Under Public Law 87-128, a source of credit has been made available to small rural communities in the United States which do not have an adequate and safe water supply. In closely settled rural communities, it is difficult and costly to obtain and develop sources of water supply free from contamination or pollution. In addition to the 15,000 rural towns which do not now have domestic water systems, there are many thousands of fairly heavily settled rural areas in which the use of individual family shallow wells creates the hazard of contaminated domestic water supply which can be remedied either by obtaining water from deep wells or the development of a group domestic water system.

The Farmers Home Administration has found that the new water development legislation has created tremendous demands for loans throughout the entire Nation as reflected by 1,429 applications now on hand. In 1960, soil and water conservation loans to associations were made in only 10 States; in fiscal 1963, they were made in 34 States; and in fiscal 1964, such loans were made in 39 States. These loans have averaged about $120,000 each. During the first half of this fiscal year, 167 loans have been made for $19 million.

These loans are available only to individuals and organizations which cannot secure the necessary financing from other credit sources. Credit is usually not available for establishing a new water distribution system by a nonpublic agency. Even where a new system is undertaken by such public bodies as small rural towns and rural water districts, they are unable to provide the needed revenue required by commercial-type investors. Hence, if rural areas are to be served with satisfactory water supplies and distribution systems which are essential factors in maintaining our rural health and economy, it will be largely through the credit available under Federal programs.

Of significant importance in addition to the new authorizations to serve small towns and rural communities is the authorization to make or insure loans to associations for shifts in land use. Generally, such shifts in land use will result in a reduction in the production of crops that are in surplus supply. This will enable small towns and nonprofit organizations to obtain loans through the Farmers Home Administration for the purpose of developing recreational facilities, such as community swimming pools, little league baseball fields, fishing lakes, and many other facilities for healthful outdoor recreation which can be enjoyed by families living in the community and surrounding urban areas. The demand for shifts in land use appears to be increasing rapidly as rural communities which have long been in need of revitalization seek to provide important public improvements. A lack of credit for such improvements has plagued rural areas for many decades.

An increase in the authorized amount of insured loans will reduce the need for direct Government loan funds for farmownership and soil and water loans. During fiscal 1964, the obligation of direct funds was discontinued for several months while the $200 million of insured loan authority was available. Under current money market conditions, an increase in the insured loan authorizations would permit meeting the credit needs of more of the applicants for farmownership and soil and water loans with insured funds and would thus effect a savings in sums authorized to be obligated for direct loans. However, to effectively operate the proposed increased program of insured loans, the present limit of $25 million of loans made from the fund and not disposed of at any one time should be increased to $50 million. Section 2(c) of the bill would accomplish this by changing section 309 (f) (1) of the act by increasing the figure from "25,000,000" to "50,000,000".

The proposed increase from $25 to $50 million in the limitation on the amount of loans that may be made out of the insurance fund, but not sold and insured at any one time, is necessary to prevent undue delays in closing loans for eligible applicants. Under the present $200 million annual authority to insure loans approximately $15 million of the $25 million limitation is encumbered at all times. This encumbrance is the result of a time elapse between the date the insurance fund issues loan checks and the date the notes for such loans are received by the insurance fund. This time elapse is required for closing of loans in the field offices. After the notes are received by the insurance fund they are sold to investors as soon as possible, thereby keeping the loans in the fund at any one time below the present $25 million limitation. The proposed increase in the annual loan insurance authority from $200 to $450 million, if enacted. would cause the amount of loans that would normally be in the insurance fund to exceed the $25 million limitation because of the time required between issuance of checks and receipt of notes for sale. Therefore, unless the limitation is

increased, loan making activities will be delayed. It would also be desirable to be able to accumulate some notes in the insurance fund so that large orders from investors could be filled more expeditiously. The change to $50 million would not permit additional loans to be made above the annual legislative ceilings and it would not add any additional cost to the Government.

Section 2 (2) and (3) would change the act as follows: (1) section 308 would be amended in clause (a) by striking out "except that no agreement shall provide for purchase by the Secretary at a date sooner than three years from the date of the note"; (2) by striking clause (b), section 308, and inserting in lieu thereof "(b) may retain out of payments by the borrower a charge at a rate specified in the insurance agreement applicable to the loan."; and (3) section 309 (e) of such act would be amended by striking out "such portion of the charge collected in connection with the insurance of loans at least equal to a rate of one-half of 1 per centum per annum on the outstanding principal obligations and the remainder of such charge" and inserting in lieu thereof "all or a portion, not to exceed one-half of 1 per centum of the unpaid principal balance of the loan, of any charge collected in connection with the insurance of loans; and any remainder of any such charge."

