                   section 502 rural housing programs
    Mr. Skeen. Please provide a table showing the numbers of pending 
requests, by State, for all section 502 loan programs as of the end of 
fiscal year 1997.
    Respondent. In response to your question, of pending requests for 
the Section 502 Guaranteed program, for fiscal year 1997, the GRH 
program was able to meet demand for the program and had no pending 
requests at the end of fiscal year 1997.
    The following chart indicates the number of pending section 502 
direct loan requests, by State, which Rural Housing Service had on hand 
as of September 30, 1997.

State:
                                                         No. of Requests
    Alabama...................................................      1290
    Alaska....................................................        49
    Arizona...................................................      1122
    Arkansas..................................................       759
    California................................................       655
    Colorado..................................................       699
    Connecticut...............................................       203
    Delaware..................................................       101
    Florida...................................................      1444
    Georgia...................................................      2083
    Hawaii....................................................       257
    Idaho.....................................................       374
    Illinois..................................................       665
    Indiana...................................................       589
    Iowa......................................................      1353
    Kansas....................................................       371
    Kentucky..................................................      1148
    Louisiana.................................................       365
    Maine.....................................................       245
    Maryland..................................................       533
    Massachusetts.............................................       649
    Michigan..................................................       746
    Minnesota.................................................       533
    Mississippi...............................................      3382
    Missouri..................................................      1599
    Montana...................................................       557
    Nebraska..................................................       453
    Nevada....................................................       210
    New Hampshire.............................................        13
    New Jersey................................................       287
    New Mexico................................................       924
    New York..................................................      1908
    North Carolina............................................      1858
    North Dakota..............................................       172
    Ohio......................................................       777
    Oklahoma..................................................       497
    Oregon....................................................      1317
    Pennsylvania..............................................       150
    Puerto Rico...............................................       630
    Rhode Island..............................................        78
    South Carolina............................................      1107
    South Dakota..............................................       330
    Tennessee.................................................      1190
    Texas.....................................................      2419
    Utah......................................................       328
    Vermont...................................................        10
    Virginia Islands..........................................        34
    Virginia..................................................       794
    Washington................................................       855
    West Virginia.............................................       769
    Wisconsin.................................................       739
    W. Pacific Areas..........................................       721
    Wyoming...................................................       221
                    --------------------------------------------------------------
                    ____________________________________________________

      Totals..................................................    40,562

Note: The 40,552 outstanding requests would translate into approximately 
$2.1 billion in 502 Direct program funds based on the average loan for 
FY 99.

    Mr. Skeen. How many houses do you currently have in inventory, by 
State, and what is the total estimated value of this housing?
    Respondent. As of February 20, 1998, RHS single family housing 
inventory was 1,300 properties with an estimated value of $54,600,000. 
The list of single family housing in inventory by State follows:

Real estate owned by State

                                                         SFH REO on hand
Alabama.......................................................        13
Alaska........................................................         9
Arizona.......................................................        81
Arkansas......................................................        58
California....................................................       123
Colorado......................................................        15
Connecticut...................................................        18
Delaware......................................................         0
Florida.......................................................        33
Georgia.......................................................        59
Hawaii........................................................         4
Idaho.........................................................        14
Illinois......................................................         8
Indiana.......................................................         0
Iowa..........................................................        12
Kansas........................................................         7
Kentucky......................................................        20
Louisiana.....................................................         9
Maine.........................................................        15
Maryland......................................................        12
Massachusetts.................................................        13
Michigan......................................................        27
Minnesota.....................................................        28
Mississippi...................................................        58
Missouri......................................................        23
Montana.......................................................         2
Nebraska......................................................         2
Nevada........................................................         4
New Hampshire.................................................        12
New Jersey....................................................        69
New Mexico....................................................        23
New York......................................................        35
North Carolina................................................        27
North Dakota..................................................         1
Ohio..........................................................         8
Oklahoma......................................................        13
Oregon........................................................        10
Pennsylvania..................................................        24
Rhode Island..................................................         0
South Carolina................................................        63
South Dakota..................................................         6
Tennessee.....................................................         7
Texas.........................................................       184
Utah..........................................................         0
Vermont.......................................................        11
Virginia......................................................        37
Washington....................................................        22
West Virginia.................................................        28
Wisconsin.....................................................        15
Wyoming.......................................................         3
Western Pacific...............................................         0
Puerto Rico...................................................        32
Virgin Islands................................................         3
                    --------------------------------------------------------------
                    ____________________________________________________

      National total..........................................     1,300
                      farm labor housing programs
    Mr. Skeen. What is the total number of applications and dollar 
amounts of Section 514 loans pending, by state, as of the end of fiscal 
year 1997? What is on hand currently in fiscal year 1998?
    Respondent. The following tables reflect both pending applications 
and proposals on hand for section 514 loans and section 516 farm labor 
housing grants for FY 97 and FY 98 as of March 11, 1998. Some projects 
from the FY 97 list have been funded in FY 98 and are removed from the 
FY 98 list. Additionally, obligations for the majority of the FY 98 
available level for farm labor loans and grants have been approved by 
the National Office and are in the final process to be obligated by the 
states.
    Partially to address this high demand, RHS is revising the Farm 
Labor regulations to move to an annual Notice of Funding Availability 
(NOFA) process, rather than approve applications on a first-come, 
first-served basis. RHS has informed the development community of the 
NOFA process and has discouraged the submission of new applications 
under the existing regulations since they would most likely not be 
reached for funding in FY 1998. RHS will complete the new regulations 
in FY 99.
    In addition, based on a recent inquiry to all of our State Offices, 
approximately $14 million in rehab funds are needed for existing 
farmworker housing complexes.

[Pages 96 - 97--The official Committee record contains additional material here.]


                   rural housing preservation grants

    Mr. Skeen. Please provide a ten-year table showing the number and 
dollar amounts of rural housing preservation grants.
    [The information follows:]

   RURAL HOUSING PRESERVATION GRANTS OBLIGATED, FISCAL YEAR 1988-1997   
                         [Dollars in thousands]                         
------------------------------------------------------------------------
            Fiscal year             Number of  grants        Amount     
------------------------------------------------------------------------
1988..............................                156             19,140
1989..............................                158             19,140
1990..............................                160             19,140
1991..............................                193             23,000
1992..............................                190             23,000
1993..............................                198             23,000
1994..............................                203             23,000
1995..............................                207             22,000
1996..............................                160             11,000
1997..............................                138              7,587
------------------------------------------------------------------------

                       self-help housing program
    Mr. Skeen. What was the total dollar amount of pending requests for 
self-help housing grants at the end of fiscal year 1997?
    Respondent. The total dollar amount pending at the end of 1997 was 
$27,825,471 in actual requests. However, this figure is not reflective 
of the demand since RHS has had to institute a number of policies to 
allocate the limited funds available. For example, RHS and the 
Technical and Management Assistance (F&MA) contractors continue to get 
many inquires from organizations that are interested in the self-help 
program which we cannot address. We have limited the funding of 
grantees in States with numerous existing grantees. We have limited 
increases in small grants to reflect cost of living factors and have 
not allowed any increases in large grants, although the demand to serve 
additional families exists. Finally, because of limited fund 
availability, we have emphasized that existing grantees must find other 
sources to leverage with RHS grant funds.
                 very low-income housing repair grants
    Mr. Skeen. Please provide a ten-year table showing the number and 
dollar amounts of very low-income housing repair grants.
    [The information follows:]

 VERY LOW-INCOME HOUSING REPAIR GRANTS OBLIGATED, FISCAL YEAR 1988-1997 
                         [Dollars in thousands]                         
------------------------------------------------------------------------
            Fiscal year             Number of  grants        Amount     
------------------------------------------------------------------------
1988..............................               3656             12,500
1989..............................               3684             12,500
1990..............................               3664             12,642
1991..............................               3695             12,740
1992..............................               3678             12,803
1993..............................               3990             14,278
1994..............................               7354             27,487
1995..............................               6964             27,821
1996..............................               6244             25,712
1997..............................               4083             17,509
------------------------------------------------------------------------

    Mr. Skeen. What is the number and dollar amounts, by state, of 
pending requests for grants for very low-income housing repair as of 
the end of fiscal year 1997?
    Respondent. The following chart indicates the number and amount of 
pending requests for grants for very low-income housing repair which 
Rural Housing Service had on hand as of September 30, 1997.

------------------------------------------------------------------------
                                             Amount of       Number of  
                  State                       request        requests   
------------------------------------------------------------------------
Alabama.................................      $1,008,991             181
Alaska..................................          33,815               6
Arizona.................................       1,001,568             188
Arkansas................................         862,599             152
California..............................         608,753             109
Colorado................................         105,120              21
Connecticut.............................          37,470               7
Delaware................................         105,078              16
Florida.................................         539,094             121
Georgia.................................       1,291,738             237
Hawaii..................................          55,040              13
Idaho...................................          86,121              24
Illinois................................         266,019              67
Indiana.................................         254,282              75
Iowa....................................         219,804              81
Kansas..................................         220,035              56
Kentucky................................         402,590              89
Louisiana...............................         814,846             161
Maine...................................         335,020              66
Maryland................................         385,129              58
Massachusetts...........................          71,786              14
Michigan................................         219,993              55
Minnesota...............................         545,306             103
Mississippi.............................       2,564,612             414
Missouri................................       1,122,578             287
Montana.................................         175,405              34
Nebraska................................         193,048              43
Nevada..................................         104,825              20
New Hampshire...........................          22,355               6
New Jersey..............................         104,465              27
New Mexico..............................         281,191              94
New York................................         508,652              95
North Carolina..........................         904,218             205
North Dakota............................         345,687              66
Ohio....................................         574,361             130
Oklahoma................................         520,832              86
Oregon..................................         208,016              42
Pennsylvania............................         255,220              60
Puerto Rico.............................         390,177              75
Rhode Island............................           2,500               1
South Carolina..........................       1,785,310             265
South Dakota............................         156,010              31
Tennessee...............................         435,426              86
Texas...................................       2,175,262             470
Utah....................................         105,450              20
Vermont.................................           4,500               1
Virgin Islands..........................          20,761               3
Virginia................................         669,988             137
Washington..............................         372,882              60
West Virginia...........................         284,202              52
Wisconsin...............................         162,096              39
W. Pacific Areas........................         666,728             158
Wyoming.................................          93,710              17
                                         -------------------------------
      Totals............................      24,680,665           4,924
------------------------------------------------------------------------

                 compensation for construction defects
    Mr. Skeen. Please provide a ten-year table showing the number and 
dollar amounts of compensation for construction defects payments made 
over the past ten years.
    Respondent. [The information follows:]

           COMPENSATION FOR CONSTRUCTION DEFECTS--FY 1988-1997          
                          [Dollars in thousand]                         
------------------------------------------------------------------------
                                                    Number of           
                    Fiscal year                       grants     Amount 
------------------------------------------------------------------------
1988..............................................         70       $258
1989..............................................         69        314
1990..............................................         37        179
1991..............................................         76        169
1992..............................................         35        193
1993..............................................         93        306
1994..............................................         99        385
1995..............................................         55        257
1996..............................................         47        295
1997..............................................         30        307
------------------------------------------------------------------------

                       self-help housing programs
    Mr. Skeen: Please list all the loans made under the self-help 
housing land development fund during fiscal year 1997.
    Respondent: There was one Section 523 Self-Help Site Development 
Loan to Nevada for $299,000 and two Section 524 RH Site Development 
Loans to the States of Indiana and Missouri for $100,000 each (a total 
of $200,000). The low levels of funding for these two programs have 
made it impossible to effectively estimate demand and solicit interest. 
The requested level of $5 million for each program in FY 99 should make 
these programs available on a nationwide basis.
                               user fees
    Mr. Skeen: During fiscal year 1997, what user fees were collected 
for FHIF?
    Respondent: The user fees collected for RHIF in fiscal year 1997 
were $20,906,289.28. A complete breakdown of fee type and amounts are:

                                                                  Amount
Application/Transfer Fees...............................      $28,029.00
Appraisal Fees..........................................    3,746,394.01
Conditional Commitment Fees.............................      206,690.00
Credit Report Fees......................................      809,316.00
502 Guarantee Fees......................................   14,962,718.29
Insurance Charges.......................................        2,155.00
Late Payment Fees.......................................      443,939.27
Service charges (non-sufficient fund checks)............       60,127.87
Tax Service Fees........................................      641,372.80
Miscellaneous Fees (legal fees, loan closing fees, 
    offset fees)........................................        5,546.35
                 section 502c rental assistance program
    Mr. Skeen: Please provide a five-year table showing the amount of 
funds used, annually, for the section 502C rental assistance program.
    Respondent: [The information follows:]

Rural Housing Service Program--Section 502C rental assistance

                        [In thousands of dollars]

Fiscal year:
                                                                  Amount
    1993..........................................................  $522
    1994.......................................................... 1,656
    1995..........................................................
    1996.......................................................... 2,645
    1997..........................................................
                    community facility loan programs
    Please provide a ten-year table showing the number and dollar 
amount of community facility loans made, by fiscal year. Also show the 
breakout of direct and guaranteed loans.
    Respondent. [The information follows:]

         DIRECT COMMUNITY FACILITY LOANS OBLIGATED--FY 1988-1997        
                         [Dollars in thousands]                         
------------------------------------------------------------------------
                                             Number of                  
               Fiscal year                     loans          Amount    
------------------------------------------------------------------------
1988....................................             234         $95,700
1989....................................             304          95,700
1990....................................             265          94,381
1991....................................             273         100,000
1992....................................             241         100,000
1993....................................             206         100,000
1994....................................             235         163,050
1995....................................             274         176,071
1996....................................             315         207,619
1997....................................             343         137,437
------------------------------------------------------------------------


       GUARANTEED COMMUNITY FACILITY LOANS OBLIGATED--FY 1988-1997      
                         [Dollars in thousands]                         
------------------------------------------------------------------------
                                             Number of                  
               Fiscal year                     loans          Amount    
------------------------------------------------------------------------
1991....................................              32         $25,000
1992....................................              31          25,000
1993....................................              53          52,346
1994....................................              40          30,028
1995....................................              40          51,092
1996....................................              65          55,922
1997....................................              81          82,869
------------------------------------------------------------------------

    Mr. Skeen. Please provide a table showing the amount and number of 
guaranteed Community Facilities (CF) loans and a table for direct CF 
loans, by State, for FY's 1996, 1997, and 1998 to date.
    Respondent. [The information follows:]

[Pages 102 - 109--The official Committee record contains additional material here.]


    Mr. Skeen. How many applications for direct and guaranteed loans 
were pending at the end of 1997? What is the current backlog of pending 
loans?
    Respondent. There were 326 preapplications and applications for 
community facility direct loan funds on hand, totaling $363,201,201. By 
March 2, 1998, those numbers had increased to 386 applications totaling 
$403,228,949. At the end of FY 1997, 37 guaranteed loan preapplications 
and applications totaling $61,766,556 had been submitted. As of March 
2, 1998, 47 applications for $86,072,743 had been received.
    Mr. Skeen. Did any of the community facility subsidy appropriated 
for fiscal year 1997 go unused?
    Respondent. The subsidy for all community facility programs was 
completely utilized in FY 1997.
    Mr. Skeen. Please provide a list of community facility loans that 
were made for medical clinics and hospitals during fiscal years 1996, 
1997, and so far in 1998.
    Respondent. [The information follows:]

[Pages 111 - 113--The official Committee record contains additional material here.]


             rural community fire protection grant program

    Mr. Skeen: Please provide a two-year table showing, by state, the 
number and amount for the rural community fir protection grants 
program.
    Respondent: [The information follows:]

          RURAL COMMUNITY FIRE PROTECTION GRANTS--FY 1996-1997          
                         [Dollars in thousands]                         
------------------------------------------------------------------------
                                Fiscal year 1996      Fiscal year 1997  
                             -------------------------------------------
                               Number     Amount     Number     Amount  
------------------------------------------------------------------------
Alabama.....................     1,034     $30,818       167     $19,158
Alaska......................        20      44,000        19      28,000
Arizona.....................         3      30,000         3      19,000
Arkansas....................         1      31,451        39      19,552
California..................        31      64,000        23      41,000
Colorado....................         3      37,700         3      24,300
Connecticut.................        17      14,482        13       9,275
Delaware....................         1      10,743         1       6,894
Florida.....................        44      41,129        82      25,666
Georgia.....................         1      36,924        31      22,954
Hawaii......................         1      43,000         1      28,000
Idaho.......................        10      23,500        12      15,200
Illinois....................        23      76,565        13      49,203
Indiana.....................        22      52,824        31      33,926
Iowa........................        93      69,027        50      44,342
Kansas......................        72      68,800        31      44,300
Kentucky....................       295      33,871       154      21,056
Louisiana...................        63      42,281        64      26,255
Maine.......................        51      15,669        52      10,069
Maryland....................        28      22,020        29      14,166
Massachusetts...............        11      16,263         1      10,069
Michigan....................        97      56,266        73      36,158
Minnesota...................       183      78,879        82      50,691
Mississippi.................        18      30,875        15      19,194
Missouri....................       185      57,988       183      37,250
Montana.....................        44      23,875        37      12,400
Nebraska....................        33      51,100        25      32,900
Nevada......................        15      20,000        11      13,000
New Hampshire...............        26      11,574        17       7,440
New Jersey..................        36      22,613        22      14,533
New Mexico..................        10      23,000         9      15,000
New York....................        34      53,952        34      34,670
North Carolina..............        93      44,124       271      27,431
North Dakota................        83      63,900        12      19,200
Ohio........................         6      59,768        11      38,390
Oklahoma....................        42      38,076        43      23,870
Oregon......................        17      33,000         6      21,000
Pennsylvania................        30      60,302        41      38,738
Rhode Island................         1       8,962         1       5,754
South Carolina..............        48      28,456        23      17,690
South Dakota................        22      48,800        14      34,700
Tennessee...................        16      35,080        87      21,808
Texas.......................        60      99,826        32      62,059
Utah........................        20      21,000         9      13,000
Vermont.....................         1      12,167         1       7,837
Virginia....................        59      30,299        30      18,836
Washington..................        11      33,000         8      21,000
West Virginia...............        23      20,299        34      13,045
Wisconsin...................        53      51,637        24      33,182
Wyoming.....................        20      15,600        24      10,000
Western Pacific.............         0           0         0           0
Puerto Rico.................         1       9,000         1       6,000
Virgin Islands..............         1       8,000         1       5,000
Other.......................  ........      42,515  ........      50,939
                             -------------------------------------------
      Total.................     3,112   1,999,000     2,000   1,275,000
------------------------------------------------------------------------

    Mr. Skeen: Can any other RHS programs be used to assist rural fire 
protection programs?
    Respondent: The community facility loan program provides direct and 
guaranteed loans and grants for the development of essential community 
facilities in rural areas. Historically, approximately 35 percent of 
direct community facility loans are made to rural fire departments for 
such projects as the construction of fire stations or the purchase of 
fire trucks.
                        rural rental assistance
    Mr. Skeen: How much rental assistance money does HUD provide 
annually to rural rental programs.
    Respondent: HUD provided $191.2 million in Section 8 Housing 
Assistance Payments to the rural rental program in 1997. This figure 
represents the outlay of funds under existing 20 year RHS housing 
assistance payment (HAP) contracts and one year renewal HAP contracts. 
The $191.2 million funds approximately 44,500 units at an annual cost 
of $4,297 per unit compared to the one year cost of RHS rental 
assistance of approximately $2,771 per unit.
                    rural housing assistance grants
    Please provide a table showing the distribution of Rural Housing 
Assistance Grants by state for fiscal year 1998 to date.
    Respondent: The Rural Housing Assistance Grants consist of Section 
504 Grants, Section 516 Farm Labor Housing Grants, Section 533 Housing 
Preservation Grants, Section 525/509 Housing Application Packaging 
Grants, and Section 502 Construction Defect Grants. Of these programs, 
only Section 504 grants and Section 533 Housing Preservation Grants are 
allocated by State, Section 533 Housing Preservation Grants have not 
yet been obligated as the application period is open until March 24, 
1998. A table showing the distributions of these programs is provided 
for the record.
    [The information follows:]

[Pages 116 - 117--The official Committee record contains additional material here.]


