Critical to rural development are a regional approach, greater flexibility among federal programs, and more investment, from government, lenders and foundations.
Editor’s note: Charles “Chuck” Fluharty directs the Rural Policy Research Institute (RUPRI). This national center, envisioned by the Agriculture Committees of Congress in 1990, studies and reports on federal policy as it affects life in the rural U.S. Today, Fluharty did just that, speaking before the Agriculture Committee of the Senate. Fluharty’s statement, excerpted below, emphasized that federal agencies have been poorly coodinated in efforts to sustain rural communties. He also stressed that investment in rural regions — from government, commercial lenders and foundations — continues to lag. Video of Fluharty’s oral testimony is also available.
Madam Chairman, and members of the Committee, in this testimony I offer three specific policy recommendations, to advance [a] more innovative Rural Development framework:
I. Given current budgetary challenges, it is critical that this Committee create a more innovative, streamlined, flexible, and regional approach to enable USDA RD to administer the remaining suite of recently-downsized, but very effective economic development programs in a more integrated, aligned, and leveraged framework, and wherever possible, in a regional context.
II. This regional framework should advance asset-based innovation and entrepreneurship, and above all else, align much more effectively and efficiently with other programs at sister federal agencies addressing similar needs.
III. Given past, current and future RD funding reductions, this Committee must ensure a sufficient level of rural debt, venture and equity capital, as well as an appropriate and flexible suite of federal instruments through which they are delivered, to meet rural financing need. In addition, this Committee should also explore why there continues to be a glaring lack of rural investment by our nation’s major foundations.…
New Rural Development Priorities, Given New Economic and Budgetary Realities
The challenges and opportunities facing rural America are both daunting and exciting. The impacts resulting from the global recession, constrained public resources, global competition and instability, limited institutional capacity, and the need for new forms of governance have serious repercussions across rural America today. Yet opportunities in local and regional food systems, bio-energy, telecommunications, stewardship of natural resources and amenities, and climate change mitigation and adaptation all represent game-changing prospects for rural economies.
However, the global recession will have a lasting impact upon U.S. federalism, forcing local jurisdictions to do even more with far less. Rural communities must build regional strategies to address these deepening capacity disadvantages, which will further exacerbate these dynamics. This will demand fresh and innovative approaches in funding, strategy, policy and program design, service delivery, and program and policy evaluation.
One of RUPRI’s most valuable policy contributions has been our prescience in identifying emerging public policy opportunities for rural America, and seeking to advantage them through public discourse, policy research, and policy development. Over a decade ago, we identified the growing importance of regional innovation and entrepreneurship—both public and private—for sustainable rural regions. In 1990, with founding support from the Ewing Marion Kauffman Foundation, RUPRI created its Center for Rural Entrepreneurship, designed to provide research and assessment of promising practices related to rural entrepreneurship development, strategic engagement with communities committed to entrepreneur-focused economic strategies, and outreach to practitioners and policymakers to share what we are learning. The Center has completed numerous Transfer of Wealth (ToW) studies for regions across the nation, collaborated with state partners – including the Entrepreneurial Communities work in Kansas, in partnership with Kansas Farm Bureau, Network Kansas, and other partners, and continues work supported by the Ford Foundation regarding Wealth Creation and Retention in rural regions.
At approximately the same time, in collaboration with the Kansas City Federal Reserve Bank, RUPRI began to explore the rural potential for regional competitiveness, innovation and new governance strategies, and held numerous national convenings to engage public sector stakeholders, and seek their counsel. Shortly thereafter, this led to the creation of RUPRI’s Center for Regional Competitiveness, which has now evolved into our Regional Rural Innovation Initiative.
Over a decade later, we believe these are the two most critical policy opportunities which this Committee can and must advantage in this Farm Bill process, given the federal government’s scarce resources, the groundbreaking work exploding across rural America to achieve these advantages, and their singular impact upon rural competitiveness, job and wealth creation, and rural resilience. Finally, if we are to truly benefit from these approaches, we must ensure linked and leveraged investment strategies among the federal, state, and local governments, as well as our private, not-for-profit, and foundation partners.
In each of these issues, the people appear ahead of the policy development process. Regional innovation and entrepreneurship based development are occurring in very diverse rural geographies, and in very different organizational and jurisdictional contexts. But it is clear that rural communities have realized how critical these collaborations are to their future competitive advantage.