These changes are necessary to assure a continuing availability of private funds for the making of insured loans or the purchase of loans made out of the fund to be sold and insured because of fluctuations in the investment market. Under these changes the yield to the investor could be made comparable to the yield of other obligations on the market. By varying the amount retained by the Secretary out of payments by the borrower, the amount payable to the investor could be increased without sale of the loan at less than the balance due on the obligation at the time of the sale. The amount to be retained would be determined by the Secretary at the time of loan closing or original sale out of the fund and could be varied upon resale of the loan after repurchase by the Secretary pursuant to the repurchase agreement in the insurance endorsement. The period of nonredemption by the Secretary would be left to the discretion of the Secretary as a further aid in the sale and insurance of loans.

The flexibility proposed in the foregoing changes is essential in order to enable the Secretary to adjust the rate of return to the lender and the period of nonredemption in accordance with the changing conditions of the money market and thus attract the investment of private funds in these insured loans.

The need for funds for salaries and other administrative expenses for the broadened insured loan program will be increased for fiscal year 1966. In order to provide for processing loan applications and servicing the increased number of insured loans which would be authorized under the proposed increase of $250 million, additional personnel will be needed throughout the United States. The Bureau of the Budget advises that there is no objection to the presentation of this report from the standpoint of the administration's program.

Sincerely yours,

ORVILLE L. FREEMAN.

How is it that we

Senator AIKEN. I have some questions to ask. received no report on this legislation until 6 months after the first bill was introduced?

Mr. BERTSCH. Senator Aiken, I do not know whether I can answer that question with any authoritative fashion. There have been negotiations going on; as I pointed out, a study, a review of our program and other programs available to the people of this country in the area of community facilities has been carried on, and pending the completion of that review, it was determined by the administration that the report on this bill should be held pending. The review has not yet been completed. Hence the recommendation of the administration that action on section 1 of the bill be deferred.

Senator AIKEN. When did you get this decision of, shall we say, the Budget Bureau, that being the arm of the administration which would make its report? How long have you had the decision?

Mr. BERTSCH. The decision to ask for a determination?

Senator AIKEN. To oppose enactment of this legislation at this time. Mr. BERTSCH. Since 5:30 last evening.

Senator AIKEN. Since 5:30 last evening. That is very thoughtful of them. Did you prepare this report since 5:30 last evening? Mr. BERTSCH. Yes, sir, beginning at 2:30 this morning.

Senator AIKEN. Have you prepared any statement previous to 5:30 last evening?

Mr. BERTSCH. Yes, Senator, anticipating a different position from the Bureau of the Budget, we had prepared a different statement. Senator AIKEN. And your conclusions were different than the ones you have just given to us.

Mr. BERTSCH. Our conclusions were different.

Senator AIKEN. You have pointed out in your testimony that a review is being conducted of existing programs to assure there will be more equitable distribution of the grant program between urban and rural areas. If an existing agency oriented largely toward the serving of urban areas were as a result of this review to be given the responsibility for the financing of community facilities in rural areas, would it not be necessary for such an agency to amend its organizational structure and establish hundreds of offices across the country available to rural people in rural areas?

As I understand it these urban agencies do not presently have offices through all the rural areas of the United States.

Mr. BERTSCH. It has certainly been our experience, Senator Aiken, having 1,600 county offices located in rural communities and staffed by men oriented toward serving rural needs-it has been one of the most important factors contributing toward our ability and success in serving rural areas. I would assume this same requirement would accrue to any agency having this responsibility.

Senator AIKEN. It would appear the Budget Bureau may have in mind the placing of agricultural rural programs under urban management. Has any review been made regarding the water facilities program, and if there has been such a review, do you know who carried it out? Has the Housing and Home Finance, for instance, carried cut any review of this rural water program or other rural programs? Mr. BERTSCH. I know of one field examination made by the committee established under the President's order which was made of our program in central Tennessee. This was carried on under the leadership of Mr. Capron, the Assistant Director of the Bureau of the Budget. He was joined by Mr. Sundquist, who was then Deputy Under Secretary of Agriculture and who is now with the Brookings Institute, and by Mr. Shushim, who is on the staff of I am not sure of his titleon the staff of the Administrator of the Housing and Home Finance Agency.

Senator AIKEN. And they have been undertaking to review your work.

Mr. BERTSCH. That is correct.

Senator AIKEN. You have a pretty good knowledge of your own work, have you not?

Mr. BERTSCH. I think that the record of our work fairly well speaks for itself.

Senator AIKEN. Do you see any duplication in your agency's serv ices and those provided by other agencies in the financing of rural water systems presently?

Mr. BERTSCH. No, I see no problem in the duplication of services. Community Facilities Administration is also in the business to aid communities who cannot obtain credit elsewhere. However, the Community Facilities Administration differs from our agency in that they do not have authority to make loans to other than public bodies, and we make loans to nonprofit associations. There are thousands of rural towns and rural water companies who need counseling and guidance in the development and operation of good community water systems. We are staffed to provide this supervision and guidance. Occasionally we receive an application which might qualify for service from the Community Facilities Administration. În such an instance our State director contacts the CFA representative in his State and together they make a determination as to whether Community Facilities Administration or the Farmers Home Administration should aid the applicant. We work very closely together. We accede to the Community Facilities Administration in any instance in which they feel qualified and willing to service the application to completion. We make loans then only to association applicants who cannot qualify for any other credit including credit from the Community Facilities Administration.