              section 538 rural rental guaranteed program

    Mr. Skeen: Why is rental assistance not used in the multifamily 
rural rental guarantee program?
    Respondent: The Section 538 Guaranteed Rural Rental Housing Program 
is intended to reach the needs of rural America not being served with 
the Section 515 Direct Rural Rental Housing Program--mainly rural 
residents with low and moderate incomes. This program provides a 
guarantee so that the private lending institutions can provide a 
competitive interest rate while ensuring the necessary profit for the 
private sector lender.
    Partnership opportunities exist with other affordable housing 
programs to allow the section 538 program to reach very-low income 
residents. The section 538 program restricts residents to those persons 
with 115% of area median income.
    The Section 515 is a direct loan program in which the subsidy rate 
reflects a buydown of the government's lending rate to 1%. This allows 
the project, specifically if coupled with rental assistance, to reach 
down to low and very low-income residents with an average annual income 
of approximately $7,300.
    Utilizing rental assistance in the guarantee 538 program would be 
inefficient when compared to the direct 515 program since the rental 
assistance would be partially utilized to bring down the cost of 
private sector borrowing and the profit earned by the private sector to 
the cost of government borrowing. For the same income tenant, it would 
cost the government significantly more to subsidize the 538 program 
with rental assistance than the 515 program.
                    section 502 eligibility criteria
    Mr. Skeen: What are the criteria for qualifying for Section 502 
direct and guaranteed loans?
    Respondent: The following is the criteria for qualifying for 
guaranteed loans under existing regulations:
Applicant eligibility
    Must have adequate and dependable income; loan applicants must 
demonstrate repayment ability for the loan in accordance with Agency 
guidelines, defined as total debt ratio, not to exceed 41 percent, and 
PITI (principle, interest, taxes and insurance), not to exceed 29 
percent; loan applicants must have an acceptable credit history, 
including rent history, to demonstrate ability and willingness to meet 
obligations; unable to get credit without RD guarantee; citizen or 
legally admitted for permanent residence; has legal capacity to incur 
the loan obligation; and does not own a home or current home is 
inadequate.
Income limits
    Guaranteed rural housing loans may be made to families with 
moderate incomes. Moderate income is described at 115 percent of the 
median income for the area, as adjusted.
    The adjusted annual income may not exceed the applicable income 
limits set forth in RD Instruction 1980-D, Exhibit C.
    In response to your question regarding eligibility for Section 502 
Direct loans, the borrower:
    Must have adjusted household income at or below 80 percent of 
median income for the area; must be unable to obtain sufficient credit 
from another source; must have adequate repayment ability; principal, 
interest, taxes and insurance debt ratio cannot exceed 29 percent for 
very low or 33 percent for low income families; total debt ratio cannot 
exceed 41 percent; cannot presently own a dwelling; must meet 
citizenship or eligible non-citizen requirements; possess legal 
capacity to incur the loan; personally occupy the dwelling; and have 
acceptable payment history.
                       chief information officer
    Mr. Skeen: What input does the Acting Chief Information Officer 
have in software development, DLOS contracts, and other computer-
related programs of rural development programs?
    Respondent: The Office of the Chief Information Officer (OCIO), in 
a collaborative effort with Rural Development's program staff, ensure 
that all automated systems developed meet identified business 
requirements and are delivered in the most effective, timely, and 
lowest possible cost.
    The OCIO establishes automation policies and procedures that govern 
development of all automation systems including those developed via 
contract. The OCIO ensures that all systems will be Year 2000 
compliant, consistent with the LAN/WAN Voice infrastructure, and 
adheres to all legislative mandates such as Clinger/Cohen Act and the 
FY 1998 Appropriation Bill containing anti-deficiency legislation. 
Additionally, the OCIO ensures compliance with regulatory 
pronouncements including Office of Management and Budget circulars.
                        section 515 rural rental
    Mr. Skeen: Last year USDA had about $13 million on hand from the 
Section 515 occupancy surcharge. Is that money still available and how 
does the Department propose to use it?
    Respondent: The Appropriation Act of 1997 repealed the Occupancy 
Surcharge requirement. This surcharge accumulated approximately $13 
million in two interest bearing accounts in the Rural Housing Insurance 
Fund. As of September 30, 1997, levels of $7,769,785.11 in principal 
and $1,337,821.55 in interest are in the pre-1991 account and 
$3,829,570.79 in principal with $498,600.38 interest are in the post 
1991 account. The multi-family housing programs continue to experience 
financial needs in continuing the service to serve low and very low-
income rural residents. We would like to work closely with the 
Committee in the future to develop the most appropriate use for these 
funds.
                          advisory loan limit
    Mr. Skeen: What is an ``advisory loan limit'' as proposed on page 
24-9 of the budget justifications?
    Respondent: We are referring to the cited new language that 
provides for a separate loan level for multi-family credit sales up to 
$5,001,000. It is ``advisory'' in that it is secondary in budgetary 
importance to the paragraph where budget authority is provided for the 
loan costs. An advisory loan limitation can be either exceeded or not 
attained with the amount of budget authority provided.
    The new procedures for executing the enacted budget authority using 
the budget rate in the President's request, should alleviate the 
problem of major deviations from the advisory levels.
                 section 504 rural housing repair loans
    Mr. Skeen: What is the current demand for direct housing repair 
loans?
    Respondent: As of March 2, 1998, Rural Housing Service had 3,955 
pending requests for section 504 direct housing repair loans in the 
amount of $28,018,254.
                     multi-family housing programs
    Mr. Skeen: How will the request for Section 515 funds be divided 
between new construction and rehabilitation?
    Respondent: In response to your question about the division of 
Section 515 funds between new construction and rehabilitation, with the 
Administration request for a $100 million program level in FY 99, we 
will allocate all funds--except for statutory set-asides and a small 
reserve--to our State Offices and provide guidance on how to analyze 
the need for construction and rehabilitation. We estimate at this time 
that with a $100 million funding level approximately $75 million will 
go toward new construction and that the remainder will go toward 
rehabilitation, with the continued policy placing the financing of any 
facility with serious health or safety concerns first prior to funding 
any new construction.
    Mr. Skeen: Who is eligible for Section 515 loans and who is 
eligible for occupancy of the units?
    Respondent: Eligible borrowers may be proprietorships, general 
partnerships, limited partnerships, nonprofit organizations, and public 
bodies. These borrowers must also evidence the managerial ability to 
own and operate a successful rental housing project. Borrowers must 
also evidence sufficient financial resources to ensure the project's 
success. These are the basic eligibility requirements for Section 515 
Rural Rental Housing Loans. Borrowers must show that the shelter costs 
charges for rent and utilities are within the payment ability of 
eligible residents. Borrowers must evidence an inability to obtain 
credit from other sources to support such affordable charges. An 
exception to this standard is permitted if the borrower is a state or 
local agency.
    Eligible occupants must be very low, low, or moderate income 
residents. These occupants must provide a verification of their income 
by a third party source. Such occupants must also execute a tenant 
certification required by the Agency. These occupants must also meet 
the eligibility requirements established by the borrower and execute a 
lease established by the borrower.
    Mr. Skeen: How will the request for farm labor housing be divided 
between new construction and rehabilitation?
    Respondent: In response to your question about how the requested 
farm labor housing funds will be divided between new construction and 
rehabilitation, we have the following answer: At the Administration's 
proposed program level of $45.1 million for the Section 514/516 Farm 
Labor Housing program, we estimate at the time thatbetween $5 and $8 
million would be allocated to rehabilitation. The Farm Labor Housing 
portfolio is aging and we anticipate that several of our larger and 
older facilities will need rehabilitation. Any facility endangering 
health or safety will receive highest priority for funds.
                   multi-family housing credit sales
    Mr. Skeen. Why is the subsidy rate for multi-family housing credit 
sales so much larger than for single family housing as indicated on 
page 24-16 of the budget justification?
    Respondent. It is for the same reasons that the direct section 515 
rental housing loan program has a subsidy rate considerably greater 
than the direct section 502 loan program. The magnitude of a subsidy 
rate is indicative of the task that the loan program aspires to 
address.
    The average income of a section 515 tenant is less than $8,000 per 
annum. In the section 502 program the average income is more than twice 
that. The cost to the Government of providing adequate housing at an 
affordable cost to resident families is directly related to the 
expected income of the program's target recipients. Another factor that 
causes the multi-family program to have a greater subsidy rate, is the 
length of the effective term that the loan will be subsidized. A 
successful section 515 loan is projected to assist the same type of 
very-low income tenants continuously for 30 years or more. However, the 
mandatory graduation provisions of the section 502 program, along with 
the cumulative impact of an array of economic, financial, and lifestyle 
factors will result in the average section 502 loan being assisted for 
less than 15 years, with the potential for many of those years being 
only modestly costly for the Government to assist as borrowers approach 
graduation.
                                 cohort
    Mr. Skeen. What is a ``cohort?''
    Respondent. A cohort is a group of loans with similar 
characteristics. Generally, a cohort will correspond to a program line 
item in the budget. For instance, Section 502 direct Single Family 
Housing loans made during FY 1998 will comprise one cohort. Section 502 
guaranteed Single Family Housing loans made during FY 1998 will 
comprise another cohort.
                            debt forgiveness
    Mr. Skeen. What kind of debt forgiveness is available under the 
rental assistance program as described on page 24-26 of the budget 
justification?
    Respondent. We provide to each nonprofit organization or public 
agency purchasing housing and related facilities financial assistance 
(in the form of monthly payments or forgiveness of debt) an amount 
necessary to ensure that the monthly rent payment made by each low 
income family or person residing in the housing does not exceed the 30 
percent of maximum rent permitted.
                           rental assistance
    Mr. Skeen. What are USDA's projections for the rental assistance 
program for the next five fiscal years?
    Respondent. The 1999 Budget projections for rental assistance are 
shown in the chart below.
                                                               Amount of
                                                       rental assistance
                                         projected; both section 521 and
Year:                                               section 502(C)(5)(D)
    1999................................................     583,397,000
    2000................................................     665,495,000
    2001................................................     660,962,000
    2002................................................     672,352,000
    2003................................................     657,198,000


    Mr. Skeen. How does the rental assistance program work? How do 
appropriated funds go from USDA to the landlord or tenant?
    Respondent. Rental Assistance (RA) assists tenants by allowing them 
to pay a monthly tenant contribution that equals 30 percent of their 
adjusted income for shelter costs. Any payment over 30 percent income 
is considered rent overburdened. The rent used in the shelter cost 
calculation is the Basic rent, which is the rent needed to pay for 
operating expenses and debt service at 1 percent. RHS uses interest 
credit to reduce the interest rate from the note rate to the 1 percent 
rate.
    A tenant does not receive any cash payment of RA, unless 30 percent 
of their adjusted income is so low that it is less than the utility 
allowance for their unit. In those cases, borrowers provide a monthly 
check for the difference between 30 percent of the tenants adjusted 
income and the utility allowance. This check provides funds to tenants 
to pay their utility expenses directly. The utility allowance is an 
amount that roughly equals the average cost of utilities paid each 
month by the MFH project's tenants. Less than 5 percent of all RA 
tenants receive a check to cover such expenses.
    The borrower either enters into or modifies an RA agreement with 
RHS to record the number of RA units assigned through each obligation 
to their project.Borrowers access RA by presenting a monthly request to 
RHS. The request is based on a worksheet that calculates the RA needed 
by each tenant depending on the tenant's adjusted income and their 
unit's rental rate and utility allowance. The RA request is made by the 
borrower at the time they make their loan payment and refund interest 
credit not needed by higher income tenants.
    The amount of RA provided to the borrower as a check to offset 
operating expenses is the amount of RA due that remains after 
``netting'' out the loan payment and overage. This allows for more 
efficient use of project operating cash by not requiring the borrower 
to submit a payment and then receive reimbursement a few weeks later.
    Mr. Skeen. What are the terms of the rental assistance contracts?
    Respondent The rental assistance payments are delivered through a 
five year contract.
                             ez/ec earmark
    Mr. Skeen. Why is an earmark of mutual and self-help housing grants 
necessary for EZ/EC's?
    Respondent The EZ/EC designated communities reflect the 
demographics that this program is intended to serve. Many of these 
communities in the designated areas suffer from a combination of high 
rates in unemployment, substandard housing, rent overburdened tenants 
and inadequate essential community facilities. The self-help housing 
program enables low and very-low income residents to achieve 
homeownership while building communities and sustainability. Additional 
benefits include increasing the tax base and enhancing the sense of 
community. If there is a balance of earmarked funds that is not 
allocated by June 30, 1999, they will be reprogrammed into the national 
self-help account which will serve additional or existing grantees.
              rural housing civil rights outreach program
    Mr. Skeen. The press reports that Rural Housing is beginning a 
series of workshops to provide information on affordable housing for 
low to moderate income families. How many of these workshops will be 
held and where?
    Respondent Consistent with Secretary Glickman's Civil Rights 
Initiatives to reach out and serve minorities and underrepresented 
populations and communities, the Administrator of RHS has established 
goals for each state to conduct outreach. States have the flexibility 
to choose the methods they feel will serve their unique populations and 
possible barriers that currently exist. As a result of these efforts, 
we expect to increase awareness for opportunities in homeownership, 
rehabilitation of existing housing stock and the availability of safe 
and affordable rental housing and essential community facilities. To 
reach this goal, each state conducts various activities, including 
workshops, press and other related educational materials, in reaching 
our potential customers and partners which include private, government 
and nonprofit entities. The National office does not direct this 
activity. Should the Committee have any concerns or questions for a 
particular state or region, we would be delighted to work with the 
states to provide you with the necessary information.
    Mr. Skeen. Will Rural Development hold workshops for other mission 
areas?
    Respondent Each state conducts various outreach activities to 
increase awareness of all of the Rural Development programs and 
associated technical assistance. This is a continuous and ongoing 
effort.
                        administrative expenses.
    Mr. Skeen. What is the reason for the increase in Object 
Classification 25.2, Other Services?
    Respondent In FY 1999, the Agency is requesting an increase of 
$5,875,000. Most of the increase, $5,000,000, will be for information 
technology initiatives. This funding will be used for software 
technological advances that are essential to keep the mission area's 
central computer systems working and for the Agency to proceed with 
field service center implementation and loan origination servicing. 
Agency initiatives encompass automation coordination with the service 
center partner agencies--the Farm Service Agency and the Natural 
Resources and Conservation Service. Funding will also be applied to the 
software development project to accomplish the changes necessitated by 
the century date change.
    In addition to these initiatives, the Agency is requesting an 
increase of $875,000 for loan program expenses. Loan program expense 
funds are used to purchase essential services which maintain the 
financial health and integrity of the Agency's $40 billion plus 
portfolio of direct and guaranteed loans; provide professional services 
and expertise in conjunction with effective loan making and 
underwriting; and meet statutory requirements for program operation and 
loan origination. This modest expenditures helps minimize losses to the 
Government's investment.
    Mr. Skeen. What is the reason for the increase in Object 
Classification 31, Equipment?
    Respondent The Agency has requested an increase of $1,147,000 for 
information technology equipment. This funding will be used to provide 
modern compatible automation components for the mission area offices in 
the field that will provide the increased capacity required to run 
necessary loan processing software and perform essential automation 
tasks. These initiatives will enable the mission area to fulfill its 
commitments to field service center implementation and automation 
coordination with service center partner agencies, as well as loan 
origination servicing.
                    multi-famil rural rental housing
    Mr. Skeen. The budget proposes a decrease in direct multi-family 
housing loans of about $29 million from 1998; however, there is an 
increase in guarantees of about $130 million. This assistance is 
expected to provide for rehabilitation of existing units as well as new 
construction. We need safe, affordable rental housing in rural areas, 
but I am concerned about our ability to support a growing portfolio of 
rental projects. Many of these projects cannot cash flow without rental 
assistance to the tenants. In 1999, rental assistance is projected to 
account for about 44 percent of the total RHS budget. How much longer 
can we continue to finance the construction of new rental units before 
the demand for rental assistance outstrips our ability to fund the 
other programs of RHS?
    Responsent. We understand the Committee's concern with the 
associated cost of rental assistance and we will work with you to 
address this complicated issue. In addition, we are currently 
reinventing the Section 515 multi-family housing regulations that will 
reflect safeguards to ensure no more rental assistance than is 
necessary will go into any one project.
                         centralized servicing
    Mr. Skeen. In 1997, you proposed to centralize the servicing of 
your direct single family housing loan portfolio. Coupled with this 
effort was the promise that you would cut 600 staff positions and 
reprogram about 900 staff positions throughout the Rural Development 
Mission Area. Your 1999 budget shows a reduction in your Rural 
Development staff ceiling of about 900 from the 1997 budget and about 
1,800 from 1995. I am concerned that the reductions have gone beyond 
those proposed and are, in fact, threatening your ability to deliver 
these programs in the field. I am also concerned that these further 
reductions may have been necessitated because you failed to recognize, 
and account for, the promotions being offered and given to the 900 
positions being reprogrammed throughout Rural Development. Has ``grade 
creep'' in the field offices resulted in additional staff reductions or 
will it cause reductions next year.
    Responsent. Mr. Chairman, before I address the specifics of your 
question, I think it may be necessary to clarify something relative to 
the 900 positions that were reassigned from single family housing to 
other functions throughout rural development. Some individuals are 
apparently under the illusion that we simply provided promotions in the 
900 positions. Nothing could be further from the truth. The 900 
individuals, carrying out the loan servicing responsibilities, were in 
relatively low level positions, typically a GS-6. The functions to 
which the 900 vacancies were reassigned were significantly more 
demanding, requiring much more education or training, and were 
justifiably higher graded positions. In those instances in which use of 
the 900 positions created a new job and existing employees were 
promoted into the positions, it opened opportunities down through the 
ranks and we were able to retain a significant number of employees in 
the servicing jobs that would have been otherwise terminated because 
the function was eliminated.
    The reassignment of the positions to other functions did indeed 
contribute to the average higher salary cost that we are now 
experiencing. However, this is only part of the reason for the higher 
cost. The increase began with the reorganization of USDA and the 
transfer of the farm credit programs to FSA. Most of the GS-9 Assistant 
County Supervisors went to FSA, leaving no staff with the authority to 
make rural housing loans. Subsequently there were a significant number 
of promotions throughout the country to enable RHS to make loans at the 
county level.
    Average salaries continued to increase through the creation of the 
Centralized Servicing System, the termination of 600 positions and the 
reassignment of the 900 positions. Throughout this process the 
percentage of employees in grades 10 through 15 increased from 39.55% 
to 44.4% while those in grades 1 through 9 decreased from 60.45% to 
55.6% as a percentage of total employment. Some increase in salary cost 
was anticipated and efforts were made to control the cost through the 
use of buyouts which typically occur at the higher levels. However, 
only 38% of those taking the buyout offer were in grades 10 or higher. 
This was exacerbated by the need to conduct RIFs in some states and the 
release of temporary employees. Of the employees subject to RIF action, 
94% were in grades 9 or below, as were the vast majority of temporary 
employees released.
    The increase in salaries has not resulted in additional reductions 
in employment. We have been able to manage the available funds in FY 
1998 by reducing administrative costs such as travel and training, and 
we have deferred some investments in information technology to avoid 
reduction of staff. If the level of funds requested for FY 1999 is 
appropriated, we would not need to reduce staff in FY 1999, further 
than the reductions proposed in the budget which are attributable to 
the Department's Streamlining Plan. We anticipate the reductions 
proposed for FY 1999 can be met through administrative convergence.
    Like you, I am convinced that program delivery will be jeopardized 
if employment in Rural Development is reduced much beyond the level of 
7,000 FTEs.

             Rural Housing Programs Eligibility Requirement

    Mr. Fazio. The budget proposes reductions in direct rural rental 
housing loans, home repair loans, and rural housing preservation 
grants. Please provide the Subcommittee with the information on 
eligibility limits for these programs as well as any information on the 
average income of the households served. Also, please provide 
information on the backlog of requests for assistance for these 
programs.
    Respondent. The information requested is as follows:
               eligibility limits for section 515 direct
    Eligible applicants should have the ability and experience to 
operate and manage a rental housing complex successfully. Loans can be 
made to individuals, trusts, associations, partnerships, limited 
partnerships, limited liability corporations, State or local public 
agencies, consumer cooperatives or profit and nonprofit corporations. 
Nonprofit corporations may be organized on a regional or multi-county 
basis.
    Very low- and low-income families including elderly, with rents 
that exceed 30 percent of the adjusted annual income can qualify for 
housing. The Agency serves families in rural communities with 
populations of 20,000 or less.
    In August 1996, Congress enacted the Agriculture, Rural 
Development, Food and Drug Administration, and Related Agencies 
Appropriations Act, 1997, Pub. L. 104-180. The Act included six reforms 
to the multi-family housing (MFH) program. These reforms made 
substantive changes in the manner in which MFH loan requests are 
processed. The Agency was mandated to prioritize its assistance which 
meant ranking rural places based on greatest need for Section 515 
housing.
    The Agency implemented a Notice of Funding Availability (NOFA) 
system. This system imposes certain time restrictions for developers to 
submit applications to the Agency (60-90 days.) The Agency established 
a list of ``designated places'' for which Section 515 applications 
would be invited. Therefore, many of the pre-applications and 
applications in the pipeline at that time were returned to the 
applicant, because the proposed housing was not to be located in a 
``designated place''. In the future, pre-applications and applications 
will not be retained by the Agency; they will be returned to the 
applicant. Each year, applicants must submit a new application. 
Therefore, for FY 1998, we are unable to provide pre-application/
application numbers. Our NOFA period has not expired in all States.
                   eligibility criteria for 504 loans
    In addition to owning a home or leasehold interest, one must be a 
very-low income applicant; below 50% of the median income limit for the 
area; limit of $20,000 on loans; grant assistance is available only to 
applicants 62 years or older; and lifetime limit of $7,500 on a loan.
    The average income of 504 applicants is the 50% of the median 
income limit for the area. These limits vary from county to county and 
state to state.
    Demand--Currently, there are 3,955 applications on-hand for 504 
assistance reflecting a demon for $6,286,882.
     eligibility limits for section 533 housing preservation grants
    Housing preservation grants are available to a public or private 
nonprofit organization. the purpose is to assist very-low income 
rehabilitate their homes or to assist owners of rental property if they 
agree to make units available to low- and very-low income persons.
    These grants are for assistance to very low- and low-income 
homeowners to repair and rehabilitate their homes and to rental 
property owners to repair and rehabilitate their units if they agree to 
make such units available to low- and very low-income families.
    A public body, Native American tribe, or public or private 
nonprofit corporations serving rural areas with legal, administrative, 
and technical capability to carry to the objectives of the program are 
qualified to apply for a Housing Preservation Grant.
    Demand--The Notice of funding Availability (NOFA) was published in 
the Federal Register on December 24, 1997. The Agency is in the process 
of accepting applications through March 24, 1998, and at this time we 
are unable to provide the backlog of requests for assistance. Based on 
the FY 1998 available level of $10,820,000, we expect to repair or 
rehabilitate approximately 2,500 units.
                     section 538 guaranteed program
    Mr. Fazio. The budget requests a substantial increase in section 
538 rental housing guarantees. This program has been a demonstration 
thus far. Please provide the Subcommittee with the information on 
eligibility limits for this program, as well as any information on the 
average income of the households served to date.
    Respondent. The section 538 rental housing guarantee limits initial 
occupancy to families or individuals with low or moderate income, i.e., 
under 115 percent of the area median income. After initial occupancy, a 
tenant's income may exceed these limits. In the demonstration, the 
approximate average annual income of the households served to date is 
less than $25,000.
    Mr. Fazio. The budget proposes a freeze for self-help housing 
technical assistance grants. Will this amount be sufficient to continue 
all current, performing programs at the present grant amount?
    Respondent. We have had to put growth restrictions on existing 
grantees to allow for expansion into States that do not have a self-
help program. By this systematic approach to funding, we have been able 
to expand the program into new States; however, this approach has 
limited the ability of existing grantees to serve more families.

                           Farm Labor Housing

    Mr. Serrano. As part of the Civil Rights Action Team 
recommendations, the 1999 budget requests $32 million for farm labor 
housing loans and $13 million for farm labor housing grants, an 
increase of $17 million in loans and $3 million in grants from last 
year's levels. According to the budget, this would provide for the 
construction of 658 new units and rehabilitation of 199 existing units 
of housing for farmworkers. Specifically, how will this initiative be 
implemented and how many minority farm workers will the increase in 
funding affect?
    Respondent. The increased funds will be implemented with our 
conventional Farm Labor Housing Program that serves almost 100 percent 
minority farmworkers. These funds will be used to improve housing 
conditions for farmworkers and their dependents. In fact, with the 
additional funding, nearly 300 additional farmworker families will be 
able to live in decent, safe and sanitary housing.

                         Child Care Facilities

    Ms. DeLauro. In your testimony, you mention that the facts that 
approximately 50 percent of rural workers that have incomes near or 
below the poverty level; and that women are filling many of the new 
jobs created in rural areas have increased the need for child care 
facilities in rural areas. I applaud your efforts to address these very 
real concerns. You also mention that you funded 32 child care projects 
in 1997 and expect even more in 1999. How many more programs do you 
expect to fund? What efforts are you taking to get the word out to 
communities and families that these projects exist?
    Respondent. We expect to help finance at least the same number in 
FY 97. We are continuing to place great emphasis on this initiative. 
The availability to provide for safe, affordable child care is 
essential if the welfare-to-work initiative is to be successful. Our 
State Offices are conducting outreach to ensure that the neediest rural 
communities are aware that we can assist them in financing these 
facilities. In addition, we anticipate continuing our collaboration 
with the Head Start Bureau, the Local Rural Initiative Support 
Corporation, the Federal Housing Finance Board, and others to leverage 
our resources to finance more comprehensive child care facilities.

                   Rural Business-Cooperative Service

                        rural business programs
    Mr. Skeen. What has RBS done with Farmer Mac in Fiscal Year 1997 
and so far in 1998?
    Respondent. We have worked with Farmer Mac in contacting lenders 
and other interested parties, through meetings and informal contacts, 
advising them of the ways the secondary market can benefit lenders and 
borrowers through the leveraging of secondary market funds.
    Mr. Skeen. How do you operate the loan programs to make sure that 
the government is not competing with private business?
    Respondent. All of the loan programs operated by RBS, except the 
Business and Industry Guaranteed Loan Program, require the applicants 
to be refused credit from private sector lenders, on reasonable rates 
and terms, before RBS financial assistance is provided. The B&I 
Guaranteed Loan Program provides private lenders with a financing tool 
that allows lenders the capacity to extend their limited lending 
capacity to more private businesses. Therefore, there is no competition 
with the private sector.
    Mr. Skeen. What is the situation with regard to delinquencies in 
the Intermediary Relending Program?
    Respondent. In response to your question, the Intermediary 
Relending Program presently had less than 1 percent delinquency. Loans 
made since the reauthorization of the program in the 1985 Farm Bill are 
all current. The delinquent loans are loans from the portfolio USDA 
inherited from HHS under a predecessor program.
    Mr. Skeen. Has the Department issued a final rule on the IRP? What 
changes will those regulations make?
    Respondent. The new regulation was published in the Federal 
Register and became effective on February 6, 1998. The regulation for 
the Intermediary Relending Program (IRP) is renumbered and completely 
reorganized and rewritten for improved clarity. Major program changes 
include the following:

[Page 126--The official Committee record contains additional material here.]