As but one example, I have been honored to assist in the development of an exciting new initiative in Ranking Member Roberts’ home state, where 17 counties in southeast Kansas recently formed a regional initiative, designed to create a new framework for economic development there. With support from Governor Brownback, four state senators representing those counties, county and municipal officials, and a diverse set of private and not-for-profit organizations and institutions, a new future is being envisioned, aligning federal, state, and local investments, contributions from the public, private, and philanthropic sectors, and strong support from state, regional, and community colleges and universities, as well as the private sector.
This “Project 17 Economic Development Initiative” anticipates support from many of the state’s leading organizations and institutions, including Kansas Farm Bureau, the Kansas Leadership Center, USDA Rural Development, the Advanced Manufacturing Institute at Kansas State, the University of Kansas, the Kansas Department of Commerce, Network Kansas, the Southeast Kansas Regional Planning Commission, the Southeast Prosperity Foundation, the Kansas Association of Community Foundations, and the Kansas Association of Regional Development Organizations, among others.
At the federal level, we are encouraged by the practical policy and program progress made since the Obama Administration’s August, 2009 guidance regarding a “Place-Based” domestic policy framework. Since then, we have witnessed a rather amazing collaboration across numerous federal agencies, and rural America has been an important beneficiary. As but one example, RUPRI is honored to be collaborating with the National Association of Development Organizations (NADO) and the National Association of Counties (NACo) in support of a capacity building and technical assistance program to assist rural and small city grantees under the Partnership for Sustainable Communities, a collaboration between the Departments of Housing and Urban Development, and the Department of Transportation, as well as the Environmental Protection Agency. Nearly 40% of the first round grantees under this program were located in rural regions.
Several recent GAO reports regarding duplicative federal programs in economic development highlight our nation’s need for further integration across these sister agencies, and USDA Rural Development, the Small Business Administration, and the Economic Development Administration/Commerce should continue their exploration of further program alignments, wherever possible.
Secretary Vilsack has been a very strong champion for USDA engagement in these efforts. Unfortunately, economic development practitioners always attest to the fact that USDA RD programs remain among the most cumbersome for which to seek funding, and the most time-consuming for which to apply. USDA administrators, state offices, and field staff are not to blame. The statutory mandates under which these civil servants must operate are among the least flexible and most onerous within the federal suite of economic development programs. As this Committee reassesses current Rural Development programs under your purview, we would urge that rational consolidation be accompanied by greatly increased flexibility, and that strong statutory support be developed to enable these programs to operate in a more rigorous regional framework, and/or leveraging concomitant funding commitments from other federal, state, and local agencies, as well as the private and philanthropic sectors.
Expanding, Aligning and Leveraging Rural Investments
This is now becoming essential. The very significant reductions in Rural Development Budget Authority, resulting from continuing reductions in annual RD appropriations over the past decade, are now being reflected in one of the largest rural disadvantages in federal per capita community and economic development funding ever witnessed, in comparison to urban per capita spending on the same program categories. In 2010, metropolitan counties received $1,519 per capita for these programs, compared to only $929 per capita in nonmetro counties. This difference would represent over $28 billion more in rural community and economic development resources, were the same level of per capita funding delivered to nonmetropolitan counties.
Unfortunately, the USDA RD program areas with some of the larger percentage funding reductions are smaller but very flexible business and community development programs, which are also known for the leveraging they achieve. The Intermediary Relending Program, the Rural Community Development Initiative, and the Rural Business Enterprise and Opportunity Grants all have been downscaled so severely that national program impact as a standalone entity must be examined.
As we all know, the importance of diverse public sector programs that can be layered to meet regional capital needs is key. While IRP is excellent for larger deals, and SBA programs work well, but present challenges in covering the up-front technical assistance costs needed to make responsible, small loans, the Rural Microentrepreneur Assistance Program (RMAP) provided a good mix of technical assistance support, quick turnaround and low paperwork, which justified the cost of microloans. Together, these three provided intermediaries a suite from which to choose. Without RMAP, some small loans will not be made. Finally, none of these address the micro-equity issue, or firm start-up, thus the angel investor component remains critical.
In a similar vein, assuring that larger rural business entities have access to credit and capital on the same basis as urban competitors, through as diverse a suite of private lenders and secondary markets as possible, augments declining federal credit program funding, and should be strengthened wherever appropriate.