Senator AIKEN. In the making of loans for rural water systems, assuming this bill should be enacted into law, what percentage of those loans do you anticipate would be direct and what would be insured? Just estimate; I know you cannot tell for sure.

Mr. BERTSCH. I suppose 25 percent might be direct because we have an agreement with the Treasury Department that we will not insure tax-exempt bonds. Public bodies ordinarily have bonds to dispose of representing their indebtedness which are tax exempt. The Treasury Department asks us to make those loans direct rather than insured, and for that reason the percentage might be as high as 25 percent. Senator AIKEN. Then your insured loans would be

Mr. BERTSCH. Seventy-five percent, I would judge, of our loans would be insured.

Senator AIKEN. I notice here that the Budget apparently says they think the urban agencies could take care of, using your words, "The most critical needs for community facilities." What about those needs that are not most critical but are almost critical? Do they not have any interest in those? I will not ask you. They are the ones who should answer that question. It is very obvious they do not, and it is very obvious, too, that the urban agencies or the administration or the Budget Bureau or somebody is particularly concerned in having the urban agencies take over the rural programs. This is not the only case. It is apparently part of a pattern.

I think that covers all my questions. I already pointed out that in the House bill I do not believe there is any reference to agricultural needs such as washing vegetables and milk cans and things like that. And if the Budget has suddenly become interested in the rural areas, well, it is since half past 5 last night according to Mr. Bertsch. It is since this bill was introduced. They had no idea of taking this on before apparently.

I think that is all the questions I have.

The CHAIRMAN. Thank you, Mr. Bertsch.

Mr. BERTSCH. Thank you, Mr. Chairman, and thank you, Senator.

49-722-65 - 5

Senator AIKEN. Just a minute. I have here a series of questions sent in by Senator Miller who could not be here this afternoon. I will not ask these questions; there are 12 of them. They relate to the kind of pipe used and cost feasibility.

The CHAIRMAN. Suppose you give them to Mr. Bertsch.

Senator AIKEN. And let him submit the answers for the record.

Mr. BERTSCH. We will do the best we can with this, Mr. Chairman. Senator AIKEN. It might take a long time to answer all of them, but probably you can answer most of them.

Mr. BERTSCH. So that you will understand our submission, I should point out that we operate as decentralized an organization as is possible.

The CHAIRMAN. Do the best you can with the answers, and send them as soon as you can.

(The information referred to follows:)

PROPOSED QUESTIONS OF SENATOR MILLER AND ANSWERS BY THE FARMERS HOME ADMINISTRATION

Question. 1. In approving loans or insuring loans under section 306 of the Consolidated Farmers Home Administration Act of 1961, as amended, does the Farmers Home Administration have any construction standards which water district installations must meet?

(Elaboration if necessary :)

Does it have any technical standards of any kind which such installations must meet?

Does it have any engineering standards?

(a) Would you furnish the committee details on such standards? Answer. 1. The Farmers Home Administration requires water systems to meet all established standards relating to safety, structural adequacy, and acceptability from the standpoint of health. Each system is individually designed by a qualified engineer registered to practice in his State. He is required to prepare designs and specifications which meet with the approval of the appropriate health departments. They must also incorporate established commercial standards for all materials and the specifications for installation of materials and equipment must comply with manufacturers' recommendations. There is no compromise with established requirements for health and safety. The only variations permitted are in the refinements which may be desirable in large urban systems to streamline operational costs or to minimize the need for future new construction in highly developed areas but which may not be necessary, advisable, or economically feasible for rural systems.

Question. 2. In administering the act, does the FHA have any standards for determining the economic feasibility of the system?

(If this question is not understood by the witness then this can be elaborated as follows:)

(a) In other words, does the administration have any standards or criteria of an economic nature for determining whether it should grant a loan to a rural water district for the construction of facilites?

(b) For instance, does the FHA take into consideration the overall cost of the system per connection, the ability of the system to provide adequate supplies of water at a reasonable cost to meet the total water demands of the users, the adequacy of existing facilities, the availability of alternative types of facilities, or other similar factors directly related to the financial structures of water districts?

(c) What other factors of an economic nature do you consider in deciding whether to insure a loan or to make a loan to a water district under section 306 of the 1961 act?

Answer. 2. (a) In determining the economic feasibility, the Farmers Home Administration goes one step further than other private and public credit sources. It first determines the ability of the proposed water users to pay for water at rates which will provide the revenue to meet operation and maintenance costs, maintain reasonable reserves, and repay the loan. This determination is made by the local Farmers Home Administration county supervisor