    Mr. Skeen. What does the Appropriate Technology Transfer for Rural 
Areas (ATTRA) program do that is not being done by other agencies, such 
as the Extension Service, public libraries, state agencies or 
commercial entities?
    Respondent. The Appropriate Technology Transfer for Rural Areas 
(ATTRA) program serves as the central source for answering questions 
about and encouraging agricultural producers to adopt sustainable 
agricultural practices which allow them to maintain or improve profits, 
produce high quality food and reduce adverse impacts to the 
environment. ATTRA effectively combines the knowledge of the University 
system, the Extension Service, and other state and commercial entities 
into a single comprehensive center of expertise. ATTRA complements the 
work of Extension and others, by responding to a total of more than 
18,000 requests in Fiscal Year 1997.
    ATTRA staff also transfer and refer information from the 
experiences of other farmers working with sustainable practices, adding 
a valued farmer-to-farmer educational component. Toll free telephone 
access combined with written responses delivered to callers' mailboxes 
gives more farmers more equitably available one-stop access to current 
sustainable agricultural information and does not depend on their 
location or electronic capabilities. ATTRA staff monitor hundreds of 
printed periodicals, farmer newsletters, sustainable agricultural 
research reports, and electronic resources, as well as personal 
contracts from across the country. They respond to timely or unique 
topics and questions for which the information may not yet otherwise be 
widely or easily available from other sources.
                    rbs loan programs subsidy rates
    Mr. Skeen: Please provide a table which lists the subsidy rates for 
fiscal years 1997, 1998, and 1999 for all of the Rural Business-
Cooperative Service programs?
    Respondent: [The information follows:]

                              SUBSIDY RATES                             
------------------------------------------------------------------------
                                                  Fiscal year--         
           RBS loan programs            --------------------------------
                                            1997       1998       1999  
------------------------------------------------------------------------
Direct Business and Industry...........       0.51      -7.16     -14.64
Guar. Business and Industry............       0.93       0.97       1.02
NAD Bank Guar. B & I...................       1.09       1.04  .........
RDLF Intermediary Relending............      46.48      48.25      50.35
Rural Economic Development.............      22.93      23.91      25.22
------------------------------------------------------------------------

                               user fees
    Mr. Skeen: During Fiscal Year 1997, what user fees were collected 
for RDIF accounts? Are there any other accounts where RBS receives or 
collects user fees?
    Respondent: It is estimated that $12,696,732 in B&I guaranteed loan 
fees will be collected for FY 1997. These fees are collected at the 
time of loan closing which is often in subsequent years due to delays 
such as construction time and obtaining closing information from the 
lenders. As of February 10, 1998, $6,589,901 has been collected.
           direct and guaranteed business and industry loans
    11. Mr. Skeen. Please provide for the record a ten-year table 
showing the annual appropriation and the number and dollar amount of 
business and industry loans made each fiscal year.
    Respondent: [The information follows;]

                       DIRECT AND GUARANTEED BUSINESS AND INDUSTRY LOANS 1988 THROUGH 1997                      
                                             [Dollars in thousands]                                             
----------------------------------------------------------------------------------------------------------------
                                                                                     Number of        Amount    
                           Fiscal year                             Appropriated        loans         obligated  
----------------------------------------------------------------------------------------------------------------
1988............................................................         $95,700              85         $95,415
1989............................................................          95,700              88          95,677
1990............................................................          95,018              82          88,473
1991............................................................         100,000              92          99,955
1992............................................................         100,000              95          99,994
1992/1993 natural disaster supplemental.........................         160,000              94          87,402
1993............................................................         100,000              97         100,000
1993/1993 natural disaster supplemental.........................          50,000  ..............  ..............
1994............................................................         249,670             179         249,648
1995............................................................         505,319             329         423,596
1996............................................................         699,673             562         638,352
1997............................................................           (\1\)             694     \2\ 828,749
----------------------------------------------------------------------------------------------------------------
\1\ $51,500,000 in budget authority appropriated for the Rural Business Assistance Program which includes:      
  business and industry direct and guaranteed loans, rural business enterprise grants, rural cooperative        
  development grants and rural business opportunity grant programs.                                             
\2\ Includes $904,200 for NAD Bank guaranteed Business and Industry Program.                                    

    12. Mr. Skeen: What percent of the B&I loans are currently 
delinquent and what is the dollar amount of the total delinquency?
    Respondent: As of December 31, 1997, the B&I loans that are 
currently delinquent is 5.9 percent of the portfolio and the total 
delinquency is $19,167,254.51, of the total portfolio of 
$1,709,305,745. The B&I delinquency rate is down by 1.9 percent from 1 
year ago.

[Page 129--The official Committee record contains additional material here.]


    Mr. Skeen: What steps are you taking to make these loans current?
    Respondent: Emphasis is placed on restructuring a delinquent loan, 
if possible, to ensure job retention in rural communities. If a 
restructuring or transfer and assumption of the loan guarantee is not 
possible, foreclosure and liquidation of the collateral are resources 
available to the lender/USDA. The National Office trains program 
managers who provide guidance on servicing loans. The State Office(s) 
monitors all loans and discuss problem loans with lenders, and visit 
delinquent borrowers (along with the lenders) at least annually, or 
more often if needed, to discuss ways to resolve delinquencies.
    Mr. Skeen: What is the total amount of B&I loans that have been 
written off? Please update the table on page 117 of last year's hearing 
record.
    Respondent: Since inception of the B&I program, as of November 7, 
1997, the total amount of B&I loans written off is $970,463,094. I am 
providing a table for the record which shows final loss claims by the 
Fiscal Year in which the loan was closed.
    [The information follows:]

[Page 131--The official Committee record contains additional material here.]


             Guaranteed Business and Industry Loan Program

    Mr. Skeen: How many loan requests, by State and dollar 
amount, of B&I loans were pending at the end of Fiscal Year 
1997?
    Respondent: [The information follows:]

    PREAPPLICATIONS AND APPLICATIONS ON HAND AS OF SEPTEMBER 30, 1997   
------------------------------------------------------------------------
                    State:                        Numer       Amount    
------------------------------------------------------------------------
Alabama.......................................         7      15,050,000
Alaska........................................         3       2,946,500
Arizona.......................................         7      13,122,000
Arkansas......................................         1         500,000
California....................................        53      96,221,380
Colorado......................................         9      23,331,843
Delaware......................................         2       1,418,000
  Maryland....................................         2       3,840,000
Florida.......................................         7      17,270,000
Georgia.......................................         4       8,829,200
Hawaii........................................         7       8,652,500
  W. Pacific Areas............................         2       4,432,000
Idaho.........................................         7      10,675,000
Illinois......................................        15      13,658,000
Indiana.......................................         4      12,978,000
Iowa..........................................        12      23,478,000
Kansas........................................         9      35,021,200
Kentucky......................................         8      27,579,600
Louisiana.....................................        12      13,837,000
Maine.........................................         5       3,556,000
Massachusetts.................................         3       4,700,000
  Connecticut.................................         5       4,425,000
  Rhode Island................................         4       9,160,000
Michigan......................................        21      46,559,600
Minnesota.....................................        17      15,505,098
Mississippi...................................        10      22,484,650
Missouri......................................        20      21,449,375
Montana.......................................        38      22,719,489
Nebraska......................................        14      23,972,710
Nevada........................................         7       6,525,100
New Jersey....................................         5      12,754,000
New Mexico....................................        11      14,329,950
New York......................................        19      23,640,000
North Carolina................................        13      21,406,000
North Dakota..................................         4       8,900,000
Ohio..........................................        19      36,430,500
Oklahoma......................................         4       6,191,520
Oregon........................................        12      30,027,222
Pennsylvania..................................        12      29,323,794
Puerto Rico...................................         8      24,508,500
South Carolina................................        11      18,324,000
South Dakota..................................         9       9,515,900
Tennessee.....................................         9      44,667,000
Texas.........................................         8       7,327,805
Utah..........................................        10      25,436,309
Vermont.......................................         3       2,610,000
  New Hampshire...............................         3       8,519,000
  Virginia Islands............................         0               0
Virginia......................................         2      27,500,000
Washington....................................        12      38,200,000
West Virginia.................................         7       9,282,000
Wisconsin.....................................         5       9,722,000
Wyoming.......................................         2       2,650,000
                                                       2       6,280,000
                                               -----------              
      Totals..................................       505     940,442,745
------------------------------------------------------------------------

    Mr. Skeen. What is the current default rate? What recourse is 
available to USDA if borrowers default?
    Respondent. In response to your question, a default is a breach or 
nonperformance of the terms of a note or the covenants of a mortgage. 
As of December 31, 1997, there are 83 borrowers in monetary default in 
the total B&I portfolio, which represents 5.9 percent of the total B&I 
borrowers. The B&I monetary default rate is down by 1.9 percent from 1 
year ago.
    The lender will notify the Agency when a Borrower is 30 days past 
due on a payment. A loan is considered in monetary default when the 
loan payment is at least 30 days past due. We make every attempt to 
work with the lender and the borrower to correct a monetary default. We 
have a number of workout strategies including but not limited to 
deferment of principal payments, an additional temporary loan by the 
lender to bring the account current, reamortization of or rescheduling 
the payments on the loan (subject to any Holder(s)), transfer and 
assumption, reorganization, liquidation, subsequent loan guarantees, 
and/or changes in the interest rate.
                     intermediary relending program
    Mr. Skeen. What are the general terms of the loans to the 
intermediary? What is the maximum size of the loans?
    Respondent. The general terms for the intermediary is 30 years at 1 
percent interest with a 3-year deferral on principal. The principal is 
amortized over the remaining term of the loan. The maximum initial loan 
to an intermediary may not exceed $2 million. Intermediaries that have 
used the loan funds received, are operating satisfactorily, and have a 
demonstrated need for additional funds, can apply for subsequent loans 
of up to $1 million per year. The outstanding balance of an 
intermediary's total IRP loans must never exceed $15 million.
    Mr. Skeen. do payments on loans go to the general Treasury or to a 
revolving fund back to the lender?
    Mr. Respondent. Payments from ultimate recipients to intermediary 
borrowers go into revolving funds established by the intermediaries and 
may only be used for repayments to USDA, administrative expenses of 
operating the revolving funds, or additional loans to ultimate 
recipients. Payments from the intermediary borrowers to USDA are 
returned to the Treasury.
    Mr. Skeen. Were all the funds available in fiscal year 1997 
obligated? What is the current rate of obligation compared to this same 
time last year?
    Respondent. All available funds for FY 1997 were obligated. As of 
February 28, 1998, 12 percent of all funds were obligated as compared 
to 29 percent at this same time last year.
    Mr. Skeen. Please provide a list, by State, of the number of loan 
requests unfunded at the end of Fiscal Year 1997.
    Respondent. I will be glad to provide that information.
    [The information follows.]

 INTERMEDIARY RELENDING PROGRAM LOAN REQUESTS NOT FUNDED IN FISCAL YEAR 
                                  1997                                  
------------------------------------------------------------------------
                     State                       Number       Amount    
------------------------------------------------------------------------
ALABAMA.......................................         1      $1,000,000
ALASKA........................................         1         750,000
ARKANSAS......................................         1       1,000,000
CALIFORNIA....................................         1       1,000,000
HAWAII........................................         1         750,000
IDAHO.........................................         4       3,150,000
ILLINOIS......................................         1       1,000,000
KENTUCKY......................................         3       2,390,000
LOUISIANA.....................................         1       2,000,000
MICHIGAN......................................         1         600,000
MINNESOTA.....................................         2       1,500,000
MISSISSIPPI...................................         1       2,000,000
MONTANA.......................................         2         200,000
NORTH CAROLINA................................         3       5,500,000
NEW HAMPSHIRE.................................         1         500,000
NEW YORK......................................         2       1,200,000
PENNSYLVANIA..................................         1       1,000,000
SOUTH CAROLINA................................         1       1,000,000
VERMONT.......................................         1         500,000
                                               -------------------------
      Total...................................        29      27,040,000
------------------------------------------------------------------------

 rural business enterprise grants and rural business opportunity grants
    Mr. Skeen. What is the difference between Rural Business Enterprise 
Grants and Rural Business Opportunity Grants?
    Respondent. There are two major differences between the Rural 
Business Enterprise Grant (RBEG) and the Rural Business Opportunity 
Grant (RBOG) Programs. Conducting local community or multi-county 
economic development planning is eligible under the RBOG program and 
not under RBEG. The other difference is the RBEG Program has a 
requirement that the grant must benefit small and emerging business 
enterprise and RBOG does not have any such requirement.
    Mr. Skeen. Please provide a table or description of RBOG activity 
to date in Fiscal Year 1998.
    Respondent. A proposed rule was published in the Federal Register 
on February 3, 1998. Public comments on the proposed rule will be 
accepted through March 20, 1998. After the comments have been analyzed 
and considered a final rule will be developed.
                    rural business enterprise grants
    Mr. Skeen. Please provide a ten-year table showing the number and 
dollar amount of Rural Business Enterprise Grants. Also, show the 
budget request versus the appropriation for each year.
    [The information follows:]

                               RURAL BUSINESS ENTERPRISE GRANTS 1988 THROUGH 1997                               
                                             [Dollars in thousands]                                             
----------------------------------------------------------------------------------------------------------------
                                                                                     Number of        Amount    
                   Fiscal year                       Requested     Appropriated       grants         obligated  
----------------------------------------------------------------------------------------------------------------
1988............................................  ..............          $6,500              27          $6,500
1989............................................  ..............           6,500              36           6,500
1990............................................  ..............          16,406             129          16,406
1991............................................  ..............          20,750             155          16,406
1992............................................          20,000          20,750             142          20,750
1993............................................          20,750          20,750             125          20,750
1994............................................          51,310          42,500             234          45,475
1995............................................          50,000          47,500             244          47,500
1996............................................          48,000          45,000             332          45,000
1997............................................          45,000           (\1\)             369         47,728 
----------------------------------------------------------------------------------------------------------------
\1\ $51,400,000 in budget authority appropriated for the Rural Business Assistance Program which includes:      
  business and industry direct and guaranteed loans, rural business enterprise grants, rural cooperative        
  development grants and rural business opportunity grant programs.                                             

                  rural cooperative development grants
    Mr. Skeen. Please list each of the rural cooperative development 
grants that were made during fiscal year 1997.
    Respondent. There were 11 rural cooperative development grants made 
during fiscal year 1997. The state, applicant name, description, and 
amount of each of these grants follows:

----------------------------------------------------------------------------------------------------------------
                                                                         Short description  of        Amount    
                  State                         Applicant name                  project              approved   
----------------------------------------------------------------------------------------------------------------
Alabama.................................  Federation of Southern      Existing Center--Continue         $139,220
                                           Cooperatives/Land           support for cooperative                  
                                           Assistance Fund.            and credit union training                
                                                                       and technical assistance                 
                                                                       programs of the rural                    
                                                                       training center.                         
Alaska..................................  Alaska Village Initiatives  Funding of Alaska                  218,140
                                                                       Cooperative Development                  
                                                                       Center.                                  
Arkansas................................  Winrock International       Existing center--Southern          169,015
                                           Institute for               Arkansas Rural Sawmill                   
                                           Agricultural Development.   Cooperative.                             
California..............................  University of California..  Existing center--New               190,268
                                                                       emphasis on tools for                    
                                                                       cooperative development.                 
Colorado................................  Rocky Mountain Farmers      Existing center--Continue          164,300
                                           Union Educational &         to improve the economic                  
                                           Charitable Foundation.      condition of rural areas                 
                                                                       through cooperative                      
                                                                       development.                             
Maryland................................  The University of Maryland  Enhancing economic                  86,600
                                           Eastern Shore.              opportunities for                        
                                                                       agricultural cooperatives                
                                                                       on the Maryland Eastern                  
                                                                       Shore.                                   
Massachusetts...........................  Cooperative Development     Existing center--                  185,000
                                           Institute, Inc.             Massachusetts Rural                      
                                                                       Energy Cooperative                       
                                                                       development project.                     
Mississippi.............................  Mississippi Association of  Funding of Mississippi             184,885
                                           Cooperatives.               Center for Cooperative                   
                                                                       Development.                             
North Dakota............................  North Dakota Association    Existing center--Continue          152,900
                                           of Rural Electric           Dakota's Center for Rural                
                                           Cooperatives.               Cooperative Business                     
                                                                       Development.                             
Washington..............................  Puget Sound Development     Existing center--                   65,000
                                           Foundation.                 Networking and                           
                                                                       communication                            
                                                                       infrastructure                           
                                                                       strengthening.                           
Wisconsin...............................  University of Wisconsin     Wisconsin cooperative              144,672
                                           Center for Cooperatives.    training and development                 
                                                                       initiative.                              
  ......................................    ........................    ........................       1,700,000
----------------------------------------------------------------------------------------------------------------

                  rural economic development programs
    Mr. Skeen. How many RUS borrowers are now taking part in the Rural 
Economic Development Grant program?
    Respondent. As of September 30, 1997, 121 RUS borrowers have been 
awarded grants to establish a revolving loan fund to promote local 
rural development projects.
    Mr. Skeen. For the record, would you please provide us a table 
showing the annual numbers of loans made in each of the last 3 years by 
the loan portion of the Rural Economic Development Loan and Grant 
Program, and what the appropriate amount of private sector capital was 
leveraged against each. As was done last year, please provide a chart 
showing the purpose of each Rural Economic Development Loan.
    Respondent. [The information follows:]

[Pages 136 - 145--The official Committee record contains additional material here.]


    Mr. Skeen. What interest rate is charged for these loans. What is 
the cost to the U.S. Government?
    Respondent. The authorizing statute requires that loans be made 
under the Rural Economic Development Loan and Grant Program as zero-
interest rate loans. The RUS borrowers are required, in turn, to re-
lend the funds, at zero-interest, to businesses and communities to 
promote economic development in rural areas. The zero-interest loan 
program results in no risk to the Government inasmuch as the RUS 
borrowers guarantee repayment of the loan to the Government.
    There is no cost to the Government to fund the Rural Economic 
Development Loan and Grant Program since funding is obtained from the 
Cushion of Credit Payment Program. The Cushion of Credit Payment 
Program is a program whereby RUS borrowers are authorized to make 
voluntary advance payments on their electric and telephone indebtedness 
to RUS. The RUS borrowers receive 5 percent interest on these advance 
payments. The cushion of credit payments are held in the Rural 
Electrification and Telephone Liquidating Account. This account is 
credited monthly with a sum determined by multiplying the outstanding 
cushion of credit payments made after October 1, 1987, by the 
difference between the average weighted interest rate paid on 
outstanding Certificates of Beneficial Ownership issued by the Fund and 
the 5 percent rate of interest paid to borrowers on cushion of credit 
payments.
                cooperative service technical assistance
    Mr. Skeen. Please list for the record the number of requests for 
technical assistance and services rendered to cooperatives in fiscal 
year 1997.
    Respondent. Cooperative Services National Office responded to a 
total of 30 technical assistance requests in fiscal year 1997. The 
recipient, location and services rendered for each of these requests 
follows:
    1. Cashmere America, Sonora, TX. Assist in strategic planning.
    2. Midland Dairy Association, Ankeny, IA, and American Dairy 
Association/Dairy Council of the Upper Midwest, St. Paul, MN. Provide 
help in evaluating operating alternatives for closer working 
relationships.
    3. Garrett Community College, McHenry, MD. Consult and assist in 
forming a telecommunications cooperative to provide services to rural 
residents.
    4. United Ratite Ranchers Cooperative, Crestview, FL. Help develop 
a business plan to secure loan.
    5. Tillamook County Creamery Association, Tillamook, OR. Assist in 
structuring membership for maintaining Capper-Volstead cooperative 
status.
    6. Malta Equity Cooperative, Malta, MT. Assist in strategic and 
organizational planning.
    7. Wooster Equity Company, Wooster, OH. Assist in strategic 
planning following fire that destroyed feed mill and warehouse.
    8. Cylinder Cooperative Elevator Company, Cylinder, IA. Conduct 
operational analysis and strategic planning sessions for management and 
board.
    9. Wyoming State Rural Development Office, Casper, WY. Assist State 
Office in working with Emu Association in forming a cooperative.
    10. Mount Wachusett Community College, Gardner, MA. Assist in the 
development, organizing and structuring forest product cooperative.
    11. Texas State Rural Development Office, Temple, TX. Help prepare 
a business plan for proposed dairy goat marketing cooperative.
    12. Alaska Rural Development Council, Anchorage, AK. Determine the 
feasibility of forming a red meat cooperative to operate a 
slaughterhouse and market Alaska red meat beef and pork products.
    13. Arkansas Kenaf Association, Conway, AR. Help a group of 
Arkansas kenaf producers establish a value-added processing 
cooperative.
    14. Vermont Department of Agriculture, Montpelier, VT. Help 
organize a cut flowers marketing cooperative.
    15. Shoreham Co-op Apple Production Association, Shoreham, VT. 
Conduct a management and operations audit, strategic planning and other 
assistance as necessary.
    16. Farmers Exchange, Inc., Bentonville, AR. Provide advice in 
rewriting bylaws and articles of incorporation.
    17. Tillamook Meadco Cooperative, Tillamook, OR. Conduct a 
feasibility study and help with a business plan.
    18. Indian Health Services, Pinetop, AZ. Conduct a feasibility 
study and provide development assistance to help organize a water and 
waste cooperative on the Hopi Reservation.
    19. Alcorn Cooperative Extension Service, Alcorn State University, 
Lorman, MS. Help organize a farmer's craft marketing cooperative.
    20. Southeast Alaska Rural Development, Sitka, AK. Assist Alaska 
State Rural Development staff in cooperative development with three 
producer/interest groups.
    21. Michigan Farmers Union, Hastings, MI. Conduct a feasibility 
study on the economic viability of a dry extrusion soybean processing 
cooperative.
    22. St. Louis District Dairy Council, St. Louis, MO, and Midland 
Dairy Association, Ankeny, IA. Evaluate closer and more coordinated 
working relationships.
    23. Washington Dairy Herd Improvement Association, Burlington, WA. 
Study feasibility of joint operating alternatives with another 
cooperative.
    24. Prairie Farms Dairy, Inc., Carlinville, IL. Assist in 
restructuring a joint venture.
    25. Nine dairy cooperatives at various sites in United States. 
Conduct a comparative manufacturing cost study for several dairy 
cooperatives.
    26. East Arkansas Produce Marketing Association, Moro, AR. Assess 
feasibility and provide assistance in a cooperative to market tomatoes 
to Burger King.
    27. National Contract Poultry Growers Association, Butler, OH. 
Assist in strategic planning and developing financial action plan to 
accomplish goals of strategic plan.
    28. Department of Agriculture, Frankfort, KY. Assist produce grower 
groups explore feasibility of forming cooperatives and developing 
business plans.
    29. Farmers Elevator Company, Linton, ND, and Farmers Union Oil 
Company of Wing-McClusky, Wing, ND. Conduct a merger feasibility study.
    30. Mid-West Dairymen's Company, Rockford, IL. Assess and assist 
with restructuring options for Muller-Pinehurst Dairy, Inc., joint 
venture.
                             ethanol plant
    Mr. Skeen. What is the situation with the default of the ethanol 
plant in Ohio? What are the Department's estimated losses in this 
situation?
    Respondent. In response to your question, the final loss claim on 
South Point Ethanol (SPE) was processed on May 1, 1997, in the amount 
of $9,704,604.85. Because of the complexity of the case, the Ohio State 
Office requested an Office of Inspector General (OIG) audit of the 
liquidation. The final loss was audited by the USDA OIG to ensure 
proper processing. OIG had no findings and has closed the audit.
    SPE, Inc., was a partnership, organized by four corporations to 
produce corn-generated ethanol. Rural Development (formerly Farmers 
Home Administration) approved a $32 million B&I loan to SPE in June 
1984. Due to changes in the economy and the rising costs of the raw 
product (corn), the borrower was unable to cashflow. The original 
estimates for construction and operating costs was $81.4 million. Other 
funding was obtained from the U.S. Department of Energy and the 
corporate partners. We understand the U.S. Department of Energy has, or 
is in the process of, writing off an estimated $24.5 million, the 
original amount of their subordinated investment. It is our 
understanding that additional financing was raised from private 
sources.
                 empowerment zone/enterprise community
    Mr. Skeen. What are the criteria to be an empowerment zone or 
enterprise community?
    Respondent. The legislation creating the Rural Empowerment Zone/
Enterprise Community program specifically limited the program to rural 
areas of 30,000 population or less, and not larger than 1,000 square 
miles. The pervasive poverty and distress criteria require a minimum 
poverty rate of 20% in each census tract, or 25% poverty rate on 90% of 
the census tracts, or a 35% poverty level in 50% of all census tracts 
used in the application. For Round II the authorizing legislation drops 
the 35% poverty level criterion, and adds criterion for selecting 
communities with outmigration concerns.
    Mr. Skeen. What is the difference between an enterprise and a 
champion community?
    Respondent. The major difference between the Empowerment Zone and 
Enterprise Communities is the amount of money available over the ten 
year span of the program--$40 million for the Zones and just another $3 
million for the Communities. In addition, during the first Round of the 
program, the Empowerment Zones qualified for a 20% wage credit for the 
first $15,000 of qualified wages paid to a zone resident. The 
Enterprise Communities did not.
    Also, under section 179 of the Internal Revenue Code, an 
Empowerment Zone business receives an increased expensing allowance by 
the lesser of 1) $20,000 or 2) actual cost of property placed in 
service during the year, as well as a reduced phaseout provision that 
would normally apply to eligible 179 property. This provision also 
applied only to Empowerment Zones.
         minority enterprise financial acquisition corporation
    Mr. Skeen. In recent years, the Rural Business-Cooperative Service 
provided funds to the National Resources Conservation Service for a 
cooperative agreement with the Minority Enterprise Financial 
Acquisition Corporation. Please provide the Committee with a copy of 
the application for funding and all correspondence between the 
Corporation and USDA.
    Respondent. I would be happy to provide the information for the 
record.
    [Clerk's Note.--The information is too lengthy to be printed, a 
copy will be retained in committee files.]
                           cooperative stock
    Mr. Skeen. The 1996 Farm Bill provided authority to guarantee loans 
under the B&I Program to assist farmers in purchasing capital stock in 
a cooperative. What has been the experience of RB-CS in using this 
authority?
    Respondents. This program is authorized under the Business and 
Industry Guaranteed Loan program and provides loan guarantees for the 
purchase of startup cooperative stock for family-sized farms where 
commodities produced are being processed by the cooperative.
    There have been several requests for information and some actual 
application activity. The following are examples:
    Northern Plains Premium Beef was a proposed beef processing and 
marketing cooperative whose members were beef ranchers in seven north 
central States surrounding the Dakotas. The Agency had approved a 
$100,000 loan to one of the cooperative members; however, the 
cooperative withdrew its proposal when the stock drive fell short of 
the minimum level of projected stock participation. We understand that 
the cooperative is considering a smaller proposal in perhaps just one 
or two States.
    U.S. Premium Beef was also a proposed beef processing and marketing 
cooperative whose members were both beef ranchers and feedlot 
operators. The cooperative depended heavily on participation of its 
feedlot operators who do not qualify as family-sized farmers. The 
Agency definition of family-sized farm is based upon the borrower 
providing the management and labor necessary to operate the business as 
well as producing agricultural commodities with sufficient income to be 
sustainable and is further limited to a B&I Guaranteed Loan of not more 
than $400,000. Once this determination was given to the cooperative, no 
further activity has been noticed.
    There are several other general inquiries or preapplications in 
Minnesota, Georgia, and Iowa which have not yet materialized into full 
applications. These include proposals involving ethanol production, 
pork, poultry, and grain.
                        administrative expenses
    Mr. Skeen. Please explain the increase in Object Class 25, Other 
Services, for the next fiscal year.
    Respondents. The increase is a program-related expense. The object 
class breakout for salaries and expenses is shown on the following 
page.