As part of a cooperative agreement between RUPRI and USDA, a RUPRI research team has been reviewing literature and data regarding rural capital access. Several early observations are relevant for this hearing, related to the federal role in ensuring that rural entrepreneurs and business owners have access to a range of capital resources and the support to effectively use that capital to grow their businesses. In general, we are making some progress in increasing rural capital access. While the aggregate amount of loans to small businesses in both urban and rural regions declined over the past four to five years, detailed National Federation of Independent Business survey data show the ability to obtain credit and loans is relatively strong for most business. These data also indicate that a greater portion of rural businesses are obtaining desired levels of credit than their urban counter parts. This may result from relatively stronger local networks connecting businesses and financial institutions. These strong relationships may play a role in the relative success with which rural businesses seeking capital from local banks actually acquire needed capital, and may underscore the importance of local relationships and local banking institutions across rural America. We need to understand whether these patterns also hold true in our nation’s more distressed rural regions.
Our initial assessment suggests that there are real opportunities for equity funding in rural and micro regions. Data clearly show that rural-based venture investments performed just as well in terms of return on investment and job creation as counterparts in places such as California or Massachusetts. So performance is not the primary obstacle to equity funding. Large venture funds are not the only source of equity capital; there is as much equity capital coming from non-institutional sources such as angel investors, angel funds, corporate or strategic investors and community-development venture funds. These sources tend to invest in smaller scale and more diverse businesses than venture capital institutions. Exploring the public sector role in expanding the scale and scope of rural angel investors and community development financial institutions remains an important topic for further analysis.
Supply side considerations related to the amount of debt and equity capital flowing into rural regions provide only one side of the capital access equation. Research suggests that you need a skilled and growth-oriented entrepreneur (the demand side) in combination with a diverse mix of capital (the supply side), and that with access to quality business advisors and networks, entrepreneurs are more able to obtain and effectively use capital, as well as being more successful in operating their business. This points to the importance of intermediary organizations that provide robust advisory and entrepreneurial services beyond basic business formation planning, that provide advanced hands-on mentoring, as well as connections to regional, national and international networks. The public sector could have an important role to play here, recognizing the critical link between business advisory services and capital, and offering programs to support the provision of these services in rural regions where private sector service provider alternatives are often lacking.
We will keep this Committee apprised as this research moves forward.
Beyond these public sector challenges, a concomitant rural disadvantage in philanthropic funding also remains significant. A 2004 report by the National Committee for Responsive Philanthropy, “Beyond City Limits: The Philanthropic Needs of Rural America,” found that out of 65,000 grant-making foundations, only 184 made grants characterized as “rural development.”
Rural America remains challenged by this long-standing, differential disadvantage in philanthropic investment in its people, organizations, and institutions. And this is now more critical than ever, as federal, state and local government resources continue to decline. Because of the generous tax subsidies granted foundations and their donors, their presidents and trustees enter into a covenant with the American people, in which our government and these institutions jointly assume an obligation to steward this awesome public trust so as to optimize the public good achieved, in exchange for the lost public sector revenues and resources, as a result of tax deductions and exemptions. An awesome challenge, indeed…….As with all subsidies, deductions, and exemptions, federal budgetary pressures are again calling these dynamics into question, as both more research and more transparency are sought.
While redlining has been decried by national foundations for years on the part of government, a current de facto foundation redlining of rural America simply must be addressed. Federal funding for community capacity continues to decrease, and rural safety net resources are in dire need. Yet, American philanthropy continues to distribute less than 3% of its annual payout to the people and places of rural America, which comprise 20% of our population and 80% of our natural resource base. In fact, foundations have withdrawn further from rural commitments in the past five years, as need has increased exponentially. These foundations, and the generous tax subsidies provided to donors, create a public partnership in pursuit of the public good. This geographic inequity must be named. It is an institutional and moral failure; and one so long-standing that serious inquiry regarding whether this is an abuse of a solemn public trust should be considered.
Chairman Baucus explored this question, and sought some rural accommodation, five years ago. Chairman Stabenow, you may recall a conversation we facilitated with then Chairman Harkin, and a number of national foundation leaders prior to the development of the last Farm Bill, seeking a similar outcome. Regional and community foundations are doing excellent work in seeking to fill this gap. But the gap remains, and it is vast. Current arguments center around whether the total outlay in rural America is one or three percent, and yet we are unable to calculate the exact number, as pathetic as it is, because zip code data is not required. This should be rectified. Such a public trust merits greater transparency.
With payouts to rural America so ridiculously small, shouldn’t the current rural capacity and safety net crisis warrant a percentage payout increase, as a good faith gesture from America’s largest foundations to rural America, in exchange for the revenue losses incurred, without the benefit of proportional foundation giving, over these many years?
Thank you, Madam Chairman, Ranking Member Roberts, and members of this Committee, for the opportunity to testify before you today. I would be pleased to answer any questions you may have.