[Page 149--The official Committee record contains additional material here.]


               national sheep industry improvement center
    Mr. Skeen. Please provide a breakdown of the proposed expenditure 
of $573,000 for the National Sheep Industry Improvement Center in 
fiscal year 1999.
    Respondent. The administrative budget for the National Sheep 
Industry Improvement Center cannot exceed 3 percent of the amount in 
the fund. For fiscal year 1999, about 40 percent of the proposed 
expenditures are for salaries and benefits, 30 percent for travel, and 
the remainder for office operating costs and miscellaneous costs.
    Mr. Skeen. Please provide a similar breakdown for funds spent since 
the Center was originally funded.
    Respondent. The proposed administrative budget for fiscal year 1998 
is $300,000. Of that amount, approximately 35 percent is for salaries 
and benefits, 25 percent for travel, 20 percent for office startup and 
operating costs, and 20 percent for other services. In fiscal year 
1997, most of the $30,000 administrative costs were for director 
travel.
  alternative agricultural research and commercialization corporation
    Mr. Skeen. What changes in the AARC program have resulted after the 
Farm Bill change from a center to a corporation?
    Respondent. The change from a center to a corporation has had an 
immediate impact on the program. The change requires us to keep our 
books differently and to undergo a financial audit as a corporation. 
The result has been a considerable administrative load on AARCC's 
limited staff, as we shift bookkeeping methods. We are working closely 
with a private sector auditing firm, financial auditors from USDA's 
Office of Inspector General, and the National Finance Center. Because 
of our limited staff and the complexity of the task, some of the 
milestones set for the completion may have to be moved forward. 
However, there is a solid working relationship amongst all of the 
partners involved and everyone appreciates the reasons for moving any 
milestones.
    In the long-term, however, annual preparation of audited corporate 
financial statements will be of significant benefit to AARCC. As AARCC 
prepares its plan for privatization, as required by the 1996 Farm Bill, 
such statements will make a valuation of the portfolio easier to 
calculate and more readily understandable to potential private sector 
partners. There are considerable difference between the way in which 
private sector venture capital firms value their portfolios and the way 
in which government auditors value such investments. The audited 
financial statements help bridge that gap.
    Finally, in order to compile audited financial statements that 
comply with USDA regulation 1700-2, which establishes Office of 
Inspector General (OIG) policies and procedures relative to the 
auditing of departmental programs, AARCC requires its funded companies 
to undergo a biennial financial audit in accordance with generally 
accepted government auditing standards. Because AARCC typically funds 
start-up companies in the development stage, they often lack the funds 
needed to pay for an expensive certified audit. Consequently, AARCC 
must cover the costs of these audits itself in order to comply with 
Department regulations. Given the size of AARCC's portfolio, compliance 
with audit regulations could result in an exposure of $600,000 to cover 
these costs. This potential liability has been factored into AARCC's 
current budget request of $10 million and further underscores the 
financial rationale of the President's FY 1999 request.
    Mr. Skeen. How much has AARC invested since its beginning and how 
much has been returned on the investments?
    Respondent. AARCC's first investment was in 1993. Through the end 
of fiscal year 1997, AARCC has invested $34,237,629. to date, AARCC has 
received $247,713.75 in repayments. AARCC's business plan projects 
repayments through 2002, based on three possible scenarios. The low 
case scenario calls for a recovery of the invested funds, with no 
additional return. The intermediate case projects a return of the basic 
investment, with an additional annual compounded rate of return of six 
percent. The high case scenario produces a return of ten percent.
    Under the high case scenario--the most bullish--there is no 
expectation of returns until FY98. By the end of FY98, the business 
plan projects a total of $300,000 being received in repayments. As 
noted above, we have already reached more than 80 percent of our 
anticipated FY's repayments.
    Even if AARCC were performing in the low case category, the 
American people will still benefit from the investments. In addition to 
return on investment (ROI), the Board of Directors considers the 
potential for an investment to generate new jobs and put unused 
agricultural land back into production. The AARCC staff estimates that 
to date approximately 5,000 new jobs have been created as a direct and 
indirect result of AARCC investment. Moreover, some 250,000 acres of 
land are under cultivation to produce crops directly related to AARCC 
investment. AARCC's Board of Directors prepared a 10-year strategic 
plan projecting 10,000 jobs created and 500,000 acres under cultivation 
because of AARCC investments. Half-way through the plan, the jobs and 
acreage numbers are on target.
    Mr. Skeen. How much additional funding has AARCC received from the 
Fund for Rural America in fiscal year 1997?
    Respondent. AARCC received $500,000 in FY97 from the Fund for Rural 
America. The Board of Directors voted to use the money in a variety of 
marketing efforts, to help selected companies sell their products in 
the private sector, as well as to help all of the AARCC companies 
generate sales to the Federal government.
    Mr. Skeen. What are the payback arrangements to AARC with private 
sector partners?
    Respondent. Payback arrangements vary with each company. Basically, 
they take one of three forms: (1) an equity position with the company 
that provides for an exit strategy within 6 to 8 years; (2) a 
percentage of sales; or (3) a combination of both. All options provide 
for a considerable premium to be paid, in appreciation for the 
Corporation's risk.
    The repayment scenarios presented in AARCC's business plan are 
calculated based on the anticipated value of our equity positions and 
the likely cash flow from royalties. The projections end with 2002, but 
repayments will continue beyond that, as money invested during the next 
few years begins to be repaid. The AARCC staff is currently calculating 
the anticipated returns beyond 2002.
    Mr. Skeen. Please update the list of AARC projects beginning on 
page 157 of last year's hearing record.
    Respondent. [The information follows:]

[Pages 152 - 156--The official Committee record contains additional material here.]


    Mr. Skeen. If the idea of the AARC Corporation investing in value-
added enterprises in rural communities is such a good idea, why isn't 
the private sector doing it? Why do we need the AARCC?
    Respondent. AARCC has a 100 year vision for the economy and rural 
America's role in that economy. Presently, the basic raw material for 
the world's economy is petroleum. We envision an economy where the 
basic raw material is derived from biological sources--primarily plants 
and animals. Given the physical and chemical nature of petroleum 
sources, it is profitable to extract the raw material from one part of 
the world, transport it half-way around the globe to process it and 
transport it even further to manufacture a finished product. The 
physics and chemistry of biological raw materials do not allow for such 
economics, however. To be profitable, the processing and manufacturing 
of bio-based products must be done close to the source of the raw 
materials. Hence, the growth of jobs in this new bio-based economy 
takes place in rural America.
    There are other advantages to shifting from an economy based on 
geology to one founded on biology. By their chemical structure, the 
waste and by-products will be largely biodegradable and eco-friendly. 
Moreover, the raw materials will be domestically produced and annually 
renewable. To borrow a phrase used by just one group of producers: The 
U.S. is the Saudi Arabia of corn. The further national security and 
geopolitical implications of such a bio-based economy are evident.
    AARCC's role has been and continues to be to serve as a catalyst 
for the development and manufacture of bio-based products, using the 
raw materials produced by our vast agricultural capacity. A catalyst is 
needed because the price of petroleum still makes it difficult for such 
bio-based products to compete. However, with improvements in bio-
processing, the cost differential is shrinking. Also, when two 
comparable products--one petroleum-based, the other bio-based--are 
subjected to life-cycle cost analysis, the disposal cost of the bio-
based product usually make it more competitive. We are at the beginning 
of the transition from geology to biology, and AARCC's catalytic role 
is still needed.
    The private sector is not ignoring the transition. For every dollar 
that AARCC invests, approximately $3.50 of private sector money is 
invested in AARCC projects. In addition, there are several examples of 
follow-on multi-million dollar investments in AARCC companies, where 
the private sector investment was initially attracted by AARCC's ``USDA 
Seal of Approval'' on a project.
    The AARCC Board of Directors has a ten-year strategic and business 
plan that does not anticipate appropriations after FY 02. During this 
transitional phase, however, it is the Board's view that AARCC needs to 
continue to identify and fund those companies that are the nucleus of 
the bio-based economy.
                          financial assistance
    Mr. Skeen. A recent New York Times article highlighted the efforts 
of the Small Business Administration to provide financing for franchise 
businesses. The article questioned whether the assistance provided by 
SBA for small business development was, in fact, going to a small 
business, or if the primary beneficiary of this assistance was the 
multi-billion dollar corporations licensing the franchise. Not only 
would these corporations have access to Government subsidized 
financing, but they would also receive free technical assistance and 
market analysis. What is the view of RBS regarding the provision of 
financial assistance for franchise operations?
    Respondent. Rural Business-Cooperative Service (RBS) believes that 
major franchise operations already have access to capital and credit 
sufficient to cover their financing needs, therefore, business 
guaranteed loan programs of the Government do not provide financial 
assistance to these organizations. Both SBA 7(a) and RBS B&I programs 
provide access to credit and capital to individual business persons 
desiring to purchase a franchise facility for their business needs. Our 
financing is provided directly to these individuals, who assumes the 
responsibility to pay the franchise operation for participating as a 
``franchisee.'' Our programs allow Americans the opportunity to own 
their business, to receive expert technical and business development 
assistance from the franchisor, and to participate in the economic 
mainstream of America. Under these circumstances, we do support the 
local business persons' efforts to improve their economic positions and 
standards of living. We do not provide financing to major franchise 
organizations through our programs and we do not support such efforts.
                business and industry guaranteed program
    Mr. Skeen. Your 1999 budget proposes a program level of $1 billion 
for the Business and Industry Guaranteed Loan Program. It was not that 
long ago that this program was plagued by an excessively high loss 
ratio, and annual funding was curtailed to around $100 million. It has 
grown very rapidly in recent years. We all know that bad investments 
have a way of finding easy money, and I am not convinced that the 
existence of a backlog of applications is necessarily an indication 
that increased funding is warranted. What is done to ensure that this 
program is operated efficiently, that losses are contained, and that 
projects are not being funded simply because money is available?
    Respondent. In response to your question, we have revised the 
regulations governing the B&I program. On September 23, 1996, the new 
streamlined B&I processing regulations were published in 7 CFR 4279-A, 
4279-B, and 4287-B. Despite staff decreases, we have increased 
efficiencies in servicing through lender management of delinquencies 
and through improved, more frequent monitoring by the State and 
National Offices. In addition, we have established delinquency goals 
for FY 1998 which will aid in monitoring and containing delinquency 
rates as appropriations increase. We have established the Business 
Programs Assessment Review process whereby the National Office visits 
the State Office, borrowers, and lenders to assess the impact of the 
program and take corrective action as warranted. We have established 
goals which require increased lender and borrower contacts through 
visits and teleconferences, providing the opportunity to discuss 
problems directly with Agency personnel.
                        rural business services
    Mr. DeLauro. The rural business programs have made important 
investments in many sectors of rural America. One such sector is the 
creation of jobs. This budget alone will help create a reported 83,000 
jobs. This is a very impressive number. Could you elaborate on what 
types of jobs these are and whether they are full-time, part-time, or 
even seasonal?
    Respondent. These jobs represent employment in many segments of the 
job market including agriculture, mining, construction, manufacturing, 
transportation, wholesale trade, and services, just to mention a few. 
These are only the direct jobs created as the result of our financing 
and do not include temporary employment or jobs in businesses that 
provide services or supplies to our borrowers or grant recipients. We 
convert part-time jobs to full-time equivalents in the calculation of 
these jobs whenever possible. We are very proud of the low budgetary 
cost-per-job that results from RBS programs.

[Pages 159 - 376--The official Committee record contains additional material here.]


                                          Wednesday, March 4, 1998.

                 FOOD, NUTRITION AND CONSUMER SERVICES

                               WITNESSES

SHIRLEY R. WATKINS, UNDER SECRETARY, FOOD, NUTRITION AND CONSUMER 
    SERVICES
YVETTE S. JACKSON, ADMINISTRATOR, FOOD AND NUTRITION SERVICE
GEORGE A. BRALEY, ASSOCIATE ADMINISTRATOR, FOOD AND NUTRITION SERVICE
RAJEN ANAND, EXECUTIVE DIRECTOR, CENTER FOR NUTRITION POLICY AND 
    PROMOTION
STEPHEN B. DEWHURST, BUDGET OFFICER, DEPARTMENT OF AGRICULTURE

                            Opening Remarks

    Mr. Skeen [presiding]. The committee will come to order. 
We're on the record--I want to welcome all of you here today. 
We have with us the Food, Nutrition, and Consumer Services. 
Under Secretary Watkins, we're pleased to welcome you for your 
first appearance before this subcommittee. The programs that 
you administer go a long way in providing important nutrition 
programs, from infants to senior citizens, and a great number 
of people in between.
    We have a lot of ground to cover today, so please introduce 
your panel, and proceed with any brief opening remarks that you 
wish to make. Your written statement, and those submitted by 
your colleagues, will be entered in full for the record. I want 
to welcome my friend, Ms. Watkins; this is her first time to 
sit up here with the staff and keep me on the right track.
    It's all yours.
    Ms. Watkins. Thank you, Mr. Chairman. I'm real honored to 
be here to make our budget presentation to you, and as you 
said, it's my first time, and I'd like to introduce the people 
who are sitting at the table with me today.
    Yvette Jackson, to my right, is the administrator for Food 
and Nutrition Service. She had previously held the position as 
deputy administrator of the Food Stamp Program; George Braley, 
the associate administrator--there's a familiar face--and Dr. 
Rajen Anand, the executive director for the Center for 
Nutrition Policy and Promotion. And to my left is Steve 
Dewhurst, who is the Department's director of the Office of 
Budget and Program Analysis. And in the audience, Mr. Chairman, 
is the deputy under secretary for Food, Nutrition and Consumer 
Services, Julie Paradis.
    Mr. Chairman, I appreciate the support that this committee 
has shown throughout the years for all of these programs, and I 
am grateful for the opportunity to present the Fiscal Year 1999 
budget proposal for Food, Nutrition and Consumer Services, and 
I would like to submit my written testimony for the record, and 
then make some brief comments.
    Thank you very much.
    The Fiscal Year 1999 budget request for Food, Nutrition, 
and Consumer Services totaled some $39.2 billion. The 
responsibility of FNCS is to ensure that all Americans have 
access to healthful diets and nutrition information. The agency 
funds more than 100 million meals everyday, and most of those 
go to poor families.
    We strive, Mr. Chairman, to enhance the public's confidence 
in these programs by ensuring the efficiency and integrity of 
the programs. And additionally, these programs support American 
agriculture by providing families and individuals the means to 
purchase food and food product, and by procuring commodities 
for donations to many of our public and private cooperators at 
both the State and local level.
    These programs provide a crucial nutrition safety net for 
low income Americans. We view the food and nutrition assistant 
programs collectively as the critical link in alleviating 
hunger in this country, as well as meeting the essential 
nutritional needs for people. And I do not wish to forget for 
one minute the responsibility that this administration and I 
have to ensure the benefits are delivered to qualified 
recipients, yet accomplish integrity and timeliness as we 
protect program credibility and ensure fiscal responsibility.
    Mr. Chairman, I'm responsible for operating a $39 billion 
nutrition business that meets customer acceptance, and I don't 
take that lightly. One of the areas that we're responsible for 
is the Center for Nutrition Policy and Promotion. And that 
program was established in 1994, and it serves as the focal 
point within USDA to promote the health of all Americans, 
including those people who participate on the food assistance 
programs. And we do that through linking good nutrition and 
scientific research to the dietary needs of the consumer.
    The importance of this mission cannot be overstated, when 
poor diet is a significant contributor to 4 out of the 10 
leading causes of death in this country. Heart disease, cancer, 
stroke, diabetes; the four of them account for nearly two-
thirds of the total deaths in the United States.
    The Center has already accomplished many, many valuable 
activities that have helped Americans to gain a better 
understanding of good nutrition and proper diet. The funding 
for the Center is $2.542 million, and that is shown in our food 
program administration account.
    The Clinton-Gore Administration is going to submit 
legislative proposals to restore food stamp benefits to legal 
immigrants, with certain exceptions, and to ensure that the 
common administrative costs are allocated fairly among TANF, 
food stamps, and Medicaid.
    Additionally, there will be proposals to reclassify food 
stamp program recipient claims as State rather than Federal 
debt, and to reauthorize the WIC and several of the nutrition 
programs whose authorization expires at the end of this Fiscal 
Year.
    We're requesting $25.1 billion for the Food Stamp Program, 
including a reserve of $1 billion. The request also includes 
$1.2 billion for the Nutrition Assistance for Puerto Rico, 
that's being discussed today; $75 million for the Food 
Distribution Program on Indian Reservations; and $100 million 
for commodity purchases for the TEFAP program.
    In Fiscal Year 1997, FNS had a great deal of success in 
combatting fraud and abuse in the Food Stamp Program, while it 
promoted program integrity. FNS aggressively continued its 
nationwide campaign to increase payment accuracy, and it has 
been successful in obtaining commitments from many of the 
States to make payment accuracy a top priority.
    Since Fiscal Year 1993, there has been a steady decline in 
the overpayment error rate. It has fallen from 8.3 percent in 
Fiscal Year 1993 to 6.9 percent in Fiscal Year 1996, and that 
has resulted in a savings of nearly $665 million. Recipient 
fraud disqualifications have increased from $94,000 in Fiscal 
Year 1996 to over $105,000 in Fiscal Year 1997, and that's an 
increase of about 12 percent. States have continued to invest 
increasing amounts of State funds into fraud control, even 
though the Federal reimbursement and retention rates have 
dropped over time.
    Let me talk a little bit about EBT. That continues to be a 
very, very positive means of combatting food stamp trafficking. 
At the end of December of 1997, we had over 28 States that had 
implemented the EBT system, and 13 of those were state-wide. 
Funds that were provided by this committee, resulted in 
successful contracting for pre- and post-authorization visits 
in participating stores. And then in Fiscal Year 1997, FNS 
passed that contracting for on-site store visits, and will 
contract for approximately 35,000 on-site store visits 
annually, beginning this year in 1998, and that will supplement 
our FNS oversight of retailers.
    FNS disqualified some 1,500 retailers for violations during 
Fiscal Year 1997, and of those that were disqualified 933 were 
permanently disqualified for trafficking violations. This 
represents a 23 percent increase in the total disqualifications 
over Fiscal Year 1996. So, we are working very aggressively 
with our inspector general, as we work through the fraud and 
abuse issues for the Food Stamp Program.
    The other area that we're responsible for is our Child 
Nutrition Programs, which are not only vitally important, but 
they also have demonstrated astounding success. We're 
requesting a total of $9.2 billion for the Child Nutrition 
Programs. These programs have their foundation in nutrition, 
and the nutrition assistance that they provide supply children 
with food that they need, and particularly our low-income 
students and adults with the help that they need to meet their 
family's food budgets.
    Every day we serve some 26 million children in this country 
a nutritious school lunch, and about half of those students are 
disadvantaged. About 7 million of those children eat a school 
breakfast, but about 85 percent of the children who are eating 
a school breakfast come from families that are at or near the 
poverty level. The availability of school meals is an absolute 
necessity if we're going to fulfill our national goal of 
preparing children for lifelong learning and lifelong health.
    Low-income children served by the National School Lunch and 
School Breakfast Programs need basic nutrition assistance, not 
only during the school year, but they also need that assistance 
during the summer months. So the Summer Food Service Program 
fills a critical need for us, as we provide meals at schools, 
at many recreational sites during the summer, as well as some 
other recreational centers.
    We have made a concerted effort to reach more children in 
the Summer Program; only a fraction of our needy children who 
eat a school lunch during the school year, also receive a meal 
in the summer.
    In Fiscal Year 1999, we estimate in excess of 149 million 
meals will be served, and that's an estimated increase of about 
8.6 million meals over Fiscal Year 1998 projections. In 
addition, we estimate that the Summer Program will serve almost 
2.6 million children, and that's an increase of about 150,000 
children over 1998's projection.
    The other area that we feel is a critical area is our 
nutrition, education, and training area. That program has a 19-
year history in delivering quality, cost-effective nutrition 
education, training, technical assistance as a component of the 
Child Nutrition Program. The funding at the net requested level 
of $10 million will enable the State and local school food 
authorities to use the established net infrastructure, so that 
they can deliver nutrition education to students, to educators, 
to parents, as well as food service training in schools and in 
child care centers.
    The net infrastructure that we have offers an effective and 
cost-efficient vehicle for reaching the 94,000 schools across 
the nation, and as we add the child care centers to that, we're 
talking about reaching even more children.
    I'd like to think that this program is going to provide us 
what is missing, now that home economics is no longer taught. I 
always say we've lost two generations of people knowing how to 
cook. Very, very few people now have that information anymore.
    The other area is our Child and Adult Daycare Food Program. 
That provides assistance and reimbursements and commodities to 
Child and Adult Care Programs across the country. Last year our 
CACFP was subsidized over 1.5 billion meals to children in our 
daycare homes, and children in family daycare settings, and to 
impaired adults in adult daycare settings.
    The other program that I feel very strongly about, and that 
I'd like to make a few comments about, is the WIC program. It's 
a program whose sole purpose is to improve the health of 
nutritionally, at risk, low-income, pregnant, breastfeeding and 
post-partum women, infants and children, up to their fifth 
birthday. This program is a nutrition prescriptive program. The 
fiscal 1999 budget request meetsthe President's commitment to 
fully fund WIC, and it's requested funding is at $4.1 billion; will 
maintain the projected Fiscal Year 1998 participation level of 
approximately 7.5 million participants.
    In the WIC program, just as our other programs, we're 
striving to improve the overall program management and program 
integrity. This spring we plan to issue the guidance to State 
agencies on more uniform application of science-based 
nutritional risk criteria. We've worked extremely hard with 
NAWD, and we are about ready to release that. The core risk 
criteria were developed through a year long Federal-State 
partnership, and it will provide us with the consistency and 
the nutritional assessment of WIC applicants.
    To address the WIC vendor issues, we will propose new 
regulations that will establish mandatory, uniform sanctions 
across WIC State agencies for the most serious WIC violations, 
and require the disqualification of any WIC vendor who has been 
disqualified through the Food Stamp Program.
    This budget request assumes the continued success of State 
agencies to obtain significant savings in the cost of infant 
formula to the program. In Fiscal Year 1997, an additional 1.9 
million participants per month were served because of the great 
success States had in collecting almost $1.3 billion in rebates 
from infant formula manufacturers. This program continues to 
collectively save money and contribute to healthier mothers, 
babies, and children, who will enter school unfettered by the 
consequences of poor nutrition and inadequate health care in 
the formative years.
    Every dollar spent on WIC, services to low-income pregnant 
women, saves between $1.77 to $3.13 in Medicaid costs for our 
first 60 days after birth. You along with us at USDA have to be 
extraordinarily proud of this program and its success.
    I am aware that this committee has had some concerns--and 
I've talked with some of you about some of the concerns that 
you have had about the level of funds carried over from one 
year to the next.
    Our Fiscal Year 1999 request assumes that $130 million will 
be carried into and out of Fiscal Year 1999. This level is 
approximately $20 million less than what we projected as being 
carried into Fiscal Year 1998. We believe that these are 
minimum levels necessary for our State and for the Indian 
Tribal Organizations to maintain the current participation 
levels in a grant program. These State and local operators must 
live within their budgets. Collectively, these organizations 
under spend their available resources by about 3 to 4 percent, 
to ensure that they don't overspend their respective budgets.
    I know this is very, very difficult, and these carryover 
issues kind of manifested themselves during the four WIC 
listening sessions that we had around the country. We held four 
listening sessions, because after I had heard the comments from 
you, I wanted to find out what some of these concerns were, and 
why these problems existed. So we talked with a diverse group 
of recipients, program operators, and health care providers. 
And State officials have kind of informed us that there are a 
variety of reasons for that carryover money, and I want to 
share that with you.
    Because a Federal grant is the only source of the WIC funds 
in most States, States exercise caution so that they can be 
sure that they don't spend more than that Federal grant calls 
for. In addition, because the States commonly distribute WIC 
food benefits in the way of vouchers and checks, it's very, 
very difficult for them to determine the program's food cost 
until these vouchers and checks have been redeemed and 
processed. So the unspent funds relate to some specific 
situations or circumstances that limit program participation.
    In one State they said at one of the listening sessions, 
that because they had a new computer system that they were 
using to certify WIC eligibility issuance, the WIC food 
vouchers temporarily had to be reduced; their staff was no 
longer able to certify; they couldn't serve new clients, 
because they were instead spending their time trying to learn 
the new computer system, and the new operating procedures, and 
learning to use the new software. I think we all can have that.
    While having unspent Federal WIC funds did not necessarily 
indicate a lack of need of program benefits, some States 
reported to us that more eligible individuals probably could 
have been served by WIC, had it not been for some of the 
reasons that they related to the program structure, and some of 
the State specific situations and circumstances.
    We've made a lot of changes also in the funding request for 
the WIC Farmers Market. We moved monies from the WIC account to 
the Commodity Assistance Program account. And this was done to 
ensure that the funds would be available for the operation of 
the program. We believe this change will enable States to 
improve the program for WIC recipients, as well as facilitate 
better program planning. These are the kinds of things that we 
heard when we were at the listening session, and listened to 
some of the farmers talk about the changes we needed to make.
    Mr. Chairman and committee, the administration strongly 
believes the funding for studies and evaluations should be with 
the entity administering the programs in order to maximize the 
value of these efforts to our food assistance programs. As 
such, this budget proposes the return of funding for studies 
and evaluations to the food and nutrition service.
    We're also requesting $2 million to provide technical 
assistance to State and local school cooperators to promote and 
enhance safe food handling and school meals preparations. And 
we would use these funds to provide training and technical 
assistance on safe food handling to our cooperators.
    One of Secretary Glickman's top priorities is food recovery 
and gleaning, and he wants to be sure that USDA is doing 
everything within its power to expand the recovery and gleaning 
of excess wholesome food for distribution to those Americans 
that are in need.
    While this administration firmly believes that the 
fundamental Federal Nutrition Assistance Program, such as food 
stamps, and WIC, and school lunch, and school breakfast will 
continue to be the first line of defense for Americans facing 
hunger. Recovered and gleaned food can also increasingly 
provide nutritious additions to the diets of low-income 
Americans. And the $20 million that's requested in the budget 
we would use for communities to have grants for a variety of 
infrastructure issues.
    The last area that I'd like to cover is our FPA account, 
and that request is a $111.8 million. In recent years, the FPA 
funding has not been enough to keep pace with the risingdemands 
made on the agency. Reduced administrative funding has required more 
than an 18 percent reduction in staffing since 1993, and nearly 40 
percent reduction since the early 1980's.
    Recent OIG and GAO audits have cited FNS for insufficient 
staff to ensure program compliance with statutory requirements. 
Well, we've reported areas of insufficient oversight, including 
retailer integrity and food stamp fraud, the agency's financial 
statements, documentation and collection of food stamp 
recipient claims, frequency of management evaluations required 
by program evaluations and regulations, oversight of the Child 
and Adult Care Food Program, and an oversight of State 
information technology and State cost allocation claiming, 
clearly to ensure that proper program and financial management 
for an agency managing almost $40 billion in program funding 
must be a top priority.
    Mr. Chairman and committee, that concludes my brief 
remarks, and we are prepared to answer any questions that you 
and the committee may have. Thank you very much.
    [Clerk's note.--Ms. Watkins's written testimony appears on 
pages      through     . Ms. Jackson's written testimony 
appears on pages      through     . Biographical sketches 
appear on pages      through     . The Food and Nutrition 
Service's budget justification appears on pages      through     
.]

                   welfare reform and operation talon

    Mr. Skeen. Well, Madam Secretary, we appreciate the whole 
litany that you've gone through. We have something like 26 
feeding programs that you're responsible for, I believe, in 
this United States, so there's no real reason for anybody to go 
hungry; but it's also an indication of just how much we believe 
in nutrition. We've got an agricultural system that takes care 
of it and provides an abundant source of food. So there's no 
reason for anyone to go hungry in this United States, because 
we've got something like 26 programs that you're in charge of, 
and we appreciate that.
    Let me ask you about welfare reform, which passed the 
Congress last year, and allowed the exchange of information 
between the law enforcement and social service agencies.
    Last month the Inspector General testified here, and he 
informed us about a special pilot project that it conducted and 
called Operation Talon. The OIG, along with other law 
enforcement agencies were able to match fugitive records with 
foods stamps and recipients records. That's one of the things 
where we've been victimized, there is an awful lot of fraud in 
the Food Stamp Program.
    But through this operation the OIG help State and local law 
enforcement agencies arrest more than 2,235 fugitive felons 
across the country. The importance to this subcommittee is that 
these fugitives were removed from the food stamp rolls. 
According to the OIG, more than $50 million a year in food 
stamps go illegally to fugitive felons and inmates.
    Let me ask you what your agency is doing in cooperation 
with the OIG to ensure that the food stamp benefit recipients 
are going to those that are truly in need.
    Ms. Watkins. Mr. Chairman, we're working very closely with 
the IG's office and all of the efforts to maintain program 
integrity.
    Mr. Skeen. I know that you had specific reference to these 
programs in your statement.
    Ms. Watkins. That's exactly right. And whatever efforts we 
can do at both the State, the local, and the regional office, 
we are trying to make certain that we are working with him.
    Mr. Skeen. You have full cooperation with the IG.
    Ms. Watkins. Yes, we are in full cooperation with the IG--
and we feel very strongly, that if we are to manage these 
programs effectively and efficiently, we also have to have some 
additional support to help us.
    Mr. Skeen. According to the report on Operation Talon, the 
vice president advised OIG and the FNS to issue a joint letter 
to all State social services agencies, informing these agencies 
of the need to conduct fugitive matches. Has this letter gone 
out to the State agencies?
    Ms. Watkins. Yes, Mr. Chairman, it certainly has. The 
letter was sent out on December 18, 1997, and it was sent to 
all of the directors of the Department of Human Services on 
Operation Talon.
    Mr. Skeen. So the word's out?
    Ms. Watkins. The word is out.

                        child nutrition program

    Mr. Skeen. Let's talk about the transfer from Food 
Nutrition Service to the Child Nutrition programs. I know 
there's a couple of items in your budget justification. There's 
one that you are transferring $315 million from the Food Stamp 
Program to the Child Nutrition Program; and two, the number of 
free meals claimed for reimbursement increased by 3.4 percent 
in Fiscal Year 1997.
    The first question is, what's the reason for having to 
transfer these funds from the Food Stamp Program to Child 
Nutrition Program?
    Mr. Skeen. Mr. Braley.
    Mr. Braley. Mr. Chairman, the level of participation in the 
Child Nutrition Programs has gone up in response to changes in 
the program in terms of the meal quality and that sort of 
thing. We've seen some increases in free meal participation. 
We're fortunate that we've had some reductions below our 
projected Food Stamp Program cost levels, so the shift in 
funding is necessary from one account to the other.
    There are a number of reasons that we have seen that make 
the level of free meal participation increase, in part, because 
of welfare reform. We think that some families that may not 
have taken advantage of the program historically are coming in 
and----
    Mr. Skeen. Became eligible?
    Mr. Braley. Became eligible or decided to participate in 
the program that hadn't historically.
    Ms. Watkins. One of the areas where you have a lot of 
children who are eligible for reduced-price meals, but simply 
do not apply and do not participate, so we see both an increase 
in free meals and in reduced-price meals. There are a lot of 
children who may be eligible for free meals, but they never 
apply. So we are seeing an increase in that area.
    Mr. Skeen. You've got a special program to get them 
enrolled, as I understand it.
    Ms. Watkins. We do have, and we are working aggressively on 
outreach to get children to participate in the program, because 
we recognize the difference that it makes in learning and in 
the educational process, so we are----
    Mr. Skeen. If children don't have proper nutrition, they 
don't learn.
    Ms. Watkins. They cannot learn. Hungry children cannot 
learn.
    Mr. Skeen. I just wanted to mention too, the President has 
been talking about the strength of the economy, and the poverty 
rates going down, as you mentioned; yet the claims for free 
meals have been growing faster than total meals. We in the 
subcommittee want to make sure that the free meals are going to 
those that need them, and you certainly bolstered our 
confidence; you're doing exactly that.
    Ms. Watkins. Well, we've looked at that, and we wanted to 
make certain that the projections that we saw, and with a 
robust economy, we wanted to look at that and find out. So I 
did have the staff to go through and give some rationale as to 
why we were seeing an increase. And obviously having 
administered those programs, I do know that there are a lot of 
children who will not apply, and whose families would not 
participate, so we can recognize what that difference is.
    Mr. Skeen. You're doing a lot with great interest--if we 
can get those numbers up, because we think that's exactly the 
most profitable place for us as a nation, to have this program 
work.
    Ms. Watkins. Thank you, Mr. Chairman. And we appreciate 
your strong commitment and support.

                          oig recommendations

    Mr. Skeen. Ms. Kaptur.
    Ms. Kaptur. Thank you, Mr. Chairman, and Secretary Watkins, 
we welcome you and your associates here today. Glad to have all 
of you. I know how hard you're working, and what your prior 
experience was to taking this position. You are very, very well 
qualified to do the job that you have to do for the country.
    Ms. Watkins. Thank you.
    Ms. Kaptur. Secretary, I wanted to ask you--last month 
you're probably aware that we had the Inspector General before 
us. You may not have heard about this, but he was talking about 
the various programs under your jurisdiction, and some of them 
being vulnerable to abuse.
    I have two questions. One is, how you are working with the 
Inspector General to act on the recommendations that he and his 
office have made. And secondly, he made some recommendations in 
his report for additional administrative expenses that would 
actually be the responsibility of the States and the Feds to 
implement.
    Are those additional administrative costs reflected in this 
budget submission?
    Ms. Watkins. The answer to your first question is how we 
are working with the Inspector General, and we are almost in 
constant contact with him, and have frequent meetings with him 
to review the kinds of things that he is finding, as well as 
what we are doing.
    One of the things that we feel very strongly about, 
Congresswoman, is that, if you are going to manage these 
programs, it's essential that they be managed as a business. We 
feel very strongly about that, and so does the IG's office. Our 
difference in what he's doing and what we're doing, is we want 
to make certain that people are trained adequately, so that 
they can respond to what we are asking them to do. We want to 
make certain that they clearly understand what we're asking 
them to do in program management to protect the program 
integrity.
    We have reflected in the budget, in our food program 
account areas, program integrity funds. That does not go to the 
Inspector General, but that is to help us administer the 
program in the most cost-effective manner possible.
    Ms. Kaptur. Do you feel you have sufficient funds to do 
that in this budget?
    Ms. Watkins. Obviously, we think that what we have at this 
point will help us to get a good start.
    Ms. Kaptur. You think that current staffing levels are 
adequate to oversee the programs that you must administer in 
this regard?
    Ms. Watkins. Well, when you have as many----
    Ms. Kaptur. It was approximately 50? I don't remember the 
exact number, but it was very lean.
    Ms. Watkins. When we have as many programs to administer as 
we have to administer, and not having direct responsibility--
we're working through States and locals to get the job done, I 
don't know that you can ever have enough people to monitor and 
to provide the guidance and technical assistance. We could 
always use additional help in getting that job done. But we 
have budgeted for what we think will help us work with him to 
manage the program.
    Of course, Congresswoman, if you see fit, and you want to 
provide some additional funds, we will gladly accept that.

                               food waste

    Ms. Kaptur. Well, thank you for that.
    Madam Secretary, when Secretary Glickman was before the 
committee, he made a statement that in our country, perhaps 20 
to 25 percent of food is wasted. He talked about everything 
from restaurants to production in the field.
    Do you think that that figure would hold for our Federal 
food programs, our child nutrition programs, our WIC programs, 
breakfast and lunch programs? Would that percent also apply 
there?
    Ms. Watkins. We have a lot of waste, and I read with 
interest your comments and the secretary's comments on this 
issue when he testified. And there is a lot of waste, and that 
is something obviously that the secretary is very concerned 
about, and wants to move aggressively to do something about 
that.
    As far as the School Lunch Program, we do have a lot of 
work that we can continue to do with our cooperators in the 
school nutrition community and our daycare--Child and Adult 
Daycare Programs. We can work with people in providing themsome 
guidance and some technical assistance, just as they do in the 
restaurant business on how you manage programs more effectively.
    One of the things when you talk about child nutrition 
programs and feeding children, you will always have some food 
wasted. Obviously, we need to look at what people are doing as 
it relates to customer service, and giving children more 
opportunities to have some input in what those meal planning 
options are. We can work, and will continue to work very 
aggressively on that. Children need to understand that it's 
healthier for them to eat the food, and we don't necessarily 
want healthy food waste disposals, and we can correct some of 
that as we work with them.
    Ms. Kaptur. When we had the representative of the Economic 
Research Service up here before the subcommittee, it was a bit 
disconcerting to see that the oversight, what was happening on 
the food front was bouncing between ERS and your division of 
USDA. It was of concern to me, because we got into the question 
with her about garbologists, and I was asking questions about 
measurement of that waste in the school program. I would hate 
to see that it didn't happen.
    I look upon this as strike visits to schools. Let's send 
neutral researchers out there; let's pick 100 sites and let's 
do it. Let's see what kind of waste there is. Let's figure out 
why it's there. Let's work back from the garbage can, back to 
the program, and figure out what we can do differently.
    I would hope that when you appear before the committee next 
year, that something like that would have been done, so you can 
actually report back to us on what is the nature of the waste, 
the plate waste, and perhaps kitchen waste. If we're serving 
things that are merely being thrown away, this is a set of 
values we don't want to pass on to our children. If we don't 
have visionary food menu planners out there, well then, let's 
produce them for the country. But let's not waste this food. I 
appreciate your sensitivity to that. With your background, I 
know you're just the person to do this. If there is a problem, 
you can find it, and change it for the better.
    Ms. Watkins. Well, we will certainly do that. And I'd also 
like to share with you that we do have grants that will be 
going to schools this year on food recovery. We have in the 
neighborhood of about $120,000 for grants on food recovery in 
schools.
    One of the things that schools had some difficulty with in 
getting food that may be left over at various times during the 
year, to soup kitchens and food banks. So we're going to look 
at the best practices in that with the 20 grants that we have, 
and see how effective that will be.
    In the meantime, there are schools that do an incredible 
amount of food waste studies, so we can also begin to encourage 
more schools to do food waste studies, and we'll be glad to 
present something to you when we get that information back.
    [The information follows:]

                    Food Waste in Nutrition Programs

    The Food and Nutrition Service has twice studied food 
wasted, or plate waste, in the school breakfast and lunch 
programs and once in the Child and Adult Care Food Program.
    The Child Nutrition Program Operations Study, Second Year 
Report of 1992, found that elementary school students wasted 
about 23 percent of the nutrient content of their school meals 
and that middle and secondary students wasted about 23 percent 
of the nutrient content of their meals. The School Nutrition 
Dietary Assessment Study of 1993 occurred soon after Child 
Nutrition Program Operation Study. It found that across all 
grade levels school lunch participants waste approximately 12 
percent of the food energy or calories that they are served. 
The SNDA study also found that younger students waste more food 
than do older students, which is consistent with the CNPOS 
findings.
    The recently completed Early Childhood and Child Care Study 
of 1997 found that the food wasted by weight by children in 
CACFP day care is about 30 percent for lunch, about 25 percent 
for breakfast, and about 20 percent for snacks. These findings 
are of the same magnitude as the CNPOS finding that elementary 
school students waste about 23 percent of the nutrient content 
of their school meals.
    The difficulties involved with measuring food waste in the 
Special Supplemental Food Program for Women, Infants, and 
Children--the WIC program--are substantial, since doing so 
would involve measuring, for a number of different food items 
with a variety of `shelf lives', the proportion of each item 
that is never prepared and discarded and, of the proportion 
prepared and the amount discarded. No study of WIC food waste 
has been performed.

    Ms. Kaptur. I think the school district that has the best 
fed children and the least waste ought to get an award from you 
every year.
    Ms. Watkins. Well, we'll do that.
    Ms. Kaptur. I think their menu should be made available to 
the other school districts in the country, where maybe there's 
less inspired leadership.
    Ms. Watkins. That's a good idea.
    Ms. Kaptur. I'll tell you, Mr. Chairman, if it turns out to 
be your district, I'm going to be really suspicious.
    Mr. Skeen. You're suspicious to start with.

                     mandatory spending on research

    Ms. Kaptur. I have a second round of questions, but this 
will be my last one on the first round.
    The Senate version of the Agriculture Research Bill uses 
food stamp administrative cost savings for new mandatory 
spending on research.
    Would you care to comment on that, Madam Secretary? Have 
you looked at that, how what will affect you, your budget, your 
agency?
    Ms. Watkins. We have looked at that, and we are working 
with the Secretary to arrive at some decisions on that, on a 
position for the Department, so we are working on that issue.
    Ms. Kaptur. Thank you.

                      oig audit of cacfp sponsors

    Mr. Skeen. Mr. Walsh.
    Mr. Walsh. Thank you, Mr. Chairman. Madam Under Secretary, 
Madam Administrator, everybody else, welcome. It's good to have 
you with us today.
    Ms. Watkins. Thank you.
    Mr. Walsh. I often thought that this subcommittee should 
probably be called the Agriculture and Nutrition Subcommittee, 
because so much of what we oversee is nutrition, and that's a 
big piece of the pie that you have. It's a tremendous 
responsibility, it's tremendously expensive, tremendously 
important.
    Along that vein, I'd like to go back now--these are 
difficult things, but the IG's report really indicted a number 
of these programs. The Child and Adult Care Food Program is a 
$1.5 billion program. The idea is to ensure that needy children 
and adults are being cared for properly in participating homes 
and centers. It's a very lofty objective, and it's something 
that everyone on this subcommittee supports.
    Last month, the IG testified before this subcommittee and 
revealed some very disturbing discoveries about CACF, and WIC, 
and food stamps. And I understand there's a WIC study that's 
being done now, we all look forward to hearing about. I'm a 
very strong supporter of all these programs, especially WIC.
    But in the CACF Program, two executives in California of a 
nonprofit child care sponsoring organization pled guilty to 
mail fraud. These executives defrauded the program of about 
$2.3 million. They allegedly used the funds to pay for their 
kids college expenses, and Lord knows, there's temptation 
there.
    Ms. Watkins. We all understand that.
    Mr. Walsh. Anybody with kids in college is looking for an 
extra buck to help--to support them, but this obviously very, 
very wrong. They also bought themselves some nice homes and 
commercial properties. These have been highlighted; everybody's 
aware of these. But he also cited a number of other cases.
    In the audit they did a pilot test that concentrated on 
approximately 1,200 sponsors, who are primarily responsible to 
oversee these programs. They reviewed 12 sponsors in 10 States, 
and found that 11 of them were seriously deficient. So, I don't 
know if you can fairly extrapolate that out across the 1,200 
sponsors, but it is a tremendous problem. They also questioned 
whether some providers were eligible to claim the meals they 
served to their own children. At some homes they found unsafe 
and unsanitary conditions; licensing violation.
    Ms. Kaptur asked about the additional need for staff, but 
in fact, as I understand the process, the sponsoring agencies 
are responsible to police those agencies and centers that 
they're working with.
    The obvious question is, how did it get this bad, and is it 
indeed this bad, when 11 out 12 agencies are in violation?
    Ms. Watkins. Mr. Walsh, thank you very much for asking that 
question. We had identified 12 sponsors that we suspected had 
problems. We gave those names and those sponsors to the IG. We 
already suspected there was a problem, but that's 12 sponsors, 
as you said, of almost 1,200 family day care sponsors.
    Mr. Walsh. So you pulled out these 12 and asked them--
    Ms. Watkins. We pulled out the 12; asked him to look at 
those 12 sponsors. That's about 1 percent of the family day 
care sponsors that we have in this country, and, obviously, 
when you have any program, you're going to run into some 
problems, and we are working with our Child and Adult Day Care 
Feeding Program sponsors. We've had meetings with them and will 
continue to do so, so that they are aware of the different 
problems that the IG identified. So they are aware of the 
problem, we are going to be working with them. We already have 
management guidance, and, Mr. Chairman, I'm going to give you a 
copy of this, because we are not wasting one minute.
    As I said to you earlier, this is a nutrition business that 
we're operating, and we're going to be on top of every issue 
that would even have a remote indication of any fraud or abuse. 
We're not going to tolerate it in the programs. I don't see 
this as a big of a problem, maybe, as it's blown up to be. It 
is a problem, and we will continue to work on that, and we will 
continue to work with people so that they do have guidance 
materials, so they know what we're expecting as outcomes and 
how we expect them to administer programs.
    Mr. Walsh. These--excuse me--these 12, these were 
sponsoring agencies as opposed to child care of adult care 
homes?
    Ms. Watkins. Right.
    Mr. Walsh. So, how many might they be--how many homes might 
they be responsible for, these 12?
    Ms. Watkins. I don't know the actual number; let me check.
    Mr. Walsh. Per sponsor. Would then those sponsors be 
stripped of that responsibility or would they be--how would 
they be dealt with?
    Ms. Watkins. They would be dealt with in a variety of ways. 
They could be stripped of their sponsorship if there was 
fraudulent waste and abuse in that program, and theycould have 
prosecution. So, there are a variety of ways that they are being dealt 
with, and that same thing would apply in any of them. George, you want 
to add to that?
    Mr. Braley. Yes, we have authority to disqualify them if 
they're found to be seriously deficient in addition to 
prosecution and other actions that can be taken as a result of 
the IG's audit and investigative work.
    Mr. Walsh. This California case, were these individuals 
running the child and adult care centers or were they the 
sponsoring agency?
    Ms. Watkins. They were the sponsoring agency.
    Mr. Walsh. They were. Now, those homes--apparently, they 
falsified the documents--but were they, in actuality, providing 
some management force for adult or child care residences, 
homes?
    Mr. Braley. The sponsoring organization?
    Mr. Walsh. Yes, were they providing any service?
    Mr. Braley. They typically would have provided some, but 
there was a lot of fraud in many of the cases. I don't know the 
details on that specific one, but they--the sponsoring 
organizations do provide oversight of the homes that are within 
their jurisdiction. They're responsible for doing reviews and 
making sure there's program compliance. Obviously, in these 
cases, these were cases where there was serious abuses of the 
program going on, so I would say the level of work that they 
were doing was certainly less than adequate and less than what 
is typical of a sponsoring organization.
    Ms. Watkins. And some of them in the California case, they 
had claimed some day care centers that did not exist.
    Mr. Walsh. It would seem to me that all the other sponsors 
should be made aware of how these folks, ultimately, were dealt 
with. Has that been done?
    Ms. Watkins. That has not been done, and we will make 
certain that they are aware of the disposition that is taken, 
so that they would guard against any of those kinds of 
violations, and that's also the purpose of our management 
improvement guidance piece.
    Mr. Walsh. That's maddening because these are the programs 
that we can all be proud of; that we can all say, ``yes, you 
said your hard earned dollars to Washington, but this is what 
we do with them.'' These are programs that few people would 
argue with, but while we see that--while we see statistics that 
we saw two, three, or four years ago on food stamps, estimates 
of up to--and these are estimates, and they're all anecdotal--
but 33 percent fraud and with hundreds of millions of dollars 
of fraud or CACF individuals stealing $2 million or $3 million 
in Federal money, they become urban legends. People talk about 
these things as total wastes of money, and they're not, but 
unless we police them well and have good sponsors and good 
management structures and good supervision on the part of the 
Federal oversight agency, we're going to have to continue to 
deal with headlines like these, and it's embarrassing for us; 
it's embarrassing for you. Is there anything that we can do to 
support your effort?
    Ms. Watkins. As we work through our State and the local 
cooperators and the sponsors and have listening sessions and 
find out the kinds of needs that they are providing to us, we 
will make you aware of that, and if there is some additional 
resources that you're going to need, we certainly will come 
back to you and say this is something we're going to need. But 
we want to work with them. We want to be supportive of the 
programs and supportive of the sponsors, and that calls for 
good technical assistance. We're also looking to see if there 
are not some ways that we can work through some things with the 
Food Management Institute at Ole Miss so they can help us 
provide some training materials. Some of the States have 
already started doing that on their own, so we are also looking 
at that as a means of providing some guidance and technical 
assistance. That's an area we feel very strongly about.
    Mr. Walsh. If we provided additional resources to the IG to 
do additional audits, would that be helpful to you?
    Ms. Watkins. I don't know if it's additional money to the 
IG to do audits. What I see as the opportunity is--I guess I 
don't always like to do the ``I got you''. I want to make 
certain that we can provide people the mechanism and the tools 
on how to do the job. If, at that point, we find that there is 
still a problem, then I would come back to you and say we need 
you to provide money to the IG to do this. But I like to take 
the high road; work with people, and provide them with the 
necessary information and guidance first and see if we can't 
correct it that way.
    Mr. Walsh. Thank you, Mr. Chairman.

                                  wic

    Mr. Skeen. Mr. Fazio.
    Mr. Fazio. Thank you, Mr. Chairman. Without wanting to, in 
any way, denigrate the line of questioning we've just been 
through, I think these are important issues, I wanted to go 
back to, perhaps, a reassertion of why it makes sense for us to 
budget WIC in the fullest possible degree. I noted from your 
budget justification that you can actually show that a dollar 
invested returns more than a dollar in Medicaid savings to the 
same Federal budget. I'd like to have you comment just on that 
issue, because I think it's very important for members to 
realize this is one of the few things we actually invest that 
in a very short-term time frame is giving back more than it 
costs even with inflation how ever low it may be.
    Ms. Watkins. One of the areas where we--as I said earlier--
where we, at USDA and this committee, can be extremely proud of 
what we're saving in the way Federal dollars, when we spend a 
dollar for WIC and then save three to four dollars in Medicaid 
costs later on, I think that is, perhaps, one of the most 
extraordinary areas that we can cite.
    The other instance that we can cite is that through WIC 
we're seeing less infant mortality. The infant mortality is 
down dramatically. We're seeing higher birth weights in babies. 
We're seeing as the research points out now, our children are 
going to be more receptive and ready to learn when they get to 
school, because they don't have some of the health risks and 
problems that other babies would have. So, I think that what 
we're doing with WIC and the prescriptive nature of this 
program helps us to be very, very pleased and proud of that 
program.
    Mr. Fazio. I was just going to read two sentences, and this 
really doesn't rely on your opinion, this is a GAO, an agency 
of this branch of Government. It says that ``For every dollar 
spent on WIC during pregnancy, we save $2.90 over the first 
year after birth and $3.50 over 18 years in Federal, State, 
local, and private health care costs.'' In 1990, the GAO 
estimated that ``Prenatal WIC expenditures would help Federal, 
State, local, and private payers avoid $1.036 billion in 
medical costs over the first 18 years of life''; That was in 
1990.'' I gather those statistics have been borne out--are 
being borne out.
    Ms. Watkins. They have and the other area--when you have a 
program that's doing really, really well, we add some 
additional things, WIC's contribution to immunization, 
preschool immunization has been recognized as a real, real 
success. So, we are also saving in costs in that area as well.

                        california shape program

    Mr. Fazio. Let me ask some questions that are a little bit 
more parochial. The California SHAPE program, Shaping Health as 
Partners in Education, is before your Department for approval. 
Recently, they had their provisional status extended for one 
year. This is a very popular program in my State. I wondered 
why they haven't received approval and what else need be done 
for them to reach that status? They're the school lunch 
program.
    Ms. Watkins. SHAPE has been approved.
    Mr. Fazio. Final approval?
    Ms. Watkins. Final approval.
    Mr. Fazio. Not just an extension of provisional status?
    Ms. Watkins. Not just an extension. Yes, final approval.
    Mr. Fazio. That was perfect timing. [Laughter.]
    Did that happen sometime earlier today? [Laughter.]
    Ms. Watkins. Just in time.

           Weighted Averages for conducting nutrient analysis

    Mr. Fazio. Just in time. It certainly was much appreciated 
here.
    The American School Food Service Association has indicated 
concern about the use of weighted averages for conducting 
nutrient analysis. They say it's unnecessarily complex. Does 
anybody have any response to the criticism that, in effect, 
people who are your allies in some ways are directing at this 
requirement?
    Ms. Watkins. We've heard the same concerns that you have 
heard, and we have made certain that we work with the American 
School Food Service Association and the school nutrition staff 
around the country by giving them a two-year extension on the 
waiver, so that we have an opportunity to look at that----
    Mr. Fazio. When did you give them that extension? 
[Laughter.]
    Ms. Watkins. They were in town in early February--so, I 
didn't do it today--they were in town in early February, and we 
wanted to make certain that we addressed their concerns on 
that, because what we want to do is to have an opportunity to 
look and see that we're not making the program so complicated 
and so difficult that the average person cannot operate that 
program, and that's what the potential of weighted averages 
has. It's not every school or school district that would have a 
computer and a dietician sitting in that office to do the 
calculations.
    Mr. Fazio. That is increasingly, unfortunately, the case.
    Ms. Watkins. That is.
    Mr. Fazio. We don't have those resources.
    Ms. Watkins. We don't have those resources, so we're 
looking at that, and we have staff who will be working in 
school to look at what kinds of complications these kinds of 
problems are playing----
    Mr. Fazio. Madame Secretary, if you and the chairman's 
grandchild can't operate this system, we ought not to put it 
into regulation. [Laughter.]
    Ms. Watkins. That's exactly right, and we're not going to 
put weighted averages in there until we get all of that worked 
out; until we know that that's going to be successful. We, 
obviously, do not want to set people up for failure, and, right 
now, that's what they're telling me we're doing. We're not 
going to do that.

                          WFC Product Rebates

    Mr. Fazio. I appreciate that.
    On the WIC formula rebates, you mention in your testimony 
the degree to which it's helping us obtain funds that we then 
reinvest in the program. Those rebates are on the traditional 
soy-based and milk-based formulas. I'm wondering why the policy 
hasn't been extended to the lacto-free product, and there may 
be other products around the country that are not being sold to 
the school lunch program but are available overseas. I'm asking 
this because it seems we aren't totally consistent, and we 
could, probably, obtain additional rebates and fill those back 
into the program as well. Does anybody want to respond to that? 
I see we have a note coming up.
    Ms. Watkins. We have a note, and I think George is going to 
respond to that, and we did hear that concern addressed in the 
WIC listening sessions. And we also heard that people who have 
special needs children expressing some concern about the 
formula, so there are a variety of things that we, perhaps, 
need to look at in the way of formulas that yesterday may not 
have been a problem but today they are. We had one parent who 
had a special needs child at one of the WIC listening sessions, 
and the child had to have two different formulas--this was a 
special needs child. George, you want to expand on that?
    Mr. Braley. Congressman Fazio, we do have a regulation 
that's in clearance now that will address that issue and will 
treat all standard formulas the same and have comparable rebate 
systems in place for those.
    Mr. Fazio. I'm three for three so far.
    Mr. Braley. Yes, you are. [Laughter.]
    That one's not ready today, however. [Laughter.]

                       WIC FARMERS' MARKET GRANTS

    Mr. Fazio. Well, I would appreciate it if you would 
expedite it. [Laughter.]
    No, I thank you for your attention. It seemed logical to me 
when I was told about it that we want to include it, but, at 
the same time, I thought maybe there was a reason why we 
hadn't. It seems to me there are a lot of other products that 
are out there, perhaps, that are going to be available to 
special needs children or maybe just the preference of people 
who don't have special needs but ought to contribute just as 
much.
    My last question is this: I was in receipt of a press 
release from the Department where Secretary Glickman announced 
that there were WIC farmer market grants to the tune of $12 
million being announced for various States around the country. 
I'm aware of how popular farmers' markets are and many of our 
States--my State and certainly my region--is increasingly 
utilizing these as a place to buy the freshest fruits and 
vegetables, and, yet, I noted that California was receiving a 
little over $400,000 which I note is comparable to Iowa and 
Connecticut, but we're a much larger State, and I wondered why 
we may have, perhaps, not done as well in terms of receiving 
this kind of funding? I wonder if it's our fault or whether 
there is some criteria that was used that, perhaps, we're not 
fulfilling? Does anybody have any idea?
    Ms. Watkins. The States requested funding for the Farmer's 
Markets Programs this year, and we wanted to make certain if we 
could that we would provide those States the exact request. We 
were fortunate enough based on this committee's support to 
provide them what they requested. California only requested the 
$440,000, so that's what we gave them.
    Mr. Fazio. I noticed Mr. Walsh's--very aggressive state, 
New York, received $2.3 million, so I guess this is one of 
these instances where you've got to ask for it if you want it, 
and we may want to go back and look at the WIC program in 
California to see what we could do to become more aggressive 
about using farmers' markets to deliver the benefit program, 
because I think its potential is far greater than, perhaps, the 
degree to which we've tapped it.
    Ms. Watkins. This is a new program, and as people learn 
more about the WIC Farmers' Markets Program I think you will 
see more requests for it, and we are working to inform people 
of the program and what the opportunities are, because we do 
think--just as you said, Mr. Fazio--that this is an opportunity 
for those families to get some fresh fruits and vegetables, and 
we also want to see the farmers' markets more accessible not 
only to WIC recipients but also to food stamp recipients, and 
we are encouraging that. As I said earlier, these programs are 
closely linked to the farm community, and we want to make 
certain that we are making those available to the farmer, so 
they understand that there are some opportunities available 
there and to our WIC recipients. So, it is a win-win situation 
for all of us.
    Mr. Fazio. Well, nobody wants to link the food nutrition 
programs and the farm programs more than this subcommittee. You 
know, that's part of what we try to do both on the merits and 
on the politics, and our districts, certainly one like mine, 
considers this a win-win. We've got a lot of small farmers 
trying to utilize farmers' markets as another avenue to 
survive, and I know you've been criticized initially a little 
bit for some of the administrative costs and some of the 
procedures that were a little hard for small operators to 
adjust to. We're used to dealing with larger retail 
institutions. Everything you can do to try to rectify that kind 
of discordant note will be appreciated. We do note your 
interest in making this program work.
    And let me just conclude, Mr. Chairman, by thanking you and 
your associates for the good work you do, and I wanted to 
particularly say hello to Dr. Anand who's got a long history at 
U.C. Davis. I think you got three degrees there, did you?
    Dr. Anand. Yes.
    Mr. Fazio. That's an incredible record, and I'm glad that 
you're serving us now.
    Dr. Anand. Thank you.
    Mr. Fazio. Thank you, Mr. Chairman. Thank you very much.
    Ms. Watkins. Thank you.

                 Aberrations in WIC food package costs

    Mr. Skeen. Mr. Kingston.
    Mr. Kingston. Thank you, Mr. Chairman, Madame Under 
Secretary. I've been looking at this consumer price information 
for Food at Home--you're familiar with it, I assume--and 
looking at some of the food increases for that total food 
package--cheese, .27; dairy, .14, and the Thrifty Food program, 
I think, .37--when you get to WIC and it's 9.25 with the big 
bump coming, actually, in the last quarter, from July to 
September, 1997. Now, that doesn't sound--it sounds like there 
must have been a mistake in there.
    Ms. Watkins. I don't have a copy of that, Mr. Kingston, and 
I'll be glad to----
    Mr. Kingston. I might be misreading it, if you want to look 
at.
    Ms. Watkins. Okay. I'll be glad to review it and get back 
with you with a response if that's acceptable?
    Mr. Kingston. Well, what would be your theory on why it's 
that high? Does anybody have a theory?
    Ms. Watkins. George?
    Mr. Braley. Congressman Kingston, there was an increase in 
food costs in WIC in the month of September, particularly, 
September of 1997. That reflected, actually, one State, the 
State of Illinois, which runs--they go out and buy food for 
their WIC programs in the city of Chicago, and they, 
apparently, bought a lot of food in the last month of the 
Fiscal Year to stock their programs, and that was such a 
significant increase that it drove that up. That is an 
aberration. We have not seen increases in WIC package costs. In 
fact, if you go back over the last several years, I think 
because of the good work by the States and others on the infant 
formula rebates, food package costs in WIC has remained 
remarkably low. They've gone up very, very slowly, and I think 
that September figure is an aberration, and we can get you the 
details----
    Mr. Kingston. Actually, if you go back to 1994, there's 
never been anything like a 9 percent increase. Now, you're 
telling me that even though whole milk, dairy products, cheese, 
fruit, and the Thrift Food program have not moved, that one 
city in the entire country drove up WIC costs 9 percent?
    Mr. Braley. I don't know what the 9 percent is compared to 
as a base, but there is also a phenomenon in the months at the 
end of the Fiscal Year. Some things get reported by other 
States that cause costs to look higher in a particular month, 
but those things fluctuate and tend to come back down in 
subsequent months. In early reports--for months not closed out 
yet, States receive some additional rebates for September that 
probably aren't reflected in that number, so it will come down 
some before it's actually closed out, finally.
    Mr. Kingston. And you're saying there's no correlation 
between the increase in food costs during that quarter and the 
supplemental appropriation that was passed by Congress? There 
was no rush to go out and spend new money?
    Mr. Braley. I'm not aware of any phenomenon like that.
    Mr. Kingston. Explain to me how that works, the Cook County 
or city of Chicago, which would it be?
    Mr. Braley. I think it's the city of Chicago that actually 
had used retail vendors in one of the--they had found some 
problems with vendors in the city of Chicago a number of years 
ago, our IG did--they went to a direct purchase and 
distribution program like the State of Mississippi uses and a 
few other smaller places around the country. So, they buy their 
foods on a different basis from a retail food environment that 
most of the WIC program goes through, and they had--we were 
just looking at this this morning, because we were trying to 
figure out why the numbers were moving around, and it was the 
State of Illinois that had a huge jump in food costs for 
participants that month, and it was, as near as we can tell, 
limited to Cook County or the city of Chicago.
    Mr. Kingston. And, so, this committee could expect to see 
that not just to level off but drop significantly, in fact, 
dip, because they have a huge food supply and a stock that 
would carry them through for how long? Six months? A year?
    Mr. Braley. I don't have enough detail to be able to 
provide that right here, but I will look into it and find out.
    Mr. Kingston. When you see that, though, as somebody with a 
modest financial background, it would ring all kinds of bells 
to me to look into it. Does your Department do that when you 
see something that's such an aberration?
    Mr. Braley. Sure, we follow up on reporting like that.
    Ms. Watkins. If you would have any number that looked like 
it was skewed, we would want to find out what's causing that, 
and as you get reports you want to find out immediately what's 
causing this. Obviously, Chicago would look a little different 
because Chicago and in Mississippi have what's like a WIC 
grocery story, so, obviously, if they went out to purchase and 
went out to bid and brought all of that product into their 
little store or their distribution center, it would be a major 
purchase and would cause a major shift. We still would like to 
see the information that you have, so we can provide you that 
information and wisely.
    Mr. Kingston. Yes, Madame Secretary, I'd be very interested 
in that, because you're saying that you would immediately look 
into it and that's good. I believe this report is over two 
months old, though. I'm not positive of the date of the report, 
but I would think if somebody is immediately looking into we 
would know by now, with certainty, what that was.
    And the reason why it's important is that there's a lot of 
questions about WIC, and, as you know, there's a study that's 
coming out, and there are--you hear a lot of stories about 
waste in the WIC program and money going to the bureaucracy and 
inefficiency and not underwriting the recipients of it and so 
forth, and, so it's something that we would be concerned about 
to make sure that there isn't an artificial spending binge in 
order to justify a bureaucracy which denies some child out 
there needed food and nutrition in order to justify folks' 
jobs, and that's what I think our concern would be.
    Ms. Watkins. I'll be glad to look at that. When you say 
that that report is over two months old, but I have not seen 
it.
    Mr. Kingston. I'm not certain.
    Ms. Watkins. Okay.
    Mr. Kingston. I think it is.
    Ms. Watkins. I will look at it and see. I have not seen it, 
and that's the reason why I wanted to look at it.
    [The information follows:]

                  Aberration in WIC Food Package Cost

    There was a 9.19 percent increase in the average food package cost 
from July to September. The majority of the increase was due to 
Illinois reporting extremely high food expenditures for September. The 
increased expenditure was due in part to the food buys conducted to 
replenish the warehouses used by the Food Centers in Chicago. However, 
during this time the State also experienced computer problems and were 
unable to write checks during the summer months. Therefore, all of the 
expenditures incurred during that time period were not reported unitl 
September. National food expenditures decreased in October--the result 
of more reasonable food costs being reported in Illinois. The following 
information reflects the percent change in food package costs by region 
during these time periods:

                      CHANGE IN FOOD PACKAGE COSTS                      
                              [In percent]                              
------------------------------------------------------------------------
           Region                July-September       September-October 
------------------------------------------------------------------------
Northeast...................                  0.15                  3.00
Mid-Atlantic................                  1.13                  0.49
Southeast...................                  0.75                  0.52
Midwest.....................                 55.66                -24.80
Southwest...................                  0.44                  4.84
Mountain Plains.............                  2.70                  1.01
Western.....................                  6.16                 -2.06
National....................                  9.19                 -3.91
------------------------------------------------------------------------

    Mr. Kingston. Okay. Well, I would appreciate that, because 
I think that you're very earnest in what you're trying to 
accomplish, and, yet, at the same time, we want to make sure 
that the dollars are scrutinized.
    One other thing only to say--split a hair with you 
earlier--you had said about we want to make sure these kids who 
are on get Government programs--I would, maybe, take a little 
step back from that philosophy to say, ``You know what, it's 
also good if you're not on a Government program.'' It's not a 
problem to feed yourself in America today. It's not a problem 
that my children or your children or somebody else's children 
can afford their own lunch, and they don't need to be on the 
Government's programs, because I think that there is a tendency 
with some nutrition programs, particularly WIC, to be, maybe, a 
tad aggressive in trying to get everybody on it, so that you 
can get more money funneled into the program. I think that we 
have to be mindful that we want an independent population far 
more than we want a dependent population. Thank you.
    Ms. Watkins. We'll be mindful of that. Thank you.
    Mr. Kingston. Just to split a hair with you.
    Ms. Watkins. That's okay. We appreciate that.
    Mr. Kingston. Thank you, Mr. Chairman.

              wic research findings and cnp participation

    Mr. Skeen. Not to split a hair, but, Ms. DeLauro.
    Ms. DeLauro. Thank you very, very much, Mr. Chairman, and 
welcome and thank you. Thank you, Madame Secretary for your 
outstanding commentary and testimony, and your response to 
questions, and to your staff for their good work in 
responsiveness to questions.
    I just want to take a couple of seconds to talk about the 
research findings on WIC; just two or three points which I want 
to make sure that are on the record. We've talked about what it 
does in terms of investments of one dollar in Medicaid and said 
that over and over again. I don't know if some of these other 
things are in the record, but I think that they're pretty 
amazing statistics and research findings. WIC contributed to a 
reduction of one-fifth to one-third in the late fetal death 
rate. Women who participate in WIC have longer pregnancies 
leading to fewer premature births, a leading cause of infant 
mortality, as you pointed out; 23 percent decrease in 
prematurity among white women with less than a high school 
education and 15 percent decrease among black women with less 
than a high school education.
    WIC participation resulted in a significant increase in the 
number of women seeking prenatal care early in pregnancy and a 
significant drop in the proportion of women with too few 
prenatal visits to a health facility. Early and adequate 
prenatal care is one of the major factors affecting the health 
of newborn infants. Children participating in WIC are better 
immunized and more likely to have a regular source of medical 
care. WIC participation also appears to lead to better 
cognitive performance. Four and five-year old children whose 
mothers participated in WIC during pregnancy had better 
vocabulary test scores. Children who participate in WIC after 
their first birthdays had better digit memory test scores. 
Women enrolled in WIC consume more iron, protein, calcium, and 
vitamin C; improve the diets of their infants by increasing 
average intake of iron and vitamin C and the diets of their 
older preschool children by increasing average consumption of 
iron, vitamin C, thiamin, and niacin.
    I think we find that we have a program that is remarkably 
successful. I wish that we could say as much about every single 
program that the Federal Government supports and funds, and I 
congratulate those who have worked with this program. I also 
want to point out and I want to congratulate USDA on 
investigating fraud in several of its programs and most notable 
in the Food Stamp program.
    I am going to submit a request. I'm for weeding out fraud 
and abuse wherever it exists, and I think the response has been 
tremendous particularly in the nutrition programs of looking at 
fraud and abuse. But I'm going to request, Mr. Chairman--and I 
will do it myself in conjunction with any other member of the 
committee--to take a look into a review of the fraud and abuse 
of a variety of the programs which under USDA jurisdiction. 
That includes the Commodity program; that includes the Crop 
Insurance program; that includes some of the rural programs or 
some others. I want to take a look and see if, in fact, we are 
weeding out fraud and abuse across the board or we are weeding 
out fraud and abuse in only a few selected programs that we 
have jurisdiction over. Again, I congratulate you.
    You mentioned that the school lunch and the breakfast 
program, which are expected to serve about 5.8 billion meals in 
Fiscal Year 1999, are currently serving the minimal amount of 
children. How many more children are in need of these programs 
and what level of funding would be needed to meet this need?
    Ms. Watkins. I'm not sure that I can give you the exact 
number of children, because we have to look at enrollment in 
schools to know exactly how many children we can eventually 
serve in all of those programs, and we can provide that 
information to you.
    Ms. DeLauro. That would be fine, thank you.
    [The information follows:]

       Child Participation in School Lunch and Breakfast Programs

    The National School Lunch Program (NSLP) serves lunches in almost 
89 thousand schools and is available to 46 million students. This makes 
the program available to 99 percent of all public school students in 
the Nation. The current average daily participation is about 27 million 
students, which is about 58 percent of the 46 million enrolled in NSLP 
schools. These figures show that the NSLP is available to effectively 
all public school students in America, so that every needy child in the 
public schools can get a nutritious lunch for free, if the child's 
household income is at or below 130 percent of the Federal poverty 
level, or reduced-price--not to exceed 40 cents--if the child's 
household income is above 130 and below 185 percent of poverty.
    The School Breakfast Program (SBP) services breakfast in almost 63 
thousand schools and is available to almost 34 million students, which 
makes it available in 71 percent of NSLP schools and to about 74 
percent of public school students. The current average daily 
participation is about 7 million students, which is about 21 percent of 
the 34 million enrolled in SBP schools. The Food and Nutrition Service 
estimates that about 80 percent of the children who are approved for 
free or reduced-price lunches are in schools offering the SBP, i.e., 
about 80 percent of low-income children have access to a SBP. While FNS 
would like to see the SBP in all NSLP schools made available to all 
low-income children, individual schools decide whether to participate 
in the SBP. FNS does pride itself, however, on overseeing the dramatic 
rise in the number of schools offering the SBP over the last decade: 
rising from 37 thousand to 69 thousand--nearly a 90 percent increase--
between 1987 and 1997.
    In 1989, Congress passed Public Law 101-147 allowing school 
officials to use ``direct certification,'' that is, to approve a child 
for free meal benefits based on confirmation from officials of either 
the Food Stamp Program or certain Temporary Assistance to Needy 
Families or TANF programs in which the child is a food stamp or TANF 
benefit recipient. Since the eligibility thresholds for food stamps and 
certain TANF programs are at or below the income threshold for free 
meal benefits, a child participating in either of these programs is 
thereby eligible for free NSLP and SBP meals. All but a handful of 
States are currently using direct certification in some form, which 
increases the likelihood that needy children will receive free NSP and 
SBP meals.
    Examining children's accessibility to NSLP and SBP meals, is one 
way of looking at how many more children are in need of the SBP and 
NSLP. Since the NSLP is essentially in all public schools FNS continue 
to work toward insuring that needy children who want free or reduced-
price benefits are able to obtain them. However, since the SBP is still 
unavailable to many needy children, FNS will continue to promote the 
SBP and encourage State and local program cooperators to provided the 
SBP in all NSLP schools. Increasing the SBP to all NSLP schools would 
provided SBP access to 12 million additional students, a 35 percent 
increase in program availability. FNS estimates that this change would 
cost roughly $300 million per year, a 21 percent increase in annual 
program costs.
    Examining the maximum number of additional children who could 
participate in NSLP on a daily basis is another way of looking at how 
many more children are in need of the SBP and NSLP. As stated earlier, 
only about 58 percent of NSLP students participates on any given day, 
and only about 21 percent of SBP students participate on any give day. 
If there were full participation in each NSLP category there would be 
an additional 2 million free NSLP lunches served daily, 1 million 
additional reduced-price NSLP lunches served daily, and 16 million 
additional paid NSLP lunches served daily, which would increase NSLP 
costs by roughly $2 billion per year, approximately a 35 percent 
increase in NSLP costs. In the SBP, there were full SBP participation, 
there would be an additional 7 million free SBP breakfast served daily, 
2 million additional reduced-price SBP breakfasts served daily, and 18 
million additional paid SBP breakfasts served daily, which would 
increase SBP costs by roughly $2.5 billion per year, a 75 percent 
increase in SBP costs. It is unlikely, however, that participation will 
ever approach 100 percent.

                        farmers' market program

    Ms. DeLauro. Just a follow up on my colleague from 
California, Mr. Fazio's question on the farmers' market 
nutrition program. Can you explain to us how some of the 
farmers' markets--how they've used the grants that have been 
given across the country, and are there other Federal agencies 
that are involved in this program?
    Ms. Watkins. With the farmers' markets, coupons are 
redeemed at the farmers' markets, and that's how States 
determine the request for the grants, and since it's such a 
young program, or new program for many, many areas, and we had 
an additional five States to come on board this year, and I 
would anticipate that we would have more States to join as they 
find out about the program.
    Ms. DeLauro. Are there other Federal agencies that are 
engaged in this program as well as----
    Ms. Watkins. The other areas that are working with us right 
now are marketing and regulatory programs through AMS. The Farm 
Service Agency has been working with us. We've been working 
with Rural Development. Those are the agencies that are working 
with us currently.
    Ms. DeLauro. Thank you very, very much, Under Secretary----
    Ms. Watkins. Thank you, Congresswoman.
    Ms. DeLauro [continuing]. Again, for your work and for your 
testimony today.
    Ms. Watkins. Thank you.

                 food stamp program and welfare reform

    Mr. Skeen. Mr. Latham?
    Mr. Latham. Thank you, Mr. Chairman, and, Ms. DeLauro, you 
should probably look, at the Inspector General's report that 
reviews all those programs you talked about, and, obviously, 
we're all in favor of looking at any waste, fraud, or abuse in 
all areas, but it certainly is looked at on regular basis.
    Ms. DeLauro. I'll look at those very, very carefully and 
ask the same questions of them that are being asked here, and I 
thank you for pointing it out. I listened to the IG and 
Operation Talent the last time around, too, and applaud that 
kind of work.
    Mr. Latham. And I will help you in any way possible, too, 
to do that.
    Ms. DeLauro. I appreciate it. I appreciate the help.
    Mr. Latham. But we have to look at everything, I think.
    Ms. DeLauro. I know.
    Mr. Latham. As far as food stamps--and I hope I'm not being 
redundant here, but--participation has dropped from a peak 
level in 1994, about 25.2 percent participation each month in 
1997 declined steadily when compared to the same month in 1996. 
You have the proposed state administrative costs which I notice 
in the Inspector General's report shows some real problems in 
some States have increased by 15.6 percent and total 
administrative costs have increased by 12.7 percent. If the 
Food Stamp program participation is decreasing and the Personal 
Responsibility and Work Opportunity Act is streamlining the 
welfare system, why are these administrative costs increasing 
so dramatically?
    Ms. Watkins. Yvette, you want to answer that?
    Ms. Jackson. Certainly. What we're seeing in States--we're, 
actually, even though the caseload, definitely, is going down 
in terms of food stamp participation, the demand on States in 
terms of the administration of the Food Stamp program have 
actually increased particularly with advent of welfare reform. 
We are putting increased demands on States in terms of program 
integrity; in terms of increasing their payment accuracy 
activities. We're also asking States to increase their efforts 
on claims collections to bring money--misspent funds back into 
the Federal Government, and States have increased 
responsibilities in terms of program oversight and additional 
options to exercise, also, as a result of welfare reform. Tying 
things like child support to food stamp eligibility; increased 
sanctioned activities against recipients who defraud the 
program because we now have increased penalties and increased 
expectations on States, and, of course, the success we've had 
in expanding the implementation of electronic benefits 
transfer. All of these activities--and I can't forget or omit 
the fact that we are working closely with States to make sure 
their computer systems are compliant with the year 2000 
requirements. So, although the caseload has gone down, we have 
not seen any reduction in the administrative responsibilities 
or burdens on the State Food Stamp agencies.
    Mr. Latham. You're aware in the Inspector General's report, 
it said the States, in certain projects, budgeted $70 million 
of projects and there's a question about $50 million of that as 
far as the States, and if you look at the Inspector General's 
report, you can probably questions whether we need to have that 
type of increase. Why would you need the increase overall here, 
administratively?
    Ms. Jackson. Well, one of the things I need to point out--
--
    Mr. Latham. With the numbers going down like that.
    Ms. Jackson [continuing]. Is that one of the items in the 
President's budget proposal for 1999 is a change in the funding 
of State administrative expenses. One of the unintended 
consequences of welfare reform with the TANF Block grant was to 
create a situation where States could charge costs to the Food 
Stamp program and to the Medicaid program, legitimate costs, 
that in the past had been charged to the AFDC program, pre-
TANF, because they got 50 percent from the Government 
regardless of which program it was. Some of those costs were 
already built into the basic level of the TANF Block grant.
    One of the proposals of the administration is twofold: 
number one, to allow States to charge appropriate costs to all 
of the program's, TANF in terms of their block grant, food 
stamps, and Medicaid. But because we're not reducing the TANF 
Block Grant, the President's proposal does call for a reduction 
in the match rate to 47 percent to allow for an equal 
distribution of the cost sharing. So, we do anticipate a 
reduction with the President's budget proposal of the matching 
rates going to States with the Food Stamp Program that would 
ensure that they are fairly charging to the Food Stamp Program 
but not double dipping by charging costs that are already 
included in the TANF Block Grant.
    Mr. Latham. Now, back in the debate on the welfare reform, 
the Food Nutrition Services did a lot of studies, just one 
after another, talking about how disastrous the welfare reform 
was going to be. Do you have data now to support the success of 
the welfare reform? Do you have current studies and 
evaluations? It's, obviously, what all the studies showed at 
that time in direct conflict with what reality is.
    Ms. Jackson. Well, I believe the administration has been 
clear that welfare reform has been very successful.
    Mr. Latham. And I'm asking----
    Ms. Jackson. In terms of any studies that are being donein 
terms of the impact of welfare reform on the Food Stamp Program, that 
is a request that we have of the Economic Research Service, because 
they now receive all of the research monies for our nutrition 
assistance programs. It's no longer funds in the control of the Food 
and Nutrition Service. That is one of the agenda items that we have 
requested to be included as part of the 1998 research agenda; to study 
the impacts of welfare reform on the Food Stamp program as well as our 
other nutrition programs.
    Mr. Latham. So, you had the capability, then, to report 
about what was supposedly a pending disaster with reform, but 
you don't have the capability now to talk about the success?
    Ms. Jackson. We're very pleased with the reforms that were 
included for the Food Stamp Program as part of welfare reform. 
We think that those reforms strengthen the Food Stamp Program. 
The impacts of welfare reform in terms of the changes that 
actually impact on families and individuals, actually, did not 
begin to take effect until the very beginning of the current 
Fiscal Year, and as a result, until now, it was really 
premature for us to even to be able to try to measure the 
impacts of any changes on the Food Stamp program. As I said, it 
is included as an agenda item for ERS for the 1998 research 
budget.
    Mr. Latham. It would be hard to say that those predictions 
at that time were correct now, wouldn't it?
    Ms. Jackson. I'm not sure what predictions you're referring 
to.
    Mr. Latham. All of the reports that you did back--during 
the debate talking about how disastrous the welfare reform was 
going to be. I mean, really, when you look at the number of 
people now-- 25 percent fewer--obviously, it's been successful; 
we have more people working than ever before.
    Ms. Jackson. Most of our earlier work during the debates on 
welfare reform had to do with the potential impacts of block 
granting nutrition assistance programs, and, as you know, that 
was not part of the ultimate welfare reform legislation. So, 
most of our earlier work was focused on block grants, and, as I 
said, we think that welfare reform has been very successful, 
but it is very early now for us to know what the impacts are on 
nutrition programs. It is something that we are working 
collaboratively with ERS on as far as the 1998 research agenda.

                      civil rights focused program

    Mr. Latham. The budget includes $270,000 for a civil rights 
focused program in the Food Programs' administration budget. 
Specifically, there's $85,000 for a central training plan and 
$60,000 for managing a diversity effort and increasing the 
diversity of all qualified candidates and selections at major 
senior management level are included. What are these 
initiatives and what are you trying to do with these programs?
    Ms. Watkins. Congressman Latham, you might remember that 
the Department of Agriculture is working on a special 
initiative for civil rights, and all of the agencies are 
required to offer civil rights training, and to maker certain 
that we are meeting the intent of the over 90 plus 
recommendations that the Secretary approved, so we do have to 
provide for some training to make certain that we can address 
the issues in the civil rights arena and our mission area.
    Mr. Latham. Aren't most of those initiatives meant to 
address service outside, not necessarily internally, 
administratively?
    Ms. Watkins. Well, we have regional offices and field 
offices all over the country, and we have to provide training 
for all of those staff persons, as well as in our 
administrative headquarters area. All of us have to----
    Mr. Latham. What kind of training does this include?
    Ms. Watkins. Many of them are videotapes that have been 
done and it means bringing people to sessions for training.
    Mr. Latham. What subject matter do the tapes cover? I mean, 
is it sensitivity training, or what are you looking at?
    Ms. Watkins. Congressman, you know, I really can't tell you 
because I'm scheduled to go to that training next week and 
after I've gone through it, I'll be able to tell you what I'm 
supposed to do. [Laughter.]
    Mr. Latham. I'll check my schedule to see if I can go with 
you.
    Ms. Watkins. Yes, I'll be glad to share that with you when 
I find out what I'm supposed to learn in that session, I'll 
tell you what it's all about.
    [The information follows:]

                 Civil Rights Focus Program Initiatives

    New mandates by Secretary Glickman have added responsibilities in 
the civil rights and administrative areas. Total increases for Civil 
Rights Focus Programs amount to $270,000 in the Food Programs' 
administrative budget.
    One mandate requires each agency to implement a Civil Rights Focus 
Program. This initiative requires funding of $100,000 to cover 1 staff 
year and travel to implement an agency-wide Complaints Prevention and 
Resolution Program. This program will allow FNS staff to be more 
proactive and reduce the number of program complaints received each 
year. Currently, FNS receives approximately 400 to 450 complaints 
nationwide.
    Because of major administrative and food program initiatives 
designed to improve work processes and increase agency effectiveness, 
an increase of $85,000 and one staff year is needed to alleviate under 
staffing in the employee development area. This area will be 
responsible for developing training that meets the Agency's needs and 
in particular coordinating mandated Civil Rights Training and 
conducting follow-up training in response to the Agency's Employee Work 
Life Survey.
    An increase of $60,000 will be needed to manage the Agency's 
diversity outreach effort, including increasing the diversity of well-
qualified candidates and selections at senior management levels. An 
additional $25,000 will be needed to fund reasonable accommodations--
auxiliary aids--for qualified individuals with targeted disabilities, 
in accordance with applicable law. Additional funding is also required 
to ensure that accommodations can be made without impacting negatively 
on the employee.

    Mr. Latham. I think that's all. Thank you, Mr. Chairman.

                state wic publications and wic outreach

    Mr. Skeen. Mr. Bonilla.
    Mr. Bonilla. Thank you, Mr. Chairman. Ms. Watkins, how are 
you doing?
    Ms. Watkins. Fine, thank you, Congressman.
    Mr. Bonilla. I wanted to start out today, by stating all of 
us on the subcommittee have supported the WIC Program, and some 
of us have expressed concerns about whether dollars going to 
the program, or in some cases, when increases have been 
requested, are necessary or are they being used effectively.
    So my first question is related to that. In Texas we have 
received these publications that are very expensive to produce, 
called ``Texas WIC News.'' And they have articles about 
employee morale and there's an article in there about how to 
make every day Valentine's Day, and a calendar of events.
    And every year we have these discussions about needing more 
money for the WIC Program. Identifying somewhat with the people 
that may read this publication, I was born and raised in a 
barrio in south Texas and in a housing project when I was very, 
very young. When you receive this kind of publication in the 
mail, in that economic neighborhood, it's not the kind of thing 
that's going to make it to the forefront. I know, they're more 
worried about paying their bills that month, and worrying about 
whether or not the kids are going to make it to school the next 
day, if there's enough money for new clothes and lunches and 
that kind of thing.
    So I question not only the expense of a publication like 
this. I know it's not initiated by USDA, but of course WIC 
money goes to the States to pay for these things. I'm 
wondering, do you know, Ms. Watkins, if Federal money is used 
for this kind of thing, or where the State of Texas would fund 
something like this from?
    Ms. Watkins. I was just in Texas last week with a WIC 
Listening Session and listening to some of the kinds of things 
that they are doing. And Texas is a very creative State and 
they are doing a variety of things to get information out about 
the WIC Program, and those kinds of materials would be done by 
the State. So they obviously are putting some monies into the 
State to do some additional kinds of things because we met in a 
center in Dallas that had a very, very interesting training 
session where they bring people in for a variety of training 
for new WIC centers and for people who are going to be working 
in the program.
    So if the State is doing that, we would want to see if 
that's a model, that's a good model. They're trying to make 
certain that they're getting the message out about their 
programs.
    And they also use that as an opportunity to teach nutrition 
education. They can't always find the available time to do 
counseling, one-on-one or group counseling, for WIC recipients. 
So they use any mechanism possible in Texas to get the 
information out to families. In fact, we were even asked to 
make certain that what we're doing in any of our materials, 
that we do a Spanish version, as well as English. That came out 
of the session. So I would imagine that Texas is doing a 
variety of creative things.
    Mr. Bonilla. Again, I can identifying with the people who 
live in those neighborhoods. Certainly outreach is important, 
and I'm going to have a follow up question about the number of 
dollars that we appropriated to go to administration including 
outreach, but when you publish pamphlets and they're 
distributed, for example, in schools or churches and you reach 
people through those avenues, I can understand publications 
that are effectively reaching out to people and teaching them 
about the program.
    My only concern is that something like this is obviously 
very expensive. There are a lot of corporations that don't 
spend money this kind of money, that are very profitable.
    And, again, I know that USDA isn't doing this, but I think 
there ought to be some accountability for what's going on in 
the State of Texas. We're certainly going to ask questions 
about this as well back home.
    Related to that, Ms. Watkins, because it ties in as well, 
there's a postcard-sized flier about WIC and phonebooks 
distributed to urban neighborhoods in Dallas, Ft. Worth, 
Houston, San Antonio. Maybe in your recent visit they might 
have told you about this.
    According to information in the budget, approximately 9 
percent of the total appropriations goes to administering 
outreach. My question is, do you know if the postcard-sized 
fliers are also part of the outreach that's covered under this 
appropriation?
    Ms. Watkins. As I indicated earlier, Texas is doing a 
variety of creative things and they may be using that as a part 
of their outreach. The staff just reminded me that Texas has 
one of the lowest food cost packages in the Nation. They are 
doing a very, very good job and have been very, very effective. 
And that was one of the reasons why they wanted me to go to 
Texas and hold a Listening Session because they're doing such 
an outstanding job.

                    cacfp funding request and fraud

    Mr. Bonilla. We are proud overall about all the programs 
that are administered, not only through USDA but through other 
Federal agencies going to the State of Texas. We pride 
ourselves in getting the most out of every dollar in the State 
of Texas, so that's consistent with the philosophy we have down 
there in raising the questions that I'm bringing up today.
    Now switching to another subject that my friend Mr. Walsh 
brought up earlier on the Child and Adult Care Feeding Program 
requesting the increase of $91 million. All of us on this 
subcommittee and you have heard that the Inspector General has 
some very big questions about this program. And, again, Mr. 
Walsh brought this up earlier, and I know you've signed an 
agreement with the IG's office to investigate this program, but 
how do you justify asking for such a huge increase when there 
are so many question marks surrounding the current funding that 
goes with the program and how this is administered?
    Ms. Watkins. As I answered earlier to Congressman Walsh, 
one of the things that we have to be reminded of is that it was 
only the 12 programs that we identified that we suspected had 
some problems. We have guidance on managing the programsgoing 
out to all of our sponsors, so this gives them the technical assistance 
that they need, and we will continue to follow up on whatever is 
necessary to do to help that program.
    All of our programs are so special and reach so many 
different people who are in need. We want to make certain that 
we are doing everything that we can and using all of the skills 
necessary with the staff to ensure that no one is abusing these 
programs.
    And obviously, with a program like our Childcare Program, 
it is going to need a lot of special attention. All of us want 
children to have the very best in childcare. And it also means 
that we're going to have to devote a lot of time to that area. 
And we're going to do that.
    Mr. Bonilla. The concern that you express is one that we 
all share. We just want to make sure that these dollars go to 
people who actually need them.
    And, again, this was mentioned earlier, I think that we 
just have to be careful because if the Inspector General does 
document widespread fraud in this program, and it blows up in 
our face, we're all going to look like fools asking for $91 
million more, and us approving $91 million more as well, for 
this program.
    It's in everyone's best interest to make sure that the rats 
are out of the system before we start to add on to the engine 
because it may not be working well as it is.
    Ms. Watkins. Well, we also want to make certain, and I know 
you do, that those children are getting food in those programs. 
And we'll make certain that we weed out the bad actors. And I 
think that's what you want me to do----
    Mr. Bonilla. Absolutely.
    Ms. Watkins [continuing]. And then provide not only the 
food for the children but also the available staffing so that 
we can monitor and provide guidance and assistance to those 
sponsors.

                        wic contingency funding

    Mr. Bonilla. In my mind, and it's a personal comment, a 
person who takes dollars, anyone who is involved in fraud out 
there, and taking a dollar that could go to someone who really 
needs it, scarce dollars that are coming out of taxpayers 
pockets to start with, is one of the lowest forms of human life 
that can possibly exist. If they somehow feel good about 
themselves that they stole from a welfare program, in essence, 
that was going to help somebody that really needs it out there. 
That's why I bring this up.
    Last question: According to information in your testimony, 
Ms. Watkins, the average monthly food costs have been kept 
stable for the past 10 years. This is due to the States 
implementing cost containment activities. And this year, you 
have requested $20 million in contingency reserved for WIC to 
be used if unforeseen increases in food prices jeopardize the 
participation level. And since food costs have been maintained 
for 10 years, why do you suddenly have the need for this 
contingency fund, especially considering that we have that $100 
million carry-over? For food costs, how much would they have to 
go up before this fund would actually kick in?
    Ms. Watkins. Well, we explained that earlier. And this is a 
very complicated funding stream and funding process for WIC, 
and I did that in the oral statement because I wanted to make 
sure this program is understood and it is probably one of the 
most complex funding streams that the States have to 
administer.
    And with WIC, there are a lot of different things that 
happen as the States get that money. The only money they're 
going to get is through the Federal Government through funding 
for WIC. The States know that they cannot overspend, so they 
watch very carefully that case load. They want to make certain 
they don't overspend. So there are a variety of things that we 
learned in those WIC Listening Sessions that happen to the 
States. They will monitor, as well as they are issuing coupons 
and checks. It's difficult to know when those are going to 
clear, so they don't know how much money they are spending for 
food costs, so they monitor that very, very carefully so they 
don't overspend.
    As one of the WIC directors from Georgia said to me, this 
is a difficult business to administer because you don't know 
how many people are going to walk through your door, you don't 
know how much you're going to have, in the way of food monies 
to spend. You don't know what your bid prices are going to be 
when you go for procurement. So it's very, very difficult. And 
sometimes they could serve more people, but as they watch and 
monitor very carefully so they don't overspend, they 
underspend.
    So we want to make certain that we're taking care of that 
process. While it seems like an awful lot, $20 million, it 
really isn't when you talk about a program as large as WIC.
    Mr. Bonilla. I appreciate you trying to clarify that Ms. 
Watkins, but I think I'm as confused as when I asked the 
question. But you told me it's complicated, I know it is, but I 
think it's something we just need to look at. I appreciate your 
time today, ladies and gentlemen.
    Chairman.
    Ms. Watkins. Thank you.
    Mr. Skeen. Thank you, and that ends the first round. I'm 
going to withhold the privilege to close and go to the second 
round. We'll keep it as brief as we can. I think the exchanges 
have been very good. We'll start with you, Ms. Kaptur.

            farm community and nutrition assistance programs

    Ms. Kaptur. Thank you, Mr. Chairman, very much. Madame 
Secretary, I just wanted to associate myself with some of the 
remarks that Ms. DeLauro made regarding waste, fraud and abuse 
in various programs. And to say, speaking for our side, we want 
to root out waste, fraud and abuse in all USDA programs, not 
just the nutrition programs.
    We've had plenty of evidence brought up before this 
committee, whether it's Housing Programs, whether it's Crop 
Insurance Programs, whether it's Commodity Credit Corporation 
Programs. There's plenty of area here for us to pay attention 
to, not just Nutrition Programs and I just wanted to place that 
on the record.
    I think also, about the effort to reach out to people who 
need food and need nutrition, we do a pretty good job of trying 
to help business expand markets in other places, through market 
access programs. It seems to me that there's a legitimate role 
in reaching out to people as well as to corporations. We are 
very supportive of those efforts, as much as we try to make 
these programs efficient and eliminate any fraud that might 
exist, obviously.
    I wanted to just ask two final questions, one having to do 
with, I think Mr. Walsh said he would love to name this 
committee Agriculture and Nutrition, and it is true two-thirds 
of our budget relates to Nutrition Programs, and only about a 
third to production agriculture. One of my continuing themes 
has been, does the Nutrition side of USDA ever talk to the 
Production-Agriculture side of USDA. And that is why we are 
very happy that, for example in the WIC Farmers Market Program, 
we have some small, fledgling effort to try to see if there's a 
possibility of a marriage here down the road. We would hope for 
the same in our Nutrition Programs.
    Secretary Thompson yesterday talked to us about some of the 
efforts being made there to help small farmers to coalesce, 
come together in a cooperative form of venture or otherwise to 
make such items as coleslaw available to school nutrition 
programs.
    This particular Member of Congress is extremely interested 
in that, and you obviously command a very large purchasing 
budget and have major authority over what States do in this 
regard. I wonder if you might detail for the committee how you 
see greater linkages between the Nutrition side of USDA and the 
Production-Agriculture side so our farmers, as opposed to the 
retail distributors of food commodities, but farmers, are able 
to move product into this system.
    Ms. Watkins. Congresswoman Kaptur, I'm glad you asked that 
question because I am just as concerned about that as you are. 
And one of the things that we've done to work with small and 
limited resource farmers is to do a pilot program so that we 
can provide the small farmer with the opportunity to provide 
fresh fruit and vegetables to schools. And we're doing that 
through our Department of Defense Produce Project.
    And co-operatives have an opportunity to sell to the 
Department of Defense and provide not only food to schools, but 
the Department of Defense will also be providing the same 
products to its own installations as well as to some prisons, 
and some other opportunities for the small farmers.
    So we're trying very hard to make the connection between 
the farm community and our Nutrition Assistance Program, 
because if the farmers understand that all of the food that 
we're getting primarily comes from the farm--and we want to 
show that direct link between the two.
    We started the program in North Carolina. We have another 
program that we will be working with in Virginia and Alabama 
and Mississippi, and we will continue to expand that effort and 
make those programs, those options, available.
    In addition to that, we're working so that we can provide 
waivers to schools that are wanting to do direct purchasing 
from a farmer to that school. And the waiver is in the way of a 
procurement agreement so that they don't have to have 3 
vendors, they can do a sole source to a farmer in the 
community.

                        farmers' market program

    Ms. Kaptur. I would encourage you on in those efforts. We 
have about 1,500 farmers markets around the country, I think, 
where farmers come together in enterprise and they are able to 
create a large set of products. I would encourage you to look 
at those locations as well, and work with those associations if 
possible through the National Farmers Market Association to see 
if there isn't a way to have some of those purchases occur 
there. My goodness, the restaurateurs do it, and so there must 
be a way of making that linkage somehow. So, in the 
demonstrations that you're doing, I would just want to add that 
to the list. You obviously have experience there, through the 
WIC program.
    You have some important initiatives underway. I commend you 
on those and look for their expansion in the years ahead.
    I also wanted to ask a final question, again, on this 
farmers market coupon program. I know that there was a letter 
sent out indicating how many States have been awarded grants 
under this program. What is curious to me, and maybe you can 
tell me why: Why would some of the smaller States actually be 
accessing more money than some of the larger States? Is it just 
that they're better? Maybe they're smaller and more able to 
move their bureaucracies.
    Mr. Walsh. Will the gentlewoman yield?
    Ms. Kaptur. Yes.
    Mr. Walsh. It's just that the fruit and vegetables of New 
York taste so much better.
    Ms. Kaptur. Is that why? I didn't want to single out New 
York, but the gentleman has noted a major aberration on this 
chart, that is for sure. I guess I'm wondering what advice you 
could give to those States that might not be as efficient in 
accessing this program. What's going on out there in the 
States?
    Ms. Watkins. As we said earlier, those States receive the 
grants that they requested, and since the program is so new--
and one of the other things that has happened, when it was 
directly tied to the WIC funding, we never knew how much money 
we were going to have for farmers markets, so that was a little 
leery situation for people and they did not want to get out 
there and participate in something they didn't know whether it 
was really going to happen or not. And since we have decoupled 
that, this gives us an opportunity to do a much better job in 
marketing that program.
    Ms. Kaptur. What's really interesting to me, and I just 
will end with this statement, Massachusetts has done quite 
well, compared to its size, and also, since so little of its 
land is in production. That particular figure amazed me, unless 
they're eating a lot of cranberries in Massachusetts, compared 
to some of the other States you would expect.
    For instance, New Jersey, I would think, should be doing 
better than it is. We don't want to offend anybody in New 
Jersey, but there are an awful lot of people that live in New 
Jersey. And you wonder about the relationship of these numbers. 
So I know over the years you'll take a look at them, and maybe 
those places that really need additional technical assistance 
to use this program will get it. Thank you very much, Madame 
Secretary. Did you wish to say something?
    Ms. Watkins. I was just going to let you know that there is 
a 30 percent State match, and you have a lot of State 
departments of agriculture, commissioners of agriculture, who 
are very, very concerned about this program and monitoring the 
program and wanting to be a part of it. And Massachusetts has 
been one of those programs. Under Secretary Gus Shumacher was 
the Commissioner of Agriculture in Massachusetts, and Gus was a 
strong proponent of this program, pushed it really, really 
hard.
    And you will see that some States will be much more 
aggressive than other States. And we will probably be meeting 
with the State departments of agriculture as we move into this 
area and continue the working relationship that we had when we 
were in Marketing and Regulatory Programs with them.
    Ms. Kaptur. Madame Secretary, we really appreciate your 
testimony today. Always feel free to call. We look forward to 
working with you in the months and years ahead. Thank you, Mr. 
Chairman.

        agriculture program oversight and wic full participation

    Mr. Skeen. Thank you. Mr. Walsh.
    Mr. Walsh. Thank you, Mr. Chairman. I'd just like to 
associate myself with the remarks of Ms. DeLauro and Ms. Kaptur 
as regards making sure we do oversight responsibilities in all 
areas of agriculture. And less there be any implication, Ms. 
Kaptur referenced her comments to her side, we on this side--I 
can't speak for everybody, I can speak for myself, certainly. 
But I think I can safely suggest that we Republicans are just 
as concerned about waste fraud and abuse in Crop Insurance, 
Rural Housing and Commodity Programs, as we are in Nutrition. 
And I think that we really have to be fair to each other and 
exercise our oversight responsibility across the board.
    Republicans are no less concerned about feeding the hungry 
in this country than are the Democrats. It could be argued, I 
suppose, by a partisan that we are more concerned. But I'm not 
going to do that.
    What I'm suggesting though is that we have a huge budget. 
The discretionary spending--Housing, Crop Insurance, 
Commodities--are less and less and less and less and less a 
portion of this budget. And Nutrition Programs, WIC has more 
than doubled since I've been on this subcommittee, Food Stamps 
has grown. This, more and more, is the responsibility of this 
subcommittee. We have to look at those dollars just as hard as 
we do at Rural Housing. And I remember when the studies were 
done in Rural Housing and there was strong criticism, and we 
said, hey, our States are doing it right, some States aren't 
doing it right. We lost. Our rural residents lost out. We have 
to make sure in all these programs, whether it's Commodities, 
or it's WIC, that the taxpayer is being protected and the money 
is getting to the people who need it. And I think that we all 
are in this together in terms of our responsibilities.
    So let me ask a WIC question, and at risk of continuing 
that perception, and I am a very strong supporter of WIC. And 
I've seen in my home community the benefits of WIC in terms of 
infant mortality because in Syracuse, our infant mortality rate 
was far higher than it should've been, and we've impacted on 
that. And the way I look at that is that the more money that's 
being well spent on WIC, the more kids are being helped. And 
the more fraud there is, the fewer kids are being helped, and 
mothers.
    But an issue that we resolved, and that we all are 
supportive of, is full participation in WIC. The problem is the 
methodology arriving at what is indeed full participation. And 
I refer you to a report that we just received, ``Special 
Supplemental Nutrition Program for Women, Infants and Children: 
Eligibility for Coverage Estimates for 1996 Update.'' This is 
the most recent data. And then last year's that we had to work 
with at this time was a 1995 update. And there's a difference 
in the report and how the methodology is reported, and it's 
curious and I wonder if you could explain why.
    In the 1995 report, which helps us to determine 1999 
eligibility, there was the estimate of 9.2 million WIC eligible 
persons in 1995. That becomes the base from which we determine 
eligibility, full participation, in 1999. That was 9.2 million.
    In this report, it's 9 million. So the base is smaller. And 
in the report there's a paragraph under WIC full participation 
where it explains what WIC full participation is. But in this 
year's report, there's a paragraph that has appeared in all the 
other reports that is not in this report, and that explains the 
methodology.
    So in order for us to have an agreement on what full 
participation is, I think we have to have a methodology that's 
consistent. Has the methodology changed in determining what 
full participation is?
    Ms. Watkins. George, you want to respond to that?
    Mr. Braley. Yes. Congressman Walsh, for a number of years, 
we've been noticing that when we first started to project WIC 
Eligibles and ultimate full participation, we used a percentage 
rate of participation among fully eligible participants, it was 
80 percent. That was based on an estimate at the time. We had 
no experience with the WIC Program at any thing like those 
participation levels. It was a much smaller program in those 
days. We made that estimate.
    As time went on, the experience in both the WIC Program, as 
well as in Food Stamps and AFDC, was that the population that 
WIC serves, families with young children, participation rates 
in all of the other social programs that were lower in the past 
had been increasing.
    We now serve over 90 percent of the Food Stamp families 
with children below the age of 5. That was not true at the time 
we did our earlier estimates. And the----
    Mr. Walsh. You have changed the methodology?
    Mr. Braley. We don't believe that the 80 percent assumption 
is correct because----
    Mr. Walsh. Then why didn't you include your methodology in 
this year's report?
    Mr. Braley. The methodology in this year's report was to 
show that the experience in WIC is that we can reach 7.5 
million participants and that is the----
    Mr. Walsh. Is the full participation of the population the 
goal or is proper methodology the goal?
    Mr. Braley. Well I think you can argue that one method is 
to say that there are 9 million people who are fully eligible 
for the WIC Program and ultimately a program could be addressed 
to that entire population. We know from experience that not 
everybody who is eligible for a program at any given time is 
going to participate in that program. The change is that we 
don't know if it's 80 percent or 83 percent or 85 percent, what 
the full level of participation in WIC might be in the current 
environment.
    Mr. Walsh. How did you arrive at the exact same number this 
year as you did last, for full participation?
    Mr. Braley. We believe that based on State's performance in 
the WIC program, that that's a number that's achievable.
    Mr. Walsh. You're throwing out all your old assumptions 
then?
    Mr. Braley. Well, I think that you could say that the 
assumptions that we had were clearly wrong. We exceeded those 
assumptions in terms of rates of participation in the WIC 
Program just as we have in other programs that serve that same 
population.
    Mr. Walsh. Then why didn't you explain your methodology 
this year?
    Mr. Braley. I think we described a level of 7-and-a-half 
million participants. We didn't think it was fruitful to pick a 
percentage of people who were fully eligible that might 
participate and alter that year after year.
    Mr. Walsh. These 2 pages are identical, except for that 1 
paragraph that's omitted, which omits your basic methodology.
    Mr. Braley. I believe even in last year's report, we 
discussed the fact that we were finding our rate of 
participation was exceeding the 80 percent figure that had been 
used historically.
    Mr. Walsh. Well, I've belabored it enough. If you're going 
to tell us what full participation is, please explain to us how 
you arrive at that. You didn't do it this year.
    Ms. Watkins. We understand your concern and we'll take care 
of that.
    [The information follows:]

                   WIC Full Participation Methodology

    Our most recent available data indicates that 9 million women, 
infants and children were fully eligible in 1996 to participate in the 
WIC Program. The President's Budget proposes to fully fund the WIC 
Program and serve 7.5 million women, infants, and children throughout 
fiscal year 1999. The full participation level, providing adequate 
funding to serve all eligible persons who would choose to participate 
in WIC, has been assumed to be approximately 7.5 million persons for 
budget purposes for the past several years. The target was originally 
based on a budget estimate prepared in 1993 by the Congressional Budget 
Office. It is also consistent with FNS' full participation estimate 
produced in 1996 using 1994 WIC eligible data.
    In the past estimates of full participation have assumed that, on 
average, approximately 80% of all persons fully-eligible for the 
program would participate. We now know that higher participation rates 
by the target population can be achieved. This is supported by the 
experience of the Food Stamp Program, where participation rates for 
families with children under 5 are over 90%, and the AFDC program, 
where participation rates since 1990 have ranged from 82% to 86%. Thus, 
use of the 80% maximum participation assumption was not included in 
last years full participation target nor is it reflected in our current 
estimate.
    Given that the estimated number of fully-eligible persons is 9 
million, and actual participation in WIC and other low-income 
assistance programs serving children exceeds the 80% previously 
assumed, FNS believes that a full funding participation target for 
fiscal year 1999 of 7.5 million remains reasonable and prudent.

    Mr. Walsh. Thank you. Thank you, Mr. Chairman.
    Mr. Skeen. Well, thank you all for your participation.
    I want the record to stop right here. We'll go off the 
record.
    [Off the record.]
    Mr. Skeen. I want to thank you for all the work that you 
do, and I want to thank the panels up here for the questions 
that they've asked. It's been very profitable, I think, to all 
of us, and we appreciate it very much.
    I thought I'd just leave you with that one little thing; be 
careful what you feed these folks. [Laughter.]
    Ms. Watkins. Mr. Chairman and to the committee, we 
appreciate all the support that you give us and this dialogue 
has been extraordinarily helpful to us today, for both the 
staff and myself. And we hope that we can continue to work with 
you as we move through this budget process so that we'll have a 
program that works the best for the people in this country, 
which is something that you want and that we want. Thank you 
very much.
    Mr. Skeen. We assure you that's the case.
    [Clerk's note.--The following questions were submitted to 
be answered for the record.]

[Pages 414 - 1150--The official Committee record contains additional material here.]








                           W I T N E S S E S

                              ----------                              
                                                                   Page
Anand, Rajen.....................................................   377
Armstrong, Robert................................................     1
Beyer, Wally.....................................................     1
Braley, G.A......................................................   377
Dewhurst, S.D....................................................1, 377
Jackson, Y.S.....................................................   377
Shadburn, J.E....................................................     1
Thompson, J.L....................................................     1
Watkins, D.J.....................................................     1
Watkins, S.R.....................................................   377









                               I N D E X

                              ----------                              

                           RURAL DEVELOPMENT

                                                                   Page
Administrative Expenses..........................................    26
Balancing the Budget.............................................    25
Biography of Jill Long Thompson..................................   159
Explanatory Notes................................................   237
Exhibit on Agriculture...........................................    13
Housing..........................................................     6
Legislative Proposals............................................     7
Nutrition........................................................    27
Questions Submitted for the Record:
    Chairman Skeen...............................................    37
Reduction in Force...............................................    27
Statement of the Under Secretary.................................   165
Welfare Reform...................................................    22

                        Rural Utilities Service

Biography of Wally Beyer.........................................   160
Explanatory Notes................................................   267
Interest and Penalties...........................................    18
Leveraging.......................................................    33
Refinancing......................................................    17
Rural Utilities.................................................. 7, 16
Questions Submitted for the Record:
    Chairman Skeen...............................................    55
    Mr. Serrano..................................................    91
    Mr. Walsh....................................................    79
Statement of the Administrator...................................   182
Telecommunications...............................................    32
Water and Waste Program..........................................21, 24
Write-Offs.......................................................    17

                         Rural Housing Service

Biography of Jan Shadburn........................................   161
Explanatory Notes................................................   296
Farm Labor Housing...............................................    20
Questions Submitted for the Record:
    Chairman Skeen...............................................    91
    Ms. DeLauro..................................................   125
    Mr. Fazio....................................................   123
    Mr. Serrano..................................................   124
Rental Assistance................................................ 8, 20
Self-Help Housing................................................    19
Single Family Housing............................................    14
Statement of the Administrator...................................   195

                  Rural Business--Cooperative Service

Agriculture Waste Materials......................................    30
Alternative Agricultural Research and Commercialization Center..9, 22, 28
Army Corps of Engineers Research.................................    29
Biography of Dayton Watkins......................................   162
Biography of Jeffrey Gain........................................   164
Business and Industry Loans......................................    10
Cooperative:
    Businesses...................................................    29
    Development..................................................    10
Community Adjustment and Investment..............................    31
Explanatory Notes................................................   344
EZ/EC Communities................................................    31
Farmers Market...................................................    14
North America Free Trade Agreement............................... 9, 30
Questions Submitted for the Record:
    Chairman Skeen...............................................   125
Statement of the Administrator...................................   212
Statement of the AARCC Chairman..................................   131
Statement of the AARCC Executive Director........................   230
Value-Added:
    Products.....................................................     8
    Cooperatives.................................................    11
Venture Capital Investments......................................    23

                       FOOD AND NUTRITION SERVICE

Biographical Sketches:
    Mr. Anand....................................................   919
    Mr. Braley...................................................   918
    Ms. Jackson..................................................   917
    Ms. Watkins..................................................   916
Budget Request.........................................377-383, 614-615
Child Nutrition Program:
    Child and Adult Care Food Program..........................749, 885
    Consumer Price Index.........................................   738
    Data Base....................................................   638
    Dietary Guidelines......................623, 666-678, 714, 867, 877
    Eligibility..................................................   648
    Family Economic Review.......................................   627
    Food Safety and Sanitation...................................   874
    Food Waste..................................................386-388
    Funding......................................................   384
    Healthy Meals................................................   425
    Nutrient Analysis...........................................392-393
    Nutrition Education and Training...........................746, 902
    Nutrition Education Partnerships.............................   423
    OIG Audit CACFP....................................388-391, 405-406
    Participation................................384, 399-400, 427, 751
    Preparation Cost.............................................   426
    Reauthorization..............................................   736
    Reviews................................................663-665, 864
    School Meals Initiative For Healthy Children.................   430
    Special Milk Program.........................................   440
    State Administrative Expense.................................   761
    Studies......................................................   649
    Verification Process.........................................   753
    Team Nutrition...............................................   745
        National Training Program................................   432
        Nutrition Education/Promotion............................   629
Center for Nutrition Policy and Promotion:
    Data Base....................................................   845
    Request......................................................   621
    Reviews......................................................   639
    Seminars.....................................................   846
Commodity Assistance Programs:
    Commodity Supplemental Food Assistance Program.............483, 484
    Funding....................................................480, 482
    Temporary Emergency Food Assistance Program...........485, 486, 487
Commodity Supplemental Food Program:
    (See Commodity Assistance Program)
The Emergency Food Assistance Program:
    (See Commodity Assistance Program)
Explanatory Notes..............................................970-1150
Food Donations Program for Selected Groups:
    Food Distribution Program on Indian Reservations......541, 542, 854
    Fresh Produce Pilot Project..................................   424
    Nutrition Program for Elderly................................   549
Food Program Administration:
    Civil Rights Program........................................403-404
    Computer/ADP Upgrades........................................   553
    Detailed Employees...........................................   555
    Farm Community and Nutrition Assistance.....................408-409
    Food Nutrition & Assistance Programs.........................   616
    Nutrition Education & Training.............................650, 746
    Object Class Breakout..................................544, 608-613
    Office of Governmental Affairs and Public Information Funding   556
    OIG Recommendations.........................................385-386
    Oversight...................................................410-411
    Staffing..............................................621, 682, 710
    Studies and Evaluations.................388, 558-606, 733, 822, 895
Food Stamp Program:
    Administrative Cost..........................................   809
    Benefit Costs................................................   730
    Bid-Rigging..................................................   434
    Cash-Out.....................................................   539
    Demonstrations, Evaluations and Studies....................544, 546
    Education....................................................   805
    Electronic Benefit Transfer............................501-527, 905
    Employment and Training...........................531-535, 812, 818
    Error Rates....................414-415, 492-496, 500, 550, 658, 819
    Error Reduction............................................735, 803
    Federal Tax Refund Offset....................................   528
    Fraud......................................................661, 862
    Funding......................................................   498
    Immigrants.................................................652, 903
    Mandatory Spending on Research...............................   388
    Nutrition Assistance for Puerto Rico and American Samoa......   530
    Nutrition Education..........................................   488
    On-Site Visits...............................................   548
    Overpayments.................................................   815
    Participation.........................................545, 810, 853
    Participation and Unemployment Rates.........................   536
    Quality Control Liabilities................................731, 737
    Recipient Claims.............................................   655
    Redemption Activities........................................   422
    Reserve....................................................489, 490
    Special Wage Incentive Program...............................   529
    State Administrative Costs...................................   808
    Welfare Reform.....................................383-384, 400-403
Special Supplemental Nutrition Program for Women, Infants, and 
  Children (WIC):
    Breast feeding...................................456, 457, 459, 776
    California SHAPE Program.....................................   392
    Contingency Fund.......................................406-407, 884
    Electronic Benefit Transfer......................647, 716, 838, 893
    Eligibility and Participation..........446, 448, 452, 765, 770, 779
    Eligibility and Training...............................435, 436-437
    Farmers' Market................394-395, 400, 409-410, 428, 445, 644
    Food Package...........................................395-398, 830
    Funding...............................................632, 780, 887
    Fraud........................................................   840
    Healthy Meals for Healthy Americans..........................   641
    Immunization Efforts.........................................   454
    Infrastructure Development...................................   785
    Outreach....................................................404-405
    Participation.......410-413, 479, 683, 728, 771, 825, 832, 835, 872
    Nutrition Education........................................462, 772
    Reauthorization.......................................680, 786, 869
    Rebates...........................................393, 442-443, 778
    Recoveries..................................................470-473
    Reimbursement................................................   752
    Risk Groups................................................762, 766
    Savings of Federal Dollars..................................391-392
    Spendforward Funds...........................398, 464, 466, 467-469
    Studies & Evaluations............................398, 460, 649, 771
    Tailoring....................................................   781
    Trafficking..................................................   791
    Vendor Management...........................416, 444, 679, 787, 868
    Verification Process.........................................   794
    Weighted Averages for Conducting Nutrient Analysis..........392-393
    Welfare Reform...................................827, 831, 834, 890
Prepared Statements:
    Shirley R. Watkins, Undersecretary, Food, Nutrition, and 
      Consumer Services..........................................   920
    Yvette S. Jackson, Administrator, Food and Consumer Service..   943
Questions Submitted for the Record:
    Chairman Skeen...............................................   413
    Mr. Bonilla..................................................   877
    Mr. Latham...................................................   884
    Mr. Dickey...................................................   889
    Mr. Serrano..................................................   908
    Ms. DeLauro..................................................